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, 1997

    [ ] Transition Report Pursuant to Section 13 or 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 of       (I.R.S. employer identification no.)
       incorporation or organization)

      975 Benecia Avenue, Sunnyvale, CA                 94086-2805
   (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 mark whether the Registrant (1) has filed all reports required
to be filed  by  Section  13 or 15 (d) of the  Securities  Exchange  Act of 1934
during the preceding 12 months (or for such shorter  period that the  Registrant
was  required  to file such  reports),  and (2) has been  subject to such filing
requirements for the past 90 days. Yes: |X| No: |_|

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

On March 18, 1998,  the aggregate  fair value of the  Registrant's  Common Stock
held by non-affiliates was $30,589,400.  On March 18, 1998, there were 7,380,007
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 5, 1998.  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.
<PAGE>
<TABLE>
                                       Signal Technology Corporation and Subsidiaries

                                             INDEX TO ANNUAL REPORT ON FORM 10-K
<CAPTION>
                                                            PART I
                                                                                                                          Page
<S>                <C>                                                                                                      <C>
Item 1:            Business                                                                                                  3
item 2:            Properties                                                                                                8
Item 3:            Legal Proceedings                                                                                         9
Item 4:            Submission of Matters to a Vote of Security Holders                                                       9

                                                           PART II

Item 5:            Market for the Registrant's Common Equity and Related Stockholder Matters                                10
Item 6:            Selected Consolidated Financial Data                                                                     11
Item 7:            Management's Discussion and Analysis of Financial Condition and Results of Operations                    12
Item 8:            Financial Statements and Supplementary Data                                                              14
Item 9:            Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                     29

                                                           PART III

Item 10:           Directors and Executive Officers of the Registrant                                                       30
Item 11:           Executive Compensation                                                                                   30
Item 12:           Security Ownership of Certain Beneficial Owners and Management                                           30
Item 13:           Certain Relationships and Related Transactions                                                           30

                                                           PART IV

Item 14:           Exhibits, Financial Statement Schedules and Reports on Form 8-K                                          31
                   Signatures                                                                                               33

</TABLE>

                                       2
<PAGE>

                                     PART I

Item I      Business

General
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 communications.  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).

The Company integrates acquired businesses and product lines where possible with
existing  operations,  reducing  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 to 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.

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.


                                       3
<PAGE>
<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
                         ------------------------------------------------------------------------------
                                1997                          1996                      1995
                         ------------------------------------------------------------------------------
(dollars in thousands)    $              %            $               %         $              %
-------------------------------------------------------------------------------------------------------
<S>                        <C>           <C>           <C>          <C>          <C>            <C>
Defense                    $67,985       61%           $74,443       65%         $57,691        64%
Space                       10,602       13              7,115        6            3,675         4
Communication               23,692       26             32,683       29           28,362        32
-------------------------------------------------------------------------------------------------------
Total                     $102,279      100%          $114,241      100%         $89,728       100%
=======================================================================================================
</TABLE>

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  management  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 20%, 22%, and 14% of the Company's net
sales in 1997,  1996, and 1995,  respectively the loss of any customer would not
have a material adverse effect on the Company.

                                       4
<PAGE>
<TABLE>
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.
<CAPTION>
                                                          Year Ended December 31
                            ------------------------------------------------------------------------
                                     1997                       1996                  1995
                            ------------------------------------------------------------------------
(dollars in thousands)          $            %          $              %         $             %
----------------------------------------------------------------------------------------------------
<S>                              <C>          <C>       <C>            <C>        <C>           <C>
U.S. government
      Military                   $77,157      65%       $75,558        66%        $62,682       70%
      Non-Military                   792       1          2,988         3           3,100        3
U.S. Commercial                    7,510      16         17,441        15           9,211       10
International
      Military                    14,420      16         11,425        10           9,742       11
      Commercial                   2,400       2          6,829         6           4,993        6
----------------------------------------------------------------------------------------------------
Total                           $102,279     100%      $114,241       100%        $89,728      100%
====================================================================================================
</TABLE>

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.

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 believes 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

                                       5
<PAGE>

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 Company  retains all rights from  customer-sponsored  development
work. 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)           1997            1996            1995
-------------------------------------------------------------------------------
Company-funded                   $777            $522          $1,610
Customer-sponsored              1,787           4,820           3,602
-------------------------------------------------------------------------------
Total                          $2,564          $5,342          $5,212
===============================================================================

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, 1997 and 1996,  the  Company  had a backlog of  unshipped  firm
orders of $87,483 and $87,887,  respectively. The Company expects to ship all of
the December 31, 1997 backlog  within  1998,  except for  approximately  $10,563
which will be shipped in later periods.

Competition
As a result of reduced defense spending by the United States government and many
of its  allies,  competition  has become  more  intense in all  markets  for the
Company's   products.   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 customers' 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.

                                       6
<PAGE>

Employees
As of December 31, 1997, the Company had 817 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.

                                       7
<PAGE>

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 $623,000 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  and a  modern  40,350  square  foot  building  in
                      Beverly.

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.

                                       8
<PAGE>

Item 3            Legal Proceedings

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

Weymouth Environmental Contamination:
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 and the costs thereof, if any, will be required. The
Company has been informed by its insurers that no recovery of costs  incurred in
the  treatment of the ground water at the  facility is possible  under  existing
insurance arrangements.

During the year,  the Company  received funds from a third party in return for a
complete release from liability for any  responsibility  for the  contamination.
This amount has been included in the Company accrued for remediation.

Sunnyvale Indemnification Claim:
A third party has filed a breach of contract  suit against the Company  alleging
that it has a contractual  duty to indemnify the third party for costs  incurred
as a result of environmental contamination and subsequent remediation. The claim
is based upon allegations  that the Company assumed certain  liabilities when it
acquired one of the  divisions of the third party.  The Company  believes it has
meritorious defenses with respect to this claim and intends to vigorously defend
its  position  in  the  suit.  The  Company  also  believes  that  the  ultimate
disposition  will not  materially  affect its  financial  position or results of
operations.


Item 4            Submission of Matters to a Vote of Security Holders

                                      None.

                                       9
<PAGE>

                                     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:
                              1997                             1996
                  --------------------------------------------------------------
                       High             Low           High                Low
--------------------------------------------------------------------------------
First Quarter       $  8 7/16       $  6 1/2       $  7 7/8           $  5 1/4
Second Quarter         8 1/4           6 1/8          9 3/4              6 7/8
Third Quarter          7 5/8           5 5/8          7 7/8              5
Fourth Quarter         7               4 5/8          8 5/8              7 1/4
================================================================================

There were  approximately  90 holders of record of the Company's Common Stock on
March 18, 1998.  The closing  price per share of the  Company's  Common Stock on
March 18, 1998 as reported on the AMEX was $6.00.

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.


                                       10
<PAGE>
Item 6            Selected Consolidated Financial Data
<TABLE>

 SELECTED CONSOLIDATED FINANCIAL DATA
 (in thousands, except per share amounts)
<CAPTION>
                                                -----------------------------------------------------------
                                                    1997        1996        1995        1994        1993
-----------------------------------------------------------------------------------------------------------
<S>                                             <C>          <C>         <C>          <C>         <C>
 OPERATIONS
 Net sales                                      $ 102,279    $ 114,241   $  89,728    $  93,094   $  97,054
===========================================================================================================
 Operating income(1)                                1,788        5,042       1,040        6,685       8,337
 Income (loss) before taxes                           718        3,697        (123)       5,839       7,890
 Net income (loss)                                    338        2,245        (269)       3,562       4,930
 Net income (loss) per share (1):
           Basic                                     0.05         0.32       (0.04)        0.53        0.80
           Diluted                              $    0.04    $    0.29   $   (0.04)   $    0.48   $    0.70
-----------------------------------------------------------------------------------------------------------

 Shares used in calculating net income (loss)
 per share:
           Basic                                    7,268        7,076       6,880        6,752       6,162
           Diluted                                  7,691        7,676       6,880        7,362       6,997

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

 FINANCIAL POSITION
 Current assets                                 $  44,212    $  48,043   $  46,421    $  39,216   $  33,756
 Current liabilities                               13,631       16,465      15,682       12,035      15,459
 Total assets                                      64,382       66,591      66,117       58,431      55,124
 Long-term debt, less current maturities           13,408       13,408      17,283       12,903      10,032
 Total debt                                        13,888       14,729      17,658       13,278      10,407
 Stockholders' equity                              35,816       34,909      31,944       31,913      28,086
 Shares outstanding at year-end                     7,417        7,172       6,949        6,827       6,711
 Book value per share                           $    4.83    $    4.87   $    4.60    $    4.67   $    4.19
-----------------------------------------------------------------------------------------------------------

 SELECTED DATA
 New orders                                     $ 101,875    $ 103,829   $ 110,656    $  90,249   $  78,109
 Year-end backlog                               $  87,483    $  87,887   $  92,837    $  65,998   $  64,489
 Employees at year-end                                817          993         894          854         996
 Revenue per employee                           $     125    $     115   $     100    $     109   $      97
-----------------------------------------------------------------------------------------------------------
</TABLE>

                                       11
<PAGE>

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.

The Company has  experienced  and expects to continue to experience  significant
fluctuations  in its results of  operations.  Factors that affect the  Company's
results of operations include the volume and timing of orders received,  changes
in the mix of products  sold,  competitive  pricing  pressures and the Company's
ability to meet customer demands. As a result of the foregoing or other factors,
there  can be no  assurance  that  the  Company  will  not  experience  material
fluctuations  in the future  operating  results on a quarterly or annual  basis,
which would  materially and adversely affect the Company's  business,  financial
condition and results of operations.

Results of Operations for the Years Ended December 31, 1997, 1996 and 1995

Net  sales  decreased  approximately  10% in  1997  compared  to  1996.  Backlog
decreased to $87.9  million from $92.8  million at the end of 1996 on new orders
of $101.9  million in 1997  compared to $103.8  million in 1996.  The  Company's
Keltec Operation, also its largest operation, accounted for 47% of the decrease.
Shipments  at  the  Keltec  Operation  were  adversely  impacted  by  production
inefficiencies  including key material shortages  throughout the year as well as
management  turnover.  The Company has taken steps to correct the problems,  but
does not expect significantly improved results until the second half of 1998.

Net sales in 1996  compared to 1995  increased  approximately  27% overall.  Net
sales in defense electronic  applications increased 29% while net sales in Space
and  Communications  grew 94% and 15%  respectively.  High levels of bookings in
1995 and 1996 contributed to the sales growth.

Gross profit as a percentage of net sales  decreased to 19.3% in 1997 from 21.7%
in 1996.  Gross profit was adversely  affected by lower  shipment  levels at its
Keltec Operation and the costs associated with the inefficiency mentioned above.
Both the Keltec  Operation and Arizona  Operation  experienced  additional costs
associated with several development  contracts and contributed  significantly to
the decrease in gross profit.

From 1995 to 1996,  gross profit as a percentage of net sales dropped from 21.9%
to 21.7%.  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.

Selling,  general and  administrative  expenses  decreased  on a dollar basis to
approximately  $17.1  million  for the year ended  December  31, 1997 from $19.3
million for 1996 and $16.2  million for 1995.  As a percentage  of sales,  these
expenses  were 16.8% in 1997,  16.9% in 1996 and 18.8% in 1995.  While net sales
decreased  10% the  Company  was able to obtain a slight  decrease  in SG&A as a
percentage  of  sales  from  1996 to 1997 as a  result  of  administrative  cost
reductions,  primarily  in reduced  personnel.  The  Company  has a total of 817
employees at the end of 1997 versus 993 at the end of 1996.


                                       12
<PAGE>

Company-funded  research and development  expenses increased $255 thousand (49%)
from 1996 levels, while  customer-sponsored R&D decreased $3,033 thousand.  This
compares with a decrease in company-funded  R&D of $1,088 thousand (68%) in 1996
from 1995.  Customer-sponsored  R&D increased  $1,218 thousand (34%) during this
same period.

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 1997 decreased to $1,070  thousand from $1,345  thousand in
1996 and $1,163  thousand  in 1995.  The  decreased  interest  expense  reflects
slightly lower interest rates and much lower levels of borrowings throughout the
year,  although  long-term  debt remained at $13,408 at the end of both 1997 and
1996.

The  provision  for income taxes in 1997 was $380  thousand on pretax  income of
$718  thousand.  The  effective  tax rate was 52.8% in 1997 compared to 39.3% in
1996 and  118.7%  in 1995.  In both 1997 and 1995,  the  effective  tax rate was
adversely  effected  by  the  non-deductibility  of  goodwill  and in  1995  the
restriction on carry forward of state tax loses.

Liquidity and Capital Resources

The  Company's  primary  source of liquidity in both 1997 and 1996 was cash flow
from the operations, $4.9 million and $6.1 million respectively. Primary sources
of liquidity in 1995 arose from cash flow from the  operations,  $813  thousand,
and additional bank borrowings of $4.8 million.  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 $32
million.  At December  31,  1997 and at various  dates  throughout  the year the
Company was not in compliance  with certain  covenants as a result of its losses
in the second and third quarters.  The Company has obtained waivers with respect
to the non-compliance as of December 31, 1997.

At  December  31,  1997,  the  Company  had  working  capital of $30.6  million,
including cash of $1.1 million, as compared to working capital and cash of $31.6
million and $1.9 million,  respectively at December 31, 1996. In 1997, additions
to  property,  plant  and  equipment  accounted  for  most of the  cash  used by
investing activities,  $5.4 million and includes  approximately $2.4 million for
the purchase of its Beverly  Massachusetts  facility,  formally under lease. The
Company had no expenditures  for acquisitions and related costs in 1997 and used
cash in 1996 and 1995 of $1 million and $4.1 million respectively.

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.

                                       13
<PAGE>

Item 8            Financial Statements and Supplementary Data

<TABLE>

                 Signal Technology Corporation and Subsidiaries
                      Consolidated Statements of Operations
<CAPTION>
                                                              Year ended December 31,
                                                         ------------------------------
(amounts in thousands, except per share data)              1997       1996      1995
---------------------------------------------------------------------------------------
<S>                                                      <C>        <C>        <C>
Net sales                                                $102,279   $114,241   $ 89,728
Cost of sales                                              82,575     89,407     70,051
---------------------------------------------------------------------------------------
Gross profit                                               19,704     24,834     19,677
Selling, general and administrative expenses               17,139     19,270     16,248
Research and development expenses                             777        522      1,610
Restructuring expense                                        --         --          779
---------------------------------------------------------------------------------------
Operating income                                            1,788      5,042      1,040
Interest expense                                            1,070      1,345      1,163
---------------------------------------------------------------------------------------
Income (loss) before income taxes                             718      3,697       (123)
---------------------------------------------------------------------------------------
Provision for income taxes                                    380      1,452        146
---------------------------------------------------------------------------------------
Net income (loss)                                        $    338   $  2,245   $   (269)
=======================================================================================

Net income (loss) per share
   Basic                                                 $   0.05   $   0.32   $  (0.04)
   Diluted                                               $   0.04   $   0.29   $  (0.04)
=======================================================================================

Shares used in calculating net income (loss) per share
   Basic                                                    7,268      7,076      6,880
   Diluted                                                  7,691      7,676      6,880
=======================================================================================
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
</TABLE>
                                       14
<PAGE>

<TABLE>
                 Signal Technology Corporation and Subsidiaries
                           Consolidated Balance Sheets
<CAPTION>
                                                                                   December 31,
                                                                               --------------------
(dollar amounts in thousands)                                                    1997        1996
---------------------------------------------------------------------------------------------------
<S>                                                                            <C>         <C>
ASSETS
Current assets:
Cash                                                                           $  1,127    $  1,870
Accounts receivable, net of allowance for doubtful
     accounts of $159 in 1997 and $170 in 1996                                   15,901      18,383
Inventories                                                                      22,707      24,293
Deferred income taxes                                                             2,327       2,989
Other current assets                                                              2,150         508
---------------------------------------------------------------------------------------------------
Total current assets                                                             44,212      48,043
---------------------------------------------------------------------------------------------------

Property, plant and equipment, net                                               16,400      14,310
Intangibles assets, net                                                           2,924       3,374
Other assets                                                                        846         864
---------------------------------------------------------------------------------------------------
Total  assets                                                                    64,382      66,591
===================================================================================================

LIABILITIES
Current liabilities:
Current maturities of long-term debt                                                480       1,321
Accounts payable                                                                  5,354       5,289
Accrued expenses                                                                  6,620       8,512
Income taxes payable                                                               --           295
Customer advances                                                                 1,177       1,048
---------------------------------------------------------------------------------------------------
Total current liabilities                                                        13,631      16,465
---------------------------------------------------------------------------------------------------
Deferred income taxes                                                             1,527       1,809
Long-term debt, net of current maturities                                        13,408      13,408
---------------------------------------------------------------------------------------------------

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;
  7,423,040 shares in 1997 and 7,171,506 shares in 1996 issued and 7,417,040
  shares in 1997 and 7,171,506 shares in 1996 outstanding                            74          72
Additional paid-in-capital                                                       12,693      12,095
Retained earnings                                                                23,080      22,742
---------------------------------------------------------------------------------------------------
                                                                                 35,847      34,909
Less treasury stock; 6,000 shares in 1997, at cost                                  (31)       --
---------------------------------------------------------------------------------------------------
Total  stockholders' equity                                                      35,816      34,909
---------------------------------------------------------------------------------------------------
Total  liabilities and stockholders' equity                                    $ 64,382    $ 66,591
===================================================================================================
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
</TABLE>
                                       15
<PAGE>
<TABLE>

                 Signal Technology Corporation and Subsidiaries
                 Consolidated Statements of Stockholders' Equity
<CAPTION>
                                                           Years ended December 31, 1997, 1996 and 1995
                               -------------------------------------------------------------------------------------------------
                                    Common Stock                                               Treasury Stock
                               --------------------   Additional                           ---------------------      Total
                               Shares                  Paid-in      Unearned     Retained                Amount   Stockholders'
(dollar amounts in thousands)  Issued     Amount       Capital    Compensation   Earnings    Shares     at Cost       Equity
--------------------------------------------------------------------------------------------------------------------------------
<S>                           <C>       <C>           <C>         <C>           <C>          <C>      <C>          <C>
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 income                                                                            (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
Exercise of stock options      246,534           2           566                                                          568
Issuance of common stock         5,000        --              32                                                           32
Stock repurchase program                                                                     (6,000)         (31)         (31)
Net income                                                                             338                                338
--------------------------------------------------------------------------------------------------------------------------------
December 31, 1997            7,423,040  $       74    $   12,693  $     --      $   23,080   (6,000)  $      (31)  $   35,816
===============================================================================================================================
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
</TABLE>
                                       16
<PAGE>
<TABLE>
                 Signal Technology Corporation and Subsidiaries
                      Consolidated Statements of Cash Flows
                          (dollar amounts in thousands)
<CAPTION>
                                                                      Years ended December 31,
                                                                 ---------------------------------
                                                                    1997       1996        1995
--------------------------------------------------------------------------------------------------
<S>                                                              <C>         <C>         <C>
Cash flows from operating activities:
Net income (loss)                                                $    338    $  2,245    $   (269)
Adjustments to reconcile net income to net cash provided
        by operations:
  Depreciation                                                      3,292       3,368       3,527
  Amortization                                                        422         390         186
  (Gain) or Loss on disposal of property, plant and equipment          10         (95)        (18)
  Unearned compensation                                              --            54          54
  Deferred taxes                                                      380        (186)        (58)
Changes in operating assets and liabilities:
  Accounts receivable                                               2,482      (2,400)        638
  Inventory                                                         1,586       2,751      (5,777)
  Other current assets                                             (1,642)        546         (95)
  Accounts payable                                                     65      (1,266)      1,997
  Accrued expenses                                                 (1,892)      3,220        (212)
  Income taxes payable                                               (295)        295         (40)
  Customer advances                                                   129      (2,808)        880
--------------------------------------------------------------------------------------------------
Net cash provided by operating activities                           4,875       6,114         813
--------------------------------------------------------------------------------------------------

Cash flows from investing activities:
Acquisitions and associated costs                                    --        (1,000)     (4,070)
Additions to property, plant and equipment                         (5,404)     (1,960)     (1,584)
Proceeds from disposal of property, plant and equipment                12         356         175
Other                                                                  46         (15)        (45)
--------------------------------------------------------------------------------------------------
Net cash used by investing activities                              (5,346)     (2,619)     (5,524)
--------------------------------------------------------------------------------------------------

Cash flows from financing activities:
Proceeds from exercise of stock options                               568         666         246
Proceeds from issuance of stock                                        32        --
Purchase of treasury stock                                            (31)       --          --
Borrowings on bank term note                                        2,980        --          --
Borrowings under bank revolving credit facilities                  33,700      24,029      26,955
Repayment of borrowings under bank revolving credit facilities    (36,200)    (27,529)    (22,200)
Payments of long-term debt                                         (1,321)       (375)       (375)
--------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities                     (272)     (3,209)      4,626
--------------------------------------------------------------------------------------------------

Net increase (decrease) in cash                                      (743)        286         (85)
Cash, beginning of year                                             1,870       1,584       1,669
--------------------------------------------------------------------------------------------------
Cash, end of year                                                $  1,127    $  1,870    $  1,584
==================================================================================================

<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
</TABLE>
                                       17
<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 accounts of Signal Technology
Corporation and its wholly-owned  subsidiaries,  (collectively,  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 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)

                                       18
<PAGE>

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
The Company has adopted the  provisions  of Statement  of  Financial  Accounting
Standards No. 128, Earnings Per Share ("SFAS 128") effective  December 31, 1997.
SFAS 128  requires  the  presentation  of basic and diluted  earnings  per share
("EPS").   Basic  EPS  is  computed  by  dividing  income  available  to  common
stockholders by the weighted average number of common shares outstanding for the
period.  Diluted EPS is computed giving effect to all dilutive  potential common
shares that were outstanding during the period. Dilutive potential common shares
consist of the  incremental  common  shares  issuable upon the exercise of stock
options and warrants for all periods using the treasury stock method.  All prior
period  earnings  per share  amounts  have  been  restated  to  comply  with the
provisions of SFAS 128.

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.

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,
1997 and 1996 accumulated amortization was $1,311 and $888 respectively.

Concentrations of Risk
The market for the Company's  products is largely  dependent on the availability
of new contracts from U.S. Government  authorities to prime contractors to which
the Company provides  components.  Any decline in expenditure by U.S. government
authorities may have an adverse effect on the Company's  financial  performance.
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.

                                       19
<PAGE>

Also,  the  Company's  international  sales  are  totally  denominated  in  U.S.
currency.  Consequently,  changes in  exchange  rates that  strengthen  the U.S.
dollar could increase the price in local currencies of the Company's products in
foreign markets and make the Company's  products  relatively more expensive than
competitors'  products that are  denominated in local  currencies,  leading to a
reduction in sales or profitability  in those foreign  markets.  The Company has
not taken any protective  measures against exchange rate  fluctuations,  such as
purchasing hedging instruments with respect to such fluctuations.

The amounts  reported  for cash  equivalents,  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
In June 1997,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standards  No.  130 (SFAS 130)  "Reporting  Comprehensive
Income".  SFAS 130 establishes  standards for reporting and display of financial
statements.  The impact of adopting SFAS 130, which is effective in fiscal 1998,
has not been determined.

In June 1997,  the Financial  Accounting  Standards  Boards issued  Statement of
Financial Accounting Standards No. 131 (SFAS 131) "Disclosures about Segments of
an  Enterprise  and  Related  Information."  SFAS  131  requires  publicly  held
companies to report financial and other  information about key revenue producing
segments of the entity for which such  information  is available and is utilized
by the chief operation decision maker.  Specific  information to be reported for
individual  segments includes profit or loss,  certain revenue and expense items
and total assets. A reconciliation of segment information to amounts reported in
the  financial  statements  would be  provided.  SFAS 131 is effective in fiscal
1998.  The  Company  operates  within one  segment:  electronic  components  and
equipment.

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.

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.

                                       20
<PAGE>

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.

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 paid in 1997. These transactions have been accounted for as purchases.  The
purchase prices,  including costs of $20 in 1996 and $95 in 1995 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, 1996, the
Company's  unaudited proforma condensed results of operations would have been as
follows:

                                                 1996               1995
                 ---------------------------------------------------------------
                 Net sales                     $120,241          $100,258
                 Net income                      $2,853             $(81)
                 Earnings per share
                          Diluted (Basic)          $.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, 1996, 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.

                                       21
<PAGE>

<TABLE>
5.   STATEMENTS OF CASH FLOWS
<CAPTION>
                                                                        Years ended December 31
                                                                    ------------------------------
                                                                       1997      1996       1995
        ------------------------------------------------------------------------------------------
<S>                                                                   <C>       <C>        <C>
        Cash paid during period for:
                 Interest                                             $1,063    $1,392     $1,135
                 Taxes                                                $1,227      $736       $802
        ------------------------------------------------------------------------------------------
        Non cash activity:
                 TDI note payable                                                 $946
                 Forgiveness of Benecia Promising Note                                     $1,800
                 Building sold in exchange for note receivable                    $858
        ==========================================================================================
</TABLE>
6.   INVENTORIES
                                                            December 31
                                                      -----------------------
                                                        1997          1996
        ---------------------------------------------------------------------
        Raw materials                                    $6,339       $8,225
        Work in progress                                 18,250       18,912
        Finished goods                                      484          307
                                                      -----------------------
                                                         25,073       27,444
                 Less: unliquidated progress payments   (2,366)      (3,151)
                                                      -----------------------
                                                        $22,707      $24,293
        =====================================================================


7.   PROPERTY, PLANT AND EQUIPMENT
                                                            December 31
                                                      ------------------------
                                                         1997         1996
        ----------------------------------------------------------------------
        Land                                                $992         $592
        Building and improvements                          9,793        7,285
        Machinery and equipment                           25,636       24,217
        Furniture and fixtures                             2,753        2,285
        ----------------------------------------------------------------------
                                                          39,174      $34,379
        Less accumulated depreciation                   (22,774)     (20,069)
        ----------------------------------------------------------------------
        Net property, plant and equipment                $16,400      $14,310
        ======================================================================


8.   ACCRUED EXPENSES
                                                           December 31
                                                      ----------------------
                                                          1997        1996
       ---------------------------------------------------------------------
       Accrued payroll & employee benefits               $1,939      $2,151
       Accrued vacation                                   1,164       1,293
       Accrued warranty                                     772         833
       Accrued commissions                                  993       1,275
       Other accrued expenses                             1,752       2,960
       ---------------------------------------------------------------------
                                                         $6,620      $8,512
       =====================================================================

                                       22
<PAGE>
<TABLE>
9.       LONG-TERM DEBT AND NOTES PAYABLE
<CAPTION>
                                                                                           December 31
                                                                                   -----------------------
                                                                                        1997       1996
           -----------------------------------------------------------------------------------------------
<S>                                                                                     <C>        <C>
           Massachusetts Industrial Revenue Bond,
                maturing  in 2009,  interest  at 62% of the prime rate plus 1/2%
                effective  interest  rate of 4.7% and  4.6%,  payable  in annual
                principal payments of $80                                                $888       $968
           Bank revolving credit facility                                               7,000      9,500
           Bank real estate term loan facility                                          6,000      3,315
           Note payable in connection with acquisition                                      -        946
           ----------------------------------------------------------------------------------------------
                                                                                       13,888     14,729
           Less: current maturities                                                     (480)    (1,321)
           ----------------------------------------------------------------------------------------------
                                                                                      $13,408    $13,408
           ==============================================================================================
</TABLE>

The Massachusetts  Industrial Revenue Bond is collateralized by real estate with
a net book value of $1,347 at December 31, 1997.

The  Company  has a $15,000  unsecured  bank  revolving  credit  facility,  (the
"Revolver").  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, 1997, the weighted
average interest rate was 7.57% and 7.81% at December 31, 1996. 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.   After  reduction  for
outstanding  letters of credit under the Revolver the company has approprimately
$7,600 available.

The Real Estate Loan is  collateralized  by real estate with a net book value of
$5,253 at December 31, 1997. Maturing in January,  2003, the Real Estate Loan is
payable in quarterly  principal  payments of $100,  plus  interest at the bank's
base rate (8.50% at December 31, 1997),  with the last installment  equal to the
remaining unpaid loan balance.

The  Agreement  in respect of the Real  Estate  Loan and the  Revolver  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, 1997
and at various dates  throughout the year the Company was not in compliance with
certain covenants. The Company has obtained waivers in respect of non-compliance
as of December 31, 1997.

                                       23
<PAGE>

10.      COMMITMENTS AND CONTINGENCIES

The Company leases real estate and equipment under operating  leases expiring at
various dates through 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 $1,256 in 1997,  $915 in 1996 and  $1,384 in 1995.  Future  minimum
lease  payments  under  noncancellable  operating  leases  with an initial  term
exceeding one year are as follows:
                                                      1998           $    764
                                                      1999           $    805
                                                      2000           $    798
                                                      2001           $    778
                                                      2002           $    819

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

Weymouth Environmental Contamination:
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 and the costs thereby, if any, will be required. The
Company has been informed by its insurers that no recovery of costs  incurred in
the  treatment of the ground water at the  facility is possible  under  existing
insurance arrangements.

During the year,  the Company  received funds from a third party in return for a
complete release from liability for any  responsibility  for the  contamination.
This amount has been included in the Company accrued for remediation.

Sunnyvale Indemnification Claim:
A third party has filed a breach of contract  suit against the Company  alleging
that it has a contractual  duty to indemnify the third party for costs  incurred
as a result of environmental contamination and subsequent remediation. The claim
is based upon allegations  that the Company assumed certain  liabilities when it
acquired one of the  divisions of the third party.  The Company  believes it has
meritorious defenses with respect to this claim and intends to vigorously defend
its  position  in  the  suit.  The  Company  also  believes  that  the  ultimate
disposition  will not  materially  affect its  financial  position or results of
operations.

                                       24
<PAGE>


11.      INCOME TAXES

                                   Years ended December 31
                            ---------------------------------------
                              1997         1996             1995
-------------------------------------------------------------------
Currently payable:
     Federal                     $0        $1,512               --
     State                        0           174             $204
-------------------------------------------------------------------
Deferred:
     Federal                    317         (430)             (50)
     State                       63           196              (8)
===================================================================
Provision for income taxes     $380        $1,452             $146
===================================================================


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

                                               Years ended December 31
                                          -----------------------------------
                                            1997         1996       1995
-----------------------------------------------------------------------------
Statutory federal income tax rate          34.0%        34.0%       (34.0)%
State income taxes, net of federal benefit  7.8          5.8         86.3
Benefit from foreign sales corporation      ---         (1.9)         ---
Non-deductible expenses and other          11.0          1.4         66.4
=============================================================================
     Effective tax rate                    52.8%        39.3%       118.7%
=============================================================================

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
                                     --------------------------------------
                                              1997             1996
---------------------------------------------------------------------------
Net tax asset:
     Net operating losses                     $317
     Vacation accrual                          417               $455
     Inventories                               776              1,646
     Warranty                                  306                331
     Deferred compensation                     243                197
     Other                                     268                360
---------------------------------------------------------------------------
Total                                       $2,327             $2,989
============================================================================

Net tax liability:
     Depreciation                           $1,527             $1,809
---------------------------------------------------------------------------
Total                                       $1,527             $1,809
============================================================================

                                       25
<PAGE>
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, 1997,  1,271  shares of common stock were  reserved for
future  issuance  under the  plans  and 565 were  available  for  future  grant.
Additionally,  non-qualified  options  to  purchase a total of 102 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 2002.

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.
<TABLE>

Information concerning the plans and non-qualified stock options is as follows:
<CAPTION>
                                          Available   Option    Option Price      Aggregate    Weighted Avg.
                                          for Grant   Shares      per Share         Price      Exercise Price
--------------------------------------------------------------------------------------------------------------
<S>                                        <C>        <C>       <C>     <C>          <C>          <C>
December 31, 1994                            172      1,269     $1.57 - $7.25        $3,435       $2.71
Options granted                            (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      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          500        ---       ---     ---           ---         ---
   Plan
-------------------------------------------------------------------------------------------------------------
December 31, 1996                            502      1,042      1.57 -  8.25        $3,799        3.65
Options granted                            (175)        250      4.94 -  7.63         1,740        6.96
Options canceled                             238      (238)      4.25 -  8.25       (1,233)        5.19
Options exercised                              -      (246)      1.57 -  5.75         (568)        2.31
-------------------------------------------------------------------------------------------------------------
December 31, 1997                            565        808     $1.57 - $8.25        $3,738       $4.63
-------------------------------------------------------------------------------------------------------------
</TABLE>

A total of 488 options were exercisable at December 31, 1997

                                       26
<PAGE>
<TABLE>

The  following  table  summarizes  information  with  respect  to stock  options
outstanding as of December 31, 1997:
<CAPTION>
         Range of        Outstanding     Weighted-Average        Weighted-Average    Exercisable    Weighted-Average
      Exercise Prices       as of      Remaining Contractual      Exercise Price       as of        Exercise Price
                           12/31/97           Life                                    12/31/97
----------------------------------------------------------------------------------------------------------------------
<S>                         <C>                <C>                  <C>                 <C>           <C>
     $1.5700 - $1.8000      311,020            2.2                  $1.6186             311,020       $1.6186
     $2.0000 - $3.9400       34,832            3.9                   2.7707              22,332        2.3625
     $4.1880 - $5.7500       84,750            2.0                   5.1852              50,500        5.2977
     $6.0600 - $7.0000      200,000            4.2                   6.5078              52,500        6.2708
     $7.2500 - $8.2500      177,000            3.2                   7.7116              51,750        7.5088
======================================================================================================================
                            807,602            3.0                  $4.5887             488,102       $3.1582
</TABLE>

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 are as follows:

                                             1997              1996 and 1995
                                      -------------------  ---------------------

           Risk-free Interest Rates          6.2%                  6.2%
           Expected Life                  4.4 years              4.7 years
           Volatility                        0.65                  0.70
           Dividend Yield                     --                    --

The weighted  average fair value of those options granted in 1997, 1996 and 1995
was $4.03, $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)
                                                    1997              1996
                                              -----------------  ---------------

      Net income (loss) -  proforma              $       (107)     $      2,045
      Net income (loss) per share - proforma
               (Basic) Diluted                   $      (0.01)     $       0.27

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.

                                       27
<PAGE>

13.      EARNING PER SHARE

In accordance with the disclosure  requirements of SFAS 128, a reconcilation  of
the  numerator  and  denominator  of both basic and  diluted  EPS is provided as
follows:

                                                 1997        1996       1995
                                                 ----        ----       ----
Numerator - Basic and Diluted EPS
         Net income (loss)                        $338       $2,245     $(269)

Denominator - Basic EPS
         Common shares outstanding               7,268        7,076     6,880
                                                 -----        -----    ------
         Basic earnings (loss) per share         $0.05        $0.32    $(0.04)
                                                 =====        =====    ======

Denominator - Diluted EPS
         Denominator - Basic EPS                 7,268        7,076     6,880

         Effect of Diluted Securities
           Common Stock Options                    423          600        --
                                                 -----        -----    ------

Denominator - Diluted EPS                        7,691        7,676     6,880
                                                 -----        -----    ------
         Diluted earnings (loss) per share       $0.04        $0.29    $(0.04)
                                                 =====        =====    ======

14.      EMPLOYEE BENEFIT PLANS

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 $401 in 1997, $164 in 1996 and
$116 in 1995.

The Company has an Employee  Stock  Purchase  Plan ("the  Purchase  Plan") under
which 300,000  shares of common stock have been reserved for issuance.  Eligible
employees  may  designate  not more than 10% of their  cash  compensation  to be
deducted  each pay period for the  purchase of common  stock under the  Purchase
Plan, and participants may purchase not more than $25,000 of common stock in any
one calendar  year. On the last business day of each six month  offering  period
shares of common stock are purchased with the employees' payroll deductions over
the  immediately  preceding six months at a price per share of 85% of the lesser
of the market price of the common stock on the purchase date or the market price
on the first day of the period.  The Purchase Plan will  terminate no later than
December 31, 1999. In fiscal 1997 no shares were issued under the Purchase Plan.

15.      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 $16,820 in 1997, $18,254 in 1996 and
$14,785 in 1995.  One U.S.  customer  accounted for 20% of net sales in 1997 and
22% of sales in 1996 and 14% in 1995.

                                       28
<PAGE>

16.      UNAUDITED QUARTERLY FINANCIAL INFORMATION
<TABLE>

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>
                                              First        Second        Third        Fourth
         1997:                                Quarter      Quarter       Quarter      Quarter
         ---------------------------------------------------------------------------------------
<S>                                          <C>         <C>          <C>           <C>
         Net sales                           $  27,082   $    25,474  $    25,639   $    24,084
         Gross profit                            6,141         4,734        3,875         4,954
         Operating income                        1,442           102        (219)           463
         Net income (loss)                         745         (107)        (320)            20
         Net income (loss) per share:
              Basic                          $    0.10   $    (0.01)  $    (0.04)   $      0.00
              Diluted                        $    0.10   $    (0.01)  $    (0.04)   $      0.00
         Shares used in calculating
              Net income (loss per share):
              Basic                              7,187         7.268        7,277         7,333
              Diluted                            7,714         7.268        7,277         7,663
         ---------------------------------------------------------------------------------------
         1996:
         ---------------------------------------------------------------------------------------
         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:
              Basic                          $  (0.02)   $      0.02  $      0.14   $      0.17
              Diluted                        $  (0.02)   $      0.02  $      0.13   $      0.16
         ---------------------------------------------------------------------------------------
         Shares used in calculating
              Net income (loss per share):
              Basic                              6,977         7,034        7,136         7,158
              Diluted                            6,977         7,711        7,652         7,720
         ---------------------------------------------------------------------------------------
</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
                                       29
<PAGE>
--------------------------------------------------------------------------------

                                    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 5, 1998,  which will be filed with the Securities
and Exchange Commission pursuant to Regulation 14A.

                                       30
<PAGE>

                                     PART IV
<TABLE>

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

(a)(1)            Index to Financial Statements and Financial Statement Schedules               Page

<S>                                                                                              <C>
         Consolidated Balance Sheet as of December 31, 1997 and 1996                             15
         Financial Statements for the Years Ended December 31, 1997, 1996 and 1995:
                  Consolidated Statements of Operations                                          14
                  Consolidated Statements of Stockholders' Equity                                16
                  Consolidated Statements of Cash Flows                                          17
         Notes to Consolidated Financial Statements                                              18

Report of Independent Accountants                                                                34


         Schedule II       Valuation and Qualifying Accounts                                     35
</TABLE>
         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.

   (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.*

10.8          Lease  dated  as of  October  18,  1990  by  and  between  Benecia
              Associates and 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  Licence  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. *****

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. *****

                                       31
<PAGE>

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

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 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. ******

10.31         Amendment No. 5 to the second and restated credit agreement, dated
              as of September 30, 1993,  with the First National Bank of Boston,
              dated as of December 15, 1997.

10.32         Purchase  and sale  agreement  by and between  Communications  and
              Power Industries,  Inc. (Seller) and Signal Technology Corporation
              (Buyer),  dated July 25,  1997 for all real  estate at 26-28 Tozer
              Road, Beverly Massachusetts.

21.1          Schedule of Registrant's subsidiaries.

23.1          Consent of Independent Accountants

*             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 Company's  Annual Meeting of
              Shareholders to held on May 6, 1997.

*******       Incorporated by reference to the  correspondence  exhibit filed as
              part of the registrant's 1996 Annual Report on Form 10-K.

(b)           Reports on Form 8-K

              None

                                       32
<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, Chief Executive Officer & President

Date:  March 27, 1998

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\      Dale L. Peterson                               March 27, 1998
         --------------------------------------------------
         Dale L. Peterson
         Chairman, Chief Executive Officer & President


         \s\      Bernard P. O'Sullivan                          March 27, 1998
         --------------------------------------------------
         Bernard P. O'Sullivan
         Director


         \s\      Harvey C. Krentzman                            March 27, 1998
         --------------------------------------------------
         Harvey C. Krentzman
         Director


         \s\      Joseph S. Schneider                            March 27, 1998
         --------------------------------------------------
         Joseph S. Schneider
         Director


         \s\      Larry L. Hansen                                March 27, 1998
         --------------------------------------------------
         Larry L. Hansen
         Director

                                       33
<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, 1997 and 1996, and
the  consolidated  results of their  operations and their cash flows for each of
the three  years in the  period  ended  December  31,  1997 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 respects, the information required to be included therein.


San Jose, California                                 COOPERS & LYBRAND L.L.P.
January 26, 1998

                                       34
<PAGE>
<TABLE>

                  Schedule II Valuation and Qualifying Accounts

<CAPTION>
                                                             Years ended December 31, 1997, 1996 and 1995
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                                                  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>

1995

Inventory reserve                                  5,065,000           934,000          (1,502,000)(2)        4,497,000


Allowance for doubtful
     accounts                                        166,000            52,000             (52,000)(1)          166,000
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1996

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


Allowance for doubtful
     accounts                                        166,000           164,000            (160,000)(1)          170,000
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1997

Inventory reserve                                  2,384,000         1,833,000          (2,588,000)(2)        1,629,000


Allowance for doubtful
     accounts                                        170,000            (8,000)             (3,000)(1)          159,000
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<FN>

Notes
 (1) Write-off of bad debts
 (2) Credit to inventory accounts for previously reserved amounts
</FN>
</TABLE>
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