SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                   FORM 10-K

       [X] Annual Report Pursuant to Section 13 or 15(d) of the Exchange
             Act of 1934 For the fiscal year ended December 31, 1996

[ ] Transition Report Pursuant to Section 13 of 15(d) of the Securities Exchange
    Act of 1934
    For the Transition period from                   to
                                    -----------------     ----------------

                        Commission file number 000-21770

                         SIGNAL TECHNOLOGY CORPORATION
             (Exact name of registrant as specified in its charter)

               Delaware                                    04-2758268
     (State or other jurisdiction           (I.R.S. employer identification no.)
  of incorporation or organization)

   975 Benecia Avenue, Sunnyvale, CA                         94086
(Address of principal executive offices)                   (Zip Code)


       Registrant's telephone number, including area code: (408) 730-6318

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

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

                    Common Stock, par value $0.01 per share
                    ---------------------------------------
                                (Title of class)


Indicate by check whether the Registrant  (1) has filed all reports  required to
be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of 1934 during
the  preceding 12 months (or for each  shorter  period that the  Registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes  X    No
                                       ---      ---
Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of Registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

On March 14, 1997,  the aggregate  fair value of the  Registrants'  Common Stock
held by non-affiliates was $28,807,800.  On March 14, 1997, there were 7,186,924
shares of the Registrant's Common Stock issued and outstanding.

                      Documents Incorporated By Reference

Part  III  incorporates  information  by  reference  from the  definitive  Proxy
Statement in connection with the Registrant's  Annual Meeting of Shareholders to
be  held  on  May  6,  1997  (the  "Proxy  Statement").   Certain  exhibits  are
incorporated by reference from the Registrant's  Registration  Statement on Form
S-1, as amended (File No.  33-61124) and Form 8-K dated  November 24, 1993,  the
Registrant's 1993 and 1994 Annual Reports on Form 10-K and the Proxy Statement.


<PAGE>


                      INDEX TO ANNUAL REPORT ON FORM 10-K


                                   PART I                                  Page
--------------------------------------------------------------------------------
Item 1: Business                                                            15

Item 2: Properties                                                          18

Item 3: Legal Proceedings                                                   19

Item 4: Submission of Matters to a Vote of Security Holders                 19


                                     PART II
--------------------------------------------------------------------------------

Item 5: Market for the Registrant's Common Equity and Related
        Stockholder Matters                                                 19

Item 6: Selected Consolidated Financial Data                                20

Item 7: Management's Discussion and Analysis of Financial Condition and
        Results of Operations                                               20

Item 8: Financial Statements and Supplementary Data                         22

Item 9: Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosure                                                34


                                    PART III
--------------------------------------------------------------------------------

Item 10:        Directors and Executive Officers of the Registrant          34

Item 11:        Executive Compensation                                      34

Item 12:        Security Ownership of Certain Beneficial Owners
                and Management                                              34

Item 13:        Certain Relationships and Related Transactions              34


                                     PART IV
--------------------------------------------------------------------------------
Item 14:        Exhibits, Financial Statement Schedules and
                Reports on Form 8-K                                         35
                Signatures                                                  37


<PAGE>

                                     PART I

                                Item I. Business
General

Signal Technology  Corporation (the "Company" or "Signal  Technology")  designs,
develops,  manufactures  and markets  sophisticated  electronic  components  and
subsystems  that are  utilized in a broad range of advanced  defense,  space and
communication  applications.  The Company's  principal strategy for growth is to
acquire complementary  businesses and product lines while aggressively marketing
growth areas in defense, space and communication.  While consolidation continues
in the  defense  industry,  the budget  down cycle  appears to have ended and we
expect to take  advantage  of being one of the  remaining  companies  in defense
electronics.

   In 1996 the Company acquired certain products lines and associated assets and
backlog of Military  Power  Systems a division of  Transistor  Devices  Inc. The
Company acquired  certain assets and backlog of four companies in 1995:  Western
Microwave,  Inc., Tecnetics  Incorporated,  Adaptive Power Solutions L.L.C., and
Benecia  Communications  Corporation (Benecia  Communications was sold in 1996).
During  1994  the  Company   acquired   the  business  of  Hughes  Power  Supply
Corporation.

   The Company integrates  acquired  businesses and product lines where possible
with  existing  operations,   reducing  costs  by  eliminating  redundancies  in
administration, operations, facilities and other areas. In addition, the Company
is diversifying its customer base by directing marketing and product development
resources to commercial and  non-military  applications  of its  technologies in
domestic and  international  markets.

   The Company's core  technology  involves  precision  control,  management and
generation of radio and microwave frequencies and electrical currents. Principal
uses  for the  Company's  products  include  communication  networks,  satellite
communications,  electronic countermeasures,  intelligence and guidance systems.
The Company's major customers are prime government  contractors  which integrate
the  Company's  products  into  complex  systems  sold to agencies of the United
States government and foreign countries.  In recent years, changes in the global
political  situation  have  resulted  in  reductions  in defense  budgets and an
apparent  increase  in  United  States  military  reliance  upon   sophisticated
electronic  equipment.  However, it appears the defense downturn has ceased with
budget  forecasts flat to slightly  increasing in the coming years. In addition,
military  agencies are seeking to maximize  resources by enhancing and upgrading
existing systems and platforms.  The Company believes that its products are well
positioned to take advantage of current  defense  trends due to its  substantial
incumbency  on key existing  programs and  platforms.  The  Company's  operating
strategy of enhancing its manufacturing and engineering  capabilities to improve
product  quality and reduce cost will also enable it to compete  effectively  in
the future.

   The Company  reports its operations  within one principal  industry  segment:
electronic components and equipment.

   During 1996 all of the Company's operating  subsidiaries merged with and into
the Company,  with the Company as the sole surviving  corporation.  Accordingly,
Signal Technology  currently  operates through the former "parent" entity rather
than through various operating subsidiaries.

Products and Customers

The  Company's  products  are  integrated  into complex  electronic  systems and
subsystems that require  precision  generation,  control and management of radio
and microwave  frequencies.  The Company is dedicated to supplying  high quality
products  that meet rigid  customer  requirements  for  performance  and on-time
delivery,  while at the same time being  competitively  priced.  The  Company is
continually  investing  in product  design  and  engineering  capability  and in
state-of-the-art manufacturing and testing systems and processes.

<TABLE>

   The  following  table  sets  forth  information  concerning  net sales of the
Company's principal classes of applications for the periods indicated:

<CAPTION>

                                           Year Ended December 31
                        -------------------------------------------------------------
                              1996                    1995                 1994
                        -------------------------------------------------------------
(dollars in thousands)       $      %             $         %           $        %
-------------------------------------------------------------------------------------
<S>                     <C>         <C>       <C>          <C>      <C>          <C>
Defense                 $ 74,443    65%       $ 57,691     64%      $ 68,937     74%
Space                      7,115     6           3,675      4          2,103      2
Communication             32,683    29          28,362     32         22,054     24
-------------------------------------------------------------------------------------
Total                   $114,241   100%       $ 89,728    100%      $ 93,094    100%
=====================================================================================
</TABLE>


<PAGE>

Defense

Signal  Technology  is a leading  supplier  of  sophisticated,  state-of-the-art
electronic  components  and systems for missile  guidance,  airborne  and ground
based radars, electronic countermeasures (ECM), and electronic intelligence. The
Company supplies products on key missiles programs such as the AMRAAM, Tomahawk,
Sparrow,  and  PAC3/Patriot  missile  system.  Key  programs  in ECM include the
ALQ-135,  ALQ-156,  ALQ-184 and ATRJ. The Company  provides  microwave and radio
frequency components and subsystems that primarily generate,  manage and control
frequencies in the range of 1 Khz to 40Ghz. A typical example is a radar jamming
system which  incorporates  a microwave  oscillator  that  generates a signal to
render enemy radar  ineffective.

   Power supply products are typically used for direct electric  current (DC) to
DC conversion or alternating electric current (AC) to DC conversion, and high or
low voltage power at varied currents.  For example,  power supply products would
be used to convert 400 Hz AC current generated by an aircraft's  generators into
the high voltage high current required for the aircraft's radar.

Space

Signal  Technology  provides  products  for  manned  and  unmanned   spacecraft.
Principal space  applications  include satellite  communications,  intelligence,
surveillance  and  sensing.  The  Company  designs,  develops  and  manufactures
components such as isolators,  circulators and DC to DC power converters for use
on  satellite-based  digital  communication  systems such as Globalstar(TM)  and
Iridium(TM).  Such  systems  are  designed to offer  voice,  data,  paging,  and
facsimile to telephones and data terminals in areas underserved or not served by
existing  systems.  The Company also provides power  converters  currently being
used in the U.S. Air Force MILSTAR II Program.  Substantially all space products
are sold to prime contractors or subcontractors.

Communication

The Company offers a wide selection of communication  products including digital
switching equipment, transceivers, power supplies, and microwave components. The
Company's  communication  products cover a diverse range of applications such as
cellular phone systems,  modems,  air traffic control,  local area and wide area
networks,  digital radios, and intelligence gathering.  Unlike space and defense
electronics  applications,  sales of  communication  products  are  primarily to
commercial  entities,  government  agencies and foreign companies rather than to
prime contractors on specific programs.

   The Company's principal customers are prime contractors and military agencies
of the  United  States  government  and  certain  foreign  countries.  With  the
exception of Raytheon  Company,  which  accounted  for 22%,  14%, and 13% of the
Company's  net  sales in 1996,  1995,  and 1994,  respectively,  the loss of any
customer would not have a material adverse effect on the Company.

   The  following  table  sets  forth  information  concerning  net sales of the
Company's products to categories of customers and geographic markets.  The sales
information  includes  direct sales by the Company to the customer or market and
indirect sales to prime contractors selling to the customer or market.

                                            Year Ended December 31
                         -------------------------------------------------------
                                1996                1995              1994
                         -------------------------------------------------------
(dollars in thousands)       $        %          $       %         $         %
--------------------------------------------------------------------------------
U.S. government
   Military               $ 75,558     66%   $ 62,682    70%   $ 66,401     71%
   Non-Military              2,988      3       3,100     3       3,502      4
U.S. Commercial             17,441     15       9,211    10       6,011      6
International
   Military                 11,425     10       9,742    11      12,594     14
   Commercial                6,829      6       4,993     6       4,586      5
--------------------------------------------------------------------------------
Total                     $114,241    100%   $ 89,728   100%   $ 93,094    100%
================================================================================

Government Contracts

A substantial portion of the Company's business is conducted under United States
government contracts and subcontracts.  These contracts are either competitively
bid or sole source  contracts.  Competitively  bid contracts are awarded after a
formal bid and proposal  competition among suppliers.  Sole source contracts are
awarded when a single  contractor  is deemed to have an expertise or  technology
that is superior to that of competing contractors.


<PAGE>

   Virtually  all  of the  Company's  United  States  government  contracts  and
subcontracts are fixed price contracts,  pursuant to which the Company agrees to
develop a product or to  manufacture a product for a fixed price and assumes the
risk of cost overruns.  Substantially all of the Company's net sales are derived
from fixed price manufacturing  contracts.  The Company's experience is that the
risk of cost overruns is lower on fixed price manufacturing contracts than it is
on fixed price product development contracts.

Sales and Marketing

The Company  markets its  products  through its own sales force and a network of
knowledgeable and active independent sales representatives and distributors. The
Company's  sales force is  comprised of its Vice  President-Marketing,  regional
sales managers,  sales personnel and support staff.  The Company has independent
sales representatives in the U.S. and numerous foreign countries.

   The Company's sales managers are responsible for coordinating the independent
sales  representatives  and for having  extensive  knowledge of  government  and
commercial  programs in their respective  regions.  They also keep the Company's
engineering,  manufacturing and management  personnel advised of possible future
trends  and  requirements  of  customers.

   The key to the Company's  sales and marketing  strategy is the development of
long-term  relationships  with  its  customers.  This  is  achieved  by  regular
communications  and meetings  between Company  personnel at all levels and their
counterparts  in the customer's  organization.  The Company is active in forming
strategic alliances and buying agreements.  These activities are critical as the
Company intends to acquire other businesses and product lines.

Product Engineering, Manufacturing and Development

The Company  believes that a principal  reason for its success is the quality of
its product design, engineering,  manufacturing and testing capabilities.  These
capabilities  enable the Company to design and  engineer  products  that meet or
exceed its customers'  demanding  specifications for performance and reliability
and to manufacture the products at competitive  prices. The Company has acquired
manufacturing,  engineering  and testing  know-how and  technology in connection
with its  acquisitions  at costs that it believes  are  considerably  lower than
would have been incurred had the Company developed the know-how and technologies
itself.

   The  Company   maintains   engineering,   product  design  and  manufacturing
operations and related  support systems at all of its operating  facilities.  In
addition, all operations utilize computer systems for product design and product
documentation and to control product performance testing. A key to the Company's
ability to reduce  manufacturing  cost has been the  reduction  of direct  labor
through the  introduction  of  automated  or  semi-automated  manufacturing  and
product  testing   systems  and  processes.

   The Company invests in product development,  principally engineering, to meet
and  anticipate  customer  requirements  for new  products  or  enhancements  of
existing  products.  In  addition,  the  Company  undertakes  customer-sponsored
product   development   contracts.   Accordingly,   the  Company's   development
activities, whether Company-funded or customer-sponsored,  are generally product
or program  specific.  The  amounts  of  Company-funded  and  customer-sponsored
development work performed in each of the last three years are as follows:

                                                   Year Ended December 31
                         -------------------------------------------------------
(dollars in thousands)                          1996         1995          1994
--------------------------------------------------------------------------------
Company Funded                                $  522        $1,610        $2,391
Customer-sponsored                             4,820         3,602         2,029
--------------------------------------------------------------------------------
Total                                         $5,342        $5,212        $4,420
================================================================================

Sources of Raw Materials

The  raw  materials  and  sub-components  which  the  Company  requires  for the
manufacture of its products are generally  available from several  sources.  The
Company purchases some raw materials and components from single sources, but has
no reason to believe it could not purchase from alternative sources of supply on
comparable  terms.  From time to time, the Company  experiences  minor delays in
obtaining raw  materials and  components;  however,  delays have not  materially
affected its operations.

Backlog

At December  31, 1996 and 1995,  the  Company  had a backlog of  unshipped  firm
orders of $87,887,000 and $92,837,000, respectively. The Company expects to ship
all of the  December  31, 1996 backlog  within  1997,  except for  approximately
$17,480,000 which will be shipped in later periods.


<PAGE>

Competition

Competition is based primarily on price,  product  performance,  reliability and
customer  support.  The Company believes that it competes  effectively in all of
these areas. The Company's  continued success will depend in part on its ability
to  develop  and  introduce  low  cost,  quality  products  that  meet or exceed
customer's specifications.

   There is no single  competitor  that  competes with the Company in all of its
product  lines.  However,  there  are a  number  of  competitors  in each of the
Company's  product  lines.  Some  of  the  Company's  competitors  have  greater
financial and operating resources than the Company. In addition,  certain of the
Company's  customers have  technological  capabilities in the Company's  product
areas and could choose to manufacture  certain products  themselves  rather than
purchase from suppliers such as the Company.

Employees

As of December 31, 1996, the Company had 993 full-time  employees at its various
divisions and subsidiaries.  No employees are represented by unions. The Company
believes its relations with its employees are satisfactory.

Patents

The Company  holds a number of patents  issued in the United  States and certain
European countries. While the Company considers its patents to be of some value,
its  technological  position depends  primarily on the technical  competence and
creative  ability of its  engineering  staff in the areas of product  design and
manufacturing  processes.  All of the  Company's  key  personnel  are subject to
confidentiality agreements.

Government Regulation

All of the  Company's  operations  are  subject to  compliance  with  regulatory
requirements of federal, state and municipal authorities,  including regulations
concerning employment  obligations and affirmative action,  workplace safety and
protection of the environment.  While compliance with applicable regulations has
not  adversely  affected the Company's  operations in the past,  there can be no
assurance  that the Company will  continue to be in  compliance in the future or
that these regulations will not change.

   In particular,  the Company must comply with detailed government  procurement
and  contracting   regulations  and  with  United  States  government   security
regulations,   certain  of  which  carry  substantial   penalty  provisions  for
nonperformance or  misrepresentation  in the course of negotiations.  Failure of
the Company to comply with its government  procurement,  contracting or security
obligations  could  result  in  penalties  or  suspension  of the  Company  from
government  contracting,  which  would  have a  material  adverse  effect on the
Company's results of operations.

   The  Company is  required to  maintain a United  States  government  facility
clearance at each of its locations. This clearance could be suspended or revoked
if the  Company  is  found  not to be in  compliance  with  applicable  security
regulations.  Any such  revocation  or  suspension  would  delay  the  Company's
delivery of its products to customers. Although the Company has adopted policies
directed at assuring its compliance with  applicable  regulations and there have
been no suspensions or  revocations  of any of its  facilities,  there can be no
assurance  that the approved  status of the Company's  facilities  will continue
without interruption. United States government regulations require a license for
the export of advanced  weapons  systems.  Changes in United  States  government
policies   towards  the  export  of  these  systems  may  impact  the  Company's
international business.

                               Item 2 Properties

The Company's principal executive offices are located in Sunnyvale,  California.
The Company's principal operating facilities, containing light manufacturing and
associated engineering and support services are located in four states:

Arizona:       The  Company  owns  a  modern  84,260  square  foot  building  in
               Chandler.

California:    The  Company  leases a modern  54,280  square  foot  building  in
               Sunnyvale.  The lease is triple net and expires in November 2003.
               The  current  annual  rent is  $619,000  with an  average  annual
               escalation of approximately 6.6% through the term of the lease.

Florida:       The Company  owns a modern  68,000  square foot  building in Fort
               Walton Beach.

Massachusetts: The Company owns a modern 25,000 square foot building in Webster.
               In  Beverly,  the  Company  leases a modern  40,350  square  foot
               building  under a triple net lease that expires in December 1997.
               The annual rent is $230,000.


<PAGE>

The Company  believes that its properties  are in good  operating  condition and
repair  and  considers  its  facilities  to be  suitable  and  adequate  for the
Company's  current  and  reasonably  foreseeable  future  activities.  There  is
capacity at the Company's  facilities to absorb acquired  businesses and product
lines. The properties  owned by the Company,  are subject to either mortgages or
industrial revenue bond financing.

                            Item 3 Legal Proceedings

The  Company  is  involved  from time to time in  litigation  incidental  to its
business.

   In April 1996, the Company sold its facility in Weymouth,  Massachusetts  but
retained  the  environmental   liability  and  responsibility   associated  with
groundwater  contaminants present at the site. This facility has been classified
as a tier 1A disposal  site by the  Massachusetts  Department  of  Environmental
Protection  ("DEP"),  as a result of past releases of petroleum  based solvents.
Environmental  assessment reports prepared by independent  consultants  indicate
that  contaminants  present in the Town of Weymouth well field across the street
from the facility are similar to those  reportedly  released at the facility and
still present in the  groundwater at the facility;  however,  these reports also
indicate that the  contaminants  do not exceed safe drinking water levels in the
finished  water  after  normal  treatment.  Other  contaminants  which  did  not
originate at the facility have also been detected in the well field.

   The Company is continuing to conduct  investigations of the facility for soil
and  groundwater  contamination  and  operates  a pilot  remediation  system  in
cooperation with the DEP. It is not possible at this stage of the proceedings to
predict what additional remediation, if any, will be required.

           Item 4 Submission of Matters to a Vote of Security Holders
                                     None.

--------------------------------------------------------------------------------
                                    PART II

  Item 5 Market for Registrant's Common Equity and Related Stockholder Matters

The Company's  Common Stock is listed on the American Stock  Exchange  ("AMEX"),
under the symbol  STZ.  Prior to its  listing on the AMEX in August,  1994,  the
Company's  Common  Stock  was  traded  in the  over-the-counter  market  and was
included in the NASDAQ National Market System under the trading symbol STCX. The
high and low sales prices for shares of the Company's  Common Stock for the past
two years were as follows:

                                   1996                         1995
                         -------------------------------------------------------
                            High          Low           High          Low
--------------------------------------------------------------------------------
First Quarter               7 7/8         5 1/4         4 1/2         3 3/8
Second Quarter              9 3/4         6 7/8         4 11/16       3 1/8
Third Quarter               7 7/8         5             5 7/16        3 3/16
Fourth Quarter              8 5/8         7 1/4         6             4 5/8
================================================================================

There were  approximately  98 holders of record of the Company's Common Stock on
March 14, 1997.  The closing  price per share of the  Company's  Common Stock on
March 14, 1997 as reported on the AMEX was $7.50.

   The Company has never paid cash  dividends on its Common  Stock.  The Company
currently  anticipates  that it  will  retain  all  available  funds  for use in
operations and expansion of its business and does not anticipate paying any cash
dividends in the foreseeable future.


<PAGE>

<TABLE>
                  Item 6 Selected Consolidated Financial Data

                      SELECTED CONSOLIDATED FINANCIAL DATA

<CAPTION>
                                                  ----------------------------------------------------------------------------------
(in thousands, except per share amounts)                 1996              1995             1994             1993             1992
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>              <C>               <C>              <C>              <C>
OPERATIONS
Net sales                                             $ 114,241        $  89,728         $  93,094        $  97,054        $  81,593
====================================================================================================================================
Operating income (1)                                      5,042            1,040             6,685            8,337            6,875
Income (loss) before taxes                                3,697             (123)            5,839            7,890            6,028
Net income (loss)                                         2,245             (269)            3,562            4,930            3,665
Net income (loss) per share (1)                       $    0.29        $   (0.04)        $    0.48        $    0.70        $    0.61
------------------------------------------------------------------------------------------------------------------------------------
Shares used in calculating
net income (loss) per share                               7,676            6,880             7,362            6,997            6,051

(1) In 1995, includes restructuring expense of $779 or $(0.07) per share.
====================================================================================================================================

FINANCIAL POSITION
Current assets                                        $  48,043        $  46,421         $  39,216        $  33,756        $  24,085
Current liabilities                                      16,465           15,682            12,035           15,459           14,540
Total assets                                             66,591           66,117            58,431           55,124           37,866
Long-term debt, less current maturities                  13,408           17,283            12,903           10,032            8,312
Total debt                                               14,729           17,658            13,278           10,407            9,562
Stockholders' equity                                     34,909           31,944            31,913           28,086           13,858
Shares outstanding at year-end                            7,172            6,949             6,827            6,711            5,373
Book value per share                                  $    4.87        $    4.60         $    4.67        $    4.19        $    2.58
------------------------------------------------------------------------------------------------------------------------------------
SELECTED DATA
New orders                                            $ 103,829        $ 110,656         $  90,249        $  78,109        $  75,865
Year-end backlog                                      $  87,887        $  92,837         $  65,998        $  64,489        $  70,610
Employees at year-end                                       993              894               854              996              955
Revenue per employee                                  $     115        $     100         $     109        $      97        $      85
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>


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

Overview

The Company's  principal  business is the design,  development,  manufacture and
marketing  of  sophisticated  electronic  components  and  subsystems  that  are
utilized  in  a  broad  range  of  advanced  space,  communication  and  defense
applications.  The  Company's  principal  strategy  for  growth  is  to  acquire
complementary  businesses and product lines while aggressively  marketing growth
areas in space, communication and defense.

Results of Operations for the Years Ended December 31, 1996, 1995 and 1994

Overall, net sales increased  approximately 27% in 1996 as compared to 1995. Net
Sales in defense electronic  applications increased 29% while net sales in Space
and  Communication   grew  94%  and  15%  respectively.   The  sales  growth  is
attributable  to the increased  level of bookings the Company has experienced in
1995 and 1996.

   Net sales  decreased  4% in 1995 as compared to 1994.  The lower level of net
sales in 1995 resulted from the completion of a major missile  supply  contract,
closing of the Company's  Systron Donner  facility,  and the engineering  effort
required prior to entering the production phase on new programs.

<PAGE>

   Gross  profit as a  percentage  of net sales  decreased to 21.7% in 1996 from
21.9% in 1995.  The  slight  decrease  in the  gross  profit  percentage  can be
attributed to higher than expected  costs on development  contracts.  Higher net
sales  accounted  for the increase in the amount of gross profit for 1996.  From
1994 to 1995, gross profit as a percentage of sales dropped from 27.9% to 21.9%.
The  decrease in the gross profit  percentage  can be  partially  attributed  to
difficulty transitioning from longer,  sub-systems contracts to quicker turning,
component  manufacturing at the California facility. In addition, the closure of
the Systron  Donner  facility and  relocation of the business to California  and
Arizona facilities caused slippage in deliveries and subsequent cost overruns in
certain programs. These factors, as well as lower net sales were responsible for
the overall decrease in the amount of gross profit for 1995.

   Selling,  general  and  administrative  expenses  in  1996  increased  $3,022
thousand  (18.6%) as  compared  to a  decrease  in 1995 of $617  thousand  (4%).
However,  as a percentage of sales,  these expenses were 16.9% in 1996, 18.1% in
1995 and  18.1% in 1994.  The  decrease,  as a  percentage  of  sales,  from the
previous  years  resulted  from  economies  of scale which  required  less of an
increase  in  selling,   general  and  administration  expense  to  support  the
significant sales increase for the year.

   Company-funded  research and development  expenses  decreased $1,088 thousand
(68%)  from 1995  levels  as the  development  activities  on  technologies  and
products for use in commercial satellite communication markets were completed in
1995 and the product line was sold in 1996.  In addition the Company was able to
shift the emphasis from  Company-funded  to customer  sponsored R&D.  Customer -
sponsored  R&D  increased  34% to  $4,820  thousand.  Research  and  development
expenses  decreased $781 thousand in 1995 from 1994 levels. The decrease in 1995
was also  attributable  to less  funding  required in the year to  complete  the
development of commercial satellite technologies and product mentioned above.

   In 1995 the Company  recorded a  restructuring  expense  pursuant to the shut
down of its ST Systron Donner facility in Sylmar,  California. The $779 thousand
restructuring expense included employee severance costs, write-down of inventory
and costs  related  to the  consolidation  of the  business  into the  Company's
Chandler, Arizona and Sunnyvale, California facilities.

   Interest expense in 1996 increased to $1,345 thousand from $1,163 thousand in
1995 and $846 thousand in 1994. The increased  interest  expense reflects higher
levels of borrowings  throughout the year as well as higher interest rates.

   The provision  for income taxes in 1996 was $1,452  thousand on pretax income
of $3,697 thousand.  The effective tax rate was 39.3% in 1996 compared to 118.7%
in 1995  and  39.0%  in  1994.  In 1995 tax on the  pretax  loss  rose  from the
non-deductibility  of goodwill  and  restriction  on carry  forward of state tax
loses.

Liquidity and Capital Resources

The Company's primary source of liquidity in 1996 was cash flow from operations.
Primary  sources of liquidity in 1995 arose from cash flow from  operations  and
bank  borrowings.  In 1994 the  Company's  primary  source of liquidity was bank
borrowings.  The bank  borrowing  arrangement  requires  the Company to maintain
certain minimum balances and ratios,  the most significant of which requires the
maintenance  of a  minimum  net  worth  of $29.5  million.  The  Company  was in
compliance with all covenants at December 31, 1996, and had  approximately  $5.0
million  available for borrowing.

   At December  31,  1996,  the Company  had working  capital of $31.6  million,
including cash of $1.9 million, as compared to working capital and cash of $30.7
million  and  $1.6  million,   respectively  at  December  31,  1995.  Operating
activities  in 1996  generated  cash  totaling  $6.1 million as compared to $0.8
million in 1995. Investing activities were less than the previous year. In 1996,
cash used for  acquisitions  and associated costs decreased to $1.0 million from
$4.0 million in 1995 and $2.1 million in 1994.

   The  Company   continues  to   investigate   acquisition   opportunities   in
complementary  businesses,  product  lines and markets,  but has no  agreements,
understandings  or  commitments  for additional  acquisitions  at this time. The
Company  believes  that it has  adequate  cash,  working  capital and  available
financing  facilities  to meet its  operating  and capital  requirements  in the
foreseeable future and to continue its acquisition program.

Recent Pronouncements

During October 1996, the AICPA issued Statement of Position 96-1  "Environmental
Remediation  Liabilities"  (SOP  96-1)  which  establishes  guidelines  for  the
recognition,   measurement,   and   disclosure  of   environmental   remediation
liabilities.  It also includes  benchmarks to aid in the  determination  of when
environmental  remediation  liabilities  should be recognized in accordance with
the criteria of Financial  Accounting  Standards  Boards (FASB)  Statement No. 5
"Accounting for  Contingencies"  (SFAS No. 5). The Company does not believe that
adoption of SOP 96-1,  which will become  effective  for fiscal years  beginning
after December 15, 1996, will have material impact on its financial condition or
operating  results.

   During  February  1997,  the  Financial  Accounting  Standards  Board  issued
Financial  Accounting  Standard  No. 128  "Earnings  per share"  (FAS 128) which
establishes  standards  for  computing  earnings  per  share  ("EPS").  FAS  128
simplifies  the  standards  for  computing  EPS and  makes  them  comparable  to
international  standards. The Company has not yet determined the impact that the
adoption of FAS 128,  which is effective  for  financial  statements  issued for
periods ending after December 15, 1997, will have on its EPS calculation.

<PAGE>

<TABLE>

               Item 8 Financial Statements and Supplementary Data

Consolidated Statements of Operations
<CAPTION>

                                                                                              Year ended December 31,
                                                                           ---------------------------------------------------------
(amounts in thousands, except per share data)                                        1996                1995                 1994
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>                 <C>                  <C>
Net sales                                                                          $114,241            $ 89,728             $ 93,094
Cost of sales                                                                        89,407              70,051               67,153
------------------------------------------------------------------------------------------------------------------------------------
Gross profit                                                                         24,834              19,677               25,941
Selling, general and administrative expenses                                         19,270              16,248               16,865
Research and development expenses                                                       522               1,610                2,391
Restructuring expense                                                                  --                   779                 --
------------------------------------------------------------------------------------------------------------------------------------
Operating income                                                                      5,042               1,040                6,685
Interest expense                                                                      1,345               1,163                  846
------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes                                                     3,697                (123)               5,839
Provision for income taxes                                                            1,452                 146                2,277
------------------------------------------------------------------------------------------------------------------------------------
Net income (loss)                                                                  $  2,245            $   (269)            $  3,562
------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share                                                        $   0.29            $  (0.04)            $   0.48
------------------------------------------------------------------------------------------------------------------------------------
Shares used in calculating net income (loss)
per share                                                                             7,676               6,880                7,362
------------------------------------------------------------------------------------------------------------------------------------
<FN>

The accompanying notes are an integral part of the consolidated financial statements
</FN>
</TABLE>

<PAGE>

<TABLE>
Consolidated Balance Sheets
<CAPTION>
                                                                                                                 December 31,
                                                                                                         ---------------------------
(dollar amounts in thousands)                                                                               1996             1995
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                      <C>               <C>
ASSETS
Current assets:
Cash                                                                                                     $  1,870          $  1,584
Accounts receivable, net of allowance for doubtful accounts of $170 and $166                               18,383            15,983
Inventories                                                                                                24,293            25,598
Deferred taxes                                                                                              2,989             2,202
Other assets                                                                                                  508             1,054
------------------------------------------------------------------------------------------------------------------------------------
Total current assets                                                                                       48,043            46,421
------------------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net                                                                         14,310            16,441
Intangible assets, net                                                                                      3,374             3,217
Other assets                                                                                                  864                38
------------------------------------------------------------------------------------------------------------------------------------
Total assets                                                                                             $ 66,591          $ 66,117
====================================================================================================================================

LIABILITIES
Current liabilities:
Current maturities of long-term debt                                                                     $  1,321          $    375
Accounts payable                                                                                            5,289             6,159
Accrued expenses                                                                                            8,512             5,292
Income taxes payable                                                                                          295              --
Customer advances                                                                                           1,048             3,856
------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities                                                                                  16,465            15,682
------------------------------------------------------------------------------------------------------------------------------------
Deferred income taxes                                                                                       1,809             1,208
Long-term debt, net of current maturities                                                                  13,408            17,283
------------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 10 )

STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value; 5,000,000 shares authorized; none issued                                   --                --
Common stock, $0.01 par value; 30,000,000 authorized;
   7,171,506 and 6,948,683 issued and outstanding                                                              72                69
Additional paid-in-capital                                                                                 12,095            11,432
Unearned compensation                                                                                        --                 (54)
Retained earnings                                                                                          22,742            20,497
------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity                                                                                 34,909            31,944
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity                                                               $ 66,591          $ 66,117
====================================================================================================================================
<FN>
The accompanying notes are an integral part of the consolidated financial statements
</FN>
</TABLE>

<PAGE>

<TABLE>
Consolidated Statements of stockholders' Equity

(dollar amounts in thousands)
<CAPTION>
                                                                        Years ended December 31, 1996, 1995 and 1994
                                                       -----------------------------------------------------------------------------
                                                                                   Additional                              Total
                                                                 Common Stock       Paid-in     Unearned      Retained Stockholders'
                                                            Shares        Amount     Capital   Compensation   Earnings     Equity
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>         <C>         <C>         <C>          <C>          <C>
December 31, 1993                                          6,710,635   $      67   $  10,977   $    (162)   $  17,204    $  28,086
Exercise of stock options                                    115,957           1         210        --           --            211
Unearned compensation                                           --          --          --            54         --             54
Net income                                                      --          --          --          --          3,562        3,562
------------------------------------------------------------------------------------------------------------------------------------
December 31, 1994                                          6,826,592          68      11,187        (108)      20,766       31,913
Exercise of stock options                                    122,091           1         245        --           --            246
Unearned compensation                                           --          --          --            54         --             54
Net loss                                                        --          --          --          --           (269)        (269)
------------------------------------------------------------------------------------------------------------------------------------
December 31, 1995                                          6,948,683          69      11,432         (54)      20,497       31,944
Exercise of stock options                                    222,823           3         663        --           --            666
Unearned compensation                                           --          --          --            54         --             54
Net income                                                      --          --          --          --          2,245        2,245
------------------------------------------------------------------------------------------------------------------------------------
December 31, 1996                                          7,171,506   $      72   $  12,095   $    --      $  22,742    $  34,909
====================================================================================================================================
<FN>
The accompanying notes are an integral part of the consolidated financial statements
</FN>
</TABLE>

<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
(dollar amounts in thousands)
<CAPTION>
                                                                                                       Years ended December 31,
                                                                                                ------------------------------------
                                                                                                    1996         1995        1994
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                              <C>          <C>          <C>
Cash flows from operating activities:
Net income (loss)                                                                                $  2,245     $   (269)    $  3,562
Adjustments to reconcile net income (loss)
      to net cash provided (used) by operating activities;
   Depreciation                                                                                     3,368        3,527        3,381
   Amortization                                                                                       390          186          154
(Gain) or Loss on disposal of property, plant and equipment                                           (95)         (18)         147
   Unearned compensation                                                                               54           54           54
   Deferred taxes                                                                                    (186)         (58)        (415)
Changes in operating assets and liabilities:
   Accounts receivable                                                                             (2,400)         638         (801)
   Inventory                                                                                        2,751       (5,777)      (1,858)
   Other current assets                                                                               546          (95)        (279)
   Accounts payable                                                                                (1,266)       1,997          264
   Accrued expenses                                                                                 3,220         (212)      (4,434)
   Income taxes payable                                                                               295          (40)        (504)
   Customer advances                                                                               (2,808)         880          (27)
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities                                                    6,114          813         (756)
------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisitions and associated costs                                                                  (1,000)      (4,070)      (2,138)
Additions to property, plant and equipment                                                         (1,960)      (1,584)      (1,077)
Proceeds from disposal of property, plant and equipment                                               356          175           72
Other                                                                                                 (15)         (45)          37
------------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities                                                              (2,619)      (5,524)      (3,106)
------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from exercise of stock options                                                               666          246          211
Borrowings under bank revolving credit facilities                                                  24,029       26,955       38,445
Repayment of borrowings under bank revolving credit facilities                                    (27,529)     (22,200)     (35,200)
Payments of long-term debt                                                                           (375)        (375)        (374)
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities                                                   (3,209)       4,626        3,082
------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash                                                                       286          (85)        (780)
Cash, beginning of year                                                                             1,584        1,669        2,449
Cash, end of year                                                                                $  1,870     $  1,584     $  1,669
====================================================================================================================================
<FN>
The accompanying notes are an integral part of the consolidated financial statements
</FN>
</TABLE>

<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      (in thousands, except per share data)

1. NATURE OF OPERATIONS

The Company designs, develops, manufactures and markets sophisticated electronic
components  and  subsystems  that are  utilized  in a broad  range  of  advanced
defense, space and communication applications.  The Company's principal strategy
for  growth is to acquire  complementary  businesses  and  product  lines  while
aggressively  marketing growth areas in defense,  space and  communication.

   The Company's core  technology  involves  precision  control,  management and
generation of radio and microwave frequencies and electrical currents. Principal
uses  for the  Company's  products  include  communication  networks,  satellite
communications,  electronic countermeasures,  intelligence and guidance systems.
The Company's major customers are prime government  contractors  which integrate
the  Company's  products  into  complex  systems  sold to agencies of the United
States government and foreign countries.  The Company believes that its products
are well  positioned  to take  advantage  of current  defense  trends due to its
substantial  incumbency on key existing  programs and  platforms.  The Company's
operating  strategy of enhancing its manufacturing and engineering  capabilities
to  improve  product  quality  and  reduce  cost will also  enable it to compete
effectively  in the  future.

   The Company  reports its operations  within one principal  industry  segment:
electronic components and equipment.

2. SIGNIFICANT ACCOUNTING POLICIES

Basis of Consolidation

The consolidated  financial  statements include the amounts of Signal Technology
Corporation  and its  wholly-owned  subsidiaries,  which during  1996,  were all
merged with and into the Company.  Intercompany  accounts and transactions  have
been eliminated.

Use of Estimates

The preparation 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 at the date of the financial  statements and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results could differ from those estimates.

Revenue Recognition

The Company records revenue upon shipment or customer acceptance,  in accordance
with the terms of individual  contracts.  Revenue is  determined  based on sales
value per unit and costs are based on  estimated  average cost per unit over the
entire  contract.  Estimated  losses on contracts are  recognized in full in the
period they become known.  Provision is made currently for estimated returns and
warranty costs.

Research and Development

Research and  development  expenditures  are charged to  operations as incurred.
Research and development expenses include  approximately $534 in 1995 and $1,206
in 1994 of funding  provided to Benecia  Communications,  Inc., a company  which
became an operating division of the Company.  Benecia Communications was sold in
May 1996. (See Note 3)

Income Taxes

Deferred tax assets and liabilities consist of differences between the tax basis
of assets and liabilities and their basis for financial  reporting  purposes and
are measured based on the enacted tax rates and laws that will be in effect when
the differences are expected to reverse. Deferred tax assets are stated at their
estimated realizable value.

The  provision for income taxes  consists of estimated  federal and state income
taxes currently  payable adjusted for changes between periods in the measurement
of  deferred  tax  assets and  liabilities.  Tax  credits  are  recognized  as a
reduction  of income tax expense in the years in which the credits are  utilized
for tax purposes.

Earnings per Share

Earnings per share have been computed  based on the weighted  average  number of
shares of common  stock and common  stock  equivalents  outstanding  during each
period.  Common stock  equivalents  are  included in the per share  calculations
where the effect of their  inclusion  would be dilutive.  Dilutive  common stock
equivalents consist of the incremental common shares issuable upon conversion of
the stock options and warrants using the treasury stock method.

Inventories

Inventories  are  valued  at the  lower of  cost,  determined  by the  first-in,
first-out (FIFO) method,  or market,  and are presented net of progress payments
and foreseeable losses.
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
                      (in thousands, except per share data)

Property, Plant and Equipment

Property,  plant and equipment are carried at cost, and depreciation is provided
using the  straight-line  method over the estimated useful life of the asset, as
follows:

        Buildings                       33 years
        Building improvements           15 years
        Machinery and equipment         7 years
        Furniture and fixtures          5-7 years

Leasehold  improvements  are amortized  over the lesser of their useful lives or
the life of the  lease.  Maintenance  and  repairs  are  charged  to  expense as
incurred; improvements are capitalized. Upon retirement or sale, the cost of the
assets disposed of and the related accumulated depreciation are removed from the
accounts; any resulting gain or loss is credited or charged to income.

Intangible Assets

Intangible  assets consist  principally of goodwill which is being  amortized on
the straight  line basis over periods of five to twenty  years.  At December 31,
1996 and 1995 accumulated amortization was $888 and $498 respectively.

Concentrations of Risk

A significant  portion of the Company's sales are to customers whose  activities
are related to the defense  industry,  including some who are located in foreign
countries.  The  Company  generally  extends  credit  to  these  customers  and,
therefore,  collection  of  receivables  is  affected  by the  defense  industry
economy. The Company closely monitors extensions of credit, maintaining reserves
for  potential  credit  losses,  and such losses  have been within  management's
expectations. Substantially all of the Company's cash is deposited with a single
bank.

   The amounts  reported for  receivables  and other  financial  instruments are
considered to approximate fair values based upon comparable  market  information
available at the  respective  balance sheet dates.  Financial  instruments  that
potentially  subject  the  Company to  concentrations  of credit  risks  consist
principally of cash and note and trade receivables.

   The Company must comply with detailed government  procurement and contracting
regulations and with United States government security  regulations,  certain of
which   carry   substantial    penalty    provisions   for   nonperformance   or
misrepresentation  in the  course of  negotiations.  Failure  of the  Company to
comply with its  government  procurement,  contracting  or security  obligations
could  result  in  penalties  or  suspension  of  the  Company  from  government
contracting, which would have a material adverse effect on the Company's results
of operations.

   The Company's  inventories include  high-technology parts and components that
may be specialized in nature or subject to rapid technology obsolescence.  While
the  Company  has  programs to minimize  the  required  inventories  on hand and
considers  technology  obsolescence  in estimating  reserves to reduce  recorded
amounts to market values, such estimates could change in the future.

Recent Pronouncements

During October 1996, the AICPA issued Statement of Position 96-1  "Environmental
Remediation  Liabilities"  (SOP  96-1)  which  establishes  guidelines  for  the
recognition,   measurement,   and   disclosure  of   environmental   remediation
liabilities.  It also includes  benchmarks to aid in the  determination  of when
environmental  remediation  liabilities  should be recognized in accordance with
the criteria of Financial  Accounting  Standards  Boards (FASB)  Statement No. 5
"Accounting for  Contingencies"  (SFAS No. 5). The Company does not believe that
adoption of SOP 96-1,  which will become  effective  for fiscal years  beginning
after December 15, 1996, will have material impact on its financial condition or
operating  results.

   During  February  1997,  the  Financial  Accounting  Standards  Board  issued
Financial  Accounting  Standard  No. 128  "Earnings  per share"  (FAS 128) which
establishes  standards  for  computing  earnings  per  share  ("EPS").  FAS  128
simplifies  the  standards  for  computing  EPS and  makes  them  comparable  to
international  standards. The Company has not yet determined the impact that the
adoption of FAS 128,  which is effective  for  financial  statements  issued for
periods ending after December 15, 1997, will have on its EPS calculation.

Reclassifications

Certain amounts in the financial  statements  have been  reclassified to conform
with the current  year's  presentation.  The  reclassification  had no impact on
previously reported net income.
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
                     (in thousands, except per share data)

3. ACQUISITIONS AND DISPOSALS

In December, 1996, the Company paid $2,342 for certain assets and the assumption
of certain  liabilities  of  Military  Power  Systems a division  of  Transistor
Devices Inc.

   In July,  1995, the Company paid $1,292 for certain assets and the assumption
of certain  liabilities  of Western  Microwave,  Inc. In  September,  1995,  the
Company paid $2,528 for certain assets and the assumption of certain liabilities
of Tecnetics,  Incorporated. In October, 1995, the Company paid $250 for certain
assets relating to a power supply contract of Adaptive Power  Solutions,  L.L.C.
The  acquisition  included  assets and the  assumption  of  certain  liabilities
relating to the contract.

   In May,  1994,  the Company paid $2,138 for certain assets and the assumption
of certain liabilities of Hughes Power Supply Corporation.

   Each of these  transactions  was financed with cash with the exception of the
Military Power Systems  transaction  which the seller  financed in the amount of
$946  and is  payable  $473 in June  1997,  and  $473 in  December  1997.  These
transactions  have  been  accounted  for  as  purchases.  The  purchase  prices,
including  costs of $20 in 1996, $95 in 1995 and $62 in 1994 associated with the
acquisitions, have been allocated to the acquired assets and liabilities assumed
based upon their fair value at the  respective  dates of the  acquisitions.  The
results of operations of the acquired businesses since the acquisition dates are
included in the consolidated statements of income.

   Assuming the  acquisitions  described above had been made on January 1, 1995,
the Company's unaudited proforma condensed results of operations would have been
as follows:

                                                --------------------------------
                                                        1996             1995
--------------------------------------------------------------------------------
Net sales                                           $ 120,241         $ 100,258
Net income (loss)                                   $   2,853         $     (81)
Net income (loss) per share                         $    0.37         $   (0.01)

The proforma results have been prepared for comparative purposes only and do not
purport to be indicative of what would have occurred had the  acquisitions  been
made on January 1, 1995, or of results  which may occur in the future.

   In April  1995,  the  company  exercised  its option to acquire the assets of
Benecia  Communications  Corporation  (BCC). BCC was a development stage company
performing research and development activities on technologies and products used
in  commercial  satellite  communications.  The  Company  had  funded  BCC since
September  1993.  Consideration  for the  acquisition  was the  forgiveness of a
promissory note in the principal amount of $1,800. In May 1996, the Company sold
the  Benecia  product  lines and  associated  assets to  Communications  & Power
Industries, Inc. for $800.

4. RESTRUCTURING

In 1995 the Company recorded a restructuring expense pursuant to the shutdown of
its  Systron  Donner  facility  in Sylmar,  California.  The $779  restructuring
expense includes severance costs of $225,  write-down of assets of $275, removal
and  transportation  costs  of  $185  and  other  costs  of $94  related  to the
restructuring of the business. As of December 31, 1996, all cash expenditures as
a result of the  restructuring  have been  incurred.  Employees  terminated as a
result of the restructuring totaled 46.

5. STATEMENT OF CASH FLOWS

                                                     Years ended December 31
                                               ---------------------------------
                                                  1996         1995        1994
--------------------------------------------------------------------------------
Cash paid during period for:
Interest                                        $1,392       $1,135       $  767
Taxes                                           $  736       $  802       $3,196
--------------------------------------------------------------------------------
Non cash activity:
Note payable in connection with acquisition     $  946
Forgiveness of Benecia Promissory Note          $ --         $1,800
Building sold in exchange for note receivable   $  858
================================================================================

<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
                     (in thousands, except per share data)

6. INVENTORIES

                                                                December 31
                                                      --------------------------
                                                            1996         1995
--------------------------------------------------------------------------------
Raw materials                                            $  8,225      $ 11,135
Work in progress                                           18,912        18,030
Finished goods                                                307           341
--------------------------------------------------------------------------------
                                                           27,444        29,506
Less: unliquidated progress payments                       (3,151)       (3,908)
--------------------------------------------------------------------------------
                                                         $ 24,293      $ 25,598
================================================================================

7. PROPERTY, PLANT AND EQUIPMENT

                                                                December 31
                                                      --------------------------
                                                            1996         1995
--------------------------------------------------------------------------------
Land                                                     $    592      $    722
Building and improvements                                   7,285         8,340
Machinery and equipment                                    24,217        22,534
Furniture and fixtures                                      2,285         2,492
--------------------------------------------------------------------------------
                                                           34,379        34,088
--------------------------------------------------------------------------------
Less accumulated depreciation                             (20,069)      (17,647)
--------------------------------------------------------------------------------
Net property plant and equipment                         $ 14,310      $ 16,441
================================================================================

8. ACCRUED EXPENSES

                                                                December 31
                                                      --------------------------
                                                            1996         1995
--------------------------------------------------------------------------------
Accrued payroll & employee benefits                      $  2,151      $    776
Accrued vacation                                            1,293         1,103
Accrued warranty                                              833           832
Accrued commissions                                         1,275           993
Other accrued expenses                                      2,960         1,588
--------------------------------------------------------------------------------
                                                         $  8,512      $  5,292
================================================================================

9. LONG-TERM DEBT AND NOTES PAYABLE

                                                                December 31
                                                      --------------------------
                                                            1996         1995
--------------------------------------------------------------------------------
Massachusetts  Industrial Revenue Bond,
   maturing in 2009, interest at 62% of the
   prime rate plus 1/2% effective interest
   rate of 4.3% and 4.6%, payable in annual
   principal payments of $80                             $    968      $  1,048
Bank revolving credit facility                              9,500        13,000
Bank real estate term loan facility                         3,315         3,610
Note payable in connection with Acquisition                   946          --
--------------------------------------------------------------------------------
                                                           14,729        17,658
Less: current maturities                                    1,321           375
--------------------------------------------------------------------------------
                                                         $ 13,408      $ 17,283
================================================================================

<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
                     (in thousands, except per share data)

The Massachusetts  Industrial Revenue Bond is collateralized by real estate with
a net book value of $1,244 at  December  31,  1996.  The  Company  has a $15,000
unsecured bank revolving  credit  facility,  (the  "Revolver") and a $4,273 bank
real estate term loan  facility,  (the "Real Estate  Loan")  (collectively,  the
"Agreement").  The Real Estate Loan is  collateralized by real estate with a net
book value of $4,820 at December  31,  1996.  Maturing in June,  2000,  the Real
Estate Loan is payable in quarterly  principal payments of $74, plus interest at
the bank's base rate (8.25% at December  31,  1996),  with the last  installment
equal to the remaining  unpaid loan balance.  The Revolver expires in June 2000,
and amounts may be borrowed,  paid and reborrowed at the election of the Company
through the expiration date. Amounts available under the Revolver are reduced by
actual borrowings and outstanding  letters of credit. The Company has the option
of borrowing under one or more differing  interest rate formulas and at December
31, 1996, the weighted  average interest rate was 7.81%. The Company also pays a
quarterly  commitment  fee at annual rates  ranging from 1/8% to 3/8%  depending
upon the amount of the unused facility.

   The Agreement  contains certain  covenants  related to tangible net worth and
interest coverage, as defined. Default on any covenant may affect the commitment
by the bank to continue to lend under the Agreement and, if not corrected, could
accelerate the maturity of any borrowings  outstanding  under the Agreement.  At
December 31, 1996,  the Company was in  compliance  with all covenants and after
reduction for outstanding letters of credit, had approximately  $5,000 available
for  borrowing  under the  Revolver  portion of the  Agreement.  The  Transistor
Devices  Inc.  note of $946 plus  interest at 8.25% is payable $473 in June 1997
and $473 in December 1997.

10. COMMITMENTS AND CONTINGENCIES

The Company leases real estate and equipment under operating  leases expiring at
various dates through  September  2003. The leases  include  provisions for rent
escalation,   renewals  and  purchase  options  and  the  Company  is  generally
responsible  for  taxes,  maintenance  and  repairs.  Aggregate  rental  expense
included in  operations  amounted to $915 in 1996,  $1,384 in 1995 and $1,711 in
1994. Future minimum lease payments under noncancelable operating leases with an
initial term exceeding one year are as follows:

                      1997                 $1,020
                      1998                  $ 750
                      1999                  $ 796
                      2000                  $ 789
                      2001                  $ 773

The  Company  is  involved  from time to time in  litigation  incidental  to its
business.

   In April 1996, the Company sold its facility in Weymouth,  Massachusetts  but
retained  the  environmental   liability  and  responsibility   associated  with
groundwater  contaminants present at the site. This facility has been classified
as a tier 1A disposal  site by the  Massachusetts  Department  of  Environmental
Protection  ("DEP"),  as a result of past releases of petroleum  based solvents.
Environmental  assessment reports prepared by independent  consultants  indicate
that  contaminants  present in the Town of Weymouth well field across the street
from the facility are similar to those  reportedly  released at the facility and
still present in the  groundwater at the facility;  however,  these reports also
indicate that the  contaminants  do not exceed safe drinking water levels in the
finished  water  after  normal  treatment.  Other  contaminants  which  did  not
originate at the facility have also been detected in the well field.

   The Company is continuing to conduct  investigations of the facility for soil
and  groundwater  contamination  and  operate  a  pilot  remediation  system  in
cooperation with the DEP. It is not possible at this stage of the proceedings to
predict what additional remediation, if any, will be required.


<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
                     (in thousands, except per share data)

11. INCOME TAXES
                                                     Years ended December 31
                                             -----------------------------------
                                                 1996       1995        1994
--------------------------------------------------------------------------------
Currently payable:
   Federal                                   $  1,512        --       $  2,149
   State                                          174     $   204          543
--------------------------------------------------------------------------------
Deferred:
  Federal                                        (430)        (50)        (383)
   State                                          196          (8)         (32)
--------------------------------------------------------------------------------
Provision for income taxes                   $  1,452     $   146     $  2,277
================================================================================

The Company's effective tax rate differs from the statutory federal income tax
rate as follows:

                                                     Years ended December 31
                                             -----------------------------------
                                                 1996        1995         1994
--------------------------------------------------------------------------------
Statutory federal income tax rate                34.0%      (34.0)%       34.0%
State income taxes, net of federal benefit        5.8        86.3          5.8
Benefit from foreign sales corporation           (1.9)     --             (0.7)
Non-deductible expenses and other                 1.4        66.4         (0.1)
--------------------------------------------------------------------------------
Effective tax rate                               39.3%      118.7%        39.0%
================================================================================

Non-deductible  expense consists  principally of goodwill,  depreciation expense
resulting  from  certain of the  Company's  acquisitions  and other  amounts not
deductible for tax purposes.  The tax effect of temporary  differences that give
rise to the net deferred tax asset and liability are as follows:

                                                               December 31
                                                      --------------------------
                                                          1996            1995
--------------------------------------------------------------------------------
Net tax asset:
   Vacation accrual                                     $   455         $   366
   Inventory                                              1,646           1,337
   Warranty                                                 331             279
   Deferred compensation                                    197             174
   Other                                                    360              46
--------------------------------------------------------------------------------
Total                                                   $ 2,989         $ 2,202
================================================================================

Net tax liability:
   Depreciation                                         $ 1,809         $ 1,794
   Operating loss carryforwards                            --              (586)
   Other                                                   --              --
--------------------------------------------------------------------------------
Total                                                   $ 1,809         $ 1,208
================================================================================

<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
                     (in thousands, except per share data)

12. STOCKHOLDERS' EQUITY

The Company has stock option plans under which a maximum of 3,167 options may be
granted  generally  at prices not less than 100 percent of the fair market value
of the Company's common stock at the date of option grant.  Options vest ratably
over a four to five year  period and expire not more than ten years from date of
grant.  At December  31, 1996,  1,451  shares of common stock were  reserved for
future  issuance  under the  plans  and 502 were  available  for  future  grant.
Additionally,  non-qualified  options  to  purchase  a total of 93 shares of the
Company's common stock have been granted to certain  non-employee  directors and
others.  These  options were  granted at the fair market value of the  Company's
common stock at the date of option grant, vest generally over a five year period
and expire between 1999 and 2001.

   For financial  reporting  purpose only,  certain options granted in 1992 were
accounted  for as if they  had been  granted  at less  than  market  value  when
compared with the value of common stock issued in the Company's  initial  public
offering  in 1993.  Unearned  compensation  related  to these  options  is being
recorded  ratably over the vesting period.  These options,  as well as all other
options  granted prior to the initial  public  offering,  were granted at prices
determined  by the Board of  Directors to be not less than the fair market value
at the date of grant. The increase in available options of 500 shares is subject
to approval of the Stockholders at the 1997 annual meeting.

<TABLE>
   Information  concerning  the  plans and  non-qualified  stock  options  is as
follows:
<CAPTION>

                                                               Available    Option     Option Price    Aggregate    Weighted Avg.
                                                               for Grant                per Share       Price      Exercise Price
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>         <C>      <C>              <C>             <C>
December 31, 1993                                                347         1,245    $1.50  -- $7.25  $ 3,129           NA
Options granted (307)                                            307           307     3.94  --  5.25    1,343           NA
Options canceled                                                 132          (167)    1.57  --  7.25     (826)          NA
Options exercised                                                --           (116)    1.50  --  3.15     (211)          NA
--------------------------------------------------------------------------------------------------------------------------------
December 31, 1994                                                172         1,269     1.57  --  7.25    3,435         $2.71
Options granted (138)                                            138           138     3.50  --  5.06      569          4.13
Options canceled                                                  75          (105)    1.57  --  7.25     (427)         4.06
Options exercised                                                --           (122)    1.57  --  2.36     (246)         2.02
--------------------------------------------------------------------------------------------------------------------------------
December 31, 1995                                                109         1,180     1.57  --  7.25    3,331          2.82
Options granted (187)                                            187           187     5.25  --  8.25    1,325          7.09
Options canceled                                                  80          (102)    1.80  --  8.25     (421)         4.09
Options exercised                                                --           (223)    1.57  --  4.75     (436)         1.96
Increase in available options, 1992 Plan                         500           --            --            --             --
--------------------------------------------------------------------------------------------------------------------------------
December 31, 1996                                                502         1,042    $1.57  -- $8.25    $ 3,799       $3.65
================================================================================================================================
A total of 683 options were exercisable at December 31, 1996

</TABLE>

<TABLE>

The  following  table  summarizes  information  with  respect  to stock  options
outstanding of December 31, 1996:
<CAPTION>


            Range of            Outstanding    Weighted-Average   Weighted-Average    Exercisable     Weighted-Average
            Exercise               as of         Remaining         Exercise Price       as of           Exercise Price
             Prices              12/31/96     Contractual Life      Outstanding       12/31/96          Exercisable
------------------------------------------------------------------------------------------------------------------------------
     <S>          <C>                <C>          <C>              <C>                  <C>             <C>
     $   1.57     $   1.80           386          3.7              $   1.62             386             $   1.62
     $   2.00     $   3.94           183          3.8              $   2.48             147             $   2.36
     $   4.19     $   5.75           271          2.6              $   4.66             124             $   4.67
     $   6.06     $   8.25         1,202          4.0              $   7.78              26             $   7.25
------------------------------------------------------------------------------------------------------------------------------
     $   1.57     $   8.25         1,042          3.5              $   3.42             683             $   2.55
==============================================================================================================================

</TABLE>
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
                     (in thousands, except per share data)

The following  information  concerning  the Company's  stock option and employee
stock  purchase plans is provided in accordance  with SFAS No. 123,  "Accounting
for Stock-Based Compensation." The Company accounts for such plans in accordance
with APB No. 25 and related Interpretations.

   The fair value of each option  grant has been  estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1996 and 1995:

        Risk-free Interest Rates                  6.20%
        Expected Life                             4.7 Years
        Volatility                                0.70
        Dividend Yield                             -

The weighted  average fair value of those  options  granted in 1996 and 1995 was
$4.51 and $2.49 respectively.


The  following  proforma  income  information  has been  prepared  following the
provisions of SFAS No. 123:

(amounts in thousands except per share data)          1996             1995
--------------------------------------------------------------------------------
Net income (loss) - proforma                        $   2,045       $   (317)
Net income (loss) per share - proforma              $    0.27       $  (0.05)
--------------------------------------------------------------------------------

The above proforma effects on income may not be representative of the effects on
net income for future years as option grants  typically  vest over several years
and additional options are generally granted each year.

13. EMPLOYEE BENEFIT PLAN

The Company maintains a 401(k) plan covering substantially all of its employees.
Eligible  employees may  contribute up to 15% of their annual  compensation,  as
defined,  to this plan. The Company may also make a discretionary  contribution.
The Company's  contributions to this plan totaled $164 in 1996, $116 in 1995 and
$123 in 1994.

14. SEGMENT INFORMATION

The Company is engaged in one industry segment:  the engineering,  manufacturing
and marketing of electronic  components and subsystems.  The Company distributes
its products  worldwide.  Export sales were $18,254 in 1996, $14,735 in 1995 and
$17,180 in 1994. One customer  accounted for 22% of net sales in 1996 and 14% of
sales in 1995 and 13% in 1994.


<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
                     (in thousands, except per share data)
<TABLE>

15. UNAUDITED QUARTERLY FINANCIAL INFORMATION

The following quarterly financial information should be read in conjunction with
Note 2. The first three  quarters in each year consist of thirteen  week periods
with the fourth quarter ending on December 31.
<CAPTION>

1996:
                                  First Quarter   Second Quarter  Third Quarter   Fourth Quarter
---------------------------------------------------------------------------------------------------
<S>                                 <C>              <C>            <C>              <C>
Net sales                           $ 22,048         $ 27,371       $ 31,624         $ 33,198
Gross profit                           4,475            5,151          7,235            7,973
Operating income                         125              648          1,903            2,366
Net income (loss)                       (155)             170            995            1,235
Net income (loss) per share         $   (.02)        $    .02       $    .13         $    .16
---------------------------------------------------------------------------------------------------
Shares used in calculating
Net income (loss) per share            6,977            7,711          7,652            7,720
===================================================================================================
</TABLE>

<TABLE>
<CAPTION>
1995:
                                  First Quarter   Second Quarter  Third Quarter   Fourth Quarter
---------------------------------------------------------------------------------------------------
<S>                                 <C>              <C>            <C>              <C>
Net sales                           $ 21,525         $ 21,935       $ 22,310         $ 23,958
Gross profit                           4,276            4,248          5,414            5,739
Operating income                        (508)              29          1,305              214
Net income (loss)                       (458)            (160)           589             (240)
Net income (loss) per share         $  (0.07)        $  (0.02)      $   0.08         $  (0.03)
Shares used in calculating
Net income (loss) per share            6,845            6,855          7,369            6,915
===================================================================================================
</TABLE>

Net sales and net income are  subject to  fluctuations  as a result of  customer
actions  including  the timing of mandated  delivery  schedules,  changes in the
timing of program funding,  delays in obtaining  qualification approvals and the
timing of preshipment inspections.

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

                                     None.
--------------------------------------------------------------------------------

                                    PART III

           Item 10 Directors and Executive Officers of the Registrant

                         Item 11 Executive Compensation

     Item 12 Security Ownership of Certain Beneficial Owners and Management

             Item 13 Certain Relationships and Related Transactions

All information  required by Items 10, 11, 12 and 13 is  incorporated  herein by
reference to the Company's  definitive proxy statement for its annual meeting of
stockholders to be held on May 6, 1997,  which will be filed with the Securities
and Exchange Commission pursuant to Regulation 14A.

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


<PAGE>

                                    PART IV
<TABLE>
<CAPTION>
Item 14  Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)(1)  Index to Financial  Statements  and Financial  Statement  Schedules                Page
----------------------------------------------------------------------------------------------------
        <S>                                                                                 <C>
        Consolidated Balance Sheets as of December 31, 1996 and 1995                        23
        Financial  Statements for the Years Ended December 31, 1996, 1995 and 1994:
        Consolidated Statements of Operations                                               22
        Consolidated Statements of Stockholders' Equity                                     24
        Consolidated Statements of Cash Flows                                               25
        Notes to Consolidated Financial Statements                                          26
        Report of Independent Accountants                                                   38

        Schedule II     Valuation and Qualifying Accounts                                   39
        All other  schedules are omitted  because they are not  applicable,  not
        required under the instructions,  or all the information required is set
        forth in the consolidated financial statements or notes thereto.
</TABLE>

        (2)  The following described exhibits are filed herewith or incorporated
herein by reference indicated:


--------------------------------------------------------------------------------
Exhibit
Number                  Description
--------------------------------------------------------------------------------

3.1     Certificate of Incorporation of Registrant, as amended to date.*

3.2     By-Laws of Registrant, as amended to date.***

10.1    Amended and Restated  Credit  Agreement among The First National Bank of
        Boston,  the  Registrant  and its  subsidiaries,  dated as of April  14,
        1992.*

10.0.1  Second Amendment and Restatement of Credit Agreement with First National
        Bank of Boston, dated as of September 30, 1993.***

10.4    Employee  Incentive Stock Option Plan-1982 of the Registrant.* 10.5 1992
        Equity Incentive Plan of the Registrant.*

10.6    Signal Technology Corporation 401(k) Plan.*

10.7    Lease dated as of December  28, 1990 by and between  Varian  Associates,
        Inc.  and ST  Olektron  Corporation  (formerly  known as RF  Components,
        Inc.).*

10.8    Lease dated as of October 18, 1990 by and between Benicia Associates and
        ST Microwave Corp.*

10.9    Lease dated as of December 7, 1990 by and between  Aetna Life  Insurance
        Company and ST Microwave Products Corporation (now known as ST Microwave
        Corp.).*

10.18   Asset  Purchase  and  Sale  Agreement  by  and  between  Adaptive  Power
        Solutions,  L.L.C. and ST Keltec Corporation,  a wholly owned subsidiary
        of Signal Technology Corporation, dated October 12, 1995. *****

10.19   Trade  License and  Purchase and Sale  Agreement by and between  Western
        Microwave, Inc. and ST Microwave Corporation,  a wholly owned subsidiary
        of Signal Technology Corporation, dated July 21, 1995. *****

10.20   Purchase and Sale Agreement by and between Tecnetics,  Incorporated. and
        ST Keltec  Corporation,  a wholly owned subsidiary of Signal  Technology
        Corporation, dated September 7, 1995. *****

10.22   Amendment  agreement  No.1 to the Second  Amendment and Restated  Credit
        Agreement,  dated as of September 30, 1993, with the First National Bank
        of Boston, dated as of July 20, 1995. *****

<PAGE>
Exhibit
Number                  Description
--------------------------------------------------------------------------------

10.23   Amendment  agreement  No.2 to the Second  Amendment and Restated  Credit
        Agreement dated as of September 30,1993, with the First National Bank of
        Boston, dated as of September 30, 1995. *****

10.24   Amendment  agreement No. 3 to the Second  Amendment and Restated  Credit
        Agreement,  dated as of September 30, 1993, with the First National Bank
        of Boston, dated as of March 29, 1996.

10.25   Amendment  agreement No. 4 to the Second  Amendment and Restated  Credit
        Agreement,  dated as of September 30, 1993, with the First National Bank
        of Boston, dated as of March 10, 1997.

10.26   Asset Purchase  Agreement by and between  Transistor Devices Inc. and ST
        Keltec  Corporation,  a wholly  owned  subsidiary  of Signal  Technology
        Corporation, dated as of December 6, 1996.

10.27   Asset Purchase  Agreement by and between Pulau  Electronics  Corporation
        and ST Microwave (Arizona) Corporation,  a wholly owned subsidiary of ST
        Microwave Corporation, dated as of June 14, 1996.

10.28   Agreement   and   instrument   of  purchase  and  sale  by  and  between
        Communications & Power Industries,  Inc. and ST Microwave Corporation, a
        wholly owned subsidiary of Signal  Technology  Corporation,  dated as of
        May 24, 1996.

10.29   First Amendment to lease,  dated as of September 9, 1996, by and between
        Benicia Associates and Signal Technology Corporation.

10.30   Employee Stock Purchase Plan. ******

11.1    Computation of net income (loss) per share

21.1    Schedule of Registrant's subsidiaries.

23.1    Consent of Independent Accountants.

27.1    Financial Data Schedule

*       Incorporated by reference to the corresponding  exhibit filed as part of
        the  Registrant's  registration  statement on Form S-1, as amended (File
        No. 33-61124).

***     Incorporated by reference to the corresponding  exhibit filed as part of
        the Registrant's 1993 Annual Report on Form 10-K.

****    Incorporated by reference to the corresponding  exhibit filed as part of
        the Registrant's 1994 Annual Report on Form 10-K.

*****   Incorporated by reference to the corresponding  exhibit filed as part of
        the Registrant's 1995 Annual Report on Form 10-K.

******  Incorporated by reference to the definitive  Proxy Statement to be filed
        with  the  SEC in  connection  with  the  Company's  Annual  Meeting  of
        Shareholders to held on May 6, 1997.



(b)     Reports on Form 8-K

        None

<PAGE>

                                   SIGNATURES

Pursuant to the  requirements  of Section 13 of the  Securities  Exchange Act of
1934,  the  Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.


                                 SIGNAL TECHNOLOGY CORPORATION




                                 By: \s\ Dale L. Peterson
                                     --------------------------------------
                                 Chairman and Chief Executive Officer

<TABLE>

Date: March 28, 1997

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  registrant and
in the capacities and on the date indicated.

<S>                                              <C>
\s\ Dale L. Peterson       March 28, 1997        \s\ Joseph S. Schneider    March 28, 1997
------------------------------------------       ----------------------------------------
Dale L. Peterson                                 Joseph S. Schneider
Chairman and Chief Executive Officer             Director


\s\ James S. Walsh         March 28, 1997        \s\ Larry L, Hansen        March 28, 1997
-----------------------------------------        -----------------------------------------
James S. Walsh                                   Larry L. Hansen
President                                        Director

\s\ Bernard P. O'Sullivan  March 28, 1997
-----------------------------------------        \s\ Russ D. Kinsch         March 28, 1997
Bernard P. O'Sullivan                            -----------------------------------------
Director                                         Rush D. Kinsch

\s\ Harvey C. Krentzman    March 28, 1997
------------------------------------------
Harvey C. Krentzman
Director
</TABLE>

<PAGE>


                       Report of Independent Accountants


To the Board of Directors and Stockholders
Signal Technology Corporation



   We have audited the consolidated financial statements and financial statement
schedule of Signal Technology Corporation listed in Item 14 (a) (1) of this Form
10-K.  These  financial  statements  and  financial  statement  schedule are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial  statements and financial statement schedule 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 Signal Technology
Corporation  and  Subsidiaries  as of  December  31,  1996  and  1995,  and  the
consolidated  results of their  operations  and their cash flows for each of the
three years in the period ended  December 31, 1996 in conformity  with generally
accepted  accounting  principles.  In addition,  in our opinion,  the  financial
statement  schedule  referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material aspects,
the information required to be included therein.



San Jose, California                                    COOPERS & LYBRAND L.L.P.
January 27, 1997


<PAGE>
<TABLE>


                 Schedule II Valuation and Qualifying Accounts
<CAPTION>

                                       Years ended  December 31, 1996, 1995 and 1994
------------------------------------------------------------------------------------------------------------------------------------

                                                Balance at      Charged to           Charged to          Balance at
                                                Beginning       Costs and             Other                  End
Description                                     of Period       Expenses              Accounts            of Period
------------------------------------------------------------------------------------------------------------------------------------
<S>                                         <C>                 <C>               <C>           <C>      <C>
Inventory reserve                           $  6,164,000        $  (101,000)      $   755,000   (2)      $  5,065,000
                                                                                   (1,753,000)  (3)
Allowance for doubtful
accounts                                         347,000           (139,000)          (42,000)  (1)           166,000

------------------------------------------------------------------------------------------------------------------------------------
1995
Inventory reserve                           $ 5,065,000         $   934,000       $(1,502,000)  (3)       $ 4,497,000

Allowance for doubtful
accounts                                        166,000              52,000           (52,000)  (1)           166,000

------------------------------------------------------------------------------------------------------------------------------------
1996
Inventory reserve                           $ 4,497,000         $ 1,308,000       $(3,421,000)  (3)       $ 2,384,000

Allowance for doubtful
accounts                                        166,000             164,000          (160,000)  (1)           170,000
------------------------------------------------------------------------------------------------------------------------------------
<FN>
Notes
(1) Write-off of bad debts.
(2) Increases due to acquisition of Hughes Power Supplies.
(3) Credit to inventory accounts for previously reserved amounts.
</FN>
</TABLE>