SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K

   FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

  [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE EXCHANGE ACT OF 1934
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

                                       OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
        ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO ________

                        Commission file 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)

     222 ROSEWOOD DRIVE, DANVERS, MA                     01923-4502
(Address of principal executive offices)                 (Zip Code)

       Registrant's telephone number, including area code: (978) 774-2281

           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 5, 1999, the aggregate fair value of the Registrant's Common Stock held
by non-affiliates was $20,806,665. On March 5, 1999, there were 7,583,661 shares
of the Registrant's Common Stock issued and outstanding.
<PAGE>

                       DOCUMENTS INCORPORATED BY REFERENCE

Part  III  incorporates  information  by  reference  from the  definitive  Proxy
Statement in connection with the Registrant's  Annual Meeting of Stockholders to
be held on May 4, 1999.  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>

                 Signal Technology Corporation and Subsidiaries

                       INDEX TO ANNUAL REPORT ON FORM 10-K


                                     PART I
                                                                            Page
Item 1.    Business                                                            4
Item 2.    Properties                                                          9
Item 3.    Legal Proceedings                                                  10
Item 4.    Submission of Matters to a Vote of Security Holders                11

                                     PART II

Item 5.    Market for the Registrant's Common Equity and Related
           Stockholder Matters                                                11
Item 6.    Selected Consolidated Financial Data                               12
Item 7.    Management's Discussion and Analysis of Financial Condition
           and Results of Operations                                          12
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk         17
Item 8.    Financial Statements and Supplementary Data                        18
Item 9.    Changes in and Disagreements with Accountants on Accounting
           and Financial Disclosure                                           38

                                    PART III

Item 10.   Directors and Executive Officers of the Registrant                 38
Item 11.   Executive Compensation                                             38
Item 12.   Security Ownership of Certain Beneficial Owners and
           Management                                                         38
Item 13.   Certain Relationships and Related Transactions                     38

                                     PART IV

Item 14.   Exhibits, Financial Statement Schedules and Reports
           on Form 8-K                                                        39
           Signatures                                                         42

                                       3
<PAGE>

                                     PART I


ITEM I.           BUSINESS

Signal  Technology  Corporation  (the  "Company") has restated its  consolidated
financial  statements  for fiscal  years 1996 and 1997 and the first  quarter of
1998.  The  adjustments  were a  result  of an  investigation  by the  Company's
management with the aid of its independent  accountants and outside counsel. The
restatements  were primarily  required to record contract  revenue and inventory
adjustments  in the correct  periods.  The restated  results for the years ended
1996 and 1997 have been reflected in Form 10-K/A filed by the Company on October
30,  1998 and for the quarter  ended March 31, 1998 in Form 10-Q/A  filed by the
Company on October 30, 1998. The consolidated  financial  statements and related
notes to consolidated  financial  statements set forth in this Form 10-K reflect
all such restatements.

GENERAL
Signal Technology  Corporation (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  pursue  existing  business
opportunities at its current operations in the defense,  space and communication
markets  and  acquire   complementary   businesses  and  product  lines.   While
consolidation  continues in the defense industry,  the budget down cycle appears
to have  ended and the  Company  expects to take  advantage  of being one of the
remaining independent companies in defense electronics.

In 1996, the Company  acquired  certain product lines and associated  assets and
backlog of Military  Power  Systems,  a division of Transistor  Devices Inc. and
sold Benecia Communications Corporation.

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
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 electronic
systems on existing  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 should also enable it to compete  effectively in
the future.

STRUCTURE AND ORGANIZATION
The Company was  incorporated  in 1982 and became a public  company in 1993. The
Company  has five  operating  divisions;  referred  to as  Arizona,  California,
Systems,  Keltec and Olektron and reports its operations  within three segments:
Microwave Components and Subsystems (Arizona, California and

                                       4
<PAGE>

Systems), Power Management Products (Keltec) and Radio Frequency (RF) Components
and Subsystems (Olektron).

PRODUCTS AND CUSTOMERS
The  Company's  products  are  integrated  into complex  electronic  systems and
subsystems that require  precision  control,  management and generation of radio
and microwave  frequencies.  The Company is dedicated to supplying  high quality
and  highly  reliable  products  that  meet  rigid  customer   requirements  for
performance  and on-time  delivery,  while at the same time being  competitively
priced.

The  following  table sets forth  information  concerning  net sales by business
segment for years ending December 31:

                                              ----------------------------------
(amounts in thousands)                            1998         1997         1996
----------------------                        ----------------------------------
Microwave Components & Subsystems             $ 51,858     $ 59,362     $ 65,757
Power Management Products                       24,262       25,298       29,788
RF Components & Subsystems                      15,963       17,579       17,519
--------------------------------------------------------------------------------
     TOTAL                                    $ 92,083     $102,239     $113,064
================================================================================

For selected financial data by business segment see ("Segment Information") note
15 to consolidated financial statements. Each of the Company's business segments
market products to one or more of the following industries:

DEFENSE
The Company 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  (ELINT).  The
Company supplies products on key missile programs such as the AMRAAM,  Tomahawk,
Sparrow,  Standard  Missile  (SM),  BAT and  PAC3/Patriot  missile  system.  Key
programs in ECM include the ALQ-99, ALQ-131,  ALQ-135,  ALQ-156, ALQ-165 (ASPJ),
ALQ-172,  ALQ-184, ALQ-211 (SIRFC), IDECM, APR-48A (RFIS), APR-39, ALR-66/67 and
Salamandre.  Radar programs include MILSTAR, ARINE, GRIFO and a number of active
electronically scanned array (AESA) programs. The Company provides microwave and
radio frequency (RF) 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
The Company  provides  products for  spacecraft and launch  vehicles.  Principal
space applications include satellite communications,  intelligence, surveillance
and sensing. The Company designs, develops and manufactures frequency components
such as isolators,  circulators,  oscillators and power components such as DC to
DC converters. The Company's products are used on satellite-based  communication
systems  such  as  Globalstar  (TM),  Iridium  (TM),  Tempo  (TM),  GPS  (Global
Positioning  System),  SBIRS (Space Based  Infared  Sensor),  HESSI (High Energy
Solar Spectroscopic Imager), N.E.A.R. (Near Earth Asteriod Rendezvous),  Milstar
II and others. Such systems are designed to offer various combinations of voice,
data,   video,   paging  and  facsimile  to  telephones   and  data   terminals,
environmental  astrological  experiment results and phenomena data,  positioning
and locating data and threat detection and warning.

                                       5
<PAGE>

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,  wireless local loop (WLL), digital radios,  terrestrial
satellite  communications  (SATCOM)/(VSAT),  modems, air traffic control,  local
area and wide area networks and intelligence gathering. Unlike space and defense
electronic  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 23%, 20%, and 22% of the Company's net
sales in 1998, 1997, and 1996, respectively,  the Company believes that the loss
of any single customer would not have a material adverse effect on the Company.

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

<TABLE>
<CAPTION>
                                                 Year Ended December 31
                          ------------------------------------------------------------------
                                   1998                   1997                   1996
                          ------------------------------------------------------------------
(dollars in thousands)       $              %       $              %       $              %
--------------------------------------------------------------------------------------------
<S>                       <C>              <C>   <C>              <C>   <C>              <C>
U.S. government
  Military                $ 64,599         70%   $ 77,117         75%   $ 74,463         66%
  Non-Military               1,262          1         792          1       2,988          3
U.S. Commercial              7,639          9       7,510          7      17,441         15
International
  Military                  16,689         18      14,420         15      11,343         10
  Commercial                 1,894          2       2,400          2       6,829          6
--------------------------------------------------------------------------------------------
Total                     $ 92,083        100%   $102,239        100%   $113,064        100%
============================================================================================
</TABLE>

GOVERNMENT CONTRACTS
A substantial portion of the Company's business is conducted under United States
government contracts primarily through subcontracts to prime contractors.  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. The majority of the Company's business is competitively bid.

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. The Company does participate in fixed
price development contracts.

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

                                       6
<PAGE>

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 for
providing insight into strategies and for gathering information for product line
expansion and acquisitions.

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

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

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

                                                    Year Ended December 31
                                            ------------------------------------
(dollars in thousands)                        1998           1997           1996
--------------------------------------------------------------------------------
Company-funded                              $  274         $  777         $  522
Customer-sponsored                           1,794          1,787          4,820
--------------------------------------------------------------------------------
Total                                       $2,068         $2,564         $5,342
================================================================================

SOURCES OF RAW MATERIALS
The  raw  materials  and  sub-components  that  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
believes it could purchase  similar or comparable raw materials from alternative
sources  of  supply  on  comparable  terms.  From  time  to  time,  the  Company
experiences  minor delays in obtaining raw materials  and  components;  however,
such delays have not materially affected its operations.

BACKLOG
At December  31, 1998 and 1997,  the  Company  had a backlog of  unshipped  firm
orders of $64,803 and $88,699,  respectively. The Company expects to ship all of
the December 31, 1998 backlog  within  1999,  except for  approximately  $13,322
which will be shipped in later periods.

                                       7
<PAGE>
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.

EMPLOYEES
As of December 31, 1998, the Company had 754 full-time  employees at its various
divisions.  No employees are  represented  by unions.  The Company  believes its
relations with its employees are good.

INTELLECTUAL PROPERTY
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,
the Company believes that its  technological  position depends  primarily on the
technical  competence and the 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. The Company also relies on
a combination of copyright and trademark  protection  with respect to certain of
its intellectual property.

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 security
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.

                                       8
<PAGE>

ITEM 2.  PROPERTIES

The Company's principal executive offices are located in Danvers, Massachusetts.
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 does not include utilities,  maintenance
                  and  repairs,  insurance  and real  estate  taxes.  The  lease
                  expires in 2003.  The current  annual rent is $670,896 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.  The Company
believes that there is capacity at the Company's  facilities to absorb  acquired
businesses  of a certain size and product  lines  and/or  internal  growth.  The
properties  owned  by the  Company  are  all  subject  to  either  mortgages  or
industrial revenue bond financing.

                                       9
<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.

SUNNYVALE INDEMNIFICATION CLAIM
Eaton Corporation has filed a suit against the Company in United States District
Court, Northern District of California,  alleging that it has a contractual duty
to indemnify Eaton  Corporation 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 Eaton Corporation. The indemnification claim was recently dismissed
at the trial level,  but may be the subject of an eventual  appeal.  The Company
also  believes  that the ultimate  disposition  will not  materially  affect its
financial position or results of operations.

DECOURSEY V. SIGNAL TECHNOLOGY CORPORATION
This class  action was filed on August 25,  1998 in the United  States  District
Court for the District of Massachusetts.  The Complaint alleges that the Company
and its former chief executive officer, Dale Peterson, violated ss. 10(b) of the
Security  Exchange Act of 1934 and Rule 10b-5 and seeks  monetary  damages.  The
Complaint  alleges that various public statements by the Company during 1997 and
1998 were false or misleading as a result of alleged accounting  irregularities.
The Company intends to defend the matter fully.

L3 COMMUNICATIONS CORPORATION V. SIGNAL TECHNOLOGY CORPORATION, et al
This case was filed on September 3, 1998 in the Superior Court in Fulton County,
Georgia.   The  Complaint   alleges  that  certain   former   employees  of  L-3
Communications   now  working  for  the   Company   unlawfully   misappropriated
confidential  and  trade  secret  information  on  behalf  of  the  Company  and
unlawfully induced other L-3 Communications  employees to join the Company.  L-3
Communications  has brought claims for civil conspiracy,  tortious  interference
with  prospective and contractual  relations,  under both the Georgia  Deceptive
Trade  Practices  Act and the  Uniform  Trade  Secrets  Act and  seeks  monetary
damages.  The case is in the initial  stages.  The Company intends to defend the
matter fully.

                                       10
<PAGE>

ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

                                     PART II

ITEM 5.           MARKET FOR REGISTRANT'S  COMMON EQUITY AND RELATED STOCKHOLDER
                  MATTERS

The Company's  Common Stock is listed on the American Stock  Exchange  ("AMEX"),
under  the  symbol  STZ.  The high and low  closing  prices  for  shares  of the
Company's Common Stock for the past two years were as follows:

                                          1998                     1997
                                   ---------------------------------------------
                                    High        Low         High          Low
--------------------------------------------------------------------------------
First Quarter                     $ 7          $ 4 3/4     $ 8 7/16      $ 6 1/2
Second Quarter                      6 1/2        5 1/4       8 1/4         6 1/8
Third Quarter                       6 3/8        3 1/2       7 5/8         5 5/8
Fourth Quarter                      3 1/2        2 1/2       7             4 5/8
--------------------------------------------------------------------------------

There were  approximately  95 holders of record of the Company's Common Stock on
March 5, 1999.  The closing  price per share of the  Company's  Common  Stock on
March 5, 1999 as  reported  on the AMEX was $ 4 1/8.  As of August 17,  1998 the
American  Stock  Exchange  halted  trading on the  Company's  stock and  trading
resumed  on  November  9,  1998 upon the  Company's  filing of Form 10-Q for the
quarter  ended June 30, 1998 on October 23, 1998 and an amended  Form 10-K/A for
the year  ending  December  31,  1997 and an amended  Form  10-Q/A for the first
quarter of 1998 both filed October 30, 1998.

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.

                                       11
<PAGE>

ITEM 6.           SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands,
except per share amounts)                      1998         1997         1996        1995         1994
------------------------------------------------------------------------------------------------------
<S>                                       <C>          <C>          <C>         <C>          <C>      
OPERATIONS
----------
Net sales                                 $  92,083    $ 102,239    $ 113,064   $  89,728    $  93,094
Operating income (loss) (1)                  (6,600)          76        4,252       1,040        6,685
Income (loss) before taxes                   (7,497)        (994)       2,907        (123)       5,839
Net income (loss)                            (7,173)        (657)       1,698        (269)       3,562
Net income (loss) per share (1):
     Basic                                    (0.97)       (0.09)        0.24       (0.04)        0.53
     Diluted                              $   (0.97)   $   (0.09)   $    0.22   $   (0.04)   $    0.48
------------------------------------------------------------------------------------------------------

Shares used in calculating net income
 (loss) per share:
     Basic                                    7,365        7,268        7,076       6,880        6,752
     Diluted                                  7,365        7,268        7,676       6,880        7,362
                          (1) In 1995, includes restructuring expense of $779 or $(0.07) per share
------------------------------------------------------------------------------------------------------

FINANCIAL POSITION
------------------
Current assets                            $  30,707    $  42,670    $  47,096   $  46,421    $  39,216
Current liabilities                          11,006       13,631       16,065      15,682       12,035
Total assets                                 48,983       62,840       65,644      66,117       58,431
Long-term debt, less current maturities       9,928       13,408       13,408      17,283       12,903
Total debt                                   10,408       13,888       14,729      17,658       13,278
Stockholders' equity                         26,487       34,274       34,362      31,944       31,913
Shares outstanding at year-end                7,349        7,417        7,172       6,949        6,827
Book value per share                      $    3.60    $    4.62    $    4.79   $    4.60    $    4.67
------------------------------------------------------------------------------------------------------

SELECTED DATA
-------------
Orders                                    $  68,187    $ 101,875    $ 103,829   $ 110,656    $  90,249
Year-end backlog                          $  64,803    $  88,699    $  89,063   $  92,837    $  65,998
Employees at year-end                           754          817          993         894          854
Revenue per employee                      $     122    $     125    $     114   $     100    $     109
------------------------------------------------------------------------------------------------------
</TABLE>

ITEM 7.           MANAGEMENT'S  DISCUSSION  AND ANALYSIS OF FINANCIAL  CONDITION
                  AND RESULTS OF OPERATIONS

As previously  reported,  the restated results for the years ended 1996 and 1997
have been  reflected in Form 10-K/A filed by the Company on October 30, 1998 and
for the quarter  ended  March 31,  1998 in Form  10-Q/A  filed by the Company on
October 30, 1998.  The  consolidated  financial  statements and related notes to
consolidated  financial  statements set forth in this Form 10-K reflect all such
restatements. The adjustments were a result of an investigation by the Company's
management with the aid of its independent  accountants and outside counsel. The
restatements  were primarily  required to record contract  revenue and inventory
adjustments in the correct periods.

CAUTIONARY NOTE
The Annual Report on Form 10-K may contain  "forward-looking  statements" within
the  meaning of Section  27A of the  Securities  Act of 1933,  as  amended,  and
Section 21E of the Securities Exchange Act of 1934, as amended,  including,  but
not limited to, (i) trends in the federal  defense budget and military  reliance
upon  sophisticated  electronic  equipment,  (ii) the impact upon the Company of
loss of customers

                                       12
<PAGE>

or sales,  (iii)  the  impact  and  effects  of  competition  and the  Company's
continued ability to compete in its markets, (iv) the suitability and adeqacy of
the Company's  properties for its intended  uses, (v) the Company's  anticipated
policy with respect to dividends, (vi) the incidence, materiality, and frequency
of fluctuations in the Company's operating results, (vii) the Company's optimism
about  improvements  in its operating  deficiencies,  (viii)  projected costs of
ameliorating  risks  associated  with,  and  problems  caused  by, the Year 2000
problem, and (ix) certain other statements identified or qualified by words such
as "likely", "will", "suggests",  "may", "would", "could", "should",  "expects",
"anticipates",  "estimates",  "plans",  "projects",  "believes",  "is optimistic
about",  or similar  expressions  (and  variants of such words or  expressions).
Investors  are  cautioned   that   forward-looking   statements  are  inherently
uncertain.  These forward-looking  statements represent the best judgment of the
Company  as on the date of this  Annual  Report on Form  10-K,  and the  Company
cautions  readers  not to  place  undue  reliance  on  such  statements.  Actual
performance and results of operations may differ materially from those projected
or  suggested  in the  forward-looking  statements  due  to  certain  risks  and
uncertainities including, without limitation, risks associated with fluctuations
in the  Company's  operating  results,  volume  and  timing of orders  received,
changes in the mix of products sold, competitive pricing pressure, the Company's
ability to meet or  renegotiate  customer  demands,  the  ability to  anticipate
changes in the market,  the Company's ability to finance its operations on terms
that are  acceptable,  the  Company's  ability to attract  and retain  qualified
personnel  including the Company's  management,  changes in the global  economy,
changes  in  regulatory  processes,  the  dependence  on certain  key  customers
(including the U.S.  government),  the Company's  ability to realize  sufficient
margins on sales of its products, the availability and timing of funding for the
Company's current products and the development of future products, and the risks
the Company faces with respect to the Year 2000 problem.

OVERVIEW

The Company's  principal  business is the design,  development,  manufacture and
marketing of sophisticated  electronic components and subsystems.  The Company's
principal  strategy for growth is to pursue existing  business  opportunities at
its current  operations  in the  defense,  space and  communication  markets and
acquire complementary businesses and product lines.

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  requirements.  As a result of the  foregoing or other
factors, there can be no assurance that the Company will not experience material
fluctuations  in its 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, 1998, 1997 AND 1996

Net sales for 1998 totaling  $92.1 million  decreased 10% from 1997 net sales of
$102.2 million. Backlog decreased to $64.8 million at the end of 1998 from $88.7
million at the end of 1997 on new orders of $68.2  million in 1998  compared  to
$101.9  million in 1997.  A reduction  in orders was the primary  reason for the
decreased  sales in 1998.  Orders  throughout  the Company have been  moderately
affected by economic conditions in Asia.  Government sanctions placed on certain
shipments to India and Pakistan  have also  delayed or cancelled  shipments  and
postponed new orders.

1997 net sales of $102.2 million  decreased  approximately  10% compared to 1996
net sales of $113.1  million.  Backlog  decreased to $88.7 million at the end of
1997 from $89.1  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
accounted  for 42% of the  decrease.  Shipments  at the  Keltec  operation  were
adversely impacted by production inefficiencies including key material shortages
throughout the year.

                                       13
<PAGE>

For the year ended 1998 gross profit as a percentage of sales decreased to 15.1%
from 17.6% in 1997. The decrease in gross profit  percentage is  attributable to
the Company currently  recognizing losses on contracts and inventory write-downs
taken at the Keltec  operation and to a lesser  extent the Microwave  Components
and Subsystems business.

Gross profit as a percentage of net sales  decreased to 17.6% in 1997 from 21.3%
in 1996.  Gross profit was adversely  affected by lower  shipment  levels at its
Keltec  opeation and the costs  associated  with the  inefficienceis  previously
discussed.   In  addition,   both  Keltec  and  Arizona  operations  experienced
additional costs associated with several development contracts which contributed
significantly to the decrease in gross profit.

Selling,  general and administrative expenses increased to $20.2 million for the
year ended 1998 from $17.1  million in 1997.  The $3.1  million  increase was in
part due to the Company taking a charge for  environmental  remediation  cost at
the Weymouth  facility due to a settlement with the State of Massachusetts and a
revision to its estimates for future remediation costs. In addition, the Company
recognized  increased legal and accounting  costs  associated with the Company's
restatement  of its 1996  and  1997  financial  statements  as well as  expenses
related to the  relocation  of new executive  employees  and  severance  paid to
former executive employees.

Selling,  general and administrative  expenses decreased to approximately  $17.1
million for the year ended  December  31,  1997 from $19.3  million for the year
ended December 31, 1996. As a percentage of sales,  these expenses were 16.8% in
1997 and 17.0% in 1996.  While net sales  decreased,  as  discussed  above,  the
Company was able to achieve the decrease in selling,  general and administrative
expenses primarily due to reductions in personnel.

Company-funded research and development for 1998 was $.3 million compared to $.8
million in 1997 and $.5  million in 1996.  The  Company  was not  engaged in any
significant  company-funded  research and  development  efforts during the years
1998, 1997 or 1996.

BUSINESS SEGMENTS

The  Company  has  five  operating   divisions   engaged  in  the   engineering,
manufacturing and marketing of electronic  components and subsystems.  The three
operating  divisions  aggregated  into the Microwave  Components  and Subsystems
segment have similar products, production processes and types of customers.

MICROWAVE COMPONENTS AND SUBSYSTEMS
Engaged  in the design  and  manufacture  of  microwave  oscillators,  frequency
synthesizers and converters,  space qualified  microwave  assemblies,  microwave
amplifiers and microwave switch matrices.

POWER MANAGEMENT PRODUCTS
Engaged in the design and  manufacture  of military  high and low voltage  power
supplies,   DC  to  DC  converters  and  military  high  power   amplifiers  and
transmitters for use in radar systems.

RADIO FREQUENCY (RF) COMPONENTS AND SUBSYSTEMS
Engaged  in the design  and  manufacture  of radio  frequency  and  intermediate
frequency signal processing components,  integrated  multi-function devices, and
switching systems for the Space, Telecommunications and Military markets.

                                       14
<PAGE>

The following  tables display net sales and operating income by business segment
for each of the three years ending  December 31 which  correspond to the segment
information presented in Note 15 to the consolidated financial statements.


(amounts in thousands)                         1998          1997           1996
--------------------------------------------------------------------------------
Net Sales
---------                                 --------------------------------------
Microwave Components & Subsystems         $  51,858     $  59,362     $  65,757
Power Management Products                    24,262        25,298        29,788
RF Components & Subsystems                   15,963        17,579        17,519
                                          --------------------------------------
                                          $  92,083     $ 102,239     $ 113,064
                                          --------------------------------------

Operating Income
----------------                          --------------------------------------
Microwave Components & Subsystems         $   2,265     $   2,856     $   4,891
Power Management Products                    (7,401)       (3,676)         (612)
RF Components & Subsystems                    2,127         2,300         1,962
Other (1)                                    (3,591)       (1,404)       (1,989)
                                          --------------------------------------
                                          $  (6,600)    $      76     $   4,252
                                          --------------------------------------

(1)  Other is primarily corporate selling,  general and administrative  expenses
     that have not been allocated to the business segments.
--------------------------------------------------------------------------------

MICROWAVE  COMPONENTS  &  SUBSYSTEMS  - Net sales of  Microwave  Components  and
Subsystems  decreased by 13% in 1998  compared to 1997 and decreased 10% in 1997
compared to 1996.  The principal  reason for the 1998 reduction in sales in this
segment was a $6.5 million  reduction in sales at the Arizona  operation  caused
mainly by the completion of two large contracts in 1997.

Operating income of Microwave components and Subsystems decreased by 21% in 1998
compared to 1997 and 42% in 1997 compared to 1996. The 1998 reduction was caused
by a $1.8  million  reduction  in  income  at the  California  operation  due to
contract losses and sales volume reductions offset by increases in income at the
Arizona and Systems operations.

POWER MANAGEMENT  PRODUCTS - Net sales of Power Management Products decreased by
4% in 1998  compared  to 1997  and by 15% in 1997  compared  to  1996.  The 1998
reduction was caused by late contract deliveries.

The  operating  loss of  Power  Management  Products  was $7.4  million  in 1998
compared  to $3.7  million  in  1997  and  $.6  million  in  1996.  The  loss is
attributable to recognizing losses on contracts and inventory write-downs.

RF COMPONENTS & SUBSYSTEMS - Net Sales of RF Components and Subsystems decreased
by 9% in 1998 compared to 1997 and 1996.  This reduction in 1998 was caused by a
reduction in new orders booked in 1998 which was a result of the loss of certain
programs and program slippages.

Operating income of RF Components and Subsystems decrease by 8% in 1998 compared
to 1997 and  increased by 17% compared to 1996.  The reduction in 1998 income is
mainly attributable to the abovementioned volume reductions.

                                       15
<PAGE>

Interest  expense in 1998 decreased to $.9 million from $1.1 million in 1997 and
from $1.3 million in 1996.  The decreased  interest  expense  reflects  slightly
lower  interest  rates and lower levels of  borrowings.  Total debt decreased to
$10.4 million at the end of 1998 from $13.9 million at the end of 1997.

The  benefit  for income  taxes in 1998 was $.3 million on a pretax loss of $7.5
million. The effective income tax rate was (4.3%) benefit in 1998 as compared to
(33.9%)  benefit in 1997 and 41.6%  provision in 1996.  At December 31, 1998 the
Company has a valuation  allowance of $2.2 million to reserve for the  Company's
deferred  tax asset  because it is more  likely than not that the  deferred  tax
asset may not be  realized.  At December  31,  1998 the  Company had  refundable
income taxes of $2.3 million.  The Company expects refunds of  approximately  $2
million to be collected during the second and third quarters of 1999.

LIQUIDITY AND CAPITAL RESOURCES

The Company's  primary source of liquidity  during 1998,  1997 and 1996 was cash
flow from  operations,  totaling  $6.9  million,  $4.9  million and $6.1 million
respectively.

The Company's  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.  At various dates  throughout  the year the
Company was not in compliance  with certain  covenants and the Company  obtained
waivers with respect to such  non-compliance.  The Company was in  compliance at
year end  December  31,  1998.  The Company  and its bank have  amended the loan
agreement as of October 20, 1998. Among other changes,  the amendment  increases
the interest  charged on the revolving  credit facility and the real estate term
loans from the bank's base rate to base rate plus 1/2%. The amount available for
current borrowing is calculated on the Company's eligible receivables as defined
in the loan  agreement  but not to exceed $15  million.  This  provision  is not
anticipated to have a material impact on the Company's cash  requirements in the
foreseeable future.

At  December  31,  1998,  the  Company  had  working  capital of $19.7  million,
including cash of $2.4 million, as compared to working capital and cash of $29.0
million and $1.1  million,  respectively  at December  31,  1997.  In 1998,  the
Company paid back borrowings  under the Company's  revolving  credit facility of
$3.0 million and purchased $.9 million of treasury stock. 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,  formerly  under  lease.  The
Company had no expenditures  for  acquisitions and related costs in 1998 or 1997
and used cash in 1996 of $1 million for such purposes.

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 pursue
acquisition opportunities.

IMPACT OF YEAR 2000

Management is aware of the potential software and hardware anomalies  associated
with the upcoming date change  commonly  known as the Year 2000 problem (Y2K). A
comprehensive  review of the Company's  computer systems,  software and internal
embedded  systems has been  undertaken and the Company is not aware at this time
of any significant  year 2000 issues that will not be resolved prior to the year
2000.  The  Company  is on  schedule  in  its  corporate-wide  plan  to  achieve
compliance by the third quarter of 1999.

                                       16
<PAGE>

The Company is presently in the third phase of a five-phase  plan to bring about
complete compliance in all of its products,  internal systems, and suppliers and
thus mitigate  against  disruption of the Company's  business at the turn of the
century.  The five  phases  of the  Company's  plan are  Awareness,  Assessment,
Remediation,  Testing,  and  Implementation.  Awareness and Assessment have been
completed at this time. Remediation, the phase that the Company is presently in,
is  scheduled  to be  completed  by the end of April 1999.  Testing,  the fourth
phase,  is scheduled  to be  completed by the end of June 1999.  The last phase,
Implementation,  is scheduled to be  completed in September  1999.  All of these
different phases overlap each other. The areas of focus are; Products,  Computer
Software,  Computer Hardware, Embedded Systems, and Supplier Compliance. Each of
the Company's five operating  divisions is separately  implementing these phases
and  because of the varied  complexity  of the areas of focus at each  division,
some of the divisions are ahead of the overall schedule.

The Company has evaluated all of its product lines and has found no product with
embedded date functions that the company believes would cause any Y2K exposure.

As part of its overall plan, the Company has surveyed its suppliers to determine
their  Y2K  readiness.  The  Company's  understands  that its  suppliers  are an
integral  part of the  Company's  success.  To the extent the  Company  believes
certain suppliers will not be Y2K compliant, it will seek alternate suppliers.

The projected costs of $475 thousand  associated with the Company's overall plan
are  not  expected  to  have a  material  effect  on the  Company's  results  of
operations  or  financial  position.   Costs  include  internal  labor,  outside
consultants and, to a lesser extent, new computer hardware and software required
for Y2K  compliance.  To date,  the  Company  has  expended  approximately  $165
thousand.

At this time,  the  Company  has not  developed  a "worst  case"  scenario or an
overall  year 2000  contingency  plan and does not intend to do so unless,  as a
result of its  ongoing  year 2000  review,  management  believes  such plans are
warranted. The only contingency planning that is currently set to be implemented
will come as a result of a  comprehensive  survey of the Company's  suppliers in
order to learn which will be impacted by the Y2K problem.

Risks associated with the Y2K problem include,  among other things,  (i) failure
of systems and software used by the Company's  customers which will impact their
financial ability to purchase products from the Company, (ii) failure of systems
and software used by vendors and  third-party  service  providers upon which the
Company relies for outsourced services and products, (iii) Y2K problems with the
Company's  suppliers which could negatively impact the Company's ability to full
fill its own orders  promptly,  and (iv)  errors or failures of systems in which
the Company's devices are implemented which could result in improper interfacing
or operation of such devices.

ITEM 7A.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Company  does not engage in trading  market risk  sensitive  instruments  or
purchasing  hedging  instruments  or "other than trading"  instruments  that are
likely to expose the Company to market  risk,  whether  interest  rate,  foreign
currency  exchange,  commodity  price or equity price risk.  The Company has not
purchased  options or entered  into swaps or forward or futures  contracts.  The
Company's  primary  market  risk  exposure  is that  of  interest  rate  risk on
borrowings under its revolving  credit  facility,  which are subject to interest
rates  based  on  the  banks  base  rate  plus  1/2%.  The  Company  also  has a
collateralized  real  estate  loan at the  bank's  base rate and a change in the
applicable  interest  rate on these  loans  would  affect  the rate at which the
Company could borrow funds.

                                       17
<PAGE>

ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                 SIGNAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                        Year ended December 31,
(amounts in thousands,
except per share data)                              1998         1997         1996
----------------------------------------------------------------------------------
<S>                                            <C>          <C>          <C>

Net sales                                      $  92,083    $ 102,239    $ 113,064
Cost of sales                                     78,203       84,247       89,020
----------------------------------------------------------------------------------
Gross profit                                      13,880       17,992       24,044
Selling, general and administrative expenses      20,206       17,139       19,270
Research and development expenses                    274          777          522
----------------------------------------------------------------------------------
Operating income (loss)                           (6,600)          76        4,252
Interest expense                                     897        1,070        1,345
----------------------------------------------------------------------------------
Income (loss) before income taxes                 (7,497)        (994)       2,907
----------------------------------------------------------------------------------
Provision (benefit) for income taxes                (324)        (337)       1,209
----------------------------------------------------------------------------------
Net income (loss)                              $  (7,173)   $    (657)   $   1,698
==================================================================================

Net income (loss) per share
   Basic                                       $   (0.97)   $   (0.09)   $    0.24
   Diluted                                     $   (0.97)   $   (0.09)   $    0.22
==================================================================================

Shares used in calculating net income
 (loss) per share
   Basic                                           7,365        7,268        7,076
   Diluted                                         7,365        7,268        7,676
==================================================================================
</TABLE>

The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements

                                       18
<PAGE>

                 SIGNAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                   December 31,
                                                               --------------------
(dollar amounts in thousands
except per share data)                                             1998        1997
-----------------------------------------------------------------------------------
<S>                                                            <C>         <C>
ASSETS
Current assets:
Cash                                                           $  2,366    $  1,127
Accounts receivable, net of allowance for doubtful
     accounts of $332 in 1998 and $159 in 1997                   12,894      15,901
Inventories, net of progress payments                            11,358      20,205
Deferred income taxes                                             1,562       2,327
Refundable income taxes                                           2,319       2,624
Prepaid expenses and other current assets                           208         486
-----------------------------------------------------------------------------------
Total current assets                                             30,707      42,670
-----------------------------------------------------------------------------------

Property, plant and equipment, net                               14,935      16,400
Intangibles assets, net                                           2,505       2,924
Other assets                                                        836         846
-----------------------------------------------------------------------------------
Total assets                                                   $ 48,983    $ 62,840
===================================================================================

LIABILITIES
Current liabilities:
Current maturities of long-term debt                           $    480    $    480
Accounts payable                                                  3,067       5,354
Accrued expenses                                                  7,456       6,620
Customer advances                                                     3       1,177
-----------------------------------------------------------------------------------
Total current liabilities                                        11,006      13,631
-----------------------------------------------------------------------------------

Deferred income taxes                                             1,562       1,527
Long-term debt, net of current maturities                         9,928      13,408

Commitments and contingencies (Note 10)

STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value;  5,000,000 shares
authorized; none issued and outstanding
Common stock, $0.01 par value; 30,000,000 authorized;
     7,501,323 shares in 1998 and 7,423,040 shares
     in 1997 issued and 7,349,223 shares in 1998
     and 7,417,040 shares in 1997 outstanding                        75          74
Additional paid-in-capital                                       12,947      12,693
Retained earnings                                                14,365      21,538
-----------------------------------------------------------------------------------
                                                                 27,387      34,305
Less treasury stock: 152,100 shares in 1998 and
6,000 shares in 1997, at cost                                      (900)        (31)
-----------------------------------------------------------------------------------
Total stockholders' equity                                       26,487      34,274
-----------------------------------------------------------------------------------
Total liabilities and stockholder's equity                     $ 48,983    $ 62,840
===================================================================================
</TABLE>
The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.

                                       19
<PAGE>

                 SIGNAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                           Years ended December 31, 1998, 1997 and 1996
                           -----------------------------------------------------------------------------------------------------
                                 Common Stock                                                  Treasury Stock
                           -----------------------  Additional                             ----------------------     Total
(dollar amounts              Shares                   Paid-in      Unearned     Retained               Amount      Stockholders'
in thousands)                Issued      Amount       Capital    Compensation   Earnings     Shares    at Cost        Equity
--------------------------------------------------------------------------------------------------------------------------------
<S>                        <C>         <C>          <C>           <C>          <C>                    <C>           <C>       
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                                                                          1,698                                1,698
--------------------------------------------------------------------------------------------------------------------------------
December 31, 1996          7,171,506           72       12,095                     22,195        --           --        34,362
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 loss                                                                             (657)                                (657)
--------------------------------------------------------------------------------------------------------------------------------
December 31, 1997          7,423,040           74       12,693                     21,538                               34,274
Exercise of stock options     36,599            1           74                                                              75
Issuance of common stock      41,684                       180                                                             180
Stock repurchase program                                                                   (146,100)        (869)         (869)
Net loss                                                                           (7,173)                              (7,173)
--------------------------------------------------------------------------------------------------------------------------------
December 31, 1998          7,501,323   $       75   $   12,947    $            $   14,365  (152,100)  $     (900)   $   26,487
================================================================================================================================
</TABLE>

The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.

                                       20
<PAGE>

                 SIGNAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                         Years ended December 31,
                                                    ---------------------------------
(dollar amounts in thousands)                           1998        1997        1996
-------------------------------------------------------------------------------------
<S>                                                 <C>         <C>         <C>
Cash flows from operating activities:
Net income (loss)                                   $ (7,173)   $   (657)   $  1,698
Adjustments to reconcile net income (loss) to
  net cash provided by operations:
  Depreciation                                         3,028       3,292       3,368
  Amortization                                           419         422         390
 (Gain) or loss on disposal of property,
  plant and equipment                                     (4)         10         (95)
  Unearned compensation                                   --          --          54
  Deferred taxes                                         800         380        (186)
Changes in operating assets and liabilities:
  Accounts receivable                                  3,007       2,482      (2,400)
  Inventory                                            8,847       2,898       3,941
  Refundable income taxes                                305      (2,205)        104
  Prepaid expenses and other current assets              278        (154)        199
  Accounts payable                                    (2,287)         65      (1,266)
  Accrued expenses                                       836      (1,492)      2,820
  Income taxes payable                                    --        (295)        295
  Customer advances                                   (1,174)        129      (2,808)
------------------------------------------------------------------------------------
Net cash provided by operating activities              6,882       4,875       6,114
------------------------------------------------------------------------------------

Cash flows from investing activities:
Acquisitions and associated costs                         --          --      (1,000)
Additions to property, plant and equipment            (1,608)     (5,404)     (1,960)
Proceeds from disposals of property, plant
  and equipment & other                                   59          58         341
------------------------------------------------------------------------------------
Net cash used by investing activities                 (1,549)     (5,346)     (2,619)
------------------------------------------------------------------------------------

Cash flows from financing activities:
Proceeds from exercise of stock options                   75         568         666
Proceeds from issuance of stock                          180          32          --
Purchase of treasury stock                              (869)        (31)         --
Borrowings on bank term note                              --       2,980          --
Borrowings under bank revolving credit facilities     26,950      33,700      24,029
Repayment of borrowings under bank revolving
  credit facilities                                  (29,950)    (36,200)    (27,529)
Payments of long-term debt                              (480)     (1,321)       (375)
------------------------------------------------------------------------------------
Net cash used by financing activities                 (4,094)       (272)     (3,209)
------------------------------------------------------------------------------------

Net increase (decrease) in cash                        1,239        (743)        286
Cash, beginning of year                                1,127       1,870       1,584
------------------------------------------------------------------------------------
Cash, end of year                                   $  2,366    $  1,127    $  1,870
====================================================================================
</TABLE>
The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements

                                       21
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

1. (A)   RESTATEMENT ADJUSTMENTS
The Company has restated its consolidated  financial statements for fiscal years
1996 and 1997 and for the first  fiscal  quarter of 1998.  As  announced  in the
Company's August 17, 1998 press release, the adjustments were primarily a result
of an  investigation  by corporate  management  with the aid of its  independent
accountants  and outside  counsel.  The  restatements  were  required to reverse
contract  revenue  recorded  in  advance of  shipment,  to  recognize  losses on
contracts when they were  estimable and probable and to reduce  inventory to its
net  realizable  value.  Certain  transactions  which  were  reversed  have been
recorded as revenues in later periods when the contract work was completed.  The
restated  results for the years ended 1996 and 1997 have been  reflected in Form
10-K/A filed by the Company on October 30, 1998 and for the quarter  ended March
31,  1998 in  Form  10-Q/A  filed  by the  Company  on  October  30,  1998.  The
consolidated  financial  statements and related notes to consolidated  financial
statements set forth in this Form 10-K reflect all such restatements.  A summary
of the impact of such  restatements  for the years ended  December  31, 1997 and
1996 is as follows:

Consolidated Statements of Operations
-------------------------------------
(in thousands, except per share data)

                                       Year ended               Year ended
                                   December 31, 1997        December 31, 1996
                                 Previously      As       Previously      As
                                  Reported    Restated     Reported    Restated
                                 ----------   ---------   ----------   ---------

Net sales                         $ 102,279   $ 102,239    $ 114,241   $ 113,064
Gross profit                         19,704      17,992       24,834      24,044
Operating income                      1,788          76        5,042       4,252
Income (loss) before income
  taxes                                 718        (994)       3,697       2,907
Net income (loss)                       338        (657)       2,245       1,698
Net income (loss) per share
    Basic                         $    0.05   $   (0.09)   $    0.32   $    0.24
    Diluted                       $    0.04   $   (0.09)   $    0.29   $    0.22


Consolidated Balance Sheets
------------------------------------
(in thousands)

                                                             Year ended
                                                         December 31, 1997
                                                   Previously             As
                                                    Reported           Restated
                                                   ----------          --------
Net inventories                                      $22,707           $20,205
Total current assets                                  44,212            42,670
Total assets                                          64,382            62,840
Current liabilities                                   13,631            13,631
Retained earnings                                     23,080            21,538
Stockholders' equity                                  35,816            34,274

1. (B)   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
pursuing existing business  opportunities at its current  operations in defense,
space

                                       22
<PAGE>
and  communication.  The Company has five  operating  divisions  and reports its
operations  within three segments:  Microwave  Components and Subsystems,  Power
Management Products and Radio Frequency (RF) Components and Subsystems.

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.

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 on a percentage of completion  basis generally using
units of  delivery  as the basis to  measure  the  contract  work which has been
completed.  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.

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.

EARNINGS PER SHARE
The Company presents 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 for all
periods using the treasury stock method.

                                       23
<PAGE>
COMPREHENSIVE INCOME (LOSS)
The  Company  adopted  Statement  of  Financial  Accounting  Standards  No. 130,
Reporting Comprehensive Income ("SFAS 130"), effective January 1, 1998. SFAS 130
requires that items defined as  comprehensive  income,  such as foreign currency
translation  adjustments,  be separately  classified in the financial statements
and that the  accumulated  balance  of other  comprehensive  income be  reported
separately from retained  earnings and additional  paid-in capital in the equity
section of the  balance  sheet.  There were no  differences  between  net income
(loss) and  comprehensive  income (loss) for the years ended  December 31, 1998,
1997 and 1996.

INVENTORIES
Inventories,  other than  inventoried  costs relating to contracts and programs,
are stated at the lower of cost  (principally  first-in,  first-out)  or market.
Inventoried  costs  relating to  contracts  are stated at the actual  production
cost, including overhead,  and other related  non-recurring  costs,  incurred to
date reduced by amounts identified with revenue recognized on units delivered or
progress  completed.  Inventoried  costs  relating to  long-term  contracts  and
programs are reduced by charging  any amounts in excess of estimated  realizable
value to cost of sales.

In accordance with industry  practice,  inventories may include amounts relating
to contracts and programs  having  production  cycles longer than one year and a
portion thereof will not be realized within one year.

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,
1998 and 1997 accumulated  amortization was $1,730 and $1,311  respectively.  At
each  reporting  date,  management  assesses  whether there has been a permanent
impairment in the value of its long-term assets and the amount of such impaiment
by comparing  anticipated  undiscounted  future  operating  income from acquired
business  units with the  carrying  value of the related  goodwill.  The factors
considered by management in performing this assessment include current operating
results, trends and prospects, as well as the effects of demand, competition and
other economic factors.

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

                                       24
<PAGE>

extensions of credit, maintaining reserves for potential credit losses, and such
losses have been within management's expectations.

Also,  the  Company's  international  sales are  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.  Substantially
all of the Company's cash is deposited in a single bank.

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.

RECLASSIFICATIONS
Certain amounts in the financial  statements  have been  reclassified to conform
with the current year's presentation.

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.  Seller  financing in the amount of $946 was paid off in 1997.  The
transaction was accounted for as a purchase and results of operations  since the
acquisition date are included in the consolidated statements of income.

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.       OTHER ASSETS

At December 31, 1998 and 1997 Other Assets includes a mortgage receivable in the
amount of $831 and $842,  respectively.  In April 1996,  the Company  issued the
mortgage  related  to the sale of its former  operating  facility  in  Weymouth,
Massachusetts  and retained an  environment  liability  present at the site. The
mortgage  receivable  matures on September 1, 2023,  and  principal and interest
payments of

                                       25
<PAGE>

approximately  $6 are due monthly (see note 10 Commitments  and  Contingencies).
The Company  earns  interest on the  mortgage  receivable  at a rate of 8.0% per
annum and interest  income for the years ended December 31, 1998,  1997 and 1996
amounted to $63, $61, and $41, respectively.

5.       STATEMENTS OF CASH FLOWS
                                                         Years ended December 31
                                                        ------------------------
                                                          1998     1997     1996
         -----------------------------------------------------------------------
         CASH PAID DURING PERIOD FOR:
                  Interest                              $  842   $1,063   $1,392
                  Taxes                                     --    1,227      736
         -----------------------------------------------------------------------
         NON CASH ACTIVITY:
                  TDI note payable                          --       --      946
                  Building sold in exchange
                   for note receivable                      --       --      858
         =======================================================================

6.       INVENTORIES
                                                                  December 31
                                                           ---------------------
                                                               1998        1997
         -----------------------------------------------------------------------
         Raw materials                                     $  3,595    $  6,239
         Work in progress                                    10,936      17,065
         Finished goods                                         279         484
                                                           ---------------------
                                                             14,810      23,788
           Less: unliquidated progress payments              (3,452)     (3,583)
                                                           ---------------------
                                                           $ 11,358    $ 20,205
         =======================================================================

7.       PROPERTY, PLANT AND EQUIPMENT
                                                                  December 31
                                                           ---------------------
                                                               1998        1997
         -----------------------------------------------------------------------
         Land                                              $    992    $    992
         Building and improvements                            9,986       9,793
         Machinery and equipment                             25,570      25,636
         Furniture and fixtures                               3,025       2,753
                                                           ---------------------
                                                             39,573      39,174
         Less accumulated depreciation                      (24,638)    (22,774)
                                                           ---------------------
         Net property, plant and equipment                 $ 14,935    $ 16,400
         =======================================================================

8.       ACCRUED EXPENSES
                                                                  December 31
                                                           ---------------------
                                                               1998        1997
         -----------------------------------------------------------------------
         Accrued payroll & employee benefits                 $2,248      $1,939
         Accrued vacation                                     1,129       1,164
         Accrued warranty                                     1,249         772
         Accrued commissions                                    934         993
         Other accrued expenses                               1,896       1,752
         -----------------------------------------------------------------------
                                                             $7,456      $6,620
         =======================================================================

                                       26
<PAGE>

9.       LONG-TERM DEBT AND NOTES PAYABLE
                                                               December 31
                                                         -----------------------
                                                             1998          1997
         -----------------------------------------------------------------------
         Massachusetts Industrial Revenue Bond,
           maturing in 2009, interest at 62% of
           the prime rate plus 1/2% effective
           interest rate of 4.6% and 4.7%, payable
           in annual principal payments of $80           $    808      $    888
         Bank revolving credit facility                     4,000         7,000
         Bank real estate term loan facility                5,600         6,000
         -----------------------------------------------------------------------
                                                           10,408        13,888
         Less: current maturities                            (480)         (480)
         -----------------------------------------------------------------------
                                                         $  9,928      $ 13,408
         =======================================================================

The Massachusetts  Industrial Revenue Bond is collateralized by real estate with
a net book value of $1,384 at December 31, 1998.

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.
In the event that the  facility  is not  extended or  renegotiated,  any amounts
borrowed would become due at the  expiration  date, as a result all amounts have
been classified as long-term.  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, 1998 and 1997,  the weighted  average  interest  rate was 7.14% and
7.57%  respectively.  The  Company  also pays a quarterly  commitment  fee at an
annual rate of 3/8% on the amount of the unused  facility.  After  reduction for
outstanding letters of credit under the Revolver,  the Company has approximately
$11,000 available as of December 31, 1998.

The Real Estate Loan is  collateralized  by real estate with a net book value of
$5,127 at December 31, 1998.  Maturing in January 2003,  the Real Estate Loan is
payable in quarterly  principal  payments of $100,  plus  interest at the bank's
base rate (7.75% at December 31, 1998),  with the last installment  equal to the
remaining unpaid loan balance.

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 and, if not corrected,
could  accelerate the maturity of any borrowings  outstanding.  At various dates
throughout the year the Company was not in compliance with certain covenants and
the Company  obtained waivers with respect to such  non-compliance.  The Company
was in compliance  at year end December 31, 1998.  The Company and its bank have
amended the loan  agreement as of October 22,  1998.  Among other  changes,  the
amendment  increases the interest  charged on the revolving  credit facility and
the real estate term loans from the bank's base rate to base rate plus 1/2%. The
amount available for current  borrowing is calculated on the Company's  eligible
receivables  as defined in the  agreement  but not to exceed $15  million.  This
provision is not  anticipated  to have a material  impact on the Company's  cash
requirements in the foreseeable future.

                                       27
<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
which are inflationary in nature,  renewals and purchase options and the Company
is generally  responsible for taxes,  maintenance and repairs.  Aggregate rental
expense included in operations amounted to $907 in 1998, $1,256 in 1997 and $915
in 1996.  Future minimum lease payments under  noncancellable  operating  leases
with an initial term exceeding one year are as follows:

                   1999             $ 841
                   2000               845
                   2001               879
                   2002               878
                   2003               721


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 at 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
exactly 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 1998 the Company took a charge for
environmental   remediation  costs  due  to  a  settlement  with  the  State  of
Massachusetts  and a revision to its estimates for future  remediation  costs at
the site.

During  1997,  the  Company  received  funds from a third  party in return for a
complete release from liability for any  responsibility  for the  contamination.
This $350 thousand  settlement  has been  included in the Company's  accrual for
remediation.

Sunnyvale Indemnification Claim:
A third  party has  filed a 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  indemnification  claim  was  recently
dismissed at the trial level, but may be the subject of an eventual appeal.  The
Company  believes the  dismissal  will be upheld and also has  counterclaims  it
continues to assert.  The Company also  believes  that the ultimate  disposition
will not materially affect its financial position or results of operations.

DeCoursey v. Signal Technology Corporation:
This  purported  class action was filed on August 25, 1998 in the United  States
District Court for the District of Massachusetts. The Complaint alleges that the
Company and its former chief  executive  officer,  Dale  Peterson,  violated ss.
10(b) of the Security Exchange Act of 1934 and Rule 10b-5 and seeks

                                       28
<PAGE>

monetary  damages.  The Complaint  alleges that various public statements by the
Company  during  1997 and 1998 were false or  misleading  as a result of alleged
accounting irregularities. The Company intends to defend the matter fully.

L3 Communications Corporation v. Signal Technology Corporation, et al:
This case was filed on September 3, 1998 in the Superior Court in Fulton County,
Georgia.   The  Complaint   alleges  that  certain   former   employees  of  L-3
Communications   now  working  for  the   Company   unlawfully   misappropriated
confidential  and  trade  secret  information  on  behalf  of  the  Company  and
unlawfully induced other L-3 Communications  employees to join the Company.  L-3
Communications  has brought claims for civil conspiracy,  tortious  interference
with  prospective and contractual  relations,  under both the Georgia  Deceptive
Trade  Practices  Act and the  Uniform  Trade  Secrets  Act and  seeks  monetary
damages.  The case is in the initial  stages.  The Company intends to defend the
matter fully.

T-3 Contract:
The  Company  is  currently  committed  to a long term  contract  at its  Keltec
division (the T-3 contract) for  amplifiers for Raytheon.  The current  contract
value is $764. If Raytheon  exercises all of its options  within this  contract,
the total  value  could be in  excess  of  $19,000.  Based on an  assessment  by
management in 1998, if all options are exercised at current  estimated costs and
prices,  the  Company's  loss  could  total up to  $4,000.  In 1999 the  Company
negotiated new prices and  specifications  for the same  amplifiers  under a new
contract and the Company believes prices are at Keltec's manufacturing cost. The
Company  believes that other future orders and options for T-3 amplifliers  will
be renegotiated.

                                       29
<PAGE>

11.      INCOME TAXES

                                                     Years ended December 31
                                                   1998        1997        1996
--------------------------------------------------------------------------------
Current (benefit) provision
     Federal                                    $(1,121)    $  (717)    $ 1,269
     State                                            0           0         174
--------------------------------------------------------------------------------
Deferred (benefit) provision
     Federal                                       (936)        317        (430)
     State                                         (480)         63         196
--------------------------------------------------------------------------------
Less: Valuation allowance
     Federal                                      1,544           0           0
     State                                          669           0           0
--------------------------------------------------------------------------------
(Benefit) provision for income taxes            $  (324)    $  (337)    $ 1,209
================================================================================

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

<TABLE>
<CAPTION>
                                                        Years ended December 31
                                                        1998      1997      1996
--------------------------------------------------------------------------------
<S>                                                    <C>       <C>        <C>  
Statutory federal income tax rate                      (34.0)%   (34.0)%    34.0%
State income taxes, net of federal benefit              (4.2)     (7.8)      7.4
Benefit from foreign sales corporation                            --        (2.4)
Non-deductible expenses and other                        4.4       7.9       2.6
Change in valuation allowance                           29.5      --        --
--------------------------------------------------------------------------------
     EFFECTIVE TAX RATE                                 (4.3)%   (33.9)%    41.6%
================================================================================
</TABLE>

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
                                                            --------------------
                                                              1998          1997
--------------------------------------------------------------------------------
Deferred tax asset:
     Net operating losses and credits                       $  972        $  317
     Vacation accrual                                          293           417
     Inventories                                               792           776
     Warranty                                                  222           306
     Deferred compensation                                     267           243
     Environmental reserve                                     388            --
     Contract reserves                                         419            --
     Other                                                     422           268
--------------------------------------------------------------------------------
Gross deferred tax asset                                     3,775         2,327
Less: valuation allowance                                    2,213            --
--------------------------------------------------------------------------------
Net deferred tax asset                                      $1,562        $2,327
Deferred tax liability:
     Depreciation                                           $1,562        $1,527
-------------------------------------------------------------------------------
Deferred tax liability                                      $1,562        $1,527
================================================================================

The Company has  provided a valuation  allowance  for the full amount of its net
deferred  tax assets at December  31,  1998 since  realization  of these  future
benefits is not sufficiently assured.

                                       30
<PAGE>

As of December 31, 1998,  the Company has federal and state net  operating  loss
carry forwards of $7,140 which expire at various dates through 2019.

12.      STOCKHOLDERS' EQUITY

The Company has stock option plans (the "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 in increments  and over periods  determined  by the Company's  Compensation
Committee and expire not more than ten years from date of grant. At December 31,
1998,  1,254 shares of common stock were reserved for future  issuance under the
plans and 126 were  available  for  future  grant.  Additionally,  non-qualified
options to purchase a total of 50 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 2003.

Information concerning the Plans and non-qualified stock options is as follows:

                          Available    Option      Option Price    Weighted Avg.
                          for Grant    Shares        per Share    Exercise Price
--------------------------------------------------------------------------------
December 31, 1995            109       1,180       $1.57 - $7.25      $2.82
Options granted             (187)        187        5.25 -  8.25       7.09
Options canceled              80        (102)       1.80 -  8.25       4.09
Options exercised             --        (223)       1.57 -  4.75       1.96
Increase in available
  options, 1992 Plan         500          --          --      --         --
--------------------------------------------------------------------------------
December 31, 1996            502       1,042        1.57 -  8.25       3.65
Options granted             (175)        250        4.94 -  7.63       6.96
Options canceled             238        (238)       4.25 -  8.25       5.19
Options exercised             --        (246)       1.57 -  5.75       2.31
--------------------------------------------------------------------------------
December 31, 1997            565         808        1.57 -  8.25       4.63
--------------------------------------------------------------------------------
Options granted             (656)        656        2.50 -  6.25       2.82
Options canceled             217        (249)       2.36 -  8.25       6.65
Options exercised             --         (37)       1.58 -  5.75       2.00
--------------------------------------------------------------------------------
December 31, 1998            126       1,178       $1.58 - $8.25      $3.27
--------------------------------------------------------------------------------

A total of 544 options were exercisable at December 31, 1998.
A total of 488 options were exercisable at December 31, 1997.
A total of 683 options were exercisable at December 31, 1996.

                                       31
<PAGE>

The  following  table  summarizes  information  with  respect  to stock  options
outstanding as of December 31, 1998:

<TABLE>
<CAPTION>
    Range of        Outstanding   Weighted-Average   Weighted-Average   Exercisable   Weighted-Average
 Exercise Prices        as of        Remaining        Exercise Price       as of       Exercise Price
                      12/31/98    Contractual Life                       12/31/98
------------------------------------------------------------------------------------------------------
<S>                     <C>             <C>              <C>                <C>           <C>
$1.5700 - $1.8000       283             1.1              $1.6221            283           $1.6221
$2.0000 - $3.9400       611             4.9               2.5130            139            2.4908
$4.1880 - $5.7500        47             2.5               4.9485             21            4.7728
$6.0600 - $7.0000       170             3.5               6.2960             74            6.2797
$7.2500 - $8.2500        67             2.8               7.8163             27            7.8602
------------------------------------------------------------------------------------------------------
Total                 1,178             3.6                                 544           $2.9076
======================================================================================================
</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:

                                              1998       1997        1996
                                           ---------   ---------   ---------
                Risk-free Interest Rates      5.3%       6.2%        6.2%
                Expected Life              4.5 years   4.4 years   4.7 years
                Volatility                    0.65       0.65        0.70
                Dividend Yield                 --         --           -

The weighted  average fair value of those options granted in 1998, 1997 and 1996
was $1.60, $4.03 and $4.51 respectively.

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

(amounts in thousands except per share data)
--------------------------------------------
                                                 1998         1997         1996
                                            ------------------------------------
Net income (loss) -  proforma               $  (7,821)   $  (1,102)   $   1,498
Net income (loss) per share - proforma
         Diluted                            $   (1.06)   $   (0.15)   $    0.20
--------------------------------------------------------------------------------

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

                                       32
<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:

                                             1998         1997         1996
                                          ---------------------------------
Numerator - Basic and Diluted EPS
  Net income (loss)                       $(7,173)     $  (657)     $ 1,698

Denominator - Basic EPS
  Common shares outstanding                 7,365        7,268        7,076
                                          -------      -------      -------
  Basic earnings (loss) per share         $ (0.97)     $ (0.09)     $  0.24
                                          =======      =======      =======

Denominator - Diluted EPS
  Denominator - Basic EPS                   7,365        7,268        7,076

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

Denominator - Diluted EPS                   7,365        7,268        7,676
                                          -------      -------      -------
  Diluted earnings (loss) per share       $ (0.97)     $ (0.09)     $  0.22
                                          =======      =======      =======

As of December 31, 1998 and 1997 the number of dilutive  shares was 238 and 423,
respectively and such shares have not been included in above calculations as the
effect would be anti-dilutive.

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 $378 in 1998, $401 in 1997 and
$164 in 1996.

The Company has an Employee  Stock  Purchase  Plan ("the  Purchase  Plan") under
which 300  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 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 on June 30, 1999
unless its term is  extended.  In fiscal  1998,  42 shares were issued under the
Purchase Plan.

15.      SEGMENT INFORMATION

The  Company is engaged  in the  engineering,  manufacturing  and  marketing  of
electronic components and subsystems.  The company has five operating divisions;
referred to as Arizona, California, Systems, Keltec and Olektron and reports its
operations within three segments:  Microwave Components and Subsystems (Arizona,
California and Systems),  Power Management Products (Keltec) and Radio Frequency
(RF) Components and Subsystems  (Olektron).  The operations  aggregated into the
Microwave  Components and Subsystems  segment have similar products,  production
processes and types of customers.

                                       33
<PAGE>

The Company's reportable segments are as follows:

MICROWAVE COMPONENTS AND SUBSYSTEMS
Engaged  in the design  and  manufacture  of  microwave  oscillators,  frequency
synthesizers and converters,  space qualified  microwave  assemblies,  microwave
amplifiers and microwave switch matrices.

POWER MANAGEMENT PRODUCTS
Engaged in the design and  manufacture  of military  high and low voltage  power
supplies,   DC  to  DC  converters  and  military  high  power   amplifiers  and
transmitters for use in radar systems.

RADIO FREQUENCY (RF) COMPONENTS AND SUBSYSTEMS
Engaged  in the design  and  manufacture  of radio  frequency  and  intermediate
frequency signal processing components,  integrated  multi-function devices, and
switching systems for the Space, Telecommunications and Military markets.

The accounting  policies of the segments are the same as those  described in the
"Summary of Significant Accounting Policies". Segment data includes a charge for
allocating a portion of  corporate-headquarters  costs. The table below presents
selected financial data by business segment for the years ending December 31:

Selected Financial Data by Business Segment
(amounts in thousands)
                                               1998          1997          1996
-------------------------------------------------------------------------------
NET SALES
Microwave Components & Subsystems         $  51,858     $  59,362     $  65,757
Power Management Products                    24,262        25,298        29,788
RF Components & Subsystems                   15,963        17,579        17,519
                                          ---------     ---------     ---------
                                          $  92,083     $ 102,239     $ 113,064

OPERATING INCOME
Microwave Components & Subsystems         $   2,265     $   2,856     $   4,891
Power Management Products                    (7,401)       (3,676)         (612)
RF Components & Subsystems                    2,127         2,300         1,962
Other                                        (3,591)       (1,404)       (1,989)
                                          ---------     ---------     ---------
                                          $  (6,600)    $      76     $   4,252

TOTAL ASSETS
Microwave Components & Subsystems         $  22,890     $  29,799     $  32,583
Power Management Products                    12,173        20,129        16,834
RF Components & Subsystems                    7,110         7,170         5,248
Other                                         6,810         5,742        10,979
                                          ---------     ---------     ---------
                                          $  48,983     $  62,840     $  65,644

LONG-LIVED ASSETS
Microwave Components & Subsystems         $   1,103     $   1,316     $   1,530
Power Management Products                     1,272         1,443         1,644
RF Components & Subsystems                      130           165           200
                                          ---------     ---------     ---------
                                          $   2,505     $   2,924     $   3,374

                                       34
<PAGE>

DEPRECIATION EXPENSE
Microwave Components & Subsystems         $   1,709     $   2,000     $   2,037
Power Management Products                       865           835           656
RF Components & Subsystems                      405           432           508
Other                                            49            25           167
                                          ---------     ---------     ---------
                                          $   3,028     $   3,292     $   3,368

Net Sales by Customer Category

(amounts in thousands)                         1998          1997          1996
-------------------------------------------------------------------------------
U.S. GOVERNMENT MILITARY
Microwave Components & Subsystems         $  33,819     $  43,258     $  40,543
Power Management Products                    17,709        18,739        18,715
RF Components & Subsystems                   13,071        15,120        15,205
                                          ---------     ---------     ---------
                                          $  64,599     $  77,117     $  74,463

U.S. GOVERNMENT NON-MILITARY
Microwave Components & Subsystems         $     949     $     348     $   2,620
Power Management Products                        --            --            22
RF Components & Subsystems                      313           444           346
                                          ---------     ---------     ---------
                                          $   1,262     $     792     $   2,988

U.S. COMMERCIAL
Microwave Components & Subsystems         $   6,485     $   6,107     $  12,674
Power Management Products                       179           515         3,607
RF Components & Subsystems                      975           888         1,160
                                          ---------     ---------     ---------
                                          $   7,639     $   7,510     $  17,441

INTERNATIONAL MILITARY
Microwave Components & Subsystems         $   9,389     $   8,340     $   7,352
Power Management Products                     5,926         5,109         3,542
RF Components & Subsystems                    1,374           971           449
                                          ---------     ---------     ---------
                                          $  16,689     $  14,420     $  11,343

INTERNATIONAL COMMERCIAL
Microwave Components & Subsystems         $   1,216     $   1,376     $   3,219
Power Management Products                       448           807         3,294
RF Components & Subsystems                      230           217           316
                                          ---------     ---------     ---------
                                          $   1,894     $   2,400     $   6,829
                                          ---------     ---------     ---------
Total                                     $  92,083     $ 102,239     $ 113,064


SIGNIFICANT CUSTOMER
Revenue of  approximately  $21,474  (23%),  $20,456  (20%) and $25,133 (22%) was
attributable to Raytheon Company for the years ended December 31, 1998, 1997 and
1996,  respectively.  At December 31, 1998 and 1997,  accounts  receivable  from
Raytheon  Company  accounted  for  approximately  $2,447 (19%) and $2,927 (18%),
respectively, of the total amount of accounts receivable due to the Company.

                                       35
<PAGE>

16.      UNAUDITED QUARTERLY FINANCIAL INFORMATION

The following quarterly financial information should be read in conjunction with
Note 1a and 1b. The first three  quarters in each year consist of thirteen  week
periods with the fourth quarter ending on December 31.

<TABLE>
<CAPTION>
                                          First     Second       Third      Fourth
1998:                                    Quarter    Quarter     Quarter     Quarter
-----------------------------------------------------------------------------------
<S>                                     <C>        <C>         <C>         <C>
Net sales                               $ 23,687   $ 22,190    $ 22,766    $ 23,440
Gross profit                               5,503     (3,315)      5,903       5,789
Operating income                             593     (8,049)        286         570
Net income (loss)                            203     (7,832)         85         371
Net income (loss) per share:
     Basic                              $   0.03   $  (1.07)   $   0.01    $   0.05
     Diluted                            $   0.03   $  (1.07)   $   0.01    $   0.05
Shares used in calculating Net income
  (loss) per share:
     Basic                                 7,411      7,335       7,349       7,349
     Diluted                               7,663      7,335       7,618       7,480
-----------------------------------------------------------------------------------
1997:
-----------------------------------------------------------------------------------
Net sales                               $ 26,881   $ 25,713    $ 25,312    $ 24,333
Gross profit                               5,222      4,197       2,734       5,839
Operating income (loss)                      523       (435)     (1,360)      1,348
Net income (loss)                            211       (419)       (983)        534
Net income (loss) per share:
     Basic                              $   0.03   $  (0.06)   $  (0.14)   $   0.07
     Diluted                            $   0.03   $  (0.06)   $  (0.14)   $   0.07
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
-----------------------------------------------------------------------------------
</TABLE>

Net sales and net income (loss) 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.

                                       36
<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Stockholders
Signal Technology Corporation


         In our opinion,  the consolidated  financial  statements  listed in the
index appearing under Item 14(a) present fairly, in all material  respects,  the
financial  position of Signal  Technology  Corporation  and its  subsidiaries at
December 31, 1998 and 1997,  and the results of their  operations and their cash
flows for each of the three years in the period  ended  December  31,  1998,  in
conformity with generally accepted accounting  principles.  In addition,  in our
opinion,  the financial  statement  schedule listed in the index appearing under
Item 14(a) presents fairly, in all material respects,  the information set forth
therein  when  read in  conjunction  with  the  related  consolidated  financial
statements.  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 of these  statements  in  accordance  with
generally accepted auditing standards which 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,
assessing the  accounting  principles  used and  significant  estimates  made by
management,  and evaluating the overall  financial  statement  presentation.  We
believe  that our audits  provide a reasonable  basis for the opinion  expressed
above.


Boston, Massachusetts                            PricewaterhouseCoopers LLP
February 16, 1999

                                       37
<PAGE>

ITEM 9.           CHANGES IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS ON ACCOUNTING
                  AND FINANCIAL DISCLOSURE

                  None
--------------------------------------------------------------------------------

                                                 PART III

ITEM 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

ITEM 11.          EXECUTIVE COMPENSATION

ITEM 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

All information  required by Items 10, 11, 12 and 13 is  incorporated  herein by
reference to the Company's  definitive proxy statement for its annual meeting of
stockholders to be held on May 4, 1999,  which will be filed with the Securities
and Exchange Commission pursuant to Regulation 14A.

                                       38
<PAGE>

                                     PART IV

ITEM 14.          EXHIBITS,  FINANCIAL  STATEMENT  SCHEDULES AND REPORTS ON FORM
                  8-K

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

                                                                            Page


         Financial  Statements for the Years Ended  December 31, 1998,
         1997 and 1996:
              Consolidated Statements of Operations                        18
              Consolidated Balance Sheets                                  19
              Consolidated Statements of Stockholders' Equity              20
              Consolidated Statements of Cash Flows                        21

         Notes to Consolidated Financial Statements                        22

         Report of Independent Accountants                                 37

         Schedule II       Valuation and Qualifying Accounts               43

         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. *****

                                       39
<PAGE>

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

10.23    Amendment  agreement No.2 to the Second  Amendment and Restated  Credit
         Agreement dated as of September  30,1993,  with the First National Bank
         of Boston, dated as of September 30, 1995. *****
10.24    Amendment  agreement No. 3 to the Second  Amendment and Restated Credit
         Agreement, dated as of September 30, 1993, with the First National Bank
         of Boston, dated as of March 29, 1996. *******
10.25    Amendment  agreement No. 4 to the Second  Amendment and Restated Credit
         Agreement, dated as of September 30, 1993, with the First National Bank
         of Boston, dated as of March 10, 1997. *******
10.26    Asset Purchase  Agreement by and between Transistor Devices Inc. and ST
         Keltec  Corporation,  a wholly owned  subsidiary  of Signal  Technology
         Corporation, dated as 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.
10.33    Sublease  Agreement  as of  October  1, 1998 by and  between  Copyright
         Clearance Center, Inc. and Signal Technology Corporation.
10.34    Amendment  Agreement  No.  6 to  Second  Amended  and  Restated  Credit
         Agreement,  dated as of September  30,  1993,  with  BankBoston,  N.A.,
         formerly know as the First National Bank of Boston, dated as of October
         20, 1998.
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.

                                       40
<PAGE>

*******  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

                                       41
<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/  Robert Nelsen
                        --------------------------------------------------------
                        Chief Financial Officer and Principle Accounting Officer

Date:  March 30, 1999

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/  George E. Lombard                                   March 30, 1999
------------------------------------------------
Chairman, Chief Executive Officer and Principle
Executive Officer


/s/  Robert Nelsen                                       March 30, 1999
------------------------------------------------
Chief Financial Officer and Principle Accounting
Officer


/s/  Bernard P. O'Sullivan                               March 30, 1999
------------------------------------------------
Bernard P. O'Sullivan
Director


/s/  Harvey C. Krentzman                                 March 30, 1999
------------------------------------------------
Harvey C. Krentzman
Director


/s/  Joseph S. Schneider                                 March 30, 1999
------------------------------------------------
Joseph S. Schneider
Director


/s/  Larry L. Hansen                                     March 30, 1999
------------------------------------------------
Larry L. Hansen
Director

                                       42
<PAGE>
SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                       Years ended December 31, 1998, 1997 and 1996
--------------------------------------------------------------------------------------------
                          Balance at       Charges to        Charged to           Balance at
                          Beginning        Costs and           Other                 End
Description               of Period         Expenses          Accounts            of Period
--------------------------------------------------------------------------------------------
<S>                      <C>              <C>               <C>         <C>      <C>
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
--------------------------------------------------------------------------------------------
1997

Inventory reserve          2,384,000        1,933,000        (2,588,000)(2)        1,729,000

Allowance for
  doubtful accounts          170,000           (8,000)           (3,000)(1)          159,000
--------------------------------------------------------------------------------------------
1998

Inventory reserve          1,729,000        5,823,000        (1,624,000)(2)        5,928,000

Allowance for
  doubtful accounts          159,000          196,000           (23,000)(1)          332,000
--------------------------------------------------------------------------------------------
</TABLE>

Notes
(1) Write-off of bad debts
(2) Charged to inventory accounts from previously established reserve amounts.

                                       43