HERLEY INDUSTRIES INC /NEW, S-1/A, 1997-11-18

HERLEY INDUSTRIES INC /NEW
S-1/A, 1997-11-18
SEARCH, DETECTION, NAVAGATION, GUIDANCE, AERONAUTICAL SYS

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 18, 1997

REGISTRATION STATEMENT NO. 333-39767

================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

AMENDMENT NO. 1

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

HERLEY INDUSTRIES, INC.

(AND WITH RESPECT TO CERTAIN WARRANTS, LEE N. BLATT, GERALD I. KLEIN AND KATHI
THONET)

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C> <C>
DELAWARE 3679 23-2413500
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NO.) IDENTIFICATION NUMBER)
</TABLE>

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

<TABLE>
<S> <C>
LEE N. BLATT
CHIEF EXECUTIVE OFFICER
HERLEY INDUSTRIES, INC.
10 INDUSTRY DRIVE 10 INDUSTRY DRIVE
LANCASTER, PENNSYLVANIA 17603 LANCASTER, PENNSYLVANIA 17603
(717) 397-2777 (717) 397-2777
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, (NAME, ADDRESS, INCLUDING ZIP CODE,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR
OFFICES) SERVICE)
</TABLE>

Copies to:

<TABLE>
<S> <C>
DAVID H. LIEBERMAN, ESQ. TERRY M. SCHPOK, P.C.
BLAU, KRAMER, WACTLAR & LIEBERMAN, P.C. AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
100 JERICHO QUADRANGLE, SUITE 225 1700 PACIFIC AVENUE, SUITE 4100
JERICHO, NEW YORK 11753 DALLAS, TEXAS 75201
(516) 822-4820 (214) 969-2870
(516) 822-4824 FAX (214) 969-4343 FAX
</TABLE>

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective, and with
respect to the shares of Common Stock issuable upon the exercise of the
Warrants, from time to time thereafter.

If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]

If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ________

If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [X]
------------------------

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
=================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) SECURITY(2)(3) PRICE FEE(6)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.10 par value............. 1,610,000 $13.53 $21,783,300 $6,601
- -----------------------------------------------------------------------------------------------------------------
Common Stock Purchase Warrants(4)........ 1,610,000 -- -- --
- -----------------------------------------------------------------------------------------------------------------
Common Stock, $.10 par value underlying
Common Stock Purchase Warrants(5)...... 1,610,000 $13.53 $21,783,300 $6,601
- -----------------------------------------------------------------------------------------------------------------
Total.................................... -- -- -- $13,202
=================================================================================================================
</TABLE>

(1) Includes up to 210,000 shares of Common Stock and 210,000 Common Stock
Purchase Warrants that may be purchased by the Underwriters to cover
over-allotments, if any.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457 under the Securities Act of 1933, as amended.
(3) Pursuant to Rule 457(c) under the Securities Act of 1933, as amended, the
proposed maximum offering price of each share of the Registrant's Common
Stock is estimated to be the average of the high and low sale prices of a
share as of a date not more than five business days before the filing of
this Registration Statement. Accordingly, the Registrant has used $13.53 as
such price per share, which is the average of the high sale price of $13 7/8
and the low sale price of $13 5/16 reported on the Nasdaq National Market
for a share on November 4, 1997.
(4) Pursuant to Rule 457(g), there is no separate registration fee for the
Common Stock Purchase Warrants because the Registrant also is registering
the issuance of the shares of Common Stock issuable upon exercise of the
Common Stock Purchase Warrants in this Registration Statement.
(5) Reserved for issuance upon exercise of the Common Stock Purchase Warrants.

(6) This total registration fee of $13,202 was previously paid upon the initial
filing of this registration statement on November 7, 1997.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED NOVEMBER 18, 1997

PRELIMINARY PROSPECTUS

HERLEY INDUSTRIES LOGO
HERLEY INDUSTRIES, INC.

1,400,000 SHARES OF COMMON STOCK AND
1,400,000 COMMON STOCK PURCHASE WARRANTS

Of the 1,400,000 shares (the "Shares") of Common Stock (the "Common Stock")
and 1,400,000 Common Stock Purchase Warrants (the "Warrants") offered hereby,
700,000 shares of Common Stock and 1,050,000 Warrants are being offered by
Herley Industries, Inc. ("Herley" or the "Company") and 700,000 shares of Common
Stock and 350,000 Warrants are being offered by certain selling stockholders
(the "Selling Stockholders"). The Shares and Warrants are sometimes hereinafter
collectively referred to as the "Securities." The Company will not receive any
of the proceeds from the sale or exercise of Securities sold by the Selling
Stockholders. See "Principal and Selling Stockholders." Each Warrant entitles
the holder to purchase one share of Common Stock at $ per share for
thirteen months from the date of issuance and thereafter at $ per share
until twenty-five months from the date of issuance. The Warrant exercise price
and the number of shares issuable upon exercise of the Warrants are subject to
adjustment under certain circumstances. One Warrant must be purchased for each
Share of Common Stock purchased, although the Warrants and the Shares will be
separately transferable immediately following the completion of this offering.

The Common Stock is traded on the Nasdaq National Market under the symbol
"HRLY." The Company has applied for inclusion of the Warrants on the Nasdaq
National Market. On November 4, 1997 the closing sale price of the Company's
Common Stock as reported by the Nasdaq National Market was $13.63 per share. See
"Price Range of Common Stock."

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

SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN RISKS THAT
SHOULD
BE CONSIDERED PRIOR TO PURCHASING THE SECURITIES.

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
=================================================================================================
UNDERWRITING DISCOUNTS
AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2) PROCEEDS TO
SELLING
STOCKHOLDERS
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share............... $ $ $ $
- -------------------------------------------------------------------------------------------------
Per Warrant............. $ $ $ $
- -------------------------------------------------------------------------------------------------
Total(3)................ $ $ $ $
=================================================================================================
</TABLE>

(1) Does not include additional compensation to be received by Janney Montgomery
Scott Inc. (the "Representative") and Southwest Securities, Inc.
(collectively, with the Representative, the "Managing Underwriters") in the
form of a warrant (the "Managing Underwriters' Warrant") entitling the
Managing Underwriters to purchase 10% of the Securities sold. In addition,
the Company, the Selling Stockholders, and the underwriters named herein
(the "Underwriters") have agreed to indemnity and contribution provisions
regarding certain civil liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."

(2) Before deducting other offering expenses payable by the Company estimated at
$ . See "Use of Proceeds."

(3) The Company has granted to the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to an aggregate of 210,000
additional shares of Common Stock and 210,000 additional Warrants solely for
the purpose of covering over-allotments, if any. If the Underwriters
exercise such over-allotment option in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."

The Securities are offered by the Underwriters, subject to prior sale,
when, as and if accepted by the several Underwriters named herein and subject to
certain other conditions, including the right of the Underwriters to withdraw,
cancel, modify or reject any order, in whole or in part. It is expected that the
delivery of the certificates representing the Common Stock and the Warrants will
be made on or about , 1997 at the offices of Janney Montgomery
Scott Inc., 26 Broadway, New York, New York.

JANNEY MONTGOMERY SCOTT INC. SOUTHWEST SECURITIES
The date of this Prospectus is , 1997
<PAGE> 3

PHOTO

The MAGIC(2) System provides Command and Control of multiple vehicles to a range
of 400 nautical miles over the horizon with a Relay. The equipment set forth
herein represent the standard components utilized by the MAGIC(2) System,
including the Command Panels used for control, the Transponder located in the
airborne target, the Radio Frequency Module used to communicate to the
Transponder and the Operator Consoles showing the current status of the target.

The MAGIC(2) System components use Computers in the Controller Consoles running
standard software as the Operating System. High Performance Field Programmable
Gate Arrays are utilized in the Transponder and Radio Frequency Module to
perform the Encoding and Decoding of data. GPS based position information
provides precise location of the vehicle.

The TTCS, which utilizes a C-band tracking antenna for the control of a single
vehicle, is used by many customers who have an installed base of equipment
designed around C-band operation. These customers continue to update hardware as
their older components become obsolete and additional operating features are
desired. The Shelter is shown in a configuration used by most of the Company's
customers today. By providing the required environmental control, the shelter
allows either the TTCS or MAGIC(2) System to be operated in harsh environments.
<PAGE> 4

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK AND
THE WARRANTS, INCLUDING ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK
AND THE WARRANTS ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF
REGULATION M. SEE "UNDERWRITING."

AVAILABLE INFORMATION

The Company and the Selling Stockholders have filed with the Securities and
Exchange Commission (the "Commission") a registration statement on Form S-1 (the
"Registration Statement"), pursuant to the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the Securities. This Prospectus does not
contain all of the information set forth in the Registration Statement, and the
exhibits thereto. For further information with respect to the Company and the
Securities, reference is made to the Registration Statement and its exhibits.
The Company is also subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy and information statements, and other information
with the Commission. The Registration Statement and such reports, proxy and
information statements, and other information can be inspected and copied at the
public reference facilities maintained by the Commission at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at its following regional
offices: Suite 788, 1375 Peachtree St. N.E., Atlanta, Georgia 30367;
Northwestern Atrium Center, 500 W. Madison Street, Suite 1400, Chicago, Illinois
60621-2511; and 7 World Trade Center, 13th Floor, New York, New York 10048.
Copies of such material can be obtained at prescribed rates from the Public
Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, or at the Commission's Web site located at
http://www.sec.gov. In addition, the Company's Common Stock is listed on the
Nasdaq National Market and copies of the foregoing materials and other
information concerning the Company can be inspected at the offices of the Nasdaq
National Market at 1735 K Street, N.W., Washington, D.C. 20006.

FORWARD-LOOKING STATEMENTS

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

3
<PAGE> 5

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise indicated, the information in
this Prospectus does not give effect to the exercise of the over-allotment
option described under "Underwriting" or the exercise of any other options or
warrants. All references herein to the Company are to Herley Industries, Inc. on
a consolidated basis with its subsidiaries, and includes their predecessors,
unless the context otherwise requires. Except where otherwise indicated, this
Prospectus gives effect to the four-for-three stock split of the Common Stock,
effected as a stock dividend, on September 30, 1997. Certain technical and other
terms used in this Prospectus are defined in the Glossary appearing at the end
of this Prospectus.

THE COMPANY

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

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

Herley believes that the demand for its systems and products should
continue to increase because of a number of important factors. The Department of
Defense has begun to place more emphasis on improved military readiness, using
advanced electronics for enhanced performance and extended life of its
equipment. The Company believes the electronic content of the military
procurement budget will grow at the expense of traditional armaments.

A modern military force must defend against multiple attacking aircraft,
cruise missiles, and short range ballistic missiles such as the Exocet and SCUD.
The Company's MAGIC(2) system, which uses Global Positioning Satellites ("GPS"),
and which the Company believes is the only commercially available command and
control system to control complex scenarios such as multiple targets attacking
from over the horizon, is being used by the U. S. Navy, the Company's largest
customer, to test and train against multiple simultaneous threats. The Company
also has supplied its command and control systems and other electronic products
to foreign countries worldwide, which historically have followed the lead of the
U.S. government in purchasing military electronic products. The Company
anticipates supplementing or replacing installed systems and establishing new
foreign country clients, through "teaming" arrangements with major domestic
military contractors and otherwise.

A rapidly growing component of the Company's business, representing 10% of
fiscal 1997 revenues, is the production of range safety transponders, which are
expendable devices used to track satellite space launches. The Company believes
that it is the only qualified supplier of space launch range safety transponders
in the U.S. The two factors expected to increase the number of commercial space
launches and the Company's space launch business are the growing number of
global mobile satellite telephone systems and the continued development of the
world's satellite communications infrastructure.

4
<PAGE> 6

Company has evolved from a components manufacturer to a systems and service
provider and has leveraged its technical capabilities and expertise into
domestic commercial and foreign defense markets.

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

The Company's growth strategy is to:

- Design and manufacture new products and systems using its expertise in
digital, software and microwave technologies;

- Broaden existing markets for the Company's products through the
aggressive pursuit of large data link and command and control system
sales;

- Expand the sales of the Company's products and systems in international
markets;

- Extend the capabilities and uses of the Company's products in the rapidly
growing space launch industry and certain commercial industrial
applications;

- Implement cost saving measures through the continued vertical integration
of the Company's recent acquisitions; and

- Continue to capitalize on strategic acquisition opportunities.

The Company was incorporated in New York in 1965 and reincorporated in
Delaware in June 1986. The Company's executive offices are located at 10
Industry Drive, Lancaster, Pennsylvania 17603, and its telephone number is (717)
397-2777.

5
<PAGE> 7

THE OFFERING

<TABLE>
<S> <C>
Securities Offered by:
The Company................................ 700,000 Shares of Common Stock and 1,050,000
Warrants.
Selling Stockholders....................... 700,000 Shares of Common Stock and 350,000
Warrants.
One Warrant must be purchased for each Share
of Common Stock purchased, although the
Warrants and the Shares will be separately
transferable immediately following the
completion of this offering.
Description of Warrants...................... Each Warrant is exercisable for 25 months and
entitles the registered holder to purchase one
share of Common Stock at an exercise price
of $ per share for thirteen months
from date of issuance and thereafter at
$ per share. The Warrant exercise
price and the number of shares issuable upon
exercise of the Warrants are subject to
adjustment under certain circumstances. See
"Description of Securities."
Common Stock Outstanding:
Before the Offering........................ 4,539,729 Shares(1)
After the Offering......................... 5,239,729 Shares(1)
Use of Proceeds.............................. The $ of net proceeds from the sale
by the Company of the Securities will be used
for general corporate purposes including
working capital and for possible
acquisitions. See "Use of Proceeds."
Nasdaq National Market Symbols:
Common Stock............................... HRLY
Warrants................................... HRLYW (Proposed)
Risk Factors................................. See "Risk Factors."
</TABLE>

- ---------------
(1) Assumes no exercise of: (i) the Underwriters' over-allotment option to
purchase up to 210,000 shares of Common Stock and 210,000 Warrants from the
Company, (ii) the 1,050,000 Warrants offered by the Company in this
offering, (iii) the 280,000 shares of Common Stock issuable upon exercise of
the Managing Underwriters' Warrant, including the exercise of the Warrants
underlying the Managing Underwriters' Warrant, (iv) the 916,327 shares of
Common Stock issuable upon the exercise of the outstanding options under the
Company's 1992, 1996 and 1997 stock option plans, and (v) the 320,000 shares
of Common Stock issuable upon the exercise of the outstanding warrants
issued to officers and directors. See "Management -- Stock Plans,"
"Description of Securities" and "Underwriting."

6
<PAGE> 8

SUMMARY FINANCIAL INFORMATION

The following summary financial information concerning the Company, other
than the as adjusted balance sheet data, has been derived from the consolidated
financial statements included elsewhere in this Prospectus and should be read in
conjunction with such consolidated financial statements and the notes thereto.
See "Financial Statements."

<TABLE>
<CAPTION>
52 WEEKS ENDED 53 WEEKS
----------------------- ENDED
JULY 30, JULY 28, AUGUST 3,
1995 1996 1997
--------- --------- ---------
(IN THOUSANDS,
EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................................. $ 24,450 $ 29,001 $ 32,195
Cost and expenses......................................... 23,189 25,630 27,047
--------- --------- ---------
Operating income before unusual item...................... 1,261 3,371 5,148
Unusual item(1)........................................... (5,447) -- --
--------- --------- ---------
Operating income (loss)................................... (4,186) 3,371 5,148
Other income (expense).................................... (700) 400 136
--------- --------- ---------
Income (loss) before income taxes......................... (4,886) 3,771 5,284
Provision for income taxes................................ 4 102 480
--------- --------- ---------
Net income (loss)......................................... $ (4,890) $ 3,669 $ 4,804
========= ========= =========
Earnings (loss) per common and common equivalent
share(2)................................................ $ (0.98) $ 0.86 $ 1.01
========= ========= =========
Weighted average number of common and common equivalent
shares outstanding(2)................................... 4,978,868 4,253,785 4,733,682
========= ========= =========
</TABLE>

<TABLE>
<CAPTION>
AUGUST 3,
JULY JULY 1997
30, 28, --------------------------
1995 1996 ACTUAL AS ADJUSTED(3)
------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets................................... $42,229 $42,509 $39,257
Current liabilities............................ 9,974 7,559 9,813
Long-term debt net of current portion.......... 10,525 11,021 2,890
Shareholders' equity........................... $18,988 $21,032 $23,371
</TABLE>

RECENT FINANCIAL PERFORMANCE:

For the quarter ended November 2, 1997, the Company's net sales were
approximately $10,573,000 as compared to approximately $7,508,000 for the
quarter ended November 3, 1996.

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

(1) The unusual item consists of settlement costs, legal fees, and related
expenses in connection with the settlement of certain legal claims.

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

(3) The pro forma balance sheet data reflects the anticipated receipt of the net
proceeds from this offering and the repayment of certain loans by the
Company's officers as if this offering and the repayment of such loans had
occurred as of August 3, 1997. See "Use of Proceeds."

7
<PAGE> 9

RISK FACTORS

This Prospectus contains forward-looking statements that involve risk and
uncertainties. Actual results could differ materially from those discussed in
the forward-looking statements as a result of certain factors, including those
set forth below and elsewhere in this Prospectus. The following risk factors
should be considered carefully in addition to the other information in this
Prospectus before purchasing the Securities offered hereby.

GOVERNMENT CONTRACTS SUBJECT TO TERMINATION

Approximately 71% and 77% of the Company's sales for fiscal 1997 and 1996,
respectively, were made to U. S. government agencies or prime contractors or
subcontractors on U.S. military and aerospace programs. Changes in government
policies, priorities or program funding levels, resulting from defense budget
cuts or otherwise, could adversely affect the Company's business or financial
performance. 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 termination, prime
contractors on such contracts are required to terminate their subcontracts on
the program, and the government or the prime contractor is obligated to pay the
costs incurred by the Company under the contract to the date of termination plus
a fee based upon work completed. All of the Company's contracts are fixed price
contracts, some of which require delivery over periods in excess of one year.
The Company agrees to deliver products at a fixed price except for costs
incurred because of change orders issued by the customer. Any cost overruns or
performance problems may have a material adverse effect on the Company's
business, operating results and financial condition. In addition, the
profitability of such contracts is subject to inherent uncertainties as to the
cost of completion. Failure of the Company to replace sales attributable to a
significant defense program or contract at the end of that program or contract,
whether due to cancellation, spending cuts, budgetary constraints or otherwise,
could have a material adverse effect upon the Company's business, operating
results and financial condition in subsequent periods. See
"Business -- Government Contracts."

RISKS ASSOCIATED WITH INTERNATIONAL SALES

In fiscal 1997 and 1996, international sales comprised approximately 29%
and 23%, respectively, of the Company's total sales, and the Company expects its
international business to continue to account for an increasing part of its
revenues. International sales are subject to numerous risks, including political
and economic instability in foreign markets, restrictive trade policies of
foreign governments, inconsistent product regulation by foreign agencies or
governments, imposition of product tariffs and burdens and costs of complying
with a wide variety of international and U.S. export laws and regulatory
requirements. The Company's international sales are subject to the Company
obtaining export licenses for certain products and systems. There can be no
assurance that the Company will be able to continue to compete successfully in
international markets or that its international sales will be profitable. All of
the Company's revenues in fiscal 1997 were denominated in U.S. dollars, and the
Company intends to continue to enter into U.S. dollar-denominated contracts.
Accordingly, the Company does not, and believes that in the future it will not,
have significant exposure to fluctuations in currency. Nevertheless,
fluctuations in currency could adversely affect the Company's customers, which
may lead to delays in the timing and execution of orders. See "Business --
Business Strategy" and "-- Products."

TECHNOLOGICAL CHANGE

The flight instrumentation industry is characterized by technological
change. The Company's future success will depend upon its ability continually to
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 the Company 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, the Company 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 the Company may not
recover if the system or product is unsuccessful. See "Business -- New Product
Development."

8
<PAGE> 10

DEPENDENCE ON PROPRIETARY TECHNOLOGY

The Company's success is dependent upon its proprietary technology. The
Company does not currently have any material patents and relies principally on
trade secret and copyright laws and certain employee and third-party
non-disclosure agreements, as well as limiting access to and distribution of
proprietary information, to protect its technology. Trade secret laws afford the
Company limited protection because they cannot be used to prevent third parties
from reverse engineering and reproducing the Company's products. Similarly,
copyright laws afford the Company limited protection because copyright
protection extends only to the expression of an idea and cannot be used to
protect the idea itself. Moreover, third parties could independently develop
technologies that compete with the Company's technologies. There can be no
assurance that the obligations to maintain the confidentiality of the Company's
proprietary technology will prevent disclosure of such information. Litigation
may be necessary for the Company to defend against claims of infringement or
protect its proprietary technology, which could result in substantial cost to
the Company and diversion of management's efforts. There can be no assurance
that the Company would prevail in any such litigation. The inability of the
Company to protect its proprietary technology could have a material adverse
effect on the Company's business, financial condition and results of operations.
Although the Company believes that its products and proprietary rights do not
infringe patents and proprietary rights of third parties, there can be no
assurance that infringement claims, regardless of merit, will not be asserted
against the Company. In addition, effective copyright and trade secret
protection of the Company's proprietary technology may be unavailable or limited
in certain foreign countries. In 2004, the Company's exclusive license to
manufacture, market, and sell the Multiple Aircraft GPS Integrated Command and
Control ("MAGIC(2)") system, including enhancements to such system, expires.
Thereafter, the Company and licensor each will have the non-exclusive right to
manufacture, market and sell the MAGIC(2) system without any payment to the
other. See "Business -- Intellectual Property."

RISKS ASSOCIATED WITH ENTERING NEW MARKETS AND EXPANSION

The Company has historically derived its revenues principally from the U.S.
Department of Defense and other government agencies. In addition to maintaining
current defense business, the Company intends to pursue a strategy that
leverages the technical capabilities and expertise derived from its defense
business into related commercial markets, both domestic and foreign. The
Company's efforts to expand its presence in the commercial market will require
significant resources, including capital and management time. There can be no
assurance that the Company will be successful in addressing these risks or in
developing these commercial business opportunities. In general, the failure to
manage growth effectively could have a material adverse effect on the Company's
business, financial condition and results of operation. See
"Business -- Business Strategy" and "-- New Product Development and
Applications."

RISKS ASSOCIATED WITH ACQUISITIONS

The Company's strategy includes pursuing additional acquisitions that will
complement its business. In attempting to make acquisitions, the Company often
competes with other potential acquirors, many of which have greater financial
and operational resources. Acquisitions involve significant risk, including (i)
the diversion of management's time and attention to the negotiation of the
acquisitions and the assimilation of the businesses acquired, (ii) the need to
modify financial and other systems and add management resources, (iii) the
potential liabilities of the acquired businesses, (iv) the unforeseen
difficulties in the acquired operations, (v) the possible adverse short-term
effects on the Company's results of operations and (vi) the financial reporting
effects of the amortization of goodwill and other intangible assets. There can
be no assurance that any business acquired in the future will achieve acceptable
levels of revenue and profitability or otherwise perform as expected or that the
Company will be able to consummate or successfully integrate any future
acquisitions or that any acquisition, when consummated, will not materially
adversely affect the Company's business, operating results or financial
condition. In addition, in connection with certain potential acquisitions and
investments in the past and future, the Company has entered or may enter into
letters of intent and other agreements. After performing due diligence on the
acquisition or investment candidate, the Company has determined or may determine
that the acquisition or investment is not in the Company's best interests. In
such a case, the Company may not proceed with such acquisition or investment. No
assurance

9
<PAGE> 11

exists that the Company's election not to proceed with any such acquisition or
investment would not have a material adverse effect upon the Company's business,
financial condition and operating results. While certain of the proceeds of this
offering may be used for acquisitions, the Company has no present arrangements
or understandings with any party with respect to any future acquisition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

PRODUCT LIABILITY; RISK OF PRODUCT DEFECTS

As the Company expands into related commercial markets, the sale of
products and systems by the Company may entail the risk of product liability and
related claims. A product liability claim brought against the Company could have
a material adverse effect upon the Company's business, operating results and
financial condition. Complex products, such as those offered by the Company, may
contain defects or failures when introduced. There can be no assurance that,
despite testing by the Company, errors will not be found in new products after
commencement of commercial shipments, resulting in loss of market share or
failure to achieve market acceptance. Upon entering the commercial markets, the
Company intends to maintain product liability insurance in amounts it deems
adequate. Although the Company has not experienced any claims to date related to
its systems or products, the occurrence of such a claim could have a material
adverse effect upon the Company's business, operating results and financial
condition. See "Business -- Business Strategy" and "-- Manufacturing, Assembly
and Testing."

BACKLOG

The Company's order backlog is subject to fluctuations and is not
necessarily indicative of future sales. There can be no assurance that current
backlog will necessarily lead to sales in any future period. The Company's order
backlog as of August 3, 1997 was approximately $36,911,000. See
"Business -- Backlog."

BROAD DISCRETION OF MANAGEMENT TO ALLOCATE OFFERING PROCEEDS

The Company expects to use net proceeds from this offering for possible
acquisitions and for working capital and other general corporate purposes. The
Company's management will have broad discretion to allocate the proceeds of the
offering, and the amounts actually expended for acquisitions or working capital
may vary significantly depending on a number of factors, including the amount of
future revenues, the amount of cash generated or used by the Company's
operations and the availability of suitable acquisitions. Stockholders will not
vote upon any acquisition nor will stockholders have an opportunity to review
the financial status of any potential acquisition. See "Use of Proceeds."

COMPETITION

The flight instrumentation products that the Company manufactures are
subject to varied competition depending upon the product and market served.
Competition is generally based upon technology, design, price and past
performance. Many of the Company's competitors are larger and possess greater
financial resources than the Company. Competitors include Aydin Corporation, L-3
Communications Corporation, Microsystems, Inc., AMP, Inc. and Remec, Inc.
Competition in follow-on procurements is generally limited after an initial
award unless the original supplier has had performance difficulties. See
"Business -- Competition."

CONTROL BY MANAGEMENT

The Company's executive officers and their relatives beneficially own a
substantial portion of the outstanding shares of the Common Stock and currently
comprise three of the seven members of the Board of Directors. As a result, such
persons have had, and may in the future have, the ability to exercise influence
over significant matters regarding the Company, including transactions between
such persons and the Company. Such a high level of influence may discourage or
prevent unsolicited mergers, acquisitions, tender offers, proxy contests or
changes of incumbent management, even when the stockholders other than such
persons consider such a transaction or event to be in their best interests.
Accordingly, holders of the Common Stock may be

10
<PAGE> 12

deprived of an opportunity to sell their shares at a premium over the trading
price of the shares. See "Management," "Management -- Certain Transactions" and
"Principal and Selling Stockholders."

DEPENDENCE UPON KEY PERSONNEL

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

FLUCTUATIONS IN QUARTERLY RESULTS; VOLATILITY OF TRADING PRICE

The Company's quarterly results have in the past been, and will continue to
be, subject to significant variations due to a number of factors, any one of
which could substantially affect the Company's results of operations for any
particular fiscal quarter. In particular, quarterly results of operations can
vary due to the timing, cancellation or rescheduling of customer orders and
shipments, the pricing and mix of systems and products sold, new system and
product introductions by the Company, the Company's ability to obtain components
and subassemblies from contract manufacturers and suppliers, and variations in
manufacturing efficiencies. Accordingly, the Company's performance in any one
fiscal quarter is not necessarily indicative of financial trends or future
performance.

The trading prices of the Common Stock and the Warrants could fluctuate
widely in response to variations in the Company's quarterly operating results,
changes in earnings estimates by securities analysts, changes in the Company's
business and changes in general market or economic conditions. In addition, in
recent years the stock market has experienced extreme price and volume
fluctuations. These fluctuations have significantly affected the trading prices
of the securities of many companies without regard to their specific operating
performance. Such market fluctuations could have a material adverse effect on
the trading prices of the Common Stock and the Warrants. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Price Range of Common Stock."

SHARES ELIGIBLE FOR FUTURE SALE

Sales of a substantial number of shares of Common Stock in the public
market after this offering may have an adverse effect on the market price of the
Common Stock and the Warrants. Upon completion of this offering, the Company
will have outstanding 5,239,729 shares of Common Stock. The shares sold in this
offering generally will be freely transferable without restriction. Of the
remaining 4,539,729 shares, 3,804,946 shares are freely transferable, including
313,193 shares previously registered for approximately 85 former stockholders of
Metraplex, which shares were recently issued in connection with such
acquisition, and 734,783 shares may not be sold unless the sale is registered
under the Securities Act, or an exemption from registration is available,
including the exemption provided by Rule 144 under the Securities Act. Without
the prior written consent of the Representative, the Selling Stockholders, the
Company's directors and certain of the Company's officers and key employees have
agreed that they will not, directly or indirectly, offer, sell, contract to
sell, pledge, grant any option for the sale of or otherwise dispose of any
shares of Common Stock or any securities convertible into, or exercisable or
exchangeable for, any shares of Common Stock for a period of 180 days after the
date of this offering with respect to the Selling Stockholders and 120 days
after the date of this offering with respect to the Company's directors and
certain of the Company's officers and key employees who are not Selling
Stockholders. After such periods, the 949,302 shares of Common Stock held by
such persons will be eligible for sale in the public market in reliance upon
Rule 144 subject to the restrictions contained therein. See "Underwriting" and
"Description of Securities -- Common Stock -- Shares Eligible for Future Sale."

11
<PAGE> 13

POSSIBLE DILUTIVE EFFECT OF THE ISSUANCE OF SUBSTANTIAL ADDITIONAL SHARES
WITHOUT STOCKHOLDER APPROVAL

After this offering, the Company will have an aggregate of approximately
557,943 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 Company's stockholders. The Company intends to propose an
increase in its authorized shares of Common Stock from 10,000,000 to 20,000,000
shares at its next annual meeting of stockholders presently scheduled to be held
in January 1998. Any shares issued would further dilute the percentage ownership
of the Company held by the investors in this offering. Unissued but reserved
shares of Common Stock include shares of Common Stock reserved for issuance in
connection with the exercise of (i) the Warrants issued by the Company, (ii) the
stock options issued under the Company's stock option plans, (iii) the warrants
held by officers and directors, and (iv) the Managing Underwriters' Warrant,
including the shares of Common Stock issuable upon the exercise of the Warrants
issuable upon exercise of the Managing Underwriters' Warrant. The terms on which
the Company could obtain additional capital during the terms of these stock
options and warrants may be adversely affected because of such potential
dilution and because the holders thereof might be expected to convert or
exercise them if the market price of the Common Stock exceeds their conversion
or exercise price. See "Description of Securities" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

DETERMINATION OF THE WARRANT EXERCISE PRICE

The exercise price of the Warrants has been set at a premium to the
existing market price of the Common Stock and bears no relationship to any
objective criteria of future value. Accordingly, such exercise price should in
no event be regarded as an indication of any future market price of the Common
Stock. See "Price Range of Common Stock."

ABSENCE OF TRADING MARKET FOR THE WARRANTS

There currently is no trading market for the Warrants. Although the Company
has applied for inclusion of the Warrants in the Nasdaq National Market, there
can be no assurance that an active market will develop for the Warrants or if
such a market develops, that it will be maintained. The market price for the
Warrants is expected to be directly related to the market price of the Common
Stock. The market price of the Common Stock and thus the trading price of the
Warrants are likely to be subject to significant fluctuations in response to
variations in quarterly results of operations, general trends in the marketplace
and other factors, many of which are not within the Company's control. See
"-- Fluctuations in Quarterly Results; Volatility of Trading Price" and "Price
Range of Common Stock."

CURRENT REGISTRATION REQUIRED TO EXERCISE THE WARRANTS

Holders of the Warrants will be able to exercise their Warrants only if
this Registration Statement or another registration statement relating to the
sale of the shares of Common Stock underlying the Warrants is then in effect, or
the sale of such shares upon exercise of the Warrants is exempt from the
registration requirements of the Securities Act, and such shares are qualified
for sale or exemption from qualification under applicable laws of the states
where the holders of the Warrants reside. Although the Company is required to
maintain this Registration Statement in effect with respect to the sale of the
shares of Common Stock underlying the Warrants until the Warrants expire, there
can be no assurance that the Company will be able to maintain the effectiveness
of the Registration Statement during such period. Those persons desiring to
exercise their Warrants will be unable to purchase the underlying shares of
Common Stock if this Registration Statement or another registration statement
covering the sale of such shares is not effective, unless the sale of such
shares is exempt from the registration requirements of the Securities Act, or if
such shares are not qualified or exempt from qualification in the states where
the holders of the Warrants reside. The Warrant Agreement governing the terms of
the Warrants, however, provides that the expiration date for the Warrants will
be extended if a registration statement with respect to the sale of underlying
shares of Common Stock has not been continuously effective during the 90 days
immediately preceding the expiration date for the Warrants. See "Description of
Securities."

12
<PAGE> 14

POTENTIAL ANTI-TAKEOVER EFFECTS OF DELAWARE LAW AND CERTIFICATE OF INCORPORATION

Certain provisions of Delaware law and the Company's Certificate of
Incorporation and By-laws could make a merger, tender offer or proxy contest
involving the Company more difficult, even if such events 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, the classification of the Company's Board of
Directors into three classes and the requirement that stockholders owning at
least 66 2/3% of the outstanding shares of Common Stock approve certain
transactions, including mergers and sales or transfers of all or substantially
all of the assets of the Company. Such provisions could limit the price that
certain investors might be willing to pay in the future for shares of the Common
Stock and the Warrants. See "Description of Securities."

LIMITATIONS ON PERSONAL LIABILITY OF DIRECTORS

The Company's Certificate of Incorporation and By-laws contain provisions
that reduce the potential personal liability of directors for certain monetary
damages and provide for indemnity of directors and other persons. The Company is
unaware of any pending or threatened litigation against the Company or its
directors that would result in any liability for which a director would seek
indemnification or similar protection. The Company also maintains officers and
directors liability insurance and has entered into indemnification agreements
with certain of its officers and directors. The indemnification agreements
provide for reimbursement for all direct and indirect costs of any type or
nature whatsoever (including attorneys' fees and related disbursements)
reasonably incurred in connection with either the investigation, defense or
appeal of a covered legal proceeding, including amounts paid in settlement by or
on behalf of an indemnitee thereunder. See "Description of Securities -- Certain
Provisions of the Certificate of Incorporation."

USE OF PROCEEDS

The net proceeds to the Company from the sale of the Securities offered by
the Company hereby (after deducting underwriting commissions and discounts and
estimated offering expenses) are estimated to be $ , excluding the
proceeds from the exercise of any Warrants sold by the Company. See
"Capitalization."

The Company intends to use the net proceeds of this offering for general
corporate purposes including working capital and for possible acquisitions.
Although the Company considers acquisitions from time to time as part of its
normal business operations and planning, it has no present commitments or
agreements with respect to any acquisition. See "Risk Factors -- Broad
Discretion of Management to Allocate Offering Proceeds." If the Underwriters
exercise the over-allotment option in full, the Company will realize additional
net proceeds of $ , which will be added to the Company's working
capital. The exercise price that the Company receives upon the exercise of any
Warrants issued by the Company will also be added to the Company's working
capital and used for general corporate purposes. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

Pending use of the proceeds from this offering as set forth above, the
Company may invest all or a portion of such proceeds in short-term,
interest-bearing securities, U.S. Government securities, money market
investments and short-term, interest-bearing deposits in major banks.

The Company will not receive any proceeds from the sale or exercise of the
Securities sold by the Selling Stockholders.

13
<PAGE> 15

PRICE RANGE OF COMMON STOCK

The Common Stock is traded in the Nasdaq National Market under the symbol
HRLY. The following table sets forth the high and low closing sales price as
reported by the Nasdaq National Market for the 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 1996
First Quarter............................................................ $ 4.59 $ 3.66
Second Quarter........................................................... 6.19 3.84
Third Quarter............................................................ 7.97 5.25
Fourth Quarter........................................................... 9.19 6.00
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 (through November 4, 1997)................................ 13.88 13.13
</TABLE>

The closing price on November 4, 1997 was $13.63. As of November 4, 1997,
there were approximately 370 record holders and 1,100 beneficial holders of the
Common Stock.

There have been no cash dividends declared or paid by the Company on its
Common Stock during the past two fiscal years or the current fiscal year.

DIVIDEND POLICY

Holders of the Common Stock are entitled to dividends when, as and if
declared by the Board of Directors out of funds legally available therefor. The
Company has not declared or paid any dividends for the past two fiscal years, or
the current fiscal year, except for a four-for-three stock split effected as a
stock dividend on September 30, 1997. The Company does not intend to pay cash
dividends in the foreseeable future.

14
<PAGE> 16

CAPITALIZATION

The following table sets forth the capitalization and certain other items
of the Company as of August 3, 1997 and stock capitalization as adjusted to give
effect to the consummation of this offering as if it occurred on August 3, 1997.
This table should be read in conjunction with the financial statements and
related notes included elsewhere in this Prospectus. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

<TABLE>
<CAPTION>
AUGUST 3, 1997
--------------------------
ACTUAL AS ADJUSTED(1)
------- --------------
(IN THOUSANDS, EXCEPT
NUMBER OF SHARES)
<S> <C> <C>
Cash and cash equivalents........................................... $ 1,195
======= =======
Current portion of long-term debt................................... 335
Long-term debt...................................................... 2,890
Note payable to related party....................................... 846
Shareholders' equity:
Common stock, $.10 par value; 10,000,000 shares authorized,
4,209,365 shares issued and outstanding and shares,
as adjusted(2)(3).............................................. 421
Additional paid-in capital........................................ 8,857
-------
Retained earnings................................................. 14,093
------- -------
Total shareholders' equity..................................... 23,371
------- -------
Total capitalization...................................... $27,442
======= =======
</TABLE>

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

(1) Adjusted to give effect to the consummation of this offering as if it
occurred on August 3, 1997, including the repayment of notes receivable of
$2,100,913 at closing from certain officers of the Company. See
"Management -- Certain Transactions."

(2) Gives effect to the four-for-three stock split on September 30, 1997.

(3) Excludes: (i) the 210,000 shares of Common Stock and the 210,000 shares of
Common Stock issuable upon the exercise of the Warrants issuable upon
exercise of the Underwriters' over-allotment option, (ii) the 140,000 shares
of Common Stock and the 140,000 shares of Common Stock issuable upon the
exercise of the Warrants issuable upon exercise of the Managing
Underwriters' Warrant, (iii) the 1,050,000 shares of Common Stock issuable
upon the exercise of the Warrants issued by the Company in connection with
this offering, (iv) the 916,327 shares of Common Stock issuable upon the
exercise of the outstanding options granted under the Company's 1992, 1996
and 1997 stock option plans, and (v) the 320,000 shares of Common Stock
issuable upon the exercise of warrants issued to officers and directors. See
"Underwriting," "Management -- Stock Plans" and "Description of Securities."

15
<PAGE> 17

SELECTED FINANCIAL DATA

The following selected consolidated financial data for each of the five
fiscal years ended August 3, 1997 are derived from the Company's audited
financial statements. This data should be read in conjunction with the
consolidated financial statements of the Company, related notes, and other
financial information included elsewhere in this Prospectus. See "Financial
Statements."
<TABLE>
<CAPTION>
52 WEEKS ENDED 53 WEEKS
--------------------------------------------------- ENDED
JULY JULY JULY AUGUST
AUGUST 1, 31, 30, 28, 3,
1993 1994 1995 1996 1997
--------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................ $21,335 $30,508 $24,450 $29,001 $32,195
Cost of products sold............ 15,129 19,625 18,118 19,798 20,754
Selling and administrative....... 4,909 7,743 5,071 5,832 6,293
------- ------- ------- ------- -------
Income before unusual items...... 1,297 3,140 1,261 3,371 5,148
Unusual items(1)................. -- (746) (5,447) -- --
------- ------- ------- ------- -------
Income (loss) from operations.... 1,297 2,394 (4,186) 3,371 5,148
Other income (expense)(2)........ 532 143 (700) 400 136
------- ------- ------- ------- -------
Income (loss) before income
taxes.......................... 1,829 2,537 (4,886) 3,771 5,284
Provision for income taxes(5).... 438 676 4 102 480
------- ------- ------- ------- -------
Income (loss) from continuing
operations..................... 1,391 1,861 (4,890) 3,669 4,804
Discontinued operations(3)....... (2,464) -- -- -- --
Cumulative effect of accounting
change(4)...................... 2,081 -- -- -- --
------- ------- ------- ------- -------
Net income (loss)................ $ 1,008 $ 1,861 $(4,890) $ 3,669 $ 4,804
======= ======= ======= ======= =======
Earnings (loss) per Common Share:
(6)
Continuing operations....... $ 0.26 $ 0.33 $ (0.98) $ 0.86 $ 1.01
Discontinued
operations(3)............. (0.47) -- -- -- --
Change in accounting........ 0.40 -- -- -- --
------- ------- ------- ------- -------
Net income (loss).............. $ 0.19 $ 0.33 $ (0.98) $ 0.86 $ 1.01
======= ======= ======= ======= =======
Weighted average number of common
and common equivalent shares
outstanding(6)................. 5,256,139 5,701,896 4,978,868 4,253,785 4,733,682
======== ======= ======= ======= =======

<CAPTION>
JULY JULY JULY AUGUST
AUGUST 1, 31, 30, 28, 3,
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets................... $17,909 $15,971 $15,453 $16,263 $20,476
Current liabilities.............. 14,369 10,218 9,974 7,559 9,813
Working capital.................. 3,540 5,753 5,479 8,704 10,663
Total assets..................... 58,375 53,752 42,229 42,509 39,257
Long-term debt, less current
portion........................ 14,054 14,823 10,525 11,021 2,890
Total shareholders' equity....... $27,182 $28,281 $18,988 $21,032 $23,371
</TABLE>

- ---------------
(1) 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.
(2) Consists principally of interest expense offset by investment income as
detailed in the Company's consolidated statements of operations.
(3) Results from the sale of the Company's Marine Products division in 1993.
(4) Relates to the adoption of Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" in 1993.
(5) See Note "I" entitled "Income Taxes" in the Notes to Consolidated Financial
Statements.
(6) As adjusted to give effect to a four-for-three stock split on September 30,
1997.

16
<PAGE> 18

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

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

OVERVIEW

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

Of the Company's total backlog of $36,911,000 at August 3, 1997,
$26,135,000 is attributable to domestic orders and $10,776,000 is attributable
to foreign orders. Management anticipates that approximately $30,000,000 of its
backlog will be shipped during the fiscal year ending August 2, 1998. The
Company includes in its backlog only firm orders for which it has accepted a
written purchase order. However, backlog is not necessarily indicative of future
sales. A substantial amount of the Company's backlog can be cancelled at any
time without penalty, except in most cases, for the recovery of the Company's
actual committed costs and profit on work performed up to the date of
cancellation.

Substantially all of the Company's contracts are fixed price contracts,
wherein sales and related costs are generally recorded as deliveries are made.
Many of these contracts include options exercisable by the customer for
additional products or systems at a fixed price. Certain costs under long-term
fixed price contracts, principally directly or indirectly with the U.S.
Government, which include non-recurring engineering, are deferred until these
costs are contractually billable. The failure to anticipate technical problems,
estimate costs accurately or control costs during a fixed price contract,
including with respect to any option for additional products or systems, may
reduce the Company's profitability or cause a loss under the contract. Revenue
under certain long-term, fixed price contracts, principally command and control
shelters, is recognized using the percentage of completion method of accounting.
Revenues recognized on these contracts are 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 costs. Losses, if
any, on contracts are recorded when first reasonably determined. While certain
revenues were recognized under the percentage of completion method on a
quarterly basis during fiscal 1997, there were no long-term contracts of this
nature during fiscal 1996 and 1995 nor as of August 3, 1997.

The Company believes that its growth depends on its ability to renew and
expand its technology, products, and design and manufacturing processes with an
emphasis on cost effectiveness. The Company's primary efforts are focused on
engineering design and product development activities, rather than pure
research. The cost of these development activities, including employees' time
and prototype development, net of amounts paid by customers, was approximately
$1,828,000, $1,453,000 and $970,000 in fiscal 1997, 1996 and 1995, respectively.
Costs of the Company's internally funded product development efforts are
included in the Company's operating expenses as cost of products sold. Revenue
from customer funded product development is included in net sales and the
related product development costs also are included in cost of products sold.

The Company's effective income tax rate for fiscal 1996 and 1997 was 2.7%
and 9.1%, respectively, reflecting the utilization of prior year net operating
loss ("NOL") carryforwards and the reversal of a valuation allowance for the NOL
carryforwards established in 1995. The valuation allowance was established based
on management's uncertainty that past performance would be indicative of future
earnings. In August 1997, the Company established a foreign sales corporation as
part of an overall domestic tax strategy to reduce

17
<PAGE> 19

its effective income tax rate. The Company anticipates that its effective income
tax rate for fiscal 1998 will be approximately 34%.

RECENT FINANCIAL PERFORMANCE

For the quarter ended November 2, 1997, the Company's net sales were
approximately $10,573,000 as compared to approximately $7,508,000 for the
quarter ended November 3, 1996.

RESULTS OF OPERATIONS

The following table sets forth for the periods indicated certain financial
information derived from the Company's consolidated statements of operations
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 ENDED 53 WEEKS
----------------------- ENDED
JULY 30, JULY 28, AUGUST 3,
1995 1996 1997
-------- -------- ---------
<S> <C> <C> <C>
Net sales..................................................... 100.0% 100.0% 100.0%
Cost of products sold......................................... 74.1 68.3 64.5
----- ----- -----
Gross profit.................................................. 25.9 31.7 35.5
----- ----- -----
Selling and administrative expenses........................... 20.7 20.1 19.5
Income before unusual item.................................... 5.2 11.6 16.0
Unusual item.................................................. (22.3) -- --
----- ----- -----
Operating income (loss)....................................... (17.1) 11.6 16.0
----- ----- -----
Other income (expense):
Net gain (loss) on available-for-sale securities and other
investments.............................................. (1.5) 3.1 1.3
Dividend and interest income................................ 2.5 1.3 0.8
Interest expense............................................ (3.9) (3.0) (1.7)
----- ----- -----
(2.9) 1.4 0.4
----- ----- -----
Income (loss) before income taxes............................. (20.0) 13.0 16.4
Provision for income taxes.................................... 0.0 0.4 1.5
----- ----- -----
Net income (loss)............................................. (20.0)% 12.7% 14.9%
===== ===== =====
</TABLE>

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 lawsuits, $325,000 to performance incentives, and $48,000 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 (expense) 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.

18
<PAGE> 20

The effective income tax rate in 1997 was 9.1%. The 1997 and 1996 tax
provisions reflect the utilization of prior year NOL 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 Financial Statements.

FISCAL 1996 COMPARED TO FISCAL 1995

Net sales for the 52 weeks ended July 28, 1996 were approximately
$29,001,000 compared to $24,450,000 for fiscal 1995. The sales increase of
$4,551,000 (18.6%) is attributable to an increase of approximately $5,845,000 in
flight instrumentation products, of which Stewart Warner Electronics Co.,
acquired in July 1995, contributed $4,321,000, offset by a decrease of
$1,294,000 in microwave components.

Gross profit of 31.7% for the 52 weeks ended July 28, 1996 exceeded the
prior year of 25.9% due to an increase of $2,648,000 in higher margin foreign
sales from $3,908,000 in 1995 to $6,556,000 in 1996, 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 July 28, 1996
were $5,832,000 compared to $5,072,000 for fiscal 1995, an increase of $760,000
of which $388,000 is attributable to increased representative fees on foreign
sales, an increase of $233,000 in personnel and related expenses and other
expenses of $46,000, offset by a reduction of $150,000 in the provision for
customer disputed charges, and decreases in group insurance of $90,000,
depreciation of $69,000 and outside services of $48,000. The addition of Stewart
Warner Electronics Co. added $450,000 in selling and administrative expenses in
fiscal 1996, the specific expenses of which are included in the above numbers.
As a percentage of net sales, selling and administrative expenses decreased from
20.7% in 1995 to 20.1% in 1996.

Included in unusual items in 1995 are settlement costs in connection with
certain legal actions of $4,310,000, legal fees of $829,000, and related
expenses of $308,000.

Other income (expense) for the 52 weeks ended July 28, 1996 increased
$1,100,000 from the prior year due to net gains on available-for-sale securities
and other long-term investments of $898,000 as compared to losses of $356,000 in
1995, and a decrease in interest expense of $88,000, offset by decreased
dividend and interest income of $242,000.

The effective income tax rate in 1996 was 2.7%. The 1996 tax provision
reflects the utilization of prior year NOL carryforwards. No income tax benefit
was recorded in 1995 due to an increase in the valuation allowance. The
valuation allowance was provided relating to that portion of NOL carryforwards
that management believed might expire unutilized.

19
<PAGE> 21

QUARTERLY RESULTS OF OPERATIONS

The following table sets forth certain unaudited quarterly consolidated
financial data for each of the eight consecutive quarters in fiscal 1996 and
1997. This information is derived from unaudited consolidated financial
statements that include, in the opinion of the Company, all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation
when read in conjunction with the consolidated financial statements of the
Company and notes thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
14 WEEKS 13 WEEKS ENDED
13 WEEKS ENDED ENDED ----------------------------
----------------------------------------------- -------- FEB. AUG.
OCT. 29, JAN. 28, APR. 28, JUL. 28, NOV. 3, 2, MAY 4, 3,
1995 1996 1996 1996 1996 1997 1997 1997
-------- -------- -------- -------- -------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.................. $7,063 $7,197 $7,236 $ 7,505 $7,508 $7,146 $8,426 $9,115
Cost of products sold...... 4,888 5,028 4,929 4,953 5,171 4,916 5,278 5,388
------ ------ ------ ------ ------ ------ ------ ------
Gross profit............... 2,175 2,169 2,307 2,552 2,337 2,230 3,148 3,727
Selling and administrative
expenses................. 1,415 1,541 1,357 1,519 1,399 1,352 1,532 2,010
------ ------ ------ ------ ------ ------ ------ ------
Operating income*.......... 760 628 950 1,033 938 878 1,616 1,717
------ ------ ------ ------ ------ ------ ------ ------
Other income (expense):
Gain (loss) on sale of
available-for-sale
securities............. 55 1,109 (131) (136) 15 -- 81 313
Dividend and interest
income................. 63 100 126 87 48 90 62 58
Interest expense......... (227) (219) (168) (260) (129) (188) (126) (89)
------ ------ ------ ------ ------ ------ ------ ------
(109) 990 (173) (309) (66) (98) 17 282
------ ------ ------ ------ ------ ------ ------ ------
Income before income
taxes.................... 651 1,618 777 724 872 780 1,633 1,999
Provision for income taxes
(benefit)................ 135 81 -- (114) -- -- 182 298
------ ------ ------ ------ ------ ------ ------ ------
Net income................. $ 516 $1,537 $ 777 $ 838 $ 872 $ 780 $1,451 $1,701
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>

20
<PAGE> 22

The following table sets forth, for the periods indicated, the percentage
of net sales represented by the indicated items:

<TABLE>
<CAPTION>
14 WEEKS 13 WEEKS ENDED
13 WEEKS ENDED ENDED ----------------------------
----------------------------------------------- -------- FEB. AUG.
OCT. 29, JAN. 28, APR. 28, JUL. 28, NOV. 3, 2, MAY 4, 3,
1995 1996 1996 1996 1996 1997 1997 1997
-------- -------- -------- -------- -------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of products sold...... 69.2 69.9 68.1 66.0 68.9 68.8 62.6 59.1
----- ----- ----- ----- ----- ----- ----- -----
Gross profit............... 30.8 30.1 31.9 34.0 31.1 31.2 37.4 40.9
Selling and administrative
expenses................. 20.0 21.4 18.8 20.2 18.6 18.9 18.2 22.1
----- ----- ----- ----- ----- ----- ----- -----
Operating income*.......... 10.8 8.7 13.1 13.8 12.5 12.3 19.2 18.8
----- ----- ----- ----- ----- ----- ----- -----
Other income (expense):
Gain (loss) on sale of
available-for-sale
securities............. 0.8 15.4 (1.8) (1.8) 0.2 -- 1.0 3.4
Dividend and interest
income................. 0.9 1.4 1.7 1.2 0.6 1.3 0.7 0.6
Interest expense......... (3.2) (3.0) (2.3) (3.5) (1.7) (2.6) (1.5) (1.0)
----- ----- ----- ----- ----- ----- ----- -----
(1.5) 13.8 (2.4) (4.1) (0.9) (1.4) 0.2 3.1
----- ----- ----- ----- ----- ----- ----- -----
Income before income
taxes.................... 9.2 22.5 10.7 9.6 11.6 10.9 19.4 21.9
Provision for income taxes
(benefit)................ 1.9 1.1 -- (1.5) -- -- 2.2 3.3
----- ----- ----- ----- ----- ----- ----- -----
Net income................. 7.3% 21.4% 10.7% 11.2% 11.6% 10.9% 17.2% 18.7%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>

- ---------------
* There were no unusual items in fiscal 1996 and 1997.

The Company has experienced in the past and will experience in the future
quarterly variations in net sales and net income. Thus, operating results for
any particular quarter are not necessarily indicative of results for any future
period. Factors that have affected quarterly operating results include the
timing, execution or delay of contract awards, the relative mix of foreign and
domestic shipments, the relative mix of flight instrumentation products and
microwave components, the timing and integration of acquisitions, and the level
of selling and administrative expenses.

LIQUIDITY AND CAPITAL RESOURCES

As of August 3, 1997 and July 28, 1996, working capital was approximately
$10,662,000 and $8,704,000, respectively, and the ratio of current assets to
current liabilities was 2.09 to 1.00 and 2.15 to 1.00, respectively. At August
3, 1997, the Company had cash and cash equivalents of approximately $1,195,000.

As is customary in the defense industry, inventory is partially financed by
advance payments. The unliquidated balance of these advance payments was
approximately $3,091,000 at the end of fiscal 1997, and $1,480,000 at the end of
fiscal 1996.

Net cash provided from operations and investing activities in 1997 was
approximately $3,647,000, and $6,159,000, respectively. Cash provided by
investing activities resulted primarily from the liquidation of all the
available-for-sale securities, and the sale of the Company's interest in the M.
D. Sass Re/Enterprise-II, L.P., limited partnership. The Company used
approximately $9,715,000 of these funds in financing activities primarily for
the net payment of outstanding bank debt of $7,250,000, and the purchase of
treasury stock for $2,783,000.

The Company maintains a revolving credit facility with a bank for an
aggregate of $11,000,000, which expires January 31, 1999. No borrowings were
outstanding on this line at August 3, 1997. As of July 28, 1996, the Company had
borrowings outstanding of $6,950,000.

21
<PAGE> 23

During the fiscal year ended August 3, 1997 the Company acquired 244,519
shares of its outstanding common stock for $2,782,686 through open market
purchases, pursuant to a stock purchase plan to acquire up to 400,000 post-split
shares of Common Stock, which was terminated in June 1997. The Company also
acquired 463,639 shares, valued at $6,429,124 in connection with certain
"stock-for-stock" exercises of stock options by which certain employees elected
to surrender "mature" shares owned in settlement of the option price. Such
exercises are treated as an exercise of a stock option and the acquisition of
treasury shares by the Company. See "Management -- Stock Plans."

The Company believes that presently anticipated future cash requirements
will be provided by internally generated funds, existing credit facilities, and
the Company's net proceeds from this offering.

22
<PAGE> 24

BUSINESS

GENERAL

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

The Company has grown internally and through five strategic acquisitions.
As a result, the Company has experienced a compound annual growth rate of 41% in
its operating income before unusual items for the five fiscal years ended August
3, 1997. See "Selected Financial Information." With these acquisitions, the
Company has evolved from a components manufacturer to a systems and service
provider and has leveraged its technical capabilities and expertise into
domestic commercial and foreign defense markets.

Since its inception in 1965, the Company has designed and manufactured
microwave devices for use in various tactical military programs. In June 1986,
the Company acquired a small engineering company, Mission Design, Inc., engaged
in the design and development of transponders. This acquisition enabled the
Company to enter the flight instrumentation business beginning with the design
and manufacture of range safety transponders. In September 1992, the Company
acquired substantially all of the assets of Micro-Dynamics, Inc. ("MDI") of
Woburn, Massachusetts, a microwave subsystem designer and manufacturer. In June
1993, the Company acquired Vega Precision Laboratories, Inc. ("Vega") of Vienna,
Virginia, a manufacturer of flight instrumentation products and command and
control systems for sale in domestic and foreign markets. In October 1993, the
Company moved the Vega operations to Lancaster, Pennsylvania. In March 1994, the
Company entered into a license agreement granting the Company the right to
manufacture, market and sell the MAGIC(2) system. In July 1995, the Company
acquired certain assets and the business of Stewart Warner Electronics Corp. of
Chicago, Illinois, a manufacturer of high frequency radio and IFF interrogator
systems. In August 1997, the Company acquired Metraplex of Frederick, Maryland,
enabling the Company to enter the airborne PCM and FM telemetry and data
acquisition systems market.

INDUSTRY OVERVIEW AND ACTIVITIES

United States Defense Market. The U. S. defense industry has undergone
significant changes resulting from federal budget pressures. These changes
include attrition in the number of military equipment suppliers and industry
consolidation among survivors. Also, new tactical threats have created new
objectives and roles for defense contractors. The Department of Defense and the
industry has begun to place more emphasis on improved military readiness and
using advanced electronics for enhanced performance and extended life of its
equipment. The focus is now on quick reaction to military and political
incidents, rather than all out nuclear war. The electronic content of the
military procurement budget is expected to grow at the expense of traditional
armaments such as tanks and ships.

The Company serves the test and training ranges established by the
government to test and develop new weapons and train troops in their use. The
government procures airborne target vehicles that simulate aggressor aircraft
during the training exercise. The function of the command and control system is
to "fly" the unmanned target through its pre-planned mission as it simulates its
attack on a ship or a ground target. The

23
<PAGE> 25

defenders will fire an instrumented defense weapon, such as a missile, at the
target as it is commanded through its attack plan. The Company believes that it
has been a principal supplier of command and control systems to the training
ranges in the United States. Until recently, the Company's command and control
system was the transportable 6104 TTCS and the portable 6157 TTCS. These systems
could control a single target, generally from up to 100 miles away. With the
limited range of defensive weapons then available, and prior to the widespread
use of GPS, the single attacking target was an acceptable training scenario.
With the weaponry available today, such military exercises are no longer
acceptable for realistic training. A modern military force must defend against
multiple attacking aircraft, cruise missiles, and short range ballistic missiles
such as the Exocet and SCUD. The Company's MAGIC(2) system has been designed to
control complex scenarios such as multiple targets attacking from over the
horizon.

The Company's largest customer is the Navy. For more than 20 years the Navy
has been developing the Aegis fire control radar, which is installed on
destroyers and cruisers in connection with the protection of a battle fleet. The
Aegis is a long range radar that is used in conjunction with the Standard
missile to defend the battle fleet against aggressors. The Standard missile has
recently been improved with an extended range that permits it to attack hostile
forces over the horizon. Prior to the development of the extended range Standard
missile, the Navy was able to train its naval forces by simulating an attack by
a single UAV at relatively close range. Recently Congress and the Department of
Defense have instructed the Navy to: (i) change its training methods to present
multiple UAVs acting as aggressor aircraft, (ii) detect and defend against them
at long ranges, taking advantage of the new range of the Standard missile and
(iii) otherwise prepare for the naval engagement of the future. Those future
naval engagements are expected to be conducted in a "littoral" warfare scenario,
meaning "along the shore," such as the Persian Gulf.

With this new directive calling for realistic training against multiple
threats at extended ranges in a littoral warfare scenario, the Navy has used the
Company's MAGIC(2) system. This system was tested and qualified by the Navy in
1995 and has been installed at the Navy range at Patuxent River, Maryland.

The primary ranges using the Company's instrumentation products are: Naval
Air Warfare Center, Weapons Division, Pt. Mugu, California; Naval Air Warfare
Center, Weapons Division, China Lake, California; Naval Air Warfare Center
Aircraft Division, Atlantic Ranges and Facilities, Patuxent River, Maryland;
U.S. Army White Sands Missile Range, New Mexico; Eglin Air Force Base, Florida;
Edwards Air Force Base, California; Pacific Missile Range Facility, Barking
Sands, Hawaii; and Atlantic Fleet Weapons Training Facility, Roosevelt Roads,
Puerto Rico.

International Defense Market. The Company believes that the training range
market is a niche market for the sale of command and control systems, test
equipment and flight instrumentation products. The highest profit margins
experienced by the Company have been from sales to foreign customers in this
niche market. Approximately 29% of the Company's backlog is from foreign
customers, especially customers in the Pacific Rim and Europe. The governments
of Japan, South Korea, Taiwan and the United Kingdom are all significant
customers of the Company and have the potential to become larger customers. The
governments of Egypt, France, Singapore and Australia are also customers of the
Company. These countries purchase the Company's products to train their forces
to defend themselves against enemies. The Company's intent is to build its
business based on these long-term relationships. This growth is intended to be
fueled by the Company's newly-developed command and control systems, including
MAGIC(2), which has already been sold to the governments of Australia and
Singapore.

The Company has approximately 20 technical representative agencies around
the world, which are experienced in selling within their markets. In addition,
the Company's products are supported by qualified service and field engineering
personnel, who are available on short notice to service the Company's systems
and products abroad.

Space Launch Systems and Satellites. In the 1950s, the development of
space launch systems and satellites was funded primarily by government agencies
responsible for national security and scientific exploration. Beginning in the
1960s government expenditures for space programs were supplemented with
commercial investments as the advantages of using satellites for relaying
television and telephone conversations over long distances were recognized.
Organizations such as the Communications Satellite Corporation

24
<PAGE> 26

("COMSAT") and the International Telecommunications Satellite Organization
("INTELSAT") were formed to promote and regulate the use of satellites for
commercial communications in the United States and abroad. Major contractors
such as TRW Inc., Space Systems/Loral Inc., Hughes Electronics Corporation, and
Lockheed-Martin Corp. invested private funds in developing satellites for
commercial communications. Other major corporations, such as Boeing Co.,
Lockheed-Martin and Orbital Sciences Corp. developed expendable launch vehicles
that could place the satellites in orbit around the globe. The Company believes
that the satellite communications business today represents the largest
commercial market in the space industry.

More recently, advances in microprocessors, antennas and power systems and
other electronic technologies have made it possible to manufacture smaller, less
expensive and higher performance launch vehicles and communication and
observation satellites. These improvements permit space-based systems to be
applied to a much broader range of commercial, research and educational
applications, including global personal communications, environmental monitoring
and vehicle navigation and position reporting. In addition to the large number
of satellites now in use that have been placed in geosynchronous orbit (fixed
position in space) at high altitudes, a less expensive market for low earth
orbit ("LEO") satellites is developing. Space launch vehicles capable of
launching clusters of small satellites in geosynchronous orbit, and sub-orbital
launch vehicles are increasingly being used for satellite-based communications
services.

A rapidly growing commercial portion of the Company's business is the
production of range safety transponders for the placement of satellites in
orbit. These transponders are expendable devices used to track a satellite space
launch. The Company believes that for the past ten years, it has been the only
qualified supplier of range safety transponders for all space launches conducted
in the United States. The Company's primary vehicle customers are
Lockheed-Martin Corp. for the Atlas, Atlas-Centaur and Titan, Boeing Co. for the
Delta II, III and IV, and Orbital Sciences Corp. for the Taurus and Pegasus. The
Company has expended over $5 million in engineering funds during the past ten
years in development of a series of Herley range safety transponders, some of
which expenses have been borne by the Company's customers.

At present, the space business represents approximately 10% of the
Company's annual revenues. The frequency of space launches has been growing
steadily during the past few years. Two factors are expected to increase the
number of space launches, and the Company's space launch business, in the next
few years.

The first factor is the growing number of global mobile satellite telephone
systems, headed by the Motorola Iridium, that are being placed in orbit around
the world. Motorola's Iridium system requires a constellation of 66 satellites.
A competitive system, the Orbcomm, developed by Orbital Sciences Corp., will use
34 satellites. Another competitive system, the Loral Globalstar currently is
being manufactured, and is planned for a 1998 space installation. The Globalstar
will use 48 satellites. In addition, a satellite network called Teledesic
manufactured by Boeing Co. received an FCC license to build 288 LEO satellites
which is scheduled to be in operation by the year 2002. Motorola also has plans
to build a 63 LEO network called Celestri by the year 2002.

The second factor working to increase the number of space launches is that
the boundaries of space are now being used for innovative applications of new
technologies. Examples of the applications of new systems include high-speed
data delivery, broadcasting interactive television and games, video
conferencing, Internet access, "intranets" for business, telemedicine,
television on demand, connecting cellular phone networks, software distribution
and training. The main target market is interactive broadband services. Leading
these applications are a joint venture of Alcatel of France with their Skybridge

network, and Loral Space and Communication with their Cyberstar system.

25
<PAGE> 27

BUSINESS STRATEGY

The Company's growth strategy to achieve its objectives involves the
following key elements:

- DESIGN AND MANUFACTURE NEW PRODUCTS AND SYSTEMS USING ITS EXPERTISE IN
DIGITAL, SOFTWARE AND MICROWAVE TECHNOLOGIES. The Company has experience
in microwave technologies and in the use of software technology in
designing and manufacturing its systems and products. With the 1997
acquisition of Metraplex, the Company has acquired the digital expertise
necessary to manufacture and design additional products for both military
and commercial use.

- BROADEN EXISTING MARKETS FOR THE COMPANY'S PRODUCTS THROUGH THE
AGGRESSIVE PURSUIT OF LARGE DATA LINK AND COMMAND AND CONTROL SYSTEM
SALES. Through its recent acquisition of Metraplex, which offers a
comprehensive product line of PCM and FM products, the Company now has
the capability of expanding sales to its existing customers through the
sale of complete data link systems for aerospace and missile
applications. Previously, the Company only could offer products
comprising part of the data link system, such as transponders, because
the Company did not sell PCM encoders, which are important components of
the data link system. In contrast to the sale of individual products,
contracts for a complete data link system are generally multi-year,
multi-million dollar projects. The ability to sell a complete data link
system also affords the Company the opportunity to expand its customer
base for its command and control systems through the introduction and
sale of command and control systems to new customers purchasing a
complete data link system.

- EXPAND THE SALES OF THE COMPANY'S PRODUCTS AND SYSTEMS IN THE
INTERNATIONAL MARKETS. In January 1996, the Company formed Global
Security Systems ("GSS"), a marketing group, to pursue additional
opportunities and service components and systems in the international
marketplace. The Company's products have been installed in a number of
training ranges throughout the world, as countries continue to train
armed forces to defend against enemies. This is a niche market served by
the Company. The Company intends to increase sales in this high margin
business through the sale of its newly developed command and control
systems, including Magic(2), and the ancillary business created in test
equipment and the replenishing of expendable products.

- EXTEND THE CAPABILITIES AND POTENTIAL USES OF THE COMPANY'S PRODUCTS IN
THE RAPIDLY GROWING SPACE LAUNCH INDUSTRY AND IN CERTAIN COMMERCIAL
INDUSTRIAL APPLICATIONS. The Company believes that for the past ten
years, it has been the only qualified supplier of range safety
transponders for any military or commercial space launches conducted in
the United States. The Company intends to capitalize on changes in
government policy that has enabled private industry to launch satellites,
and new technology providing for use of satellites, by selling its
transponders and systems for use on the numerous space launches to be
conducted in the next few years. The Company also intends to expand the
sale of its products and systems into new commercial areas.

- IMPLEMENT COST SAVING MEASURES THROUGH THE CONTINUED VERTICAL INTEGRATION
OF THE COMPANY'S RECENT ACQUISITIONS. The Company believes that
additional cost saving measures can be achieved through consolidating the
manufacturing operations of its various recent acquisitions. These cost
savings include reducing corporate, administrative and facilities
expenses and from certain operating performance improvements.

- CONTINUE TO CAPITALIZE ON STRATEGIC ACQUISITION OPPORTUNITIES. The
Company intends to continue to consider potential acquisitions in related
areas that offer opportunities to increase market share and expand the
Company's line of systems and products.

26
<PAGE> 28

PRODUCTS

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

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

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

With the 1994 licensing of the MAGIC(2) system, the Company increased the
selection of command and control systems. The 6104 TTCS (Target Tracking and
Control System) unit is a line-of-sight command and control system with an
installed base of equipment worldwide. The Company's engineers and marketers are
now able to offer the 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 Company command panel and the software
peculiar to one vehicle. Telemetry display software is embedded for the
specified vehicle, and a magnetic hard drive is supplied with a mission map
prepared in accordance with a customer supplied detailed map of the area.

27
<PAGE> 29

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

MAGIC(2)

MULTIPLE AIRCRAFT GPS INTEGRATED

COMMAND & CONTROL

[DIAGRAM OF USE OF MAGIC2 SYSTEM CONTROLLING MULTIPLE TARGETS OVER THE HORIZON
IN THE TESTING OF AN AEGIS CRUISER]
- --------------------------------------------------------------------------------

The TTCS provides reliable control of a single target, it has been utilized
world wide for over 20 years. 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 requirements.

TTCS 6104

[DIAGRAM OF THE USE OF TTCS TO CONTROL A SINGLE TARGET]

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<PAGE> 30

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

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

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

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

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

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

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

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

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

29
<PAGE> 31

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. The FTR can be programmed for
complex combinations of audio tone frequencies so that it will not accidentally
explode the vehicle, but will not fail to explode the vehicle when so commanded.

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

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

The Company produces receiver protector devices. These high power devices
protect a radar receiver from transient bursts of microwave energy and are
employed in almost every military and commercial radar system. With the
contraction of the defense business, the Company believes that it has only one
competitor in this market.

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

NEW PRODUCT DEVELOPMENT AND APPLICATIONS

The Company believes that its growth depends, in part, on its ability to
renew and expand its technology, products, and design and manufacturing
processes with an emphasis on cost effectiveness. The Company's primary efforts
are focused on engineering design and product development activities rather than
pure research. A substantial portion of the Company's development activities
have been funded by the Company's customers. Certain of the Company's officers
and engineers are involved at various times and in varying degrees in these
activities. The Company's policy is to assign the required engineering and
support people, on an ad hoc basis, to new product development as needs require
and budgets permit. The cost of these development activities, including
employees' time and prototype development, net of amounts paid by customers,
were approximately $1,828,000, $1,453,000, and $970,000 in fiscal 1997, 1996,
and 1995, respectively.

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<PAGE> 32

by others to the Company's existing customers. With its recent acquisition of
Metraplex, the Company may now offer data link systems to its customers, either
directly or through teaming arrangements. Upon receipt of an order, the Company
will customize the design of a system for its customer for delivery typically
nine months after receipt of such order.

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

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

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

GOVERNMENT CONTRACTS

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

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

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

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<PAGE> 33

MARKETING AND DISTRIBUTION

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

BACKLOG

The Company's backlog of firm orders was approximately $36,911,000 on
August 3, 1997 ($26,135,000 in domestic orders and $10,776,000 in foreign
orders) as compared to approximately $23,770,000 on July 28, 1996 ($13,632,000
in domestic orders and $10,138,000 in foreign orders). Management anticipates
that approximately $30,000,000 of the backlog will be shipped during the fiscal
year ending August 2, 1998. There can be no assurance that the Company's backlog
will result in sales in any particular period or at all, or that the contracts
included in backlog that result in sales will be profitable.

MANUFACTURING, ASSEMBLY AND TESTING

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

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

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

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

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

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

COMPETITION

The flight instrumentation products that the Company manufactures are
subject to varied competition depending on the product and market served.
Competition is generally based upon technology, design, price and past
performance. The Company's ability to compete for defense contracts depends, in
part, on its ability to offer better design and performance than its competitors
and its readiness in facilities, equipment and personnel to undertake to
complete the programs. In certain products on programs, the Company believes it
is

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<PAGE> 34

sole source, which means that all work is directed to a single manufacturer. In
other cases, there may be other suppliers that have the capability to compete
for the programs involved, but they can only enter or reenter the market if the
government should choose to reopen the particular program to competition.
Competition in follow-on procurements is generally limited after an initial
award unless the original supplier has had performance problems. Many of
Herley's competitors are larger and may have greater financial resources than
the Company. Competitors include Aydin Corporation, L-3 Communications
Corporation, Microsystems, Inc., AMP, Inc. and Remec, Inc.

EMPLOYEES

As of October 12, 1997, the Company employed 286 full-time persons. A total
of 203 employees were engaged in manufacturing, 38 in engineering, 20 in
marketing, contract administration and field services and the balance in general
and administrative functions. None of the Company's employees are covered by
collective bargaining agreements and the Company considers its employee
relations to be satisfactory.

The Company believes that its future success will depend, in part, on its
continued ability to recruit and retain highly skilled technical, managerial and
marketing personnel. To assist in recruiting and retaining such personnel, the
Company has established competitive benefits programs, including stock option
plans.

INTELLECTUAL PROPERTY

The Company does not presently hold any significant patents applicable to
its products. In order to protect its intellectual property rights, the Company
relies on a combination of trade secret, copyright and trademark laws and
certain employee and third-party nondisclosure agreements, as well as limiting
access to and distribution of proprietary information. There can be no assurance
that the steps taken by the Company to protect its intellectual property rights
will be adequate to prevent misappropriation of the Company's technology or to
preclude competitors from independently developing such technology. Trade secret
and copyright laws afford the Company limited protection. Furthermore, there can
be no assurance that, in the future, third parties will not assert infringement
claims against the Company or with respect to its products for which the Company
has indemnified certain of its customers. Asserting the Company's rights or
defending against third party claims could involve substantial costs and
diversion of resources, thus materially and adversely affecting the Company's
business, results of operations and financial condition. In the event a third
party were successful in a claim that one of the Company's products infringed
its proprietary rights, the Company would have to pay substantial royalties or
damages, remove that product from the marketplace or expend substantial amounts
to modify the product so that it no longer infringed such proprietary rights,
any of which could have a material adverse effect on the Company's business,
results of operations and financial condition.

PROPERTIES

The Company's properties are as follows:

<TABLE>
<CAPTION>
AREA OWNED
OCCUPIED OR
LOCATION PURPOSE OF FACILITY (SQ. FT.) LEASED
- --------------------------------- ------------------------------------------- --------- -------
<S> <C> <C> <C>
Lancaster, PA(1)................. Production, engineering, administrative and 71,200 Owned
executive offices
Woburn, MA....................... Production, engineering and administration 60,000 Owned
Chicago, IL...................... Production, engineering and administration 9,500 Leased
Frederick, MD.................... Production, engineering and administration 14,700 Leased
Lancaster, PA(2)................. Land held for expansion 21 acres Owned
</TABLE>

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

(2) See "Business -- Certain Transactions."

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

LEGAL PROCEEDINGS

The Company is not involved in any material legal proceedings.

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<PAGE> 35

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH THE COMPANY
- ----------------------------------- --- --------------------------------------------------
<S> <C> <C>
Lee N. Blatt....................... 69 Chairman of the Board and Chief Executive Officer
Myron Levy......................... 57 President and Director
Anello C. Garefino................. 50 Vice President -- Finance, Treasurer and Chief
Financial Officer
Allan Coon......................... 61 Vice President
Adam J. Bottenfield................ 37 Vice President -- Engineering
Raymond Umbarger................... 50 Vice President -- Domestic Marketing
George Hopp........................ 59 Vice President -- International Marketing
Glenn Rosenthal.................... 37 Vice President
David H. Lieberman................. 52 Secretary and Director
Adm. Thomas J. Allshouse (Ret.).... 72 Director, Member of Compensation and Audit
Committees
Alvin M. Silver.................... 66 Director, Member of Compensation and Audit
Committees
John A. Thonet..................... 47 Director
Adm. Edward K. Walker, Jr. Director, Member of Compensation and Audit
(Ret.)........................... 64 Committees
</TABLE>

Mr. Lee N. Blatt is a co-founder of the Company and has been Chairman of
the Board of the Company 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 1999 annual meeting of stockholders.

Mr. Myron Levy has been President of the Company 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 the Company, 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 the Company 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 the Company in 1992 and was appointed Vice President
in December 1995. Prior to joining the Company, Mr. Coon was Senior Vice
President and Chief 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 the Company as Systems Engineering
Manager of Herley-Vega Systems since the Company's acquisition of Vega in 1993.
From 1984 to 1993, Mr. Bottenfield was Manager of Digital and Software
Engineering of Vega.

Mr. Raymond Umbarger was appointed Vice President -- Domestic Marketing in
July 1997, having been employed by the Company 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

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<PAGE> 36

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 the Company in a sales and marketing
position since 1995 and directs the operations of the Company's GSS division.
For more than ten years prior to joining the Company, Mr. Hopp was Director of
International Programs for Northrop Grumman, Military Aircraft Division.

Mr. Glenn Rosenthal was appointed Vice President of the Company in August
1997. From June 1988 until its acquisition by the Company 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. David H. Lieberman has been a director of the Company since 1985 and
Secretary of the Company 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 Company. Mr. Lieberman's term as a director expires at the 1997 annual
meeting of stockholders.

Admiral Thomas J. Allshouse (Ret.) has been a director of the Company 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 Business Administration
from Harvard University. Admiral Allshouse's term as a director expires at the
1998 annual meeting of stockholders.

Mr. John A. Thonet has been a director of the Company 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 1999
annual meeting of stockholders.

Dr. Alvin M. Silver has been a director of the Company 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 the Company
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 1997 annual meeting of stockholders.

Mr. Gerald Klein, Chief Technologist for the Company since March 1994, has
been employed by the Company since 1988, serving as Chief Operating Officer and
Executive Vice President from July 1988 until December 1996 and was a director
of the Company from 1991 until December 1996.

CORPORATE GOVERNANCE

In November, 1997, the Board of Directors of the Company amended the
Company's By-laws to add a new article, which concerns certain corporate
governance matters. This article may only be amended or repealed with the
approval of the holders of 66 2/3% of the outstanding shares of the Common
Stock. In

35
<PAGE> 37

addition, in the Underwriting Agreement the Company agreed to certain
compensation restrictions during the two years immediately after the closing of
this offering.

By-laws. The new article requires that any corporate opportunity presented
to any director or officer of the Company (or any director or officer of any
subsidiary of the Company), including any affiliates of such director or
officer, concerning a business transaction involving the type of business
conducted by the Company or any of its subsidiaries, to be defined therein, be
submitted to the Company's Board of Directors for its approval. Such director or
officer may not take any action with respect to such opportunity until the
earlier of: (i) the decision by the Board of Directors of the Company not to
pursue the opportunity or (ii) the expiration of 30 days after submission of
such opportunity to the Board of Directors.

The new article prohibits the Company, and requires the Company to prohibit
any of its subsidiaries, from entering into any transaction with any director or
officer of the Company or any of its subsidiaries, or any affiliate of such
director or officer, unless such transaction has been unanimously approved by
the disinterested directors of the Company's Board of Directors.

The new article provides that both the Audit Committee and the Compensation
Committee of the Board of Directors must contain only independent directors. As
described above, in November 1997, the Board of Directors expanded the number of
directors comprising the Board of Directors to seven members and elected Mr.
Silver and Admiral Walker to fill the two vacancies created. Mr. Silver and
Admiral Walker will serve on the Audit Committee and the Compensation Committee
with Admiral Allshouse.

The new article requires the Company to invest any cash not necessary for
the Company's current needs in certain high quality short-term securities.

Underwriting Agreement. In the Underwriting Agreement, the Company agreed
that for the two years immediately after the closing of this offering, the
Company would not issue or sell any shares of Common Stock (except with respect
to outstanding options or warrants), or securities convertible into,
exchangeable for, or options or other rights to acquire shares of Common Stock
to Lee N. Blatt, Myron Levy, or Gerald I. Klein, or any relative or affiliate of
such individuals (collectively, the "Executives") or increase any compensation
payable to any Executive unless such issuance or sale of securities or increase
in compensation is unanimously approved by the members of the Compensation
Committee. During such two year period, the Company also agreed that it would
not re-price any outstanding stock options.

In addition, the Company agreed that during such two year period the
compensation to the Company's directors and executive officers would be based
upon standards established with the assistance of an outside compensation
specialist. In furtherance of certain of these new policies, Messrs. Blatt, Levy
and Klein amended certain aspects of their employment agreements with the
Company and will repay the loans that the Company previously made to them, at
the closing of this offering.

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<PAGE> 38

EXECUTIVE COMPENSATION

The following table sets forth the annual and long-term compensation with
respect to the Chairman/Chief Executive Officer, the Company's four most highly
compensated executive officers other than the Chief Executive Officer and one
individual who served as an executive officer for a portion of fiscal year 1997
and all of fiscal years 1996 and 1995 (the "named executive officers") for
services rendered for the fiscal years ended August 3, 1997, July 28, 1996 and
July 30, 1995.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION(1) --------------------------------
--------------------------------- SECURITIES
NAME AND FISCAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY(2) BONUS(3) OPTIONS/SARS(4) COMPENSATION
- -------------------------------- ------ --------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Lee N. Blatt.................... 1997 $ 531,629 $302,432 599,999(5) $4,500(6)
Chairman of 1996 483,028 203,068 133,333(7) 4,500
the Board 1995 503,842 -- 133,333 4,620
Myron Levy...................... 1997 $ 307,764 $181,460 400,000(5) $9,000(6)
President 1996 288,726 121,841 66,667(7) 7,380
1995 295,331 27,500 66,666 6,636
Allan Coon...................... 1997 $ 110,011 -- 73,332(5) $5,751(6)
Vice President 1996 110,011 $ 30,000 13,333(7) 4,569
1995 99,008 15,000 -- 4,245
Anello C. Garefino.............. 1997 $ 101,914 -- 59,999(5) $3,579(6)
Vice President 1996 97,885 $ 15,000 13,333(7) 3,424
Finance-Treasurer 1995 90,620 -- 13,333 3,173
George Hopp..................... 1997 $ 107,615 -- 18,666(5) $1,422(6)
Vice President 1996 104,000 -- -- 1,185
1995 44,000 -- 6,667 --
Gerald I. Klein(8).............. 1997 $ 307,764 $181,460 99,999(5) $4,500(6)
1996 288,726 121,841 66,667(7) 4,500
1995 295,328 -- 66,666 4,620
</TABLE>

- ---------------
(1) Does not include Other Annual Compensation because amounts of certain
perquisites and other non-cash benefits provided by the Company 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, Levy and Klein incentive compensation under
employment agreements. No incentive compensation was earned under the
employment agreements in fiscal 1995. Mr. Levy was awarded a bonus by the
Board of Directors for fiscal 1995. See "Management -- 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 Common Stock of the Company 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, Gerald I.
Klein - 33,333 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, Gerald I. Klein - 66,666 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 $1,422
for Mr. Hopp, and (b) contributions to the Company's 401(k) Plan as a
pre-tax salary deferral as follows: $4,500 for each of Messrs. Blatt, Levy
and Klein, $3,364 for Mr. Coon, and $3,057 for Mr. Garefino.

(7) Represents warrants issued in December 1995 for the right to purchase Common
Stock of the Company at a price of $4.6425.

(8) Effective December 1996, Mr. Klein ceased to serve as an executive officer
of the Company.

37
<PAGE> 39

OPTION/SAR GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
--------------------------------------------------- POTENTIAL REALIZED VALUE AT
NUMBER OF % OF TOTAL ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS ISSUED STOCK PRICE APPRECIATION
UNDERLYING TO EMPLOYEES EXERCISE OPTION TERM(4)
OPTIONS IN PRICE EXPIRATION -----------------------------------
NAME GRANTED(2) FISCAL YEAR(3) ($/SH) DATE 0% 5% 10%
- ------------------- ---------- -------------- -------- ---------- ----- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Lee N. Blatt....... 133,333 9 $ 6.9375 10/08/06 $0.00 $ 255,559 $ 564,720
133,333 9 $ 6.0938 04/04/07 $0.00 $ 224,480 $ 496,042
333,333 24 $ 6.4688 05/01/07 $0.00 $1,356,063 $3,436,530
Myron Levy......... 100,000 7 $ 6.9375 10/08/06 $0.00 $ 191,670 $ 423,541
100,000 7 $ 6.0938 04/04/07 $0.00 $ 168,360 $ 372,032
200,000 14 $ 6.4688 05/01/07 $0.00 $ 813,638 $2,061,920
Allan Coon......... 26,666 2 $ 6.9375 10/08/06 $0.00 $ 51,111 $ 112,942
20,000 1 $ 6.0938 04/04/07 $0.00 $ 33,672 $ 74,406
26,666 2 $ 6.4688 05/01/07 $0.00 $ 108,482 $ 274,916
Anello C.
Garefino......... 13,333 1 $ 6.9375 10/08/06 $0.00 $ 25,555 $ 56,470
20,000 1 $ 6.0938 04/04/07 $0.00 $ 33,672 $ 74,406
26,666 2 $ 6.4688 05/01/07 $0.00 $ 108,482 $ 274,916
George Hopp........ 5,333 -- $ 6.0938 04/04/07 $0.00 $ 8,979 $ 19,840
13,333 1 $ 6.4688 05/01/07 $0.00 $ 54,241 $ 137,458
Gerald I. Klein.... 33,333 2 $ 6.0938 04/04/07 $0.00 $ 56,120 $ 124,009
66,666 5 $ 6.4688 05/01/07 $0.00 $ 271,210 $ 687,301
</TABLE>

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

(1) 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.

(2) Options were issued in fiscal 1997 at 100% of the closing price of the
Company's Common Stock on dates of issue and vest as follows: Lee N.
Blatt - all options vest at date of grant; Myron Levy, Allan Coon, Anello C.
Garefino and Gerald I. Klein - one third of the options vest at date of
grant, one-third vest one year from date of grant and the balance vest two
years from date of grant; George Hopp - one fifth of the options vest one
year from date of grant and one fifth each year thereafter.

(3) Total options issued to employees and directors in fiscal 1997 were for
1,465,649 shares of Common Stock.

(4) The amounts under the columns labeled "5%" and "10%" are included by the
Company pursuant to certain rules promulgated by the Commission and are not
intended to forecast future appreciation, if any, in the price of the Common
Stock. Such amounts are based on the assumption that the named persons hold
the options for the full term of the options. The actual value of the
options will vary in accordance with the market price of the Common Stock.
The column headed "0%" is included to demonstrate that the options were
issued with an exercise price equal to the trading price of the Common Stock
so that the holders of the options will not recognize any gain without an
increase in the stock price, which increase benefits all stockholders
commensurately.

38
<PAGE> 40

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

The following table sets forth stock options and warrants exercised during
fiscal 1997 and all unexercised stock options and warrants held by the named
executive officers as of August 3, 1997.

<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS AND WARRANTS AT OPTIONS AND WARRANTS AT
SHARES FISCAL YEAR-END(2) FISCAL YEAR-END(3)
ACQUIRED ON VALUE ---------------------------- ------------------------------
NAME EXERCISE(#) REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------- ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Lee N. Blatt....... 688,886 $3,203,301 133,333 177,779 $ 706,532 $ 785,698
Myron Levy......... 264,441 1,255,128 66,667 255,558 353,293 969,833
Allan Coon......... 10,000 70,625 32,222 41,110 109,350 140,202
Anello Garefino.... 41,109 200,659 13,333 38,889 70,657 153,102
George Hopp........ 4,443 22,442 2,667 18,222 10,261 72,993
Gerald Klein....... 163,330 854,708 66,667 83,335 353,293 382,947
</TABLE>

- ---------------
(1) Values are calculated by subtracting the exercise price from the trading
price of the Common Stock as of the exercise date.

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

(3) Based upon the trading price of the Common Stock of $9.94 on August 3, 1997,
as adjusted to give effect to the four-for-three stock split on September
30, 1997.

EMPLOYMENT AGREEMENTS

Lee N. Blatt has entered into a new employment agreement with the Company,
dated as of November 1, 1997, which provides for a three year term, terminating
on October 31, 2000. Pursuant to the agreement, Mr. Blatt receives compensation
consisting of a base salary of $375,000, with an annual cost of living increase
and an incentive bonus. Mr. Blatt's incentive bonus is 5% of the pretax income
of the Company in excess of 10% of the Company'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 the Company,
dated as of November 1, 1997, which provides for a five year term, terminating
on October 31, 2002, and a five year consulting period commencing at the end of
the employment period. Pursuant to the agreement, Mr. Levy receives compensation
consisting of a base salary of $275,000, with an annual cost of living increase
and an incentive bonus. Mr. Levy's incentive bonus is 4% of the pretax income of
the Company in excess of 10% of the Company's stockholders' equity for specific
periods, as adjusted for stock issuances. Mr. Levy's incentive bonus cannot
exceed his base salary.

Gerald Klein has entered into a new employment agreement with the Company,
dated as of November 1, 1997, which provides for a four year term, terminating
on October 31, 2001, and an eight year consulting period commencing at the end
of the employment period. Pursuant to the agreement, Mr. Klein receives
compensation consisting of a base salary of $275,000, with an annual cost of
living increase and an incentive bonus. Mr. Klein's incentive bonus is 3% of the
pretax income of the Company in excess of 10% of the Company's stockholders'
equity for specific periods, as adjusted for stock issuances. Mr. Klein's
incentive bonus cannot exceed his base salary.

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

Glenn Rosenthal entered into an employment agreement with the Company and
Metraplex, dated as of August 4, 1997, which provides for a three year term,
terminating on August 4, 2000. Pursuant to this agreement, Mr. Rosenthal
receives annual compensation consisting of a base salary of $130,000 and an
incentive bonus based on 3% of the pre-tax income of Metraplex. The employment
agreement also provides

39
<PAGE> 41

that if Mr. Rosenthal is relocated out of Frederick, Maryland, he shall receive
$260,000 if during the first year of the employment agreement, $195,000 if
during the second year, and $130,000 if during the third year or beyond.

In addition, Allan Coon has entered into a severance agreement with the
Company, dated June 11, 1997, which provides that in the event Mr. Coon is
terminated other than for cause prior to June 11, 1999, he is entitled to two
years' base salary and in the event he is so terminated after June 11, 1999 and
before June 11, 2002, he is entitled to one year's base salary. Mr. Coon's
present base salary is $110,000.

INDEMNIFICATION AGREEMENTS

The Company has entered into separate indemnification agreements with the
officers and directors of the Company. The Company 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 the
Company and with respect to any criminal proceeding, had no reasonable cause to
believe his or her conduct was unlawful. The Company 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.

TABLE OF TEN-YEAR OPTION REPRICINGS

The following table sets forth information concerning options of the named
executive officers that were repriced during fiscal 1997.

<TABLE>
<CAPTION>
MARKET PRICE EXERCISE LENGTH OF ORIGINAL
NUMBER OF SECURITIES OF STOCK AT PRICE NEW OPTION TERM
UNDERLYING OPTIONS TIME OF AT TIME OF EXERCISE REMAINING AT DATE OF
REPRICED OR REPRICING OR REPRICING OR PRICE REPRICING OR
NAME DATE AMENDED(#) AMENDMENT($) AMENDMENT($) ($) AMENDMENT(YRS)
- --------------------- ------- -------------------- ------------ ------------ ------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Lee N. Blatt......... 4/8/97 133,333 $ 6.0938 $ 8.3438 $6.0938 9 years, 10 months
Myron Levy........... 4/8/97 100,000 $ 6.0938 $ 8.3438 $6.0938 9 years, 10 months
Gerald I. Klein...... 4/8/97 33,333 $ 6.0938 $ 8.3438 $6.0938 9 years, 10 months
Anello C. Garefino... 4/8/97 20,000 $ 6.0938 $ 8.3438 $6.0938 9 years, 10 months
Allan Coon........... 4/8/97 20,000 $ 6.0938 $ 8.3438 $6.0938 9 years, 10 months
</TABLE>

The Board of Directors determined to reprice the above described stock
options to strengthen the link that the Company believes exists between
executive compensation and corporate objectives.

CERTAIN TRANSACTIONS

In November 1995 and March 1996, the Company loaned $1,400,000, $300,000
and $300,000, to Messrs. Blatt, Levy and Klein, respectively, as authorized by
the Board of Directors, pursuant to the terms of non-negotiable promissory
notes. The loans are secured by 315,774, 50,000, and 80,000 shares of Common
Stock, respectively. The notes were initially due November 1996, March 1997 and
March 1997, respectively. The notes were extended by the Company and are now due
April 30, 1998, January 31, 1998 and January 31, 1998, respectively. Interest is
payable at maturity at the average rate of interest paid by the Company on
borrowed funds during the fiscal year. The pledge agreement also provides for
the Company to have the right of first refusal to purchase the pledged
securities, based on a formula as defined, in the event of the death or
disability of the officer. Upon completion of this offering, the loans will be
repaid.

On March 6, 1996, the Board of Directors, by action of the disinterested
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 will be paid at settlement on or
before March 31, 1998. The Company intends to use this land for possible future
expansion.

40
<PAGE> 42

STOCK PLANS

Certain officers and directors of the Company hold options or warrants to
purchase Common Stock under the Company'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 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 3, 1997, non-qualified options to purchase 151,127 shares
of Common Stock were outstanding under this plan.

1996 Stock Option Plan. The 1996 Stock Option Plan covers 666,667 shares
of Common Stock. Options granted under the plan may be incentive stock options
qualified under Section 422 of the Internal Revenue Code of 1986, as amended
(the "Internal Revenue Code") 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. Options for 663,997 shares of Common Stock were granted during the fiscal
year ended August 3, 1997. At August 3, 1997, non-qualified options to purchase
394,662 shares of Common Stock were outstanding under this plan.

1997 Stock Option Plan. The 1997 Stock Option Plan covers 1,666,667 shares
of Common Stock. Options granted under the plan may be incentive stock options
qualified under Section 422 of the Internal Revenue Code of 1986 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. Options for 800,665 shares
of Common Stock were granted during the fiscal year ended August 3, 1997. At
August 3, 1997, options to purchase 369,553 shares of Common Stock were
outstanding under this plan.

Warrant Agreements. In April 1993, common stock warrants were issued to
certain officers and directors for the right to acquire 573,333 shares of Common
Stock at an exercise price of $5.3475 per share, which was the closing price of
the 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 Common Stock at an exercise price of $4.6425 per share, which
was the closing price of the Common Stock on the date of issue. These warrants
expire December 13, 2005.

EMPLOYEE SAVINGS PLAN

The Company 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. The
Company, 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
Company 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. The Company accrued approximately $178,000 for the fiscal year
ended August 3, 1997 and contributed approximately $159,000 and $151,000 to this
plan for the years ended July 28, 1996 and July 30, 1995, respectively. For the
year ended August 3, 1997, $4,500, $4,500, $3,364, and $3,057 was contributed by
the Company to this plan for Messrs. Blatt, Levy, Coon and Garefino,
respectively, and $20,452 was contributed for all officers and directors as a
group.

41
<PAGE> 43

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth the indicated information as of the date of
this Prospectus with respect to the beneficial ownership of the Company's
securities by: (i) all persons known to the Company to be beneficial owners of
more than 5% of the outstanding shares of Common Stock, (ii) each director and
named executive officer of the Company, and (iii) by all executive officers and
directors as a group:

<TABLE>
<CAPTION>
SHARES
UNDERLYING THE
SHARES TO BE WARRANTS TO
SOLD IN THIS BE SOLD IN
OFFERING THIS OFFERING
------------ --------------
SHARES OF COMMON SHARES OF COMMON
STOCK BENEFICIALLY STOCK BENEFICIALLY
OWNED PRIOR TO THIS OWNED AFTER
OFFERING(1)(5) THIS OFFERING
------------------- ---------------------
NAME SHARES PERCENT SHARES(6) PERCENT(6)
- --------------------------------- --------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Lee N. Blatt(2)(4)(5)............ 913,065 19.3% 550,000 250,000 363,065(7) 6.7%
Myron Levy(4)(5)(8).............. 396,687 8.5% -- -- 396,687 8.5%
Gerald I. Klein(4)(5)............ 356,186 7.7% 75,000 75,000 281,186(7) 5.3%
Anello C. Garefino(4)(5)......... 47,440 1.0% -- -- 47,440 1.0%
Allan Coon(4).................... 45,555 1.0% -- -- 45,555 1.0%
Adam J. Bottenfield(4)........... 18,442 -- -- -- 18,442 --
Glenn Rosenthal.................. 262 -- -- -- 262 --
Adm. Thomas J. Allshouse
(Ret.)(4)(5)................... 32,798 -- -- -- 32,798 --
David H. Lieberman(4)(5)......... 20,799 -- -- -- 20,799 --
John A. Thonet(3)(4)(5).......... 28,359 -- -- -- 28,359 --
Alvin M. Silver.................. -- -- -- -- -- --
Adm. Edward K. Walker, Jr.
(Ret.)......................... -- -- -- -- -- --
Kathi Thonet..................... 156,309 3.4% 75,000 25,000 81,309(7) 1.6%
Directors and executive officers
as a group (11 persons)........ 1,518,471 30.3% 550,000 250,000 968,471(7) 17.0%
</TABLE>

- ---------------
(1) No officer or director owns more than one percent of the outstanding shares
of Common Stock unless otherwise indicated. Ownership represents sole voting
and investment power.

(2) Does not include an aggregate of 562,259 shares owned by family members,
including Hannah Thonet, Rebecca Thonet, Kathi Thonet, Randi Rossignol, Max
Rossignol, Henry Rossignol, Patrick Rossignol and Allyson Gerber, certain of
which are to be sold in this offering, of which Mr. Blatt disclaims
beneficial ownership.

(3) Does not include 153,332 shares, owned by Mr. Thonet's children, Hannah and
Rebecca Thonet, and 156,309 shares owned by his wife, Kathi Thonet, certain
of which are to be sold in this offering. Mr. Thonet disclaims beneficial
ownership of these shares.

(4) Includes shares subject to options exercisable within the 60 days after the
date of this Prospectus at prices ranging from $2.535 to $6.9375 per share
pursuant to the Company's Stock Plans: Lee N. Blatt - 66,667, Myron
Levy - 50,002, Anello C. Garefino - 6,667, Allan Coon - 45,555, George
Hopp - 2,667, Adm. Thomas J. Allshouse - 6,665, David H. Lieberman - 6,666,
John A. Thonet - 6,666, Raymond Umbarger - 7,000, Adam J.
Bottenfield - 16,442.

(5) Includes shares subject to outstanding warrants exercisable within 60 days
after the date of this Prospectus at a price of $4.6425: Lee N.
Blatt - 133,333, Myron Levy - 66,667, Gerald I. Klein - 66,667, Anello C.
Garefino - 13,333, and the following at a price of $5.3475: Adm. Thomas J.
Allshouse - 13,333, David H. Lieberman 13,333, John A. Thonet - 13,333.

(6) Does not assume exercise of the Underwriters' over-allotment option for
210,000 shares of Common Stock and 210,000 Warrants, nor exercise of all the
Warrants sold in this offering.

(7) Includes shares reserved for exercise of Warrants sold in this offering; Lee
N. Blatt - 250,000, Gerald I. Klein - 75,000 and Kathi Thonet - 25,000.

(8) Does not include 12,666 shares owned by Mr. Levy's children, Stephanie Levy
and Ronnie Roth, of which Mr. Levy disclaims beneficial ownership.

42
<PAGE> 44

DESCRIPTION OF SECURITIES

CAPITAL STOCK

The Company's authorized capital stock consists of 10,000,000 shares of
Common Stock, $.10 par value per share.

COMMON STOCK

General. The Company has 10,000,000 authorized shares of Common Stock,
4,539,729 of which were issued and outstanding as of November 1, 1997. The
Company intends to propose an increase in its authorized shares of Common Stock
to 20,000,000 shares at its next annual meeting of stockholders presently
scheduled to be held in January 1998. All shares of Common Stock currently
outstanding are validly issued, fully paid and non-assessable, and all shares
which are the subject of this Prospectus, when issued and paid for pursuant to
this offering, will be validly issued, fully paid and non-assessable.

Voting Rights. Each share of Common Stock entitles the holder thereof to
one vote, either in person or by proxy, at meetings of the stockholders. The
Company'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 Common Stock can elect all of the directors of the Company
standing for election at a stockholders' meeting.

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

Miscellaneous Rights and Provisions. Holders of 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 the Company, each share of Common Stock is entitled
to share ratably in any assets available for distribution to holders of the
equity of the Company after satisfaction of all liabilities.

Shares Eligible for Future Sale. Upon completion of this offering, the
Company will have 5,239,729 shares of Common Stock outstanding. Of these shares,
4,504,946, including the 1,400,000 shares sold in this offering (1,610,000
shares if the Underwriters' over-allotment option is exercised in full) will be
freely tradeable without restriction or further registration under the
Securities Act, except for any shares purchased by an "affiliate" of the Company
(in general, a person who has a control relationship with the Company), 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. The freely tradeable shares include 313,193 shares
issued to the former stockholders of Metraplex in connection with the Metraplex
acquisition. In August 2000 and for two years thereafter, each former Metraplex
stockholder has the right to put such stockholder's shares of Common Stock
received in connection with the acquisition to the Company at certain guaranteed
prices.

In addition, the Company will have issued 1,050,000 Warrants (1,260,000
Warrants if the Underwriters' over-allotment option is exercised in full) that
will be exercisable for 1,050,000 newly issued shares of Common Stock (1,260,000
shares if the Underwriters' over-allotment option is exercised in full) and the
Selling Stockholders will have issued Warrants that will be exercisable for
350,000 outstanding shares of

43
<PAGE> 45

Common Stock. Upon exercise of those Warrants, all of these shares of Common
Stock will also be freely tradeable without restriction or future registration
under the Securities Act.

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 the Company 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 734,783 shares of Common Stock that constitute restricted
securities, shares have been held for more than one year. Persons who
have agreed not to sell their shares of Common Stock for a period ranging
between 120 days and 180 days after the closing of this offering, however, own
of these shares of Common Stock.

No predictions can be made as to the effect, if any, that sales of shares
of 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 Common Stock pursuant to Rule 144 or
otherwise may adversely affect the market price of the Common Stock or the
Warrants.

DESCRIPTION OF WARRANTS

The following is a brief summary of certain provisions of the 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 the Company,
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.

Exercise Price and Terms. Each Warrant entitles the registered holder
thereof to purchase one share of Common Stock at an exercise price of
$ per share for thirteen months from date of issuance prior to
and thereafter at $ per share until twenty-five months from
date of issuance, 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. No fractional shares will be issued upon the
exercise of the Warrants.

The exercise price of the Warrants has been set at a premium to the
existing trading price of the Common Stock and bears no relationship to any
objective 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 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 Common Stock, or sale by the Company of
shares of its Common Stock or other securities convertible into Common Stock
(exclusive of shares issued upon the exercise or conversion of outstanding
options, warrants and convertible securities and the Managing Underwriters'
Warrant, as defined herein) at a price below the market price of the Common
Stock as defined in the Warrant Agreement. Additionally, an adjustment would be
made in the case of a reclassification or exchange of Common Stock,
consolidation or merger of the Company with or into another corporation (other
than a consolidation or merger in which the Company is the continuing
corporation) or sale of all or substantially all of the assets of the Company in
order to enable Warrant holders to acquire the kind and

44
<PAGE> 46

number of shares of stock or other securities or property receivable in such
event by a holder of the number of shares of 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 twenty-five months from the closing of
this offering, 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.

The 350,000 shares of Common Stock underlying the 350,000 Warrants sold by
the Selling Stockholders in this offering will be deposited with the Warrant
Agent. Upon the exercise of any Warrants, the underlying shares of Common Stock
will be satisfied from newly issued shares by the Company and the deposited
shares in proportion to the number of Warrants sold by the Company and the
Selling Stockholders, respectively. The Warrant Agreement provides that if for
any reason the Warrant Agent cannot transfer the respective shares of Common
Stock deposited by the Selling Stockholders upon the exercise of the Warrants,
the Company will issue the shares of Common Stock to be sold upon the exercise
of such Warrants. In such a case, the Company will receive the exercise price
for such shares and the Selling Stockholders will pay to the Company the
proceeds that they received in connection with the sale of the related Warrants.

Warrant Holder Not a Stockholder. The Warrants do not confer upon holders
any voting, dividend or other rights as stockholders of the Company.

Modification of Warrants. The Company and the Warrant Agent may make such
modifications to the Warrants as they deem necessary and desirable that do not
adversely affect the interests of the Warrant holders. The Company may, in its
sole discretion, lower the exercise price of the Warrants for a period of not
less than 30 days on not less than 30 days' prior written notice to the Warrant
holders and the Representative. Except as described above, modification of the
number of securities purchasable upon the exercise of any Warrant, the exercise
price and the expiration date with respect to any Warrant or any other
modification to the Warrant requires the consent of the holders of 66 2/3% of
the outstanding Warrants.

The Warrants are not exercisable unless, at the time of the exercise, the
Company has a registration statement in effect under the Securities Act covering
the shares of Common Stock issuable upon exercise of the Warrants, and such
shares have been registered, qualified or are deemed to be exempt under the
securities laws of the state of residence of the exercising holder of the
Warrants. Although the Company will use its best efforts to have all the shares
of Common Stock issuable upon exercise of the Warrants registered or qualified
on or before the exercise date and to maintain a registration statement relating
thereto until the expiration of the Warrants, there can be no assurance that it
will be able to do so. Notwithstanding the stated expiration date of the
Warrants, however, such expiration date will be extended if the Company has not
maintained a registration statement in effect with respect to the shares of
Common Stock underlying the Warrants during the 90 days immediately preceding
such stated expiration date. The extended expiration date will be the first date
thereafter for which the Company has maintained such a registration statement
for such 90-day period.

The Warrants are separately transferable immediately upon issuance.
Although the Warrants will not knowingly be sold to purchasers in jurisdictions
in which the Warrants are not registered or otherwise qualified for sale,
purchasers may buy Warrants in the aftermarket in, or may move to, jurisdictions
in which the shares underlying the Warrants are not so registered or qualified
during the period that the Warrants are exercisable. In this event, the Company
would be unable to issue shares to those persons desiring to exercise their
Warrants, and holders of Warrants would have no choice but to attempt to sell
the Warrants in a jurisdiction where such sale is permissible or allow them to
expire unexercised.

CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION

The Company'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

45
<PAGE> 47

intended to discourage certain types of transactions that involve an actual or
threatened change of control of the Company. 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 the Company 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 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 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 or 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 the
Company 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
acquirers to obtain control of the Company in any transaction that is not
approved by the Company'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.

DELAWARE GENERAL CORPORATION LAW

The Delaware General Corporation Law further contains certain anti-takeover
provisions. Section 203 of the Delaware General Corporation Law provides, with
certain exceptions, that a Delaware corporation may not engage in any of a broad
range of business combinations with a person who owns 15% or more of the
corporation's outstanding voting stock (an "interested stockholder") for a
period of three years from the date that such person became an interested
stockholder unless: (i) the transaction resulting in a person's becoming an
interested stockholder, or the business combination, is approved by the board of
directors of the corporation before the person becomes an interested
stockholder, (ii) the interested stockholder acquires 85% or more of the
outstanding voting stock of the corporation (excluding shares owned by persons
who are both officers and directors of the corporation and shares held by
certain employee stock ownership plans), or (iii) the business combination is
approved by the corporation's board of directors and by the holders of at least
66 2/3% of the corporation's outstanding voting stock at an annual or special
meeting, excluding shares owned by the interested stockholder.

TRANSFER AGENT, REGISTRAR AND WARRANT AGENT

The transfer agent and registrar for the Common Stock and Warrant Agent for
the Warrants is American Stock Transfer & Trust Company, 6201 15th Avenue,
Brooklyn, New York 11219.

46
<PAGE> 48

UNDERWRITING

Subject to the terms and conditions contained in the Underwriting
Agreement, each of the Underwriters has severally agreed to purchase, and the
Company and the Selling Stockholders have agreed to sell to each such
Underwriter, the respective number of Securities set forth opposite the name of
such Underwriter below at the price to public less the underwriting discounts
and commissions set forth on the cover page of this Prospectus:

<TABLE>
<CAPTION>
NUMBER OF
SHARES NUMBER OF
UNDERWRITERS OF COMMON STOCK WARRANTS
--------------------------------------------------------------- --------------- ---------
<S> <C> <C>
Janney Montgomery Scott Inc. ..................................
Southwest Securities, Inc. ....................................

--------- ---------
Total................................................ 1,400,000 1,400,000
========= =========
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Securities offered hereby are
subject to certain conditions. The Underwriters are obligated to take and pay
for all of the Securities offered hereby (other than those Securities covered by
the over-allotment option described below), if any such Securities are to be
purchased.

The Underwriters, for whom Janney Montgomery Scott Inc. is acting as
Representative, propose to initially offer the Securities directly to the public
at the initial offering price set forth on the cover page hereof and to certain
dealers (who may be Underwriters) at a price that represents a concession not in
excess of $ per Share and $ per Warrant under the initial
offering price. The Underwriters may allow, and such dealers may re-allow, a
concession not in excess of $ per Share and $ per Warrant to
other dealers. After the commencement of the offering, the public offering
prices, such concessions and other selling terms may be changed by the
Representative. The Representative has informed the Company and the Selling
Stockholders that the Underwriters do not intend to confirm sales to any account
over which the Underwriters exercise discretionary authority.

The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to 210,000 additional
Shares and 210,000 additional Warrants at the offering prices set forth on the
cover page hereof, less the underwriting discounts and commissions. The
Underwriters may exercise such option to purchase additional Shares and Warrants
solely for the purpose of covering over-allotments, if any, incurred in
connection with the sale of the Securities offered hereby. If purchased, the
Underwriters will sell such additional Shares and Warrants on the same terms as
those on which the Shares and the Warrants that the Underwriters have agreed to
purchase from the Company and the Selling Stockholders are being offered.

This offering is made for delivery when, as and if accepted by the
Underwriters and subject to prior sale and withdrawal, cancellation or
modification of this offering without notice. The Underwriters reserve the right
to reject any order for the purchase of any Shares or Warrants, in whole or in
part.

Southwest Securities, Inc. currently makes a market in the Common Stock,
and although it has no obligation to do so, intends to make a market in the
Warrants. Although it has no obligation to do so, the Representative currently
intends to make a market in the Common Stock and the Warrants and may

47
<PAGE> 49

otherwise effect transactions in such Securities. Such market-making activity
may be discontinued at any time. During the period beginning , 1997
and ending upon the completion of each Underwriter's distribution of the Shares
and the Warrants in this offering (including the distribution of any Shares and
Warrants received upon the exercise of the Underwriters' over-allotment option),
rules of the Commission will limit the ability of such Underwriter to bid for
and purchase shares of Common Stock and Warrants. During this period, any market
making by such Underwriter will be limited to passive market making on the
Nasdaq National Market. Passive market making consists of displaying bids and
effecting transaction in a security at a price that is not in excess of the
highest bid price for the security that is displayed by a market maker who is
not an Underwriter or affiliated purchaser. New purchases on each day by a
passive market maker are limited to 30% of the average daily trading volume in
the security during a certain period.

In addition, the Representative may engage in certain transactions that
stabilize the price of the Common Stock and the Warrants. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the Common Stock and the Warrants.

If the Underwriters create a short position in the Common Stock or the
Warrants in connection with this offering, i.e, if they sell more Shares or
Warrants than are set forth on the cover page of this Prospectus, the Managing
Underwriters may reduce the short position by purchasing Common Stock or
Warrants in the open market. The Managing Underwriters may then impose a penalty
bid on certain Underwriters and selling group members. This means that if the
Managing Underwriters purchase shares of Common Stock or Warrants in the open
market to reduce their short position or stabilize the price of the Common Stock
or the Warrants, they may reclaim the amount of the selling concession from the
Underwriters and selling group members who sold those Shares or Warrants as part
of this offering.

In general, purchase of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it
discourages resales. Neither the Company, the Selling Stockholders, nor any of
the Underwriters make any representation or prediction as to the direction or
magnitude of any effect that the transactions described above may have on the
trading price of the Common Stock or the Warrants. In addition, neither the
Company, the Selling Stockholders, nor any of the Underwriters make any
representation that the Representative or the Managing Underwriters will engage
in such transactions or that such transactions, once commenced, will not be
discontinued without further notice.

The Selling Stockholders have agreed that they will not, without the prior
written consent of the Representative, sell, offer to sell, contract to sell or
otherwise transfer or dispose of any shares of Common Stock, options, rights or
warrants to acquire shares of Common Stock (other than the Shares and the
Warrants offered by them in this offering) during the period beginning on the
date of the Underwriting Agreement and ending 180 days after the date hereof,
except that the Company may issue shares of Common Stock upon the exercise of
outstanding stock options and warrants previously issued to them. In addition,
the Company's directors, executive officers, and certain key employees who are
not Selling Stockholders have agreed to similar restrictions with respect to
their shares of Common Stock for the period beginning on the date of the
Underwriting Agreement and ending 120 days after the date hereof.

The price to the public for the Shares offered hereby was based
approximately upon the closing bid price for a share of Common Stock on the
Nasdaq National Market on the date of the Underwriting Agreement. The price to
the public for each Warrant was based upon negotiations among the Company, the
Selling Stockholders, and the Managing Underwriters.

The Company, the Selling Stockholders and the Underwriters have agreed to
certain indemnity and contribution provisions regarding certain civil
liabilities that may be incurred in connection with this offering, including
liability that may be incurred under the Securities Act.

Pursuant to a letter of intent between the Representative and the Company
(the "Letter of Intent"), the Company has agreed to pay the Managing
Underwriters a financial advisory fee equal to 1.33% of the gross

48
<PAGE> 50

proceeds received by the Company in this offering. Such financial advisory fee
relates to financial advisory services provided by the Managing Underwriters to
the Company in connection with this offering and related matters. In addition,
in the Letter of Intent the Company agreed that if the Company or any of its
subsidiaries were sold during the six months following the offering, the Company
would retain the Managing Underwriters as the Company's joint investment bankers
in such transaction and pay them an aggregate cash fee equal to 1.0% of the
transaction's value. In addition, if such transaction value exceeds $10.0
million, the Company will retain the Representative to render an opinion
concerning whether the transaction is fair to the Company and its stockholders
from a financial point of view for an additional fee of $200,000. If such
transaction value is less than $10.0 million and the Company's Board of
Directors seeks a fairness opinion, the Company will also retain the
Representative to render such an opinion for a mutually agreed upon additional
fee, which will not be less than $100,000.

The Letter of Intent also provides that if during the first year following
the completion of this offering either Managing Underwriter is instrumental in
introducing an acquisition candidate to the Company and the Company consummates
a transaction with such acquisition candidate within two years following the
completion of this offering, the introducing Managing Underwriter will receive a
fee from the Company equal to 1.0% of the transaction's value. If the
transaction value exceeds $10.0 million, the Company will retain the other
Managing Underwriter to render a fairness opinion for a mutually agreed upon
fee, which shall not be less than $100,000. If the transaction value is less
than $10.0 million and the Company's Board of Directors seeks a fairness
opinion, the Company will also retain the other Managing Underwriter to render
such fairness opinion for a fee upon which they mutually agree.

If this offering is not consummated for certain reasons, the Company has
agreed to pay certain expenses of the Managing Underwriters.

In connection with this offering, the Company has agreed to sell to the
Managing Underwriters a warrant to purchase from the Company 140,000 shares of
Common Stock at an exercise price of $ per share and 140,000 Warrants
at an exercise price of $ per Warrant. The Managing Underwriters'
Warrant is exercisable with respect to the Common Stock for a period of four
years commencing one year after the closing of this offering and with respect to
the Warrants, for a period of thirteen months following such one year period.
The Managing Underwriters' Warrant provides for adjustment in the number of
shares of Common Stock and the number of Warrants issuable upon the exercise
thereof as a result of certain events, including stock dividends, stock splits,
combinations and the issuance of Common Stock for consideration less than the
offering price of the Common Stock in this offering, subject to certain
exceptions. The Managing Underwriters' Warrant may not be sold, transferred,
assigned or hypothecated for a period of one year after the closing of this
offering, except to the officers of either of the Managing Underwriters.

A new registration statement will be required to be filed and declared
effective by the Commission before a public sale or distribution of: (i) the
Managing Underwriters' Warrant, (ii) the shares of Common Stock issuable upon
exercise of the Managing Underwriters' Warrant, (iii) the Warrants issuable upon
exercise of the Managing Underwriters' Warrant, and (iv) the shares of Common
Stock issuable upon exercise of the Warrants issued upon exercise of the
Managing Underwriters' Warrant (collectively, the "Registrable Securities"). In
addition, before a public sale or distribution of the Registrable Securities
occurs, the Registrable Securities must also be registered or qualified under
the applicable state securities laws. Pursuant to a Registration Rights
Agreement, the Company has granted the Managing Underwriters one demand
registration right with respect to the Managing Underwriters' Warrant and the
shares of Common Stock issuable upon exercise of the Managing Underwriters'
Warrant. Either Managing Underwriter may exercise this right during the period
beginning on the first anniversary of the closing of this offering and ending on
the fifth anniversary of the closing of this offering. Upon such demand, the
Company will make the required filings for the Managing Underwriters' Warrant
(including all divisible portions thereof) and all shares of Common Stock
issuable upon the exercise of the Managing Underwriters' Warrants at the
Company's expense (subject to a maximum expense of $5,000 for the reimbursement
of the Managing Underwriters' legal fees). The Company will then use its best
efforts to cause such filings to become effective and remain effective for at
least two years. After such two year period, each Managing Underwriter may make
one additional demand registration for such securities on terms identical to the
demand registration rights described above for

49
<PAGE> 51

such securities, provided that the demanding Managing Underwriter pay all of the
Company's fees and expenses, including reasonable legal fees, in connection with
such filings. The Company also has granted the Managing Underwriters one demand
registration right with respect to the Managing Underwriters' Warrant, the
Warrants issuable upon the exercise of the Managing Underwriters' Warrant, and
the shares of Common Stock issuable upon the exercise of such Warrants. Either
Managing Underwriter may exercise this right during the period beginning on the
first anniversary of the closing of this offering and ending on the fifth
anniversary of the closing of this offering. Upon such demand the Company will
make the required filings for the Managing Underwriters' Warrant (including all
divisible portions thereof), all Warrants issuable upon the exercise thereof,
and all shares of Common Stock issuable upon the exercise of such Warrants at
the Company's expense (subject to a maximum expense of $5,000 for the
reimbursement of the Managing Underwriters' legal fees). The Company will then
use its best efforts to cause such filings to become effective and remain
effective for at least two years. After such two year period, each Managing
Underwriter may make one additional demand registration for such securities on
terms identical to the demand registration rights described above for such
securities, provided that the demanding Managing Underwriter pay all of the
Company's fees and expenses, including reasonable legal fees, in connection with
such filings. In addition, the Company has granted the holders of the Managing
Underwriters' Warrant (and the holders of any other Registrable Securities not
issued, sold, or distributed in a transaction registered under the Securities
Act and applicable state securities laws) unlimited piggy-back registration
rights during the period beginning on the first anniversary of the closing of
this offering and ending on the fifth anniversary of the closing of this
offering with respect to the Registrable Securities. In connection with such
rights, the Company will notify such holders if the Company intends to file
certain registration statements. Such holders will then have the right to
require the Company to include such holder's Registrable Securities in such
registration statement and maintain the effectiveness of such registration
statement for at least one year.

The foregoing includes a summary of the principal terms of the Underwriting
Agreement, the Letter of Intent, the Managing Underwriters' Warrant, and the
Registration Rights Agreement and does not purport to be complete. Reference is
made to the form of Underwriting Agreement, the copy of the Letter of Intent,
the form of the Managing Underwriters' Warrant Agreement, and the form of the
Registration Rights Agreement that are on file as exhibits to the Registration
Statement of which this Prospectus is a part.

LEGAL MATTERS

The validity of the issuance of the Securities offered hereby will be
passed upon for the Company by the law firm of Blau, Kramer, Wactlar &
Lieberman, P.C., Jericho, New York. The law firm of Akin, Gump, Strauss, Hauer &
Feld, L.L.P, Dallas, Texas will pass on certain aspects of this offering on
behalf of the Underwriters. Employees of Blau, Kramer, Wactlar & Lieberman, P.
C. own an aggregate of 800 shares of Common Stock, none of which are registered
for resale hereunder, 13,333 options to purchase shares of Common Stock and
13,333 warrants to purchase shares of Common Stock.

EXPERTS

The financial statements of the Company as of August 3, 1997 and July 28,
1996 and for the 53 weeks ended August 3, 1997, and the 52 weeks ended July 28,
1996 and July 30, 1995, included herein and in the Registration Statement 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 accounting and auditing
in giving said report.

50
<PAGE> 52

HERLEY INDUSTRIES, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS............................................ F-2
FINANCIAL STATEMENTS:
Consolidated Balance Sheets, August 3, 1997 and July 28, 1996..................... F-3

Consolidated Statements of Operations for the 53 Weeks Ended August 3, 1997, and
the 52 Weeks Ended July 28, 1996 and July 30, 1995............................. F-4

Consolidated Statements of Shareholders' Equity for the 53 Weeks Ended August 3,
1997, and the 52 Weeks Ended July 28, 1996 and July 30, 1995................... F-5

Consolidated Statements of Cash Flows for the 53 Weeks Ended August 3, 1997, and
the 52 Weeks Ended July 28, 1996 and July 30, 1995............................. F-6

Notes to Consolidated Financial Statements........................................ F-7
</TABLE>

Schedules have been omitted as not applicable.

F-1
<PAGE> 53

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 3, 1997 and July 28, 1996, and
the related consolidated statements of operations, shareholders' equity and cash
flows for the 53 weeks ended August 3, 1997 , and the 52 weeks ended July 28,
1996 and July 30, 1995. 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 3, 1997 and July 28, 1996, and
the consolidated results of their operations and their cash flows for the 53
weeks ended August 3, 1997, and the 52 weeks ended July 28, 1996, and July 30,
1995 in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Lancaster, PA
September 19, 1997

F-2
<PAGE> 54

HERLEY INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
AUGUST 3, JULY 28,
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents....................................... $ 1,194,650 $ 1,104,445
Accounts receivable............................................. 5,176,523 3,249,225
Notes receivable-officers....................................... 2,100,913 2,083,543
Other receivables............................................... 152,148 124,992
Inventories..................................................... 9,790,382 8,010,687
Deferred taxes and other........................................ 2,061,066 1,689,988
----------- -----------
Total Current Assets.................................... 20,475,682 16,262,880
Property, Plant and Equipment, net................................ 11,704,755 12,579,044
Intangibles, net of amortization of $1,133,750 in 1997 and
$861,650 in 1996................................................ 4,308,136 4,580,236
Available-for-sale Securities..................................... -- 4,912,387
Other Investments................................................. 1,313,502 3,000,000
Other Assets...................................................... 1,455,111 1,174,395
----------- -----------
$39,257,186 $42,508,942
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt............................... $ 335,000 $ 300,000
Note payable to related party................................... 846,000 --
Accounts payable and accrued expenses........................... 4,986,740 5,123,868
Income taxes payable............................................ 76,635 166,295
Reserve for contract losses..................................... 478,000 489,110
Advance payments on contracts................................... 3,091,001 1,480,033
----------- -----------
Total Current Liabilities............................... 9,813,376 7,559,306
Long-term Debt.................................................... 2,890,000 11,021,000
Deferred Income Taxes............................................. 2,696,394 1,923,058
Excess of fair value of net assets of business acquired over cost,
net of amortization of $973,667 in 1997 and $486,833 in 1996.... 486,833 973,667
----------- -----------
15,886,603 21,477,031
----------- -----------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $.10 par value; authorized 10,000,000 shares;
issued and outstanding 4,209,365 in 1997 and 2,936,122 in
1996......................................................... 420,936 293,612
Additional paid-in capital...................................... 8,856,516 11,448,827
Retained earnings............................................... 14,093,131 9,289,472
----------- -----------
Total Shareholders' Equity.............................. 23,370,583 21,031,911
----------- -----------
$39,257,186 $42,508,942
=========== ===========
</TABLE>

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

F-3
<PAGE> 55

HERLEY INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
53 WEEKS 52 WEEKS ENDED
ENDED -------------------------------
AUGUST 3, 1997 JULY 28, 1996 JULY 30, 1995
-------------- ------------- -------------
<S> <C> <C> <C>
Net sales.......................................... $ 32,195,168 $ 29,001,404 $ 24,450,267
----------- ----------- -----------
Cost and expenses:
Cost of products sold............................ 20,753,707 19,798,692 18,117,874
Selling and administrative expenses.............. 6,293,199 5,831,830 5,071,840
Unusual item..................................... -- -- 5,447,005
----------- ----------- -----------
27,046,906 25,630,522 28,636,719
----------- ----------- -----------
Operating income (loss).................. 5,148,262 3,370,882 (4,186,452)
----------- ----------- -----------
Other income (expense):
Net gain (loss) on available-for-sale securities
and other investments......................... 409,399 897,919 (355,709)
Dividend and interest income..................... 257,676 376,007 617,645
Interest expense................................. (531,678) (873,452) (961,650)
----------- ----------- -----------
135,397 400,474 (699,714)
----------- ----------- -----------
Income (loss) before income taxes........ 5,283,659 3,771,356 (4,886,166)
Provision for income taxes......................... 480,000 102,400 4,000
----------- ----------- -----------
Net income (loss)........................ $ 4,803,659 $ 3,668,956 $ (4,890,166)
=========== =========== ===========
Earnings (loss) per common and common equivalent
share............................................ $ 1.01 $ .86 $ (.98)
=========== =========== ===========
Weighted average number of common and common
equivalent shares outstanding.................... 4,733,682 4,253,785 4,978,868
=========== =========== ===========
</TABLE>

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

F-4
<PAGE> 56

HERLEY INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
53 WEEKS ENDED AUGUST 3, 1997, AND 52 WEEKS ENDED JULY 28, 1996 AND JULY 30,
1995

<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 31,
1994.................... 4,278,189 $ 427,819 17,989,374 10,510,682 (201,117) (445,620) $28,281,138
Net (loss)................ (4,890,166) (4,890,166)
Issuance of common
stock................... 35,000 3,500 99,313 102,813
Unrealized gain on
available-for-sale
securities.............. 226,117 226,117
Purchase of 1,194,701
shares of treasury
stock................... (4,732,165) (4,732,165)
Retirement of 1,297,201
shares of treasury
stock................... (1,297,201) (129,720) (5,048,065) 5,177,785 --
--------- -------- ---------- ---------- --------- --------- -----------
Balance at July 30,
1995.................... 3,015,988 $ 301,599 13,040,622 5,620,516 25,000 -- $18,987,737
Net income................ 3,668,956 3,668,956
Exercise of stock
options................. 406,432 40,643 2,577,360 (2,483,552) 134,451
Unrealized loss on
available-for-sale
securities.............. (25,000) (25,000)
Purchase of 270,339 shares
of treasury stock....... (1,734,233) (1,734,233)
Retirement of treasury
shares.................. (486,298) (48,630) (4,169,155) 4,217,785 --
--------- -------- ---------- ---------- --------- --------- -----------
Balance at July 28,
1996.................... 2,936,122 $ 293,612 11,448,827 9,289,472 -- -- $21,031,911
Net income................ 4,803,659 4,803,659
Exercise of stock options
and warrants............ 929,060 92,906 6,653,917 (6,429,124) 317,699
Four-for-three stock
split................... 1,052,341 105,234 (105,234) --
Purchase of 244,519 shares
of treasury stock....... (2,782,686) (2,782,686)
Retirement of treasury
shares.................. (708,158) (70,816) (9,140,994) 9,211,810 --
--------- -------- ---------- ---------- --------- --------- -----------
Balance at August 3,
1997.................... 4,209,365 $ 420,936 8,856,516 14,093,131 -- -- $23,370,583
========= ======== ========== ========== ========= ========= ===========
</TABLE>

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

F-5
<PAGE> 57

HERLEY INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
53 WEEKS 52 WEEKS ENDED
ENDED --------------------------
AUGUST 3, JULY 28, JULY 30,
1997 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Income (loss)................................. $4,803,659 $ 3,668,956 $(4,890,166)
---------- ---------- -----------
Adjustments to reconcile net income (loss) to net
cash provided by operations:
Depreciation and amortization.................. 1,538,283 1,563,354 2,116,233
(Gain) loss on sale of available-for-sale
securities and other investments............. (409,572) (1,018,643) 355,709
Decrease (increase) in deferred tax assets..... -- (393,389) 596,055
Increase in deferred tax liabilities........... 773,336 376,723 255,240
Unrealized loss on available-for-sale
securities................................... -- 121,550 --
Unusual item................................... -- -- 5,447,005
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable... (1,927,298) 1,430,692 1,285,694
(Increase) in notes receivable-officers...... (17,370) (2,083,543) --
Decrease (increase) in other receivables..... (27,156) 38,410 136,635
Decrease (increase) in inventories........... (1,779,695) 1,319,366 2,208,137
(Increase) in prepaid expenses and other..... (371,078) (25,940) (753,838)
(Decrease) in accounts payable and accrued
expenses.................................. (137,128) (513,649) (3,879,974)
Increase (decrease) in income taxes
payable................................... (89,660) 166,295 (162,543)
(Decrease) in reserve for contract losses.... (11,110) (6,890) (4,000)
Increase (decrease) in advance payments on
contracts................................. 1,610,968 3,393 (1,397,334)
Other, net................................... (309,500) 40,000 153,335
---------- ---------- -----------
Total adjustments......................... (1,156,980) 1,017,729 6,356,354
---------- ---------- -----------
Net cash provided by operations................ 3,646,679 4,686,685 1,466,188
---------- ---------- -----------
Cash flows from investing activities:
Purchase of available-for-sale securities and
other investments.............................. (159,364) (11,077,331) (22,766,138)
Proceeds from sale of fixed assets................ 15,468 -- --
Proceeds from sale of available-for-sale
securities and other investments............... 7,164,538 11,879,157 30,417,016
Capital expenditures.............................. (862,129) (643,330) (182,241)
---------- ---------- -----------
Net cash provided by investing activities...... 6,158,513 158,496 7,468,637
---------- ---------- -----------
Cash flows from financing activities:
Borrowings under bank line of credit.............. 2,825,000 9,875,000 4,044,668
Proceeds from exercise of stock options........... 317,699 134,451 --
Payments under lines of credit.................... (9,775,000) (9,925,000) (8,025,000)
Payments under litigation settlement.............. -- (2,000,000) (2,000,000)
Payments of long-term debt........................ (300,000) (363,709) (512,735)
Purchase of treasury stock........................ (2,782,686) (1,734,233) (2,708,732)
---------- ---------- -----------
Net cash (used in) financing activities........ (9,714,987) (4,013,491) (9,201,799)
---------- ---------- -----------
Net increase (decrease) in cash and cash
equivalents.................................. 90,205 831,690 (266,974)
Cash and cash equivalents at beginning of period.... 1,104,445 272,755 539,729
---------- ---------- -----------
Cash and cash equivalents at end of period.......... $1,194,650 $ 1,104,445 $ 272,755
========== ========== ===========
Supplemental cash flow information:
Cashless exercise of stock options................ $6,429,124 $ 2,483,552
========== ==========
Liabilities assumed in connection with
acquisition.................................... $ 915,000
===========
</TABLE>

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

F-6
<PAGE> 58

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1. Nature of Operations

The Company principally designs, manufactures and sells flight
instrumentation 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 year 1997 consisted of 53 weeks, and
fiscal years 1996 and 1995 consisted of 52 weeks.

3. Basis of Financial Statement Presentation

The consolidated financial statements include the accounts of Herley
Industries, Inc. and its subsidiaries, all of which are wholly-owned. All
significant intercompany 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. Revenue and Cost Recognition

Under fixed-price contracts, sales and related costs are recorded primarily
as deliveries are made. Certain costs under long-term, fixed-price contracts
(principally either directly or indirectly with the U.S. Government), which
include non-recurring billable engineering, are deferred until these costs are
contractually billable. Revenue under certain long-term, fixed price contracts,
principally 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
costs). Losses on contracts are recorded when first reasonably determined.

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.

5. Inventories

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

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

6. 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.

F-7
<PAGE> 59

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. Intangibles

Intangibles are comprised of customer lists, installed products base,
drawings, patents, licenses, certain government qualifications and technology
and goodwill in connection with the acquisition of 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 3, 1997, there were no adjustments to the
carrying amount of the cost in excess of net assets acquired resulting from
these evaluations.

8. 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
(expense). The cost of securities sold is based on the specific identification
method. Interest and dividends on securities are included in other income
(expense).

9. Other Investments

The Company is a limited partner in certain nonmarketable limited
partnerships 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.

10. 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.

11. 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.

F-8
<PAGE> 60

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12. Earnings Per Common Share

Earnings per common share and common equivalent share is based on the
weighted average number of outstanding shares of common stock (reflective of a
4-for-3 stock split on September 15, 1997), including common stock equivalents
(options and warrants) as determined under the treasury stock method as follows:
4,733,682 shares in 1997; 4,253,785 shares in 1996; and 4,978,868 shares in
1995.

13. Cash and Cash Equivalents

For purposes of the statement of cash flows, short-term investments which
have a maturity of ninety days or less at the date of acquisition are considered
cash equivalents.

14. 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 $1,828,000, $1,453,000, and $970,000 in
fiscal 1997, 1996, and 1995, respectively.

15. New Accounting Standards

In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), which
is effective for both interim and annual periods ending after December 15, 1997.
SFAS 128 supersedes 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. Earlier application of this
Statement is not permitted. Therefore, the EPS in the Consolidated Statements of
Operations are presented under APB No. 15.

NOTE B -- ACQUISITIONS

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

NOTE C -- NOTES RECEIVABLE-OFFICERS

In fiscal 1996 the Company loaned $1,400,000, $300,000, and $300,000 to
certain officers, as authorized by the Board of Directors, pursuant to the terms
of nonnegotiable promissory notes. The notes were initially due November 1996,
November 1996 and March 1997, respectively. The notes may be renewed by the
Company from year to year. The notes were extended by the Company in fiscal 1997
and are now due April 30, 1998, January 31, 1998, and January 31, 1998,
respectively. The loans are secured by 594,365 shares of common stock of the
Company. Interest is payable at maturity at the average rate of interest paid by
the Company on borrowed funds during the fiscal year. The pledge agreement also
provides for the Company to have the right of first refusal to purchase the
pledged securities, based on a formula as defined, in the event of the death or
disability of the officer.

F-9
<PAGE> 61

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE D -- INVENTORIES

The major components of inventories are as follows:

<TABLE>
<CAPTION>
AUGUST 3, JULY 28,
1997 1996
-------------- -------------
<S> <C> <C>
Purchased parts and raw materials................. $4,780,336 $ 3,358,256
Work in process................................... 4,899,551 4,580,538
Finished products................................. 110,495 71,893
---------- ----------
$9,790,382 $ 8,010,687
========== ==========
</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 December 1995, the Company sold its investment and terminated its
limited partnership interest in M.D. Sass Re/Enterprise Partners, L.P., a
Delaware limited partnership for $3,823,233 realizing a gain of $1,095,727.

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 3, 1997 and July 28, 1996 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.

NOTE G -- PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are comprised of the following:

<TABLE>
<CAPTION>
AUGUST 3, JULY 28, ESTIMATED
1997 1996 USEFUL LIFE
-------------- ------------- -----------
<S> <C> <C> <C>
Land........................................ $ 880,270 $ 880,270
Building and building improvements.......... 5,438,663 5,362,409 10-40 years
Machinery and equipment..................... 17,515,954 16,788,901 5- 8 years
Furniture and fixtures...................... 494,056 494,056 5-10 years
Tools....................................... 24,869 24,869 5 years
Leasehold improvements...................... 288,757 288,757 5-10 years
----------- -----------
24,642,569 23,839,262
Less accumulated depreciation............... 12,937,814 11,260,218
----------- -----------
$ 11,704,755 $ 12,579,044
=========== ===========
</TABLE>

F-10
<PAGE> 62

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 53 weeks ended August 3, 1997, and the 52 weeks ended
July 28, 1996 and July 30, 1995 was approximately $229,900, $284,600, and
$158,000, respectively.

Minimum annual rentals under noncancellable leases are as follows:

<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
Year ending fiscal 1998........................................... $204,800
1999........................................... 153,900
2000........................................... 97,400
</TABLE>

Employment Agreements

The Company has employment agreements with various executives and employees
of the Company, which, as amended, expire at various dates through December 31,
2002, subject to extension each January 1 for six years from that date not to
extend, in any event, beyond December 31, 2006. These agreements provide for
aggregate annual salaries of $1,185,000. Certain agreements provide for an
annual increment equal to the greater of a cost of living adjustment based on
the consumer price index or 10%, and also provide for incentive compensation
related to pretax income. Incentive compensation in the amount of $665,352 was
expensed in fiscal year ended August 3, 1997. Incentive compensation of $446,750
was expensed in fiscal 1996. No incentive compensation was due for the fiscal
year ended July 30, 1995.

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. As of August 3, 1997, the amount
payable in the event of such termination would be approximately $2,050,000.

One of the employment contracts provides for a consulting agreement
commencing January 1, 2002 and terminating December 31, 2010 at the annual rate
of $100,000. Another one of the employment contracts, as amended January 1,
1997, 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 $60,000. One officer of the Company has a severance agreement providing for a
lump-sum payment of $220,000 through June 1999, adjusted to $110,000 through
June 2002.

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

F-11
<PAGE> 63

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, 1999. At August 3, 1997 stand-by letters of credit
aggregating $3,241,392 were outstanding under this facility.

NOTE I -- INCOME TAXES

Income tax provision consisted of the following:

<TABLE>
<CAPTION>
52 WEEKS ENDED
53 WEEKS ENDED -------------------------------
AUGUST 3, 1997 JULY 28, 1996 JULY 30, 1995
-------------- ------------- -------------
<S> <C> <C> <C>
Current......................................
Federal.................................... $ (52,000) $ 90,000 $ --
State...................................... 89,000 12,400 --
--------- -------- ------
37,000 102,400 --
--------- -------- ------
Deferred.....................................
Federal.................................... (142,000) -- 4,000
State...................................... 585,000 -- --
--------- -------- ------
443,000 -- 4,000
--------- -------- ------
$ 480,000 $ 102,400 $ 4,000
========= ======== ======
</TABLE>

The Company paid income taxes of approximately $178,000 in 1997, $19,000 in
1996, and $122,000 in 1995. 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 ENDED
53 WEEKS ENDED -------------------------------
AUGUST 3, 1997 JULY 28, 1996 JULY 30, 1995
-------------- ------------- -------------
<S> <C> <C> <C>
U.S. Federal statutory rate.................. 34.0% 34.0% (34.0)%
State taxes, net of federal tax benefit...... 12.2 0.2 --
Alternative minimum tax...................... -- 2.4 --
Benefit of net operating loss carryforward... (30.8) (35.2) --
Non-deductible expenses...................... .3 1.3 --
Increase (decrease) in valuation allowance... (9.4) -- 34.0
Other, net................................... 2.8 -- --
----- ----- -----
Effective tax rate........................... 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-12
<PAGE> 64

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

As of August 3, 1997, the Company has net operating loss carryforwards for
Federal income tax purposes of approximately $2,000,000 which expire in 2010.

Components of deferred tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
AUGUST 3, 1997 JULY 28, 1996
----------------------- -----------------------
DEFERRED DEFERRED DEFERRED DEFERRED
TAX TAX TAX TAX
ASSETS LIABILITIES ASSETS LIABILITIES
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Intangibles............................. $ -- $1,681,375 $ 807,537 $ --
Alternative minimum tax................. 265,906 -- 176,707 --
Accrued vacation pay.................... 123,644 -- 118,104 --
Accrued bonus........................... 343,398 -- 243,760 --
Warranty costs.......................... 220,000 -- 220,000 --
Inventory............................... 985,703 -- 910,081 --
Depreciation............................ -- 2,006,038 -- 1,923,058
Net operating loss carryforwards........ 725,113 -- 2,781,480 --
Litigation settlement................... -- -- 495,080 --
Contract losses......................... 275,635 -- 215,208 --
Other................................... 71,917 78,967 97,645 --
---------- ---------- ---------- ----------
3,011,316 3,766,380 6,065,602 1,923,058
Valuation allowance..................... -- -- 4,454,627 --
---------- ---------- ---------- ----------
$3,011,316 $3,766,380 $1,610,975 $1,923,058
========== ========== ========== ==========
</TABLE>

NOTE J -- LONG-TERM DEBT

Long-term debt is summarized as follows:

<TABLE>
<CAPTION>
AUGUST 3, JULY 28,
RATE 1997 1996
----------- -------------- -------------
<S> <C> <C> <C>
Note payable bank(a)....................... 6.22%-8.50% $ -- $ 6,950,000
Mortgage note(b)........................... 10.4% 3,225,000 3,525,000
Long term liability(c) -- -- 846,000
---------- -----------
3,225,000 11,321,000
Less current portion....................... 335,000 300,000
---------- -----------
$2,890,000 $ 11,021,000
========== ===========
</TABLE>

(a) In January 1997, the Company renewed the revolving credit agreement
with its bank that provides for the extension of credit in the aggregate
principal amount of $11,000,000 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, 1999. Interest is set biweekly at 1% over the FOMC Target Rate
applied to outstanding balances up to 80% of the net equity value of
available-for-sale securities, and at the bank's Base Rate for outstanding
balances in excess of this limit. There were no borrowings outstanding at August
3, 1997. The premium rate portion of the facility would be secured by any
available-for-sale securities.

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

F-13
<PAGE> 65

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(b) The mortgage note provides for annual principal payments at varying
amounts through 2004 plus semiannual interest payments. Land and buildings in
Lancaster, Pa. 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 3, 1997 and
July 28, 1996 and are being amortized over the term of the loan (15 years).

(c) Under a contract for the purchase of an industrial parcel of land from
its Chairman, the Company is obligated to pay $846,000 at settlement on or
before April 30, 1998.

The Company paid interest of approximately $567,000 in 1997, $854,000 in
1996, and $1,010,000 in 1995.

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

<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
Fiscal year ending during:
1998......................................................... $ 335,000
1999......................................................... 370,000
2000......................................................... 410,000
2001......................................................... 450,000
2002......................................................... 500,000
Thereafter................................................... 1,160,000
----------
$3,225,000
==========
</TABLE>

NOTE K -- ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses include the following:

<TABLE>
<CAPTION>
AUGUST 3, JULY 28,
1997 1996
---------- ----------
<S> <C> <C>
Accounts payable.................................... $1,841,468 $1,579,230
Accrued payroll and bonuses......................... 1,483,915 1,160,345
Accrued commissions................................. 205,692 247,687
Accrued interest.................................... 55,900 95,925
Accrued litigation expenses......................... 297,538 1,206,914
Accrued expenses.................................... 1,102,227 833,794
---------- ----------
$4,986,740 $5,123,868
========== ==========
</TABLE>

NOTE L -- 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 $178,000 for the 53 weeks ended
August 3, 1997, and contributed approximately $159,000, and $151,000 to this
plan for the 52 weeks ended July 28, 1996, and July 30, 1995, respectively.

F-14
<PAGE> 66

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE M -- SHAREHOLDERS' EQUITY

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 6.1%; volatility factor of the expected
market price of the Company's common stock of .63; and a weighted-average
expected life of the option 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 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:

<TABLE>
<CAPTION>
1997
----------
<S> <C>
Net earnings -- as reported.................................... $4,803,659
Net earnings -- pro forma...................................... $3,451,882
Earnings per share -- as reported.............................. $ 1.01
Earnings per share -- pro forma................................ $ .73
</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.

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
801,660 shares were granted during the fiscal year ended August 3, 1997.

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.

F-15
<PAGE> 67

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

A summary of stock option activity under all plans for the 53 weeks ended
August 3, 1997, and the 52 weeks ended July 28, 1996, and July 30, 1995 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 31, 1994..... 929,969 $4.27 - 9.01 5.00 573,333 $ 5.35
Granted..................... 339,986 2.54 2.54
Canceled.................... (13,331) 2.54 - 5.25 4.88
---------- ------------- -------- -------- -------------
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
========== ========
</TABLE>

F-16
<PAGE> 68

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Options to purchase 130,218 shares of common stock were exercisable under
all plans at August 3, 1997 at a weighted average exercise price of $5.59 with a
weighted average remaining contractual life of 6.8 years as follows:

OPTIONS OUTSTANDING AND EXERCISABLE BY PRICE RANGE AS OF AUGUST 3, 1997

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ----------------------------
AVERAGE WEIGHTED WEIGHTED
RANGE OF EXERCISE NUMBER REMAINING AVERAGE NUMBER AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------------------------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$2.5350 - $5.2500............. 151,117 6.43 $ 2.9164 38,672 $ 4.0255
6.0938 - 6.0938............. 259,997 4.67 6.0938 56,995 6.0938
6.4688 - 6.4688............. 326,550 9.74 6.4688 8.889 6.4688
6.9375 - 10.4063............. 178,663 4.31 7.0152 25,662 6.9375
------- ------- ---- ------- -------
$2.5350 - $10.4063............. 916,327 6.79 $ 5.8728 130,218 $ 5.5948
</TABLE>

In April 1993, common stock warrants were issued to certain officers and
directors for the right to acquire 573,333 shares of common stock of the Company
at the fair market value of $5.35 per share at date of issue. In December 1995
warrants for 533,333 shares were canceled. The warrants vest immediately and
expire April 30, 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.

In connection with the sale of common stock to the public in 1992, the
Company issued to the underwriter, for its own account, warrants to purchase
170,529 shares of common stock of the Company (as adjusted under the agreement),
exercisable for a period of four years at a price of $9.06 per share (as
adjusted under the agreement), subject to further adjustment in certain events.
The warrants expired in February 1997.

On July 31, 1993, the Company issued 46,666 shares of common stock valued
at $5.91 per share in connection with the acquisition of substantially all of
the assets of Micro-Dynamics, Inc. These shares were subsequently canceled and
reissued in January 1995.

NOTE N -- 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 will be paid at settlement on or before April 30, 1998. The Company
intends to use this land for possible future expansion.

NOTE O -- MAJOR CUSTOMERS

Net sales to the U.S. Government in 1997, 1996, and 1995 accounted for
approximately 34%, 33%, and 30% of net sales, respectively. Net sales to the
Republic of Korea and Lockheed Martin accounted for approximately 22% of net
sales in 1997. Foreign sales amounted to approximately $9,320,000, $6,556,000,
and $3,908,000 in fiscal 1997, 1996, and 1995, respectively.

Included in accounts receivable as of August 3, 1997 and July 28, 1996 are
amounts due from the U.S. Government of approximately $1,454,000 and $933,000,
respectively.

NOTE P -- UNUSUAL ITEM

The Consolidated Statements of Operations for the fifty-two weeks ended
July 30, 1995 includes an unusual charge of $5,447,005 for settlement costs,
legal fees, and related expenses in connection with the settlement of certain
legal claims against the Company. Payments of $2,000,000 each, without interest,
were made in July 1995 and July 1996 in connection with the settlement of one of
the claims.

F-17
<PAGE> 69

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 3, 1997
------------------------------
CARRYING AMOUNT FAIR VALUE
--------------- ----------
<S> <C> <C>
Cash and cash equivalents........................ $ 1,194,650 $1,194,650
Notes receivable-officers........................ 2,100,913 2,100,913
Long-term debt................................... 2,890,000 3,408,000
Stand-by letters of credit....................... -- 3,241,392
</TABLE>

NOTE R -- CONCENTRATION OF CREDIT RISK

Financial instruments which potentially subject the Company to credit risk
consist primarily of trade accounts receivable. Credit risk with respect to
trade receivables is minimized since most of the Company's business is direct to
the U. S. Government or as a subcontractor to companies with significant
financial resources acting as prime contractors to the U. S. Government, as well
as to foreign governments. Additionally, shipments to foreign governments are
generally under irrevocable letters of credit.

NOTE S -- SUBSEQUENT EVENTS

On August 4, 1997, the Company completed the acquisition of Metraplex
Corporation, a Maryland corporation for 313,193 shares of common stock of the
Company 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. Metraplex products are used worldwide for testing
space launch vehicle instrumentation, aircraft flight testing, and amphibian,
industrial and automotive vehicle testing. The transaction will be accounted for
under the purchase method.

On September 4, 1997 the Board of Directors declared a 4-for-3 stock split
effected as a stock dividend payable September 29, 1997 to holders of record on
September 15, 1997. The effect of the split is presented within shareholders'
equity at August 3, 1997. The distribution increased the number of shares
outstanding from 3,157,024 to 4,209,365. The amount of $105,234 was transferred
from the 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 this annual report have been restated to reflect the stock
split.

F-18
<PAGE> 70

GLOSSARY

<TABLE>
<S> <C>
C2 Command and Control referring to a system which controls UAVs and directs their
flight path.
EHD Electrode-less High Density
EMI Electro-Magnetic Interference
FTR Flight Termination Receiver, which is a device for the translation of range
safety command information into self-destruct signals
FM Frequency Modulation, which is angle modulation of a sine wave carrier in which
the instantaneous frequency of the modulated wave differs from the carrier
frequency by an amount proportional to the instantaneous value of the modulating
wave
GSS Global Security Systems, the international marketing group of the Company that
provides range instrumentation solutions to the international community
GPS Global Positioning System which is the satellite network used to provide point
positioning for users anywhere on the earth with the use of a GPS receiver
IFF Identification of Friend from Foe, referring to radar interrogation-transponder
system in which the transponder, when interrogated, provides a coded response to
identify the corresponding vehicle as a "friend"
MAGIC(2) Multiple Aircraft GPS Integrated Command and Control, referring to a system
manufactured by the Company having the capability to provide simultaneous command
and control functionality for multiple remotely piloted vehicles with the GPS
used for vehicle tracking
MIC Microwave Integrated Circuit, which are devices incorporating multiple discrete
microwave components in a single, encapsulated, package
PCM Pulse Code Modulation, referring to a variety of pulse modulation wherein the
modulating (data) signal is sampled at regular intervals, quantized into discrete
steps, and then transmitted over the system by means of a code pattern of a
series of pulses
PPC Pulse Position Coding, referring to a variety of pulse modulation wherein the
modulating (data) signal is sampled at regular intervals and the sampled data is
used to vary the position in time of a pulse, relative to its unmodulated time of
occurrence
PCS Personal Communication System, referring to a cellular communication technology
utilizing spreadspectrum, microwave, communications techniques
RF Radio Frequency
RPV Remotely Piloted Vehicle, referring to a vehicle deriving its command and control
inputs from a source external to the vehicle
RSO Range Safety Officer, which for range operations is the person assigned the task
of ensuring safe conditions during the operations period
TTCS Target Tracking and Control System, referring to a system manufactured by the
Company having the capability to provide Command and Control functionality for
remotely piloted vehicles with radar tracking techniques used for vehicle
tracking
UAV Unmanned Airborne Vehicle, referring to an aircraft deriving its command and
control inputs either autonomously or from a source external to the vehicle
</TABLE>

G-1
<PAGE> 71

======================================================

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. ANY INFORMATION OR PRESENTATIONS
NOT HEREIN CONTAINED, IF GIVEN OR MADE, MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES
OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE SECURITIES BY ANY PERSON IN ANY JURISDICTION
WHERE SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING SUCH OFFER IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. THE DELIVERY OF THIS PROSPECTUS
SHALL NOT, UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 3
Prospectus Summary.................... 4
Risk Factors.......................... 8
Use of Proceeds....................... 13
Price Range of Common Stock........... 14
Dividend Policy....................... 14
Capitalization........................ 15
Selected Financial Data............... 16
Management's Discussion and Analysis
and of Financial Condition and
Results of Operations............... 17
Business.............................. 23
Management............................ 34
Principal and Selling Stockholders.... 42
Description of Securities............. 43
Underwriting.......................... 47
Legal Matters......................... 50
Experts............................... 50
Financial Statements.................. F-1
Glossary.............................. G-1
</TABLE>

======================================================
======================================================
HERLEY INDUSTRIES, INC.
1,400,000 SHARES OF COMMON STOCK

1,400,000 COMMON STOCK
PURCHASE WARRANTS
-----------------

PROSPECTUS
-----------------
JANNEY MONTGOMERY SCOTT INC.
SOUTHWEST SECURITIES
, 1997
======================================================
<PAGE> 72

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The estimated expenses of the distribution, all of which shall be borne by
the Company, are as follows:

<TABLE>
<S> <C>
SEC Registration Fee....................................................... $13,202
NASD Filing Fee............................................................ 2,695
NASDAQ National Market Fees................................................ *
Blue Sky Fees and Expenses (including legal fees).......................... *
Transfer Agent and Warrant Agent Fees...................................... *
Accounting Fees and Expenses............................................... *
Legal Fees and Expenses.................................................... *
Printing and Engraving..................................................... *
Managing Underwriters' Financial
Advisory Fee............................................................. *
Miscellaneous..............................................................
-------
Total.................................................................... $ *
=======
</TABLE>

- ---------------
* To be filed by amendment

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

The Company, a Delaware corporation, is empowered by Section 145 of the
Delaware General Corporation Law (the "Delaware Act"), subject to the procedures
and limitations stated therein, to indemnify certain parties. Section 145 of the
Delaware Act provides in part that a corporation shall have the power to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding (other than
an action by or in the right of the corporation) by reason of the fact that such
person is or was a director, officer, employee or agent of the corporation or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. Similar indemnity is authorized for such persons against
expenses (including attorneys' fees) actually and reasonably incurred in defense
or settlement of any threatened, pending or completed action or suit by or in
the right of the corporation, if such person acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and provided further that (unless a court of competent jurisdiction
otherwise provides) such person shall not have been adjudged liable to the
corporation. Any such indemnification may be made only as authorized in each
specific case upon a determination by the stockholders or disinterested
directors that indemnification is proper because the indemnitee has met the
applicable standard of conduct. Where an officer or a director is successful on
the merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which such officer or
director actually or reasonably incurred. Section 145 provides further that
indemnification pursuant to its provisions is not exclusive of other rights of
indemnification to which a person may be entitled under any bylaw, agreement,
vote of stockholders or disinterested directors or otherwise.

The Company's Certificate of Incorporation and By-laws contain provisions
that limit the potential personal liability of directors for certain monetary
damages and provide for indemnity of directors and other persons. The Company
also maintains officers and directors liability insurance. The policy coverage
is $3,000,000, which includes reimbursement for costs and fees, with a maximum
deductible for officers and directors of $150,000 for each claim. The Company is
unaware of any pending or threatened litigation

II-1
<PAGE> 73

against the Company or its directors that would result in any liability for
which such director would seek indemnification or similar protection.

The provisions affecting personal liability do not abrogate a director's
fiduciary duty to the Company and its stockholders, but eliminate personal
liability for monetary damages for breach of that duty. The provisions do not,
however, eliminate or limit the liability of a director for failing to act in
good faith, for engaging in intentional misconduct or knowingly violating a law,
for authorizing the illegal payment of a dividend or repurchase of stock, for
obtaining an improper personal benefit, for breaching a director's duty of
loyalty (which is generally described as the duty not to engage in any
transaction that involves a conflict between the interests of the Company and
those of the director) or for violations of the federal securities laws. The
provisions also limit or indemnify against liability resulting from grossly
negligent decisions, including grossly negligent business decisions relating to
attempts to change control of the Company.

The provisions regarding indemnification provide, in essence, that the
Company will indemnify its directors against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection with any action, suit or proceeding arising out of the
director's status as a director of the Company, including actions brought by or
on behalf of the Company (shareholder derivative actions). The provisions do not
require a showing of good faith. Moreover, they do not provide indemnification
for liability arising out of willful misconduct, fraud, or dishonesty, for
"short-swing" profits violations under the federal securities laws, or for the
receipt of illegal remuneration. The provisions also do not provide
indemnification for any liability to the extent such liability is covered by
insurance. One purpose of the provisions is to supplement the coverage provided
by such insurance.

These provisions diminish the potential rights of action that might
otherwise be available to shareholders by limiting the liability of officers and
directors to the maximum extent allowable under Delaware law and by affording
indemnification against most damages and settlement amounts paid by a director
of the Company in connection with any stockholders derivative action. However,
the provisions do not have the effect of limiting the right of a stockholder to
enjoin a director from taking actions in breach of the director's fiduciary
duty, or to cause the Company to rescind actions already taken, although as a
practical matter courts may be unwilling to grant such equitable remedies in
circumstances in which such actions have already been taken.

The Company has entered into indemnification agreements with certain of its
officers and directors. The indemnification agreements provide for reimbursement
for all direct and indirect costs of any type or nature whatsoever (including
attorneys' fees and related disbursements) actually and reasonably incurred in
connection with either the investigation, defense or appeal of a legal
proceeding, including amounts paid in settlement by or on behalf of an
indemnitee thereunder.

The Underwriting Agreement among the Company, the Selling Stockholders and
the Underwriters provides that the indemnification by the Underwriters of the
Company, certain of its directors and officers and any controlling person
against any liabilities and expenses incurred by any of them in certain stated
proceedings and under certain stated conditions.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

In August 1997, Registrant purchased all of the outstanding common stock of
Metraplex Corporation, a Delaware corporation, in exchange for 313,193 shares of
Registrant's Common Stock. Pursuant to demand registration rights, the Company
included these 313,193 shares in a Registration Statement on Form S-3 which was
declared effective by the Commission on October 16, 1997. The transaction
exchanging the Metraplex common stock for Registrant's Common Stock was a
transaction by the issuer not involving any public offering which was exempt
from the registration requirements under the Act pursuant to Section 4(2)
thereof.

II-2
<PAGE> 74

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

<TABLE>
<CAPTION>
EXHIBITS
- --------
<S> <C>
1.1** Form of Underwriting Agreement between the Company, the Selling Stockholders and the
Underwriters.
2.1** Agreement and Plan of Reorganization, dated as of July 8, 1997, by and among the
Company, Metraplex Acquisition Corp. and Metraplex Corporation (Incorporated by
reference to Exhibit 2.1 of the Company's Registration Statement on Form S-3, File
No. 333-35485 dated September 4, 1997).
2.2** Stock Purchase Agreement, dated as of June 1, 1993, among the Company, Herley
Interim Corp., Milton Barnard, Edward M. Webber, Marvin Adler and Carlton
Industries, Inc. (Incorporated by reference to Exhibit 7(c) of the Company's Report
on Form 8-K, dated June 18, 1993).
2.3** Asset Purchase Agreement, dated as of September 1, 1992, between Micro-Dynamics,
Inc. and the Company (Incorporated by reference to Exhibit 7(c) of the Company's
Report on Form 8-K dated October 22, 1992).
2.4** Purchase and Sale Agreement, dated as of July 28, 1995, between Stewart Warner
Electronics Co. and the Company.
3.1** Certificate of Incorporation of the Company, as amended (Incorporated by reference
to Exhibit 3.1 to the Company's Registration Statement on Form S-2, File No.
2-87160).
3.2* By-laws of the Company, as amended.
4.1** Specimen Common Stock Certificate (Incorporated by reference to Exhibit 4 to the
Company's Registration Statement on Form S-2, File No. 2-87160).
4.2* Form of Warrant.
4.3* Form of Warrant Agreement among the Company, the Selling Stockholders, the
Representative, and the Warrant Agent.
4.4* Form of Deposit Agreement between the Selling Stockholders and the Warrant Agent.
5.1* Form of Opinion and Consent of Blau, Kramer, Wactlar & Lieberman, P.C. regarding the
legality of the Securities being registered.
10.1** 1992 Non-Qualified Stock Option Plan (Incorporated by reference to Exhibit A to the
Company's Proxy Statement filed December 30, 1992).
10.2** 1996 Stock Option Plan (Incorporated by reference to Exhibit 10 to the Company's
Annual Report on Form 10-K for the fiscal year ended July 28, 1996).
10.3** 1997 Stock Option Plan (Incorporated by reference to Exhibit 10.1 of the Company's
Quarterly Report on Form 10-Q for the period ended May 4, 1997).
10.4** Form of Employment Agreement between the Company and Lee N. Blatt dated as of
November 1, 1997.
10.5** Form of Employment Agreement between the Company and Myron Levy dated as of November
1, 1997.
10.6** Form of Employment Agreement between the Company and Gerald Klein dated as of
November 1, 1997.
10.7** Severance Agreement between the Company and Allan Coon dated June 11, 1997.
10.8** Revised Non-Negotiable Promissory Note of Lee N. Blatt dated June 2, 1997
(Incorporated by reference to Exhibit 10.4 of the Company's Quarterly Report on Form
10-Q for the period ended May 4, 1997).
10.9** Revised Non-Negotiable Promissory Note of Gerald I. Klein dated June 2, 1997
(Incorporated by reference to Exhibit 10.5 of the Company's Quarterly Report on Form
10-Q for the period ended May 4, 1997).
10.10** Revised Non-Negotiable Promissory Note of Myron Levy dated June 2, 1997
(Incorporated by reference to Exhibit 10.6 of the Company's Quarterly Report on Form
10-Q for the period ended May 4, 1997).
10.11** Loan Agreement between the Company and Allstate Municipal Income Opportunities Trust
(Incorporated by reference to Exhibit 10.6 of the Company's Annual Report on Form
10-K for the fiscal year ended July 31, 1989).
</TABLE>

II-3
<PAGE> 75

<TABLE>
<CAPTION>
EXHIBITS
- --------
<S> <C>
10.12** Form of Warrant Agreement with directors.
10.13** Credit Agreement, dated January 25, 1996 between Dauphin Deposit Bank and the
Company.
10.14** Form of Indemnification Agreement with officers and directors.
10.15* Form of Managing Underwriters' Warrant Agreement between the Company and the
Managing Underwriters.
10.16** Form of Registration Rights Agreement between the Company and the Managing
Underwriters.
10.17** License Agreement, dated March 1, 1994, between the Company and Clem Whittemore
d/b/a Allied Consulting and Engineering Services.
10.18** Agreement for Sale of Real Estate, dated April 11, 1996, between the Company and Lee
N. Blatt.
10.19** Letter of Intent, dated October 30, 1997, between the Managing Underwriters and the
Company.
10.20* Employment Agreement, dated August 4, 1997, among Metraplex Corporation, the Company
and Glenn Rosenthal.
11.1 ** Statement regarding Computation of Earnings Per Share.
21.1 ** Subsidiaries of the Company.
23.1 * Consent of Blau, Kramer, Wactlar & Lieberman, P.C. (included in Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP.
25.1 ** Powers of Attorney (included on the signature page hereto).
</TABLE>

- ---------------
* To be filed by amendment.

**Previously filed.

Financial Statement Schedules

Not applicable.

ITEM 17. UNDERTAKINGS.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the issuer
pursuant to the foregoing provisions, or otherwise, the issuer has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the issuer of expenses
incurred or paid by a director, officer or controlling person of the issuer in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the issuer will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

Registrant hereby undertakes that it will:

(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:

(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;

(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement; and

(iii) Include any additional or changed material information on the
plan of distribution.

(2) For determining any liability under the Securities Act of 1933, treat
each post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.

II-4
<PAGE> 76

(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.

II-5
<PAGE> 77

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Lancaster, Pennsylvania on the 17th
day of November, 1997.

HERLEY INDUSTRIES, INC.

By: /s/ LEE N. BLATT
------------------------------------
Lee N. Blatt
Chairman of the Board
(Chief Executive Officer)

POWER OF ATTORNEY

Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed below on November 17, 1997,
by the following persons in the capacities indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE/CAPACITY
- ------------------------------------------ -------------------------------------------------
<C> <S>

/s/ LEE N. BLATT Chairman of the Board (Chief Executive Officer)
- ------------------------------------------ and Issuer of Certain Warrants
Lee N. Blatt
/s/ MYRON LEVY President and Director
- ------------------------------------------
Myron Levy

/s/ ANELLO C. GAREFINO* Vice President -- Finance, Treasurer (Chief
- ------------------------------------------ Financial Officer and Principal Accounting
Anello C. Garefino Officer)

/s/ THOMAS J. ALLSHOUSE* Director
- ------------------------------------------
Thomas J. Allshouse

/s/ DAVID H. LIEBERMAN* Secretary and Director
- ------------------------------------------
David H. Lieberman

/s/ JOHN THONET* Director
- ------------------------------------------
John Thonet

/s/ ALVIN M. SILVER* Director
- ------------------------------------------
Alvin M. Silver

/s/ EDWARD K. WALKER, JR.* Director
- ------------------------------------------
Edward K. Walker, Jr.

/s/ GERALD I. KLEIN* Issuer of Certain Warrants
- ------------------------------------------
Gerald I. Klein

/s/ KATHI THONET* Issuer of Certain Warrants
- ------------------------------------------
Kathi Thonet

By: /s/ MYRON LEVY
--------------------------------------
Myron Levy
Attorney-in-Fact
</TABLE>

II-6
<PAGE> 78

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBITS
- --------
<S> <C>
1.1** Form of Underwriting Agreement between the Company, the Selling Stockholders and the
Underwriters.
2.1** Agreement and Plan of Reorganization, dated as of July 8, 1997, by and among the
Company, Metraplex Acquisition Corp. and Metraplex Corporation (Incorporated by
reference to Exhibit 2.1 of the Company's Registration Statement on Form S-3, File
No. 333-35485 dated September 4, 1997).
2.2** Stock Purchase Agreement, dated as of June 1, 1993, among the Company, Herley
Interim Corp., Milton Barnard, Edward M. Webber, Marvin Adler and Carlton
Industries, Inc. (Incorporated by reference to Exhibit 7(c) of the Company's Report
on Form 8-K, dated June 18, 1993).
2.3** Asset Purchase Agreement, dated as of September 1, 1992, between Micro-Dynamics,
Inc. and the Company (Incorporated by reference to Exhibit 7(c) of the Company's
Report on Form 8-K dated October 22, 1992).
2.4** Purchase and Sale Agreement, dated as of July 28, 1995, between Stewart Warner
Electronics Co. and the Company.
3.1** Certificate of Incorporation of the Company, as amended (Incorporated by reference
to Exhibit 3.1 to the Company's Registration Statement on Form S-2, File No.
2-87160).
3.2* By-laws of the Company, as amended.
4.1** Specimen Common Stock Certificate (Incorporated by reference to Exhibit 4 to the
Company's Registration Statement on Form S-2, File No. 2-87160).
4.2* Form of Warrant.
4.3* Form of Warrant Agreement among the Company, the Selling Stockholders, and the
Warrant Agent.
4.4* Form of Deposit Agreement between the Selling Stockholders and the Warrant Agent.
5.1* Form of Opinion and Consent of Blau, Kramer, Wactlar & Lieberman, P.C. regarding the
legality of the Securities being registered.
10.1** 1992 Non-Qualified Stock Option Plan (Incorporated by reference to Exhibit A to the
Company's Proxy Statement filed December 30, 1992).
10.2** 1996 Stock Option Plan (Incorporated by reference to Exhibit 10 to the Company's
Annual Report on Form 10-K for the fiscal year ended July 28, 1996).
10.3** 1997 Stock Option Plan (Incorporated by reference to Exhibit 10.1 of the Company's
Quarterly Report on Form 10-Q for the period ended May 4, 1997).
10.4** Form of Employment Agreement between the Company and Lee N. Blatt dated as of
November 1, 1997.
10.5** Form of Employment Agreement between the Company and Myron Levy dated as of November
1, 1997.
10.6** Form of Employment Agreement between the Company and Gerald Klein dated as of
November 1, 1997.
10.7** Severance Agreement between the Company and Allan Coon dated June 11, 1997.
10.8** Revised Non-Negotiable Promissory Note of Lee N. Blatt dated June 2, 1997
(Incorporated by reference to Exhibit 10.4 of the Company's Quarterly Report on Form
10-Q for the period ended May 4, 1997).
10.9** Revised Non-Negotiable Promissory Note of Gerald I. Klein dated June 2, 1997
(Incorporated by reference to Exhibit 10.5 of the Company's Quarterly Report on Form
10-Q for the period ended May 4, 1997).
10.10** Revised Non-Negotiable Promissory Note of Myron Levy dated June 2, 1997
(Incorporated by reference to Exhibit 10.6 of the Company's Quarterly Report on Form
10-Q for the period ended May 4, 1997).
</TABLE>

<PAGE> 79

<TABLE>
<CAPTION>
EXHIBITS
- --------
<S> <C>
10.11** Loan Agreement between the Company and Allstate Municipal Income Opportunities Trust
(Incorporated by reference to Exhibit 10.6 of the Company's Annual Report on Form
10-K for the fiscal year ended July 31, 1989).
10.12** Form of Warrant Agreement with directors.
10.13** Credit Agreement, dated January 25, 1996 between Dauphin Deposit Bank and the
Company.
10.14** Form of Indemnification Agreement with officers and directors.
10.15* Form of Managing Underwriters' Warrant Agreement between the Company and the
Managing Underwriters.
10.16** Form of Registration Rights Agreement between the Company and the Managing
Underwriters.
10.17** License Agreement, dated March 1, 1994, between the Company and Clem Whittemore
d/b/a Allied Consulting and Engineering Services.
10.18** Agreement for Sale of Real Estate, dated April 11, 1996, between the Company and Lee
N. Blatt.
10.19** Letter of Intent, dated October 30, 1997, between the Managing Underwriters and the
Company.
10.20* Employment Agreement, dated August 4, 1997, among Metraplex Corporation, the Company
and Glenn Rosenthal.
11.1 ** Statement regarding Computation of Earnings Per Share.
21.1 ** Subsidiaries of the Company.
23.1 * Consent of Blau, Kramer, Wactlar & Lieberman, P.C. (included in Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP.
25.1 ** Powers of Attorney (included on the signature page hereto).
</TABLE>

- ---------------
* To be filed by amendment.

** Previously filed.

<PAGE> 1
ARTHUR ANDERSEN LLP

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

As independent public accountants, we hereby consent to the use of our report
dated September 17, 1997 and to all references to our Firm included in this
Amendment No. 1 to Form S-1 Registration Statement (File No. 333-39767).

Arthur Andersen LLP

Lancaster, PA
November 18, 1997