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

  [X] Annual Report Pursuant to Section 13 or 15(d) of the Exchange Act of 1934
                   For the fiscal year ended December 31, 1997

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

                        Commission file number 000-21770

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

           Delaware                                            04-2758268
(State or other jurisdiction of                             (I.R.S. employer 
 incorporation or organization)                             identification no.)
                                           
    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 18, 1998,  the aggregate  fair value of the  Registrant's  Common Stock
held by non-affiliates was $30,589,400.  On March 18, 1998, there were 7,380,007
shares of the Registrant's Common Stock issued and outstanding.

                       Documents Incorporated By Reference

Part  III  incorporates  information  by  reference  from the  definitive  Proxy
Statement in connection with the Registrant's  Annual Meeting of Shareholders to
be held on May 5, 1998.  Certain exhibits are incorporated by reference from the
Registrant's  Registration Statement on Form S-1, as amended (File No. 33-61124)
and Form 8-K dated November 24, 1993.


<PAGE>


                 Signal Technology Corporation and Subsidiaries

                      INDEX TO ANNUAL REPORT ON FORM 10-K/A


                                     PART I
                                                                            Page
                                                                            ----
Item 1:    Business                                                            3
Item 2:    Properties                                                          8
Item 3:    Legal Proceedings                                                   9
Item 4:    Submission of Matters to a Vote of Security Holders                10

                                     PART II

Item 5:    Market for the Registrant's Common Equity and 
               Related Stockholder Matters                                    10
Item 6:    Selected Consolidated Financial Data                               11
Item 7:    Management's Discussion and Analysis of 
               Financial Condition and Results of Operations                  12
Item 8:    Financial Statements and Supplementary Data                        15
Item 9:    Changes in and Disagreements with Accountants on
                Accounting and Financial Disclosure                           32

                                    PART III

Item 10:   Directors and Executive Officers of the Registrant                 33
Item 11:   Executive Compensation                                             33
Item 12:   Security Ownership of Certain Beneficial Owners and Management     33
Item 13:   Certain Relationships and Related Transactions                     33

                                     PART IV

Item 14:   Exhibits, Financial Statement Schedules and Reports on Form 8-K    34
           Signatures                                                         36


                                       2
<PAGE>

                                     PART I

Note:  This Form 10-K/A for the year ended  December  31,  1997 is being  filed,
together  with Form 10-Q/A for the first quarter ended March 31, 1998 to reflect
restatements  of the  Company's  financial  statements  for the four quarters of
1996,  the four  quarters of 1997 and the first  quarter of 1998.  The items set
forth below are amended: Items 1,3,6,7,8 and 14(a).

Item I      Business

General

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

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

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

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

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

Products and Customers

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

                                       3
<PAGE>

investing in product design and engineering  capability and in  state-of-the-art
manufacturing and testing systems and processes.

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

<CAPTION>
                                                                         Year Ended December 31
                                    ------------------------------------------------------------------------------------------------
                                                 1997                             1996                             1995
                                            (As restated)                     (As restated)
                                    ------------------------------------------------------------------------------------------------
(dollars in thousands)                    $               %                $                %                 $              %
------------------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>            <C>               <C>             <C>                <C>             <C>  
Defense                                    $67,945        67  %             $73,266         65  %              $57,691         64  %
Space                                       10,602        10                  7,115          6                   3,675          4
Communication                               23,692        23                 32,683         29                  28,362         32
------------------------------------------------------------------------------------------------------------------------------------
Total                                     $102,239       100  %            $113,064        100  %              $89,728        100  %
====================================================================================================================================
</TABLE>


Defense

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

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

Space

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

Communication

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

The Company's principal customers are prime contractors and military agencies of
the United States government and certain foreign  countries.  With the exception
of Raytheon Company,  which accounted

                                        4
<PAGE>

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

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

<CAPTION>
                                                                       Year Ended December 31
                                     --------------------------------------------------------------------------------------------
                                               1997                          1996                             1995
                                           (As restated)                (As restated)
                                     --------------------------------------------------------------------------------------------
(dollars in thousands)                     $            %             $               %                $                %
---------------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>           <C>           <C>             <C>               <C>              <C>  
U.S. government
      Military                             $77,117       65  %         $74,463         66    %           $62,682          70  %
      Non-Military                             792        1              2,988          3                  3,100           3
U.S. Commercial                              7,510       16             17,441         15                  9,211          10
International
      Military                              14,420       16             11,343         10                  9,742          11
      Commercial                             2,400        2              6,829          6                  4,993           6
---------------------------------------------------------------------------------------------------------------------------------
Total                                     $102,239      100  %        $113,064        100    %           $89,728         100  %
=================================================================================================================================
</TABLE>

Government Contracts

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

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

Sales and Marketing

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

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

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

Product Engineering, Manufacturing and Development

                                        5
<PAGE>

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

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

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

<CAPTION>
                                                                            Year Ended December 31
                                                   -------------------------------------------------------------------------
(dollars in thousands)                                           1997                    1996                    1995
----------------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>                     <C>                   <C>   
Company-funded                                                   $777                    $522                  $1,610
Customer-sponsored                                              1,787                   4,820                   3,602
----------------------------------------------------------------------------------------------------------------------------
Total                                                          $2,564                  $5,342                  $5,212
============================================================================================================================
</TABLE>

Sources of Raw Materials

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

Backlog

At December  31, 1997 and 1996,  the  Company  had a backlog of  unshipped  firm
orders of $88,699 and $89,063,  respectively. The Company expects to ship all of
the December 31, 1997 backlog  within  1998,  except for  approximately  $10,563
which will be shipped in later periods.

Competition

As a result of reduced defense spending by the United States government and many
of its  allies,  competition  has become  more  intense in all  markets  for the
Company's   products.   Competition  is  based   primarily  on  price,   product
performance,  reliability  and customer  support.  The Company  believes that it
competes effectively in all of these areas. The Company's continued success will
depend in part on its  ability  to  develop  and  introduce  low  cost,  quality
products that meet or exceed customers' specifications.

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

                                        6
<PAGE>

Employees

As of December 31, 1997, the Company had 817 full-time  employees at its various
divisions and subsidiaries.  No employees are represented by unions. The Company
believes its relations with its employees are satisfactory.

Patents

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

Government Regulation

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

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

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

                                       7
<PAGE>

Item 2   Properties

The Company's principal executive offices are located in 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 is triple net and expires in November
                      2003.  The current annual rent is $623,000 with an average
                      annual  escalation of approximately  6.6% through the term
                      of the lease.

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

Massachusetts:        The Company owns a modern  25,000  square foot building in
                      Webster  and a  modern  40,350  square  foot  building  in
                      Beverly.

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


                                       8
<PAGE>

Item 3   Legal Proceedings

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

Weymouth Environmental Contamination:

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

The Company is continuing to conduct investigations of the facility for soil and
groundwater contamination and operates a pilot remediation system in cooperation
with the DEP.  It is not  possible at this stage of the  proceedings  to predict
what additional remediation and the costs thereof, if any, will be required. The
Company has been informed by its insurers that no recovery of costs  incurred in
the  treatment of the ground water at the  facility is possible  under  existing
insurance arrangements.

During the year,  the Company  received funds from a third party in return for a
complete release from liability for any  responsibility  for the  contamination.
This $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 case was filed on August 25,
1998.  The  Complaint  alleges that the Company and its former  president,  Dale
Peterson,  violated ss. 10(b) of the Exchange Act and Rule 10b-5.  The Complaint
alleges that various public  statements by the Company during 1997 and 1998 were
false or misleading  arising from alleged  accounting  irregularities  that were
unreported.  The case is in the initial stages, and the Court has not designated
a lead  plaintiff  or  lead  law  firm as  required  by the  Private  Securities
Litigation  Reform  Act.  Until it does so, the  Company  has no  obligation  to
respond to the  Complaint.  At present it is too early to evaluate the merits of
the action or to predict  the  likelihood  of success.  The  Company  intends to
defend the matter fully.

L-3  Communications  Corporation v. Signal Technology  Corporation,  et al: This
case was filed on September 3, 1998.  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. The Company
denies the allegations. At present it is too early to evaluate the merits of the
action or to predict the  likelihood of success.  The Company  intends to defend
the matter fully.


                                       9
<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

<TABLE>
The Company's  Common Stock is listed on the American Stock  Exchange  ("AMEX"),
under the symbol  STZ.  Prior to its  listing on the AMEX in August,  1994,  the
Company's  Common  Stock  was  traded  in the  over-the-counter  market  and was
included in the NASDAQ National Market System under the trading symbol STCX. The
high and low sales prices for shares of the Company's  Common Stock for the past
two years were as follows:
<CAPTION>
                                                                    1997                                1996
                                                       -----------------------------------------------------------------------
                                                             High             Low              High                Low
------------------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>             <C>               <C>                <C>
First Quarter                                             $  8 7/16       $  6 1/2          $  7 7/8           $  5 1/4
Second Quarter                                               8 1/4           6 1/8             9 3/4              6 7/8
Third Quarter                                                7 5/8           5 5/8             7 7/8              5
Fourth Quarter                                               7               4 5/8             8 5/8              7 1/4
==============================================================================================================================
</TABLE>


There were  approximately  90 holders of record of the Company's Common Stock on
March 18, 1998.  The closing  price per share of the  Company's  Common Stock on
March 18,  1998 as  reported  on the AMEX was $6.00.  As of August 17,  1998 the
American  Stock  Exchange  halted  trading on the Company's  stock.  The Company
anticipates  trading to resume upon filing of the Company's Form 10-K /A for the
year  ending  December  31,  1997 and the  Company's  Form  10-Q/A for the first
quarter 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.


                                       10
<PAGE>


Item 6            Selected Consolidated Financial Data

<TABLE>

 SELECTED CONSOLIDATED FINANCIAL DATA                                                                           
 (in thousands, except per share amounts)                          -----------------------------------------------------------------
<CAPTION>
                                                                       1997          1996        1995           1994          1993  
                                                                   (As restated) (As restated)                                   
------------------------------------------------------------------------------------------------------------------------------------
OPERATIONS
<S>                                                                  <C>           <C>          <C>           <C>          <C>      
Net sales                                                            $ 102,239     $ 113,064    $  89,728     $  93,094    $  97,054
====================================================================================================================================
Operating income(1)                                                         76         4,252        1,040         6,685        8,337
Income (loss) before taxes                                                (994)        2,907         (123)        5,839        7,890
Net income (loss)                                                         (657)        1,698         (269)        3,562        4,930
Net income (loss) per share(1):
          Basic                                                          (0.09)         0.24        (0.04)         0.53         0.80
          Diluted                                                    $   (0.09)    $    0.22    $   (0.04)    $    0.48    $    0.70
------------------------------------------------------------------------------------------------------------------------------------
Shares used in calculating net income (loss) per share:
          Basic                                                          7,268         7,076        6,880         6,752        6,162
          Diluted                                                        7,268         7,676        6,880         7,362        6,997

         (1) In 1995,  includes  restructuring  expense of $779 or $ (0.07) per share.
====================================================================================================================================
FINANCIAL POSITION
Current assets                                                       $  42,670     $  47,096    $  46,421     $  39,216    $  33,756
Current liabilities                                                     13,631        16,065       15,682        12,035       15,459
Total assets                                                            62,840        65,644       66,117        58,431       55,124
Long-term debt, less current maturities                                 13,408        13,408       17,283        12,903       10,032
Total debt                                                              13,888        14,729       17,658        13,278       10,407
Stockholders' equity                                                    34,274        34,362       31,944        31,913       28,086
Shares outstanding at year-end                                           7,417         7,172        6,949         6,827        6,711
Book value per share                                                 $    4.62     $    4.79    $    4.60     $    4.67    $    4.19
------------------------------------------------------------------------------------------------------------------------------------
SELECTED DATA
New orders                                                           $ 101,875     $ 103,829    $ 110,656     $  90,249    $  78,109
Year-end backlog                                                     $  88,699     $  89,063    $  92,837     $  65,998    $  64,489
Employees at year-end                                                      817           993          894           854          996
Revenue per employee                                                 $     125     $     114    $     100     $     109    $      97
------------------------------------------------------------------------------------------------------------------------------------

</TABLE>

                                                                   11

<PAGE>

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

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 a result of an
investigation   by  corporate   management  with  the  aid  of  its  independent
accountants and outside counsel at its Keltec  Operation.  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.  The  consolidated
financial statements and related notes to consolidated  financial statements set
forth in this Form 10-K/A  reflect all such  restatements  through  December 31,
1997. A summary of the impact of such  restatements for the years ended December
31,  1997  and 1996 can be  found  in Note  1.(a) of the  Notes to  Consolidated
Financial Statements.

Overview

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

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

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

Net  sales  decreased  approximately  10% in  1997  compared  to  1996.  Backlog
decreased to $88.7  million 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, also its largest 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 as well as
management  turnover.  The Company has taken steps to correct the problems,  but
does not expect significantly improved results until 1999.

Net sales in 1996  compared to 1995  increased  approximately  26% overall.  Net
sales in defense electronic  applications increased 27% while net sales in Space
and  Communications  grew 94% and 15%  respectively.  High levels of bookings in
1995 and 1996 contributed to the sales growth.

Gross profit as a percentage of net sales  decreased to 17.6% in 1997 from 21.3%
in 1996.  Gross profit was adversely  affected by lower  shipment  levels at its
Keltec Operation and the costs associated with the inefficiency mentioned above.
Both the Keltec  Operation and Arizona  Operation  experienced  additional costs
associated with several development  contracts and contributed  significantly to
the decrease in gross profit.

                                       12
<PAGE>

From 1995 to 1996,  gross profit as a percentage of net sales dropped from 21.9%
to 21.3%.  The slight decrease in the gross profit  percentage can be attributed
to  higher  than  expected  costs on  development  contracts.  Higher  net sales
accounted for the increase in the amount of gross profit for 1996.

Selling,  general and  administrative expenses decreased to approximately  $17.1
million for the year ended  December  31,  1997 from $19.3  million for 1996 and
$16.2 million for 1995. As a percentage of sales,  these  expenses were 16.8% in
1997, 17.0% in 1996 and 18.1% in 1995. While net sales decreased 10% the Company
was able to obtain a slight  decrease in SG&A as a percentage of sales from 1996
to 1997 as a result of  administrative  cost  reductions,  primarily  in reduced
personnel.  The Company had a total of 817  employees  at the end of 1997 versus
993 at the end of 1996.

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

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

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

The benefit for income taxes in 1997 was $337  thousand on a pretax loss of $994
thousand.  The  effective tax rate was (33.9%) in 1997 compared to 41.6% in 1996
and 118.7% in 1995. In 1995,  the  effective tax rate was adversely  effected by
the  non-deductibility of goodwill and the restriction on carry forward of state
tax loses.

Liquidity and Capital Resources

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

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.

At  December  31,  1997,  the  Company  had  working  capital of $29.0  million,
including cash of $1.1 million, as compared to working capital and cash of $31.0
million and $1.9 million,  respectively at December 31, 1996. In 1997, additions
to  property,  plant  and  equipment  accounted  for  most of the  cash  used by

                                       13
<PAGE>

investing activities,  $5.4 million and includes  approximately $2.4 million for
the purchase of its Beverly  Massachusetts  facility,  formally under lease. The
Company had no expenditures  for acquisitions and related costs in 1997 and used
cash in 1996 and 1995 of $1 million and $4.1 million respectively.

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

                                       14
<PAGE>

Item 8            Financial Statements and Supplementary Data

<TABLE>

                 Signal Technology Corporation and Subsidiaries
                      Consolidated Statements of Operations


<CAPTION>
                                                               Year ended December 31,
                                                            1997         1996        1995
                                                            (As          (As
(amounts in thousands, except per share data)            restated)    restated)
-------------------------------------------------------------------------------------------
<S>                                                      <C>          <C>         <C>      
Net sales                                                $ 102,239    $ 113,064   $  89,728
Cost of sales                                               84,247       89,020      70,051
-------------------------------------------------------------------------------------------
Gross profit                                                17,992       24,044      19,677
Selling, general and administrative expenses                17,139       19,270      16,248
Research and development expenses                              777          522       1,610
Restructuring expense                                         --           --           779
-------------------------------------------------------------------------------------------
Operating income                                                76        4,252       1,040
Interest expense                                             1,070        1,345       1,163
-------------------------------------------------------------------------------------------
Income (loss) before income taxes                             (994)       2,907        (123)
-------------------------------------------------------------------------------------------
Provision (benefit) for income taxes                          (337)       1,209         146
-------------------------------------------------------------------------------------------
Net income (loss)                                        $    (657)   $   1,698   $    (269)
===========================================================================================

Net income (loss) per share
   Basic                                                 $    (0.09)  $    0.24   $   (0.04)
   Diluted                                               $    (0.09)  $    0.22   $   (0.04)
===========================================================================================

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

                                            15

<PAGE>

<TABLE>
                                        Signal Technology Corporation and Subsidiaries
                                                  Consolidated Balance Sheets


<CAPTION>
                                                                                                  December 31,

(dollar amounts in thousands)                                                             1997                   1996
                                                                                      (As restated)          (As restated)
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                        <C>                    <C>   
ASSETS
Current assets;
Cash                                                                                       $1,127                 $1,870
Accounts receivable, net of allowance for doubtful
     accounts of $159 in 1997 and $170 in 1996                                             15,901                 18,383
Inventories                                                                                20,205                 23,103
Deferred income taxes                                                                       2,327                  2,989
Other current assets                                                                        3,110                    751
------------------------------------------------------------------------------------------------------------------------------
Total current assets                                                                       42,670                 47,096
------------------------------------------------------------------------------------------------------------------------------

Property, plant and equipment, net                                                         16,400                 14,310
Intangibles assets, net                                                                     2,924                  3,374
Other assets                                                                                  846                    864
------------------------------------------------------------------------------------------------------------------------------
Total assets                                                                               62,840                 65,644
==============================================================================================================================

LIABILITIES
Current liabilities:
Current maturities of long-term debt                                                          480                  1,321
Accounts payable                                                                            5,354                  5,289
Accrued expenses                                                                            6,620                  8,112
Income taxes payable                                                                           --                    295
Customer advances                                                                           1,177                  1,048
------------------------------------------------------------------------------------------------------------------------------
Total current liabilities                                                                  13,631                 16,065
------------------------------------------------------------------------------------------------------------------------------
Deferred income taxes                                                                       1,527                  1,809
Long-term debt, net of current maturities                                                  13,408                 13,408
------------------------------------------------------------------------------------------------------------------------------

Commitments and contingencies (Note 10)

STOCKHOLDERS' EQUITY
Preferred  stock,  $0.01 par value;  5,000,000  shares  authorized;  none issued
Common stock, $0.01 par value; 30,000,000 authorized;
     7,423,040  shares in 1997 and 7,171,506 shares in 1996 issued and 7,417,040
     shares in 1997 and 7,171,506 shares
     in 1996 outstanding                                                                       74                     72
Additional paid-in-capital                                                                 12,693                 12,095
Retained earnings                                                                          21,538                 22,195
------------------------------------------------------------------------------------------------------------------------------
                                                                                           34,305                 34,362
Less treasury stock; 6,000 shares in 1997, at cost                                            (31)                    --
------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity                                                                 34,274                 34,362
Total liabilities and stockholder's equity                                                $62,840                $65,644
==============================================================================================================================
<FN>                                                                                                            
                     The accompanying notes are an integral part of the consolidated financial statements.
</FN>
</TABLE>


                                                              16
<PAGE>

<TABLE>
                                           Signal Technology Corporation and Subsidiaries
                                           Consolidated Statements of Stockholders' Equity
                                         
<CAPTION>
                                                       Years ended December 31, 1997, 1996 and 1995
                                ----------------------------------------------------------------------------------------------------
                                     Common Stock                                                   Treasury Stock   
                                ----------------------  Additional                               --------------------     Total
                                  Shares                 Paid-in       Unearned      Retained                Amount    Stockholders'
(dollar amounts in thousands)     Issued      Amount     Capital     Compensation    Earnings      Shares    at Cost      Equity
------------------------------------------------------------------------------------------------------------------------------------
<S>                              <C>          <C>        <C>          <C>            <C>             <C>     <C>         <C>       
December 31, 1994                6,826,592    $   68     $ 11,187     $     (108)    $ 20,766        --      $   --      $   31,913
Exercise of stock options          122,091         1          245                                                               246
Unearned compensation                                                         54                                                 54
Net loss                                                                               (269)                                 (269)
------------------------------------------------------------------------------------------------------------------------------------
December 31, 1995                6,948,683        69       11,432            (54)      20,497        --          --          31,944
Exercise of stock options          222,823         3          663                                                               666
Unearned compensation                                                         54                                                 54
Net income (restated)                                                                   1,698                                 1,698
------------------------------------------------------------------------------------------------------------------------------------
December 31, 1996 (restated)     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 (restated)                                                                      (657)                                 (657)
------------------------------------------------------------------------------------------------------------------------------------
December 31, 1997 (restated)     7,423,040    $   74     $ 12,693     $     --       $ 21,538    (6,000)     $  (31)     $   34,274
====================================================================================================================================
<FN>
                           
                        The accompanying notes are an integral part of the consolidated financial statements.
</FN>
</TABLE>
                                


                                                                 17


<PAGE>


<TABLE>
                 Signal Technology Corporation and Subsidiaries
                      Consolidated Statements of Cash Flows
                          (dollar amounts in thousands)
<CAPTION>
                                                                       Years ended December 31,
                                                                    1997       1996         1995
                                                                    (As        (As
                                                                 restated)   restated)
--------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S>                                                              <C>         <C>         <C>      
Net income (loss)                                                $   (657)   $  1,698    $   (269)
Adjustments to reconcile net income to net cash provided
        by operations:
  Depreciation                                                      3,292       3,368       3,527
  Amortization                                                        422         390         186
 (Gain) or Loss on disposal of property, plant and equipment .         10         (95)        (18)
  Unearned compensation                                              --            54          54
  Deferred taxes                                                      380        (186)        (58)
Changes in operating assets and liabilities:
  Accounts receivable                                               2,482      (2,400)        638
  Inventory                                                         2,898       3,941        --
  Other current assets                                             (2,359)        303         (95)
  Accounts payable                                                     65      (1,266)      1,997
  Accrued expenses                                                 (1,492)      2,820        (212)
  Income taxes payable                                               (295)      2,295         (40)
  Customer advances                                                   129      (2,808)        880
--------------------------------------------------------------------------------------------------
Net cash provided by operating activities                           4,875       6,114         813
--------------------------------------------------------------------------------------------------

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

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

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

<FN>
The accompanying notes are an integral part of the consolidated financial statements
</FN>
</TABLE>
                                              18




<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 a result of an
investigation   by  corporate   management  with  the  aid  of  its  independent
accountants and outside counsel at its Keltec  Operation.  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.  The  consolidated
financial statements and related notes to consolidated  financial statements set
forth in this Form 10-K/A  reflect all such  restatements  through  December 31,
1997. A summary of the impact of such  restatements for the years ended December
31, 1997 and 1996 is as follows:

<TABLE>
Consolidated Statements of Operations
-----------------------------------------------
(in thousands, except per share data)
<CAPTION>
                                                                Year ended                              Year ended
                                                             December 31, 1997                      December 31, 1996
                                                      Previously              As              Previously              As
                                                       Reported            Restated            Reported            Restated
                                                    ---------------     ----------------    ----------------    ---------------
<S>                                                       <C>                  <C>                 <C>                <C>     
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
</TABLE>

<TABLE>

Consolidated Balance Sheets
---------------------------------------------------
(in thousands)
<CAPTION>
                                                               Year ended                              Year ended
                                                             December 31, 1997                      December 31, 1996
                                                      Previously              As              Previously              As
                                                       Reported            Restated            Reported            Restated
                                                    ---------------     ----------------    ----------------    ---------------
<S>                                                        <C>                  <C>                 <C>                <C>    
Net inventories                                         $22,707              $20,205             $24,293            $23,103
Total current assets                                     44,212               42,670              48,043             47,096
Total assets                                             64,382               62,840              66,591             65,644
Retained earnings                                        23,080               21,538              22,742             22,195
Stockholders' equity                                     35,816               34,274              34,909             34,362
</TABLE>


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
aggressively marketing growth areas in defense, space and communication.

                                       19
<PAGE>

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

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

2.       SIGNIFICANT ACCOUNTING POLICIES

Basis of Consolidation

The consolidated  financial statements include the accounts of Signal Technology
Corporation and its wholly-owned  subsidiaries,  (collectively,  the "Company").
Intercompany accounts and transactions have been eliminated.

Use of Estimates

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

Revenue Recognition

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

Research and Development

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

Income Taxes

Deferred tax assets and liabilities consist of differences between the tax basis
of assets and liabilities and their basis for financial  reporting  purposes and
are measured based on the enacted tax rates and laws that will be in effect when
the differences are expected to reverse. Deferred tax assets are stated at their
estimated realizable value. The provision for income taxes consists of estimated
federal and state income taxes  currently  payable  adjusted for changes between
periods in the measurement of deferred tax assets and  liabilities.  Tax credits
are  recognized  as a reduction  of income tax expense in the years in which the
credits are utilized for tax purposes.

Earnings per Share

The Company has adopted the  provisions  of Statement  of  Financial  Accounting
Standards No. 128, Earnings Per Share ("SFAS 128") effective  December 31, 1997.
SFAS 128  requires  the  presentation  of

                                       20
<PAGE>

basic and diluted earnings per share ("EPS").  Basic EPS is computed by dividing
income available to common stockholders by the weighted average number of common
shares outstanding for the period.  Diluted EPS is computed giving effect to all
dilutive  potential  common  shares  that were  outstanding  during the  period.
Dilutive  potential  common  shares  consist of the  incremental  common  shares
issuable  upon the exercise of stock  options and warrants for all periods using
the treasury stock method. All prior period earnings per share amounts have been
restated to comply with the provisions of SFAS 128.

Inventories

Inventories  are  valued  at the  lower of  cost,  determined  by the  first-in,
first-out (FIFO) method,  or market,  and are presented net of progress payments
and foreseeable losses.

Property, Plant and Equipment

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

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

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

Intangible Assets

Intangible  assets consist  principally of goodwill which is being  amortized on
the straight  line basis over periods of five to twenty  years.  At December 31,
1997 and 1996 accumulated amortization was $1,311 and $888 respectively.

Concentrations of Risk

The market for the Company's  products is largely  dependent on the availability
of new contracts from U.S. Government  authorities to prime contractors to which
the Company provides  components.  Any decline in expenditure by U.S. government
authorities may have an adverse effect on the Company's  financial  performance.
The  Company  generally  extends  credit  to  these  customers  and,  therefore,
collection  of  receivables  is affected by the defense  industry  economy.  The
Company  closely  monitors  extensions  of  credit,   maintaining  reserves  for
potential  credit  losses,  and  such  losses  have  been  within   management's
expectations. Substantially all of the Company's cash is deposited with a single
bank.

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

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

                                       21
<PAGE>

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

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

Recent Pronouncements

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

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

Reclassifications

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

3.       ACQUISITIONS AND DISPOSALS

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

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

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

                                       22
<PAGE>

Assuming the acquisitions  described above had been made on January 1, 1996, the
Company's  unaudited proforma condensed results of operations would have been as
follows:

                                        1996                   1995
       -------------------------------------------------------------------
       Net sales                     $119,064              $100,258
       Net income                      $2,306                  $(81)
       Earnings per share
       Diluted                           $.30                $(0.01)

The proforma results have been prepared for comparative purposes only and do not
purport to be indicative of what would have occurred had the  acquisitions  been
made on January 1, 1996, or of results which may occur in the future.

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

4.       RESTRUCTURING

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


                                       23
<PAGE>

<TABLE>
5.       STATEMENTS OF CASH FLOWS
<CAPTION>
                                                                                           Years ended December 31
                                                                              --------------------------------------------------
                                                                                   1997             1996             1995
          ----------------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>              <C>              <C>
          Cash paid during period for:
                   Interest                                                       $1,063           $1,392           $1,135
                   Taxes                                                          $1,227             $736             $802
          ----------------------------------------------------------------------------------------------------------------------
          Non cash activity:
                   TDI note payable                                                                  $946
                   Forgiveness of Benecia Promising Note                                                            $1,800
                   Building sold in exchange for note receivable                                     $858
          ======================================================================================================================
</TABLE>

<TABLE>
6.        INVENTORIES
<CAPTION>
                                                                                                 December 31
                                                                              --------------------------------------------------
                                                                                        1997                      1996
                                                                                    (As restated)            (As restated)
          ----------------------------------------------------------------------------------------------------------------------
<S>                                                                                      <C>                      <C>   
          Raw materials                                                                  $6,239                   $8,225
          Work in progress                                                               17,065                   18,899
          Finished goods                                                                    484                      307
                                                                              --------------------------------------------------
                                                                                         23,788                   27,431
                   Less: unliquidated progress payments                                  (3,583)                  (4,328)
                                                                              --------------------------------------------------
                                                                                        $20,205                  $23,103
          ======================================================================================================================
</TABLE>


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


<TABLE>
8.       ACCRUED EXPENSES
<CAPTION>
                                                                                                 December 31
                                                                              --------------------------------------------------
                                                                                       1997                      1996
                                                                                                            (As restated)
          ----------------------------------------------------------------------------------------------------------------------
<S>                                                                                     <C>                       <C>   
          Accrued payroll & employee benefits                                           $1,939                    $2,151
          Accrued vacation                                                               1,164                     1,293
          Accrued warranty                                                                 772                       833
          Accrued commissions                                                              993                     1,275
          Other accrued expenses                                                         1,752                     2,560
          ----------------------------------------------------------------------------------------------------------------------
                                                                                        $6,620                    $8,112
          ======================================================================================================================
</TABLE>


                                       24
<PAGE>

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

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

The  Company  has a $15,000  unsecured  bank  revolving  credit  facility,  (the
"Revolver").  The  Revolver  expires in June 2000,  and amounts may be borrowed,
paid and reborrowed at the election of the Company through the expiration  date.
Amounts  available  under the  Revolver  are  reduced by actual  borrowings  and
outstanding letters of credit. The Company has the option of borrowing under one
or more differing  interest rate formulas and at December 31, 1997, the weighted
average interest rate was 7.57% and 7.81% at December 31, 1996. The Company also
pays a  quarterly  commitment  fee at  annual  rates  ranging  from 1/8% to 3/8%
depending  upon  the  amount  of  the  unused  facility.   After  reduction  for
outstanding  letters of credit under  the Revolver the company has approximately
$7,600 available.

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

The  Agreement  in respect of the Real  Estate  Loan and the  Revolver  contains
certain  covenants  related to  tangible  net worth and  interest  coverage,  as
defined.  Default  on any  covenant  may affect  the  commitment  by the bank to
continue to lend under the Agreement and, if not corrected, could accelerate the
maturity of any borrowings outstanding under the Agreement. At December 31, 1997
and at various dates  throughout the year the Company was not in compliance with
certain covenants. The Company has obtained waivers in respect of non-compliance
as of December 31, 1997.

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.


                                       25
<PAGE>

10.      COMMITMENTS AND CONTINGENCIES

The Company leases real estate and equipment under operating  leases expiring at
various dates through 2003. The leases include  provisions for rent  escalation,
renewals  and  purchase  options and the Company is  generally  responsible  for
taxes, maintenance and repairs.  Aggregate rental expense included in operations
amounted  to $1,256 in 1997,  $915 in 1996 and  $1,384 in 1995.  Future  minimum
lease  payments  under  noncancellable  operating  leases  with an initial  term
exceeding one year are as follows:

                          1998            $ 764
                          1999            $ 805
                          2000            $ 798
                          2001            $ 778
                          2002            $ 819

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

Weymouth Environmental Contamination:

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

The Company is continuing to conduct investigations of the facility for soil and
groundwater  contamination and operate a pilot remediation system in cooperation
with the DEP.  It is not  possible at this stage of the  proceedings  to predict
what additional remediation and the costs thereby, if any, will be required. The
Company has been informed by its insurers that no recovery of costs  incurred in
the  treatment of the ground water at the  facility is possible  under  existing
insurance arrangements.

During  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 breach of contract  suit against the Company  alleging
that it has a contractual  duty to indemnify the third party for costs  incurred
as a result of environmental contamination and subsequent remediation. The claim
is based upon allegations  that the Company assumed certain  liabilities when it
acquired one of the divisions of the third party. The 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 case was filed on August 25,
1998.  The  Complaint  alleges that the Company and its former  president,  Dale
Peterson,  violated ss. 10(b) of the Exchange Act and Rule 10b-5.  The Complaint
alleges that various public  statements by the Company during 1997 and 1998 were
false or misleading  arising from alleged  accounting  irregularities  that were
unreported.  The case is in the initial stages, and the Court has not designated
a lead  plaintiff  or  lead  law  firm as  required  by the  Private  Securities
Litigation  Reform  Act.  Until it does so, the  Company  has no  obligation  to

                                       26
<PAGE>

respond to the  Complaint.  At present it is too early to evaluate the merits of
the action or to predict  the  likelihood  of success.  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.  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. The Company
denies the allegations. At present it is too early to evaluate the merits of the
action or to predict the  likelihood of success.  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 thousand. If Raytheon exercises all of its options within
this  contract,  the total value could be in excess of $19 million.  Based on an
assessment  by  management  in the third  quarter of 1998,  if all  options  are
exercised at current estimated costs and prices,  the Company's loss could total
up to $4 million.

The Company is currently negotiating with Raytheon for changes that would reduce
costs or increase prices and, therefore,  any potential losses are not currently
estimable.  The Company is not accepting  options  against this  contract  until
mutually agreeable terms are reached with Raytheon.


                                       27
<PAGE>

<TABLE>
11.      INCOME TAXES

<CAPTION>
                                                                             Years ended December 31
                                                            1997                   1996                     1995
                                                        (As restated)         (As restated)
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                        <C>                     <C>                        <C>
Currently payable (refundable):
     Federal                                                $(717)                 $1,269                       --
     State                                                      0                     174                     $204
-----------------------------------------------------------------------------------------------------------------------------
Deferred:
     Federal                                                 (317)                   (430)                     (50)
     State                                                     63                     196                       (8)
=============================================================================================================================
Provision (benefit) for income taxes                        $(337)                 $1,209                     $146
=============================================================================================================================
</TABLE>


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

<CAPTION>
                                                                                 Years ended December 31
                                                            -----------------------------------------------------------------
                                                                    1997                   1996                  1995
                                                                (As restated)          (As restated)
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>                  <C>                    <C>      
Statutory federal income tax rate                                     (34.0)%             34.0%                   (34.0)%
State income taxes, net of federal benefit                             (7.8)               7.4                     86.3
Benefit from foreign sales corporation                                  ---               (2.4)                     ---
Non-deductible expenses and other                                       7.9                2.6                     66.4
=============================================================================================================================
     Effective tax rate                                               (33.9)%             41.6%                   118.7 %
=============================================================================================================================
</TABLE>

<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:

<CAPTION>
                                                                                     December 31
                                                               ---------------------------------------------------------
                                                                           1997                        1996
------------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>                          <C>
Net tax asset:
     Net operating losses                                                    $317
     Vacation accrual                                                         417                          $455
     Inventories                                                              776                         1,646
     Warranty                                                                 306                           331
     Deferred compensation                                                    243                           197
     Other                                                                    268                           360
------------------------------------------------------------------------------------------------------------------------
Total                                                                      $2,327                        $2,989
========================================================================================================================

Net tax liability:
     Depreciation                                                          $1,527                        $1,809
------------------------------------------------------------------------------------------------------------------------
Total                                                                      $1,527                        $1,809
========================================================================================================================
</TABLE>

                                       28
<PAGE>


12.      STOCKHOLDERS' EQUITY

The Company has stock option plans under which a maximum of 3,167 options may be
granted  generally  at prices not less than 100 percent of the fair market value
of the Company's common stock at the date of option grant.  Options vest ratably
over a four to five year  period and expire not more than ten years from date of
grant.  At December  31, 1997,  1,271  shares of common stock were  reserved for
future  issuance  under the  plans  and 565 were  available  for  future  grant.
Additionally,  non-qualified  options  to  purchase a total of 102 shares of the
Company's common stock have been granted to certain  non-employee  directors and
others.  These  options were  granted at the fair market value of the  Company's
common stock at the date of option grant, vest generally over a five year period
and expire between 1999 and 2002.

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

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

<CAPTION>
                                                     Available      Option      Option Price         Aggregate        Weighted Avg.
                                                     for Grant      Shares        per Share            Price         Exercise Price
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>          <C>       <C>          <C>            <C>            <C>  
December 31, 1994                                       172          1,269     $1.57  -     $7.25          $3,435         $2.71
Options granted                                        (138)           138      3.50  -      5.06             569          4.13
Options canceled                                         75           (105)     1.57  -      7.25            (427)         4.06
Options exercised                                       ---           (122)     1.57  -      2.36            (246)         2.02
------------------------------------------------------------------------------------------------------------------------------------
December 31, 1995                                       109          1,180      1.57  -      7.25           3,331          2.82
Options granted                                        (187)           187      5.25  -      8.25           1,325          7.09
Options canceled                                         80           (102)      1.80  -      8.25           (421)         4.09
Options exercised                                       ---           (223)      1.57  -      4.75           (436)         1.96
Increase in available options, 1992                     500            ---       ---          ---             ---           ---
   Plan
------------------------------------------------------------------------------------------------------------------------------------
December 31, 1996                                       502          1,042      1.57  -      8.25           3,799          3.65
Options granted                                        (175)           250      4.94  -      7.63           1,740          6.96
Options canceled                                        238           (238)     4.25  -      8.25          (1,233)         5.19
Options exercised                                         -           (246)     1.57  -      5.75            (568)         2.31
------------------------------------------------------------------------------------------------------------------------------------
December 31, 1997                                       565            808     $1.57  -     $8.25          $3,738         $4.63
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

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


                                       29
<PAGE>

<TABLE>
The  following  table  summarizes  information  with  respect  to stock  options
outstanding as of December 31, 1997:

<CAPTION>
         Range of              Outstanding       Weighted-Average         Weighted-Average        Exercisable      Weighted-Average
      Exercise Prices             as of        Remaining Contractual       Exercise Price            as of          Exercise Price
                                12/31/97               Life                                         12/31/97
------------------------------------------------------------------------------------------------------------------------------------

<S>  <C>            <C>              <C>                 <C>                    <C>                   <C>               <C>    
     $1.5700 -      $1.8000          311,020             2.2                    $1.6186               311,020           $1.6186
     $2.0000 -      $3.9400           34,832             3.9                     2.7707                22,332            2.3625
     $4.1880 -      $5.7500           84,750             2.0                     5.1852                50,500            5.2977
     $6.0600 -      $7.0000          200,000             4.2                     6.5078                52,500            6.2708
     $7.2500 -      $8.2500          177,000             3.2                     7.7116                51,750            7.5088
====================================================================================================================================

                                     807,602             3.0                    $4.5887               488,102           $3.1582
</TABLE>

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

<TABLE>
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:

<CAPTION>
                                                                 1997                   1996 and 1995
                                                          -------------------       ----------------------

<S>                                                              <C>                        <C> 
                      Risk-free Interest Rates                   6.2%                       6.2%
                      Expected Life                           4.4 years                   4.7 years
                      Volatility                                 0.65                       0.70
                      Dividend Yield                              --                         --
</TABLE>

The weighted  average fair value of those options granted in 1997, 1996 and 1995
was $4.03, $4.51 and $2.49 respectively.

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

<CAPTION>
    (amounts in thousands except per share data)
----------------------------------------------------------------------------------------------------------
                                                                       1997                  1996
                                                                     (As restated)          (As restated)
                                                                -------------------     -----------------
<S>                                                                <C>                   <C>            
    Net income (loss) -  proforma                                  $       (1,102)       $         1,498
    Net income (loss) per share - proforma
             (Basic) Diluted                                       $        (0.15)       $          0.20
----------------------------------------------------------------------------------------------------------
</TABLE>

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

                                       30
<PAGE>

13.      EARNING PER SHARE

<TABLE>
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:

<CAPTION>
                                                             1997                   1996                 1995
                                                      (As restated)          (As restated)
                                                      -------------------    -------------------    ---------------
<S>                                                                <C>                   <C>                 <C>   
Numerator - Basic and Diluted EPS
         Net income (loss)                                         $(657)                $1,698              $(269)

Denominator - Basic EPS
         Common shares outstanding                                 7,268                  7,076              6,880
                                                      -------------------    -------------------    ---------------
         Basic earnings (loss) per share                          $(0.09)                 $0.24             $(0.04)
                                                      ===================    ===================    ===============

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

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

Denominator - Diluted EPS                                          7,268                  7,676              6,880
                                                      -------------------    -------------------    ---------------
         Diluted earnings (loss) per share                        $(0.09)                 $0.22             $(0.04)
                                                      ===================    ===================    ===============
</TABLE>

14.      EMPLOYEE BENEFIT PLANS

The Company maintains a 401(k) plan covering substantially all of its employees.
Eligible  employees may  contribute up to 15% of their annual  compensation,  as
defined,  to this plan. The Company may also make a discretionary  contribution.
The Company's  contributions to this plan totaled $401 in 1997, $164 in 1996 and
$116 in 1995.

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

15.      SEGMENT INFORMATION

The Company is engaged in one industry segment:  the engineering,  manufacturing
and marketing of electronic  components and subsystems.  The Company distributes
its products  worldwide.  Export sales were $16,820 in 1997, $18,172 in 1996 and
$14,785 in 1995. One U.S.  customer  accounted for 20% of net sales in 1997, 22%
in 1996 and 14% in 1995.

                                       31
<PAGE>

16.      UNAUDITED QUARTERLY FINANCIAL INFORMATION

<TABLE>
The following quarterly financial information should be read in conjunction with
Notes 1 and 2. The first three  quarters in each year  consist of thirteen  week
periods with the fourth quarter ending on December 31.

<CAPTION>
       As Restated                                       First              Second             Third              Fourth
       1997:                                             Quarter            Quarter            Quarter            Quarter
       -------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>               <C>                <C>                 <C>          
       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
       -------------------------------------------------------------------------------------------------------------------------
       1996:
       -------------------------------------------------------------------------------------------------------------------------
       Net sales                                         $     22,048      $       26,437     $      31,395       $      33,184
       Gross profit                                             4,405               5,232             6,716               7,691
       Operating income                                            55                 729             1,384               2,084
       Net income (loss)                                         (168)                220               608               1,038
       Net income (loss) per share:
            Basic                                        $      (0.02)     $         0.03     $        0.09       $        0.15
            Diluted                                      $      (0.02)     $         0.03     $        0.08       $        0.13
       -------------------------------------------------------------------------------------------------------------------------
       Shares used in calculating
            Net income (loss per share):
            Basic                                               6,977               7,034             7,136               7,158
            Diluted                                             6,977               7,711             7,652               7,720
       -------------------------------------------------------------------------------------------------------------------------


                                       32
<PAGE>


       As Originally Reported

                                                         First              Second             Third              Fourth
       1997:                                             Quarter            Quarter            Quarter            Quarter
       -------------------------------------------------------------------------------------------------------------------------
       Net sales                                         $     27,082      $       25,474     $      25,639       $      24,084
       Gross profit                                             6,141               4,734             3,875               4,954
       Operating income                                         1,442                 102              (219)                463
       Net income (loss)                                          745                (107)             (320)                 20
       Net income (loss) per share:
           Basic                                         $       0.10      $        (0.01)    $       (0.04)      $        0.00
           Diluted                                       $       0.10      $        (0.01)    $       (0.04)      $        0.00
       Shares used in calculating
           Net income (loss per share):
           Basic                                                7,187               7,268             7,277               7,333
           Diluted                                              7,714               7,268             7,277               7,663
       -------------------------------------------------------------------------------------------------------------------------
       1996:
       -------------------------------------------------------------------------------------------------------------------------
       Net sales                                         $     22,048      $       27,371     $      31,624       $      33,198
       Gross profit                                             4,475               5,151             7,235               7,973
       Operating income                                           125                 648             1,903               2,366
       Net income (loss)                                         (155)                170               995               1,235
       Net income (loss) per share:
           Basic                                         $      (0.02)     $         0.02     $        0.14       $        0.17
           Diluted                                       $      (0.02)     $         0.02     $        0.13       $        0.16
       -------------------------------------------------------------------------------------------------------------------------
       Shares used in calculating
           Net income (loss per share):
           Basic                                                6,977               7,034             7,136               7,158
           Diluted                                              6,977               7,711             7,652               7,720
       -------------------------------------------------------------------------------------------------------------------------
</TABLE>

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



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

                  None

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

Item 10  Directors and Executive Officers of the Registrant

Item 11  Executive Compensation

Item 12  Security Ownership of Certain Beneficial Owners and Management

Item 13  Certain Relationships and Related Transactions


All information  required by Items 10, 11, 12 and 13 is  incorporated  herein by
reference to the Company's  definitive proxy statement for its annual meeting of
stockholders to be held on May 5, 1998,  which will be filed with the Securities
and Exchange Commission pursuant to Regulation 14A.


                                       33
<PAGE>

                                     PART IV

<TABLE>
Item 14  Exhibits, Financial Statement Schedules and Reports on Form 8-K
<CAPTION>
(a)(1)            Index to Financial Statements and Financial Statement Schedules                        Page

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

         Notes to Consolidated Financial Statements                                                       19

         Report of Independent Accountants                                                                37


         Schedule II       Valuation and Qualifying Accounts                                              38
</TABLE>

         All other schedules are omitted  because they are not  applicable,  not
         required under the instructions, or all the information required is set
         forth in the consolidated financial statements or notes thereto.

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

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

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

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

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

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

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

10.5     1992 Equity Incentive Plan of the Registrant.*

10.6     Signal Technology Corporation 401(k) Plan.*

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

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

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

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

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

                                       34
<PAGE>

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. *****

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

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

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

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

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

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

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

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

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

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

21.1     Schedule of Registrant's subsidiaries.

23.1     Consent of Independent Accountants

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

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

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

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

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

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

(b)               Reports on Form 8-K

                  None


                                       35
<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

Date:  October 30, 1998

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


       \s\      George E. Lombard                              October 30, 1998
       ---------------------------------------------------
       Chairman, Chief Executive Officer & President


       \s\        Robert Nelsen                                October 30, 1998
       ---------------------------------------------------
       Chief Financial Officer


       \s\      Bernard P. O'Sullivan                          October 30, 1998
       ---------------------------------------------------
       Bernard P. O'Sullivan
       Director


       \s\      Harvey C. Krentzman                            October 30, 1998
       ---------------------------------------------------
       Harvey C. Krentzman
       Director


       \s\      Joseph S. Schneider                            October 30, 1998
       ---------------------------------------------------
       Joseph S. Schneider
       Director


       \s\      Larry L. Hansen                                October 30, 1998
       ---------------------------------------------------
       Larry L. Hansen
       Director


                                       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, 1997 and 1996,  and the results of their  operations and their cash
flows for each of the three years in the period  ended  December  31,  1997,  in
conformity with generally accepted accounting  principles.  In addition,  in our
opinion,  the financial  statement  schedule 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.

As  discussed  in  Note  1.(a)  to  the  accompanying   consolidated   financial
statements,  the Company has restated  its  financial  statements  for the years
ended December 31, 1997 and 1996.


Boston, Massachusetts                                 PricewaterhouseCoopers LLP
October 30, 1998


                                       37
<PAGE>

<TABLE>
                                         Schedule II Valuation and Qualifying Accounts
<CAPTION>

                                                  Years ended December 31, 1997, 1996 and 1995
----------------------------------------------    ------------------------------------------------------------------------------
                                                    Balance at         Charged to         Charged to               Balance at
                                                    Beginning          Costs and             Other                    End
Description                                         of Period           Expenses           Accounts                of Period
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>                <C>                <C>                      <C>
1995

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


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

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  (as restated)

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

                                       38