<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

                                   (Mark One)

[X]      Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
         Exchange Act of 1934

                        FOR THE PERIOD ENDED MAY 2, 1997

                                       or

[ ]      Transition Report Pursuant to Section 13 or 15(d) of the Securities
         Exchange Act of 1934 for the Transition Period from
         ____________________to ____________________.

Commission file number 0-21236

                         APPLIED SIGNAL TECHNOLOGY, INC.
             (Exact name of registrant as specified in its charter)

          CALIFORNIA                                    77-0015491
(State or other jurisdiction of                      (I.R.S. Employer
incorporation or organization)                      Identification No.)

                 400 WEST CALIFORNIA AVENUE, SUNNYVALE, CA 94086
                                 (408) 749-1888
              (Registrant's telephone number, including area code)

                                 Not Applicable
              (Former name, former address and former fiscal year,
                         if changed since last report)

Indicate by a check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods 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 [ ]

                      Applicable Only to Corporate Issuers

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.

Common Stock, no par value, 8,052,548 shares outstanding as of May 29, 1997.

This Quarterly Report on Form 10-Q consists of pages. The Exhibit Index is on 
page 20.


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<PAGE>   2
                                      INDEX

                         APPLIED SIGNAL TECHNOLOGY, INC.

PART I.    FINANCIAL INFORMATION

Item 1.    Financial Statements (Unaudited)

                  Balance Sheets -- May 2, 1997 and October 31, 1996

                  Statements of Operations -- Three months ended May 2, 1997 and
                  May 3, 1996; Six months ended May 2, 1997 and May 3, 1996

                  Statements of Cash Flows -- Six months ended May 2, 1997 and
                  May 3, 1996

                  Notes to Financial Statements -- May 2, 1997

Item 2.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

PART II.   OTHER INFORMATION

Item 1.    Legal Proceedings

Item 4.    Submission of Matters to a Vote of Security Holders

Item 6.    Exhibits and Reports on Form 8-K

Signatures

Index to Exhibits

                                       2

<PAGE>   3
PART I.    FINANCIAL INFORMATION

ITEM 1:    FINANCIAL STATEMENTS

                         APPLIED SIGNAL TECHNOLOGY, INC.
                                 BALANCE SHEETS

                        (In thousands, except share data)

<TABLE>
<CAPTION>
                       ASSETS                    MAY 2, 1997     OCTOBER 31, 1996
                                                 (UNAUDITED)          (NOTE)
                                                   --------           --------
<S>                                                <C>                <C>     
Current assets:
  Cash                                             $     --           $  1,559
  Short term investments                              1,564                767
  Accounts receivable:
    Billed                                           13,964             14,491
    Unbilled                                         17,606             15,527
                                                   --------           --------
  Total accounts receivable                          31,570             30,018
  Inventory                                           5,390              3,208
  Prepaid and other current assets                    2,586              2,236
                                                   --------           --------
    Total current assets                             41,110             37,788

Property and equipment, at cost:
  Machinery and equipment                            25,034             23,221
  Furniture and fixtures                              3,471              3,301
  Leasehold improvements                              4,422              3,356
  Construction in process                               279                191
                                                   --------           --------
                                                     33,206             30,069
Accumulated depreciation and amortization           (19,164)           (17,198)
                                                   --------           --------
    Net property and equipment                       14,042             12,871

Long-term investments                                   525              1,326

Other assets                                            116                118
                                                   --------           --------

Total assets                                       $ 55,793           $ 52,103
                                                   ========           ========
</TABLE>



                                       3
<PAGE>   4
                         APPLIED SIGNAL TECHNOLOGY, INC.
                           BALANCE SHEETS (continued)

                        (In thousands, except share data)

<TABLE>
<CAPTION>
       LIABILITIES AND SHAREHOLDERS' EQUITY               MAY 2, 1997      OCTOBER 31, 1996
                                                           (UNAUDITED)          (NOTE)
                                                            --------           --------
<S>                                                         <C>                <C>     
Current liabilities:
  Accounts payable                                          $  3,100           $  3,045
  Accrued payroll and related benefits                         4,469              4,337
  Other accrued liabilities                                    2,484              1,900
  Income taxes payable                                         1,796              2,029
                                                            --------           --------
    Total current liabilities                                 11,849             11,311

Deferred income taxes                                            827                827

Shareholders' equity:
  Common stock, no par value: 20,000,000 shares
  authorized; issued and outstanding--8,034,928 at
  May 2, 1997 and 7,873,347 at October 31, 1996               20,669             20,099
  Retained earnings                                           22,459             19,872
  Net unrealized gain/(loss) on securities                       (11)                (6)
                                                            --------           --------
Total shareholders' equity                                    41,117             39,965
                                                            --------           --------
               Total liabilities and
                   shareholders' equity                     $ 55,793           $ 52,103
                                                            ========           ========
</TABLE>


Note: The balance sheet at October 31, 1996 has been derived from the audited
financial statements at that date but does not include all of the information
and features required by generally accepted accounting principles for complete
financial statements.

                       See notes to financial statements.




                                       4
<PAGE>   5
                         APPLIED SIGNAL TECHNOLOGY, INC.
                            STATEMENTS OF OPERATIONS
                                   (UNAUDITED)
                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                            THREE MONTHS ENDED                     SIX MONTHS ENDED
                                       -----------------------------        ------------------------------
                                       MAY 2, 1997       MAY 3, 1996        MAY 2, 1997        MAY 3, 1996
                                       -----------       -----------        -----------        -----------
<S>                                      <C>               <C>                <C>               <C>     
Revenues from contracts                  $ 23,987          $ 16,970           $ 44,071          $ 32,768

Operating expenses:
  Contract costs                           15,742            12,180             28,878            22,995
  Research and development                  2,394             2,155              4,864             4,067
  General and administrative                3,171             2,528              6,353             5,368
                                         --------          --------           --------          --------

       Total operating expenses            21,307            16,863             40,095            32,430
                                         --------          --------           --------          --------

Operating income                            2,680               107              3,976               338
Interest income/(expense), net                 37                (4)                98                15
                                         --------          --------           --------          --------
Income before provision for
   taxes on income                          2,717               103              4,074               353
Provision for taxes on income                 992                24              1,487               124
                                         --------          --------           --------          --------

Net income                               $  1,725          $     79           $  2,587          $    229
                                         ========          ========           ========          ========

Earnings per share                       $   0.21          $   0.01           $   0.32          $   0.03

Weighted average common shares
   outstanding                              8,156             7,905              8,135             7,840
</TABLE>





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<PAGE>   6
                         APPLIED SIGNAL TECHNOLOGY, INC.
                            STATEMENTS OF CASH FLOWS
                           INCREASE (DECREASE) IN CASH
                                   (UNAUDITED)
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                SIX MONTHS ENDED
                                                         -----------------------------
                                                         MAY 2, 1997       MAY 3, 1996
                                                         -----------       -----------
<S>                                                         <C>               <C>    
OPERATING ACTIVITIES:
   Net income                                               $ 2,587           $   229
   Adjustments to reconcile net income to net cash
   provided by (used in) operating activities:
     Depreciation and amortization                            1,966             1,771
     Accounts receivable                                     (1,552)            4,878
     Inventory, prepaids and other current assets            (2,533)           (3,801)
     Other assets                                                 2                66
     Accounts payable and accrued expenses                      538            (1,426)
                                                            -------           -------
     Net cash provided by operating activities                1,008             1,717

INVESTING ACTIVITIES:
   Additions to property and equipment                       (3,137)           (3,170)
                                                            -------           -------
     Net cash (used in) investing activities                 (3,137)           (3,170)

FINANCING ACTIVITIES:
   Increase in bank line of credit                               --               500
   Issuance of common stock                                     570               585
   Repurchase of common stock                                    --                (1)
                                                            -------           -------
     Net cash provided by financing activities                  570             1,084
                                                            -------           -------
Net decrease in cash and cash equivalents                    (1,559)             (369)
Cash at beginning of period                                   1,559               369
                                                            -------           -------
Cash at end of period                                       $     0           $     0
                                                            =======           =======
Supplemental disclosures of cash flow information:
   Interest paid                                            $    30           $    51
   Taxes paid                                               $ 1,720           $   780
</TABLE>


                                       6
<PAGE>   7
                         APPLIED SIGNAL TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)

May 2, 1997


NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


BASIS OF PRESENTATION

               The accompanying unaudited condensed financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the six month period
ending May 2, 1997 are not necessarily indicative of the results that may be
expected for the year ending October 31, 1997. For further information, refer to
the financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended October 31, 1996.

INVESTMENTS

               The Company's investment securities, which consist primarily of
U.S. Treasury securities, are classified as available-for-sale and are carried
at fair market value. Unrealized gains and losses, net of tax, are reported as a
separate component of shareholders' equity. Realized gains and losses on
available-for-sale securities are included in interest income (expense), net.
The cost of securities sold is based on the specific identification method.
Interest on securities classified as available-for-sale is included in interest
income (expense), net. As of May 2, 1997, the contractual maturities of the debt
securities will mature by June 30, 1998.

REVENUES FROM CONTRACTS

               The Company accounts for fixed price contracts using the
percentage-of-completion method of accounting. Under this method, all contract
costs are charged to operations as incurred; and a portion of the contract
revenues, based on estimated profits and the degree of completion of the
contract as measured by a comparison of the actual and estimated costs, is
recognized as revenues each quarter. The Company accounts for cost reimbursement
contracts by charging contract costs to operations as incurred and recognizing
contract revenues and profits by applying an estimated fee rate to actual costs.
Management reviews contract performance, costs incurred and estimated completion
costs regularly and adjusts revenues and profits on contracts in the month in
which changes become determinable.

EARNINGS PER SHARE

               Earnings per share (EPS) are based on the weighted average number
of common and common equivalent shares outstanding. Common equivalent shares
result from the assumed exercise of outstanding stock options that have a
dilutive effect when applying the treasury stock method. Earnings per share is
calculated using the weighted average number of common shares outstanding during
the period.


                                       7
<PAGE>   8
               In February 1997, the Financial Accounting Standards Board issued
Statement of Accounting Standards No. 128 (SFAS No. 128), "Earnings per Share."
The Statement is effective for periods ending after December 15, 1997, at which
time the Company will be required to change the method currently used to compute
EPS. SFAS No. 128 will require entities to report "basic" and "diluted" earnings
per share. For the Company, the "basic" earnings per share calculation is
equivalent to its present EPS calculation, excluding the effect of dilutive
stock options. The "diluted" earnings per share calculation is equivalent to the
existing EPS calculation. The Company has determined that, on a pro forma basis
with respect to each income statement line for which it presently reports an EPS
amount, "basic" earnings per share would have been $0.22 and $0.01 for the three
months ended May 2, 1997 and May 3, 1996 respectively, and $0.33 and $0.03 for
the six month period ending on those respective dates.

ACCOUNTING FOR STOCK-BASED COMPENSATION

               In October 1995, the Financial Accounting Standards Board issued
Statement No. 123 (SFAS 123), "Accounting for Stock-Based Compensation." SFAS
123 encourages entities to adopt a fair value based method of accounting for
employee stock compensation plans, however it also allows an entity to continue
to measure compensation cost for those plans using the intrinsic value method of
accounting. Under the intrinsic value based method, many companies, including
Applied Signal Technology, Inc., have not recognized compensation cost for stock
options granted to their employees.

               The Company will adopt SFAS 123 during fiscal year 1997. While
the Company has not yet determined the total effect of adopting SFAS 123, it
believes that the adoption of the standard will not result in material charges
to operations in fiscal 1997 and thereafter.

NOTE 2 -- INVENTORY

The components of inventory consist of the following (in thousands):

<TABLE>
<CAPTION>
                         MAY 2, 1997      OCTOBER 31, 1996
                         -----------      ----------------
<S>                        <C>                 <C>   
Raw Materials              $  722              $  591
Work in Process             4,413               2,195
Finished Goods                243                 322
                           ------              ------
                            5,378               3,108
Precontract Costs              12                 100
                           ------              ------
                           $5,390              $3,208
                           ======              ======
</TABLE>                             

The Company records contract revenues and costs for interim reporting purposes
based on annual targeted indirect rates. At year end, the revenues and costs are
adjusted for actual indirect rates. During the interim reporting periods
variances may accumulate between the actual indirect rates and the annual
targeted rates. All timing-related indirect spending variances are inventoried
as part of work in process during these interim reporting periods. These rates
are reviewed regularly and any permanent variances are reflected in the income
statement as they become known. At May 2, 1997, the inventoried variance was
approximately $70,000 ($2,330,000 at May 3, 1996) and was included in work in
process. At October 31, 1996 the variance was zero since all revenues and costs
were recorded at the actual indirect rates for the fiscal year end.


                                       8
<PAGE>   9
ITEM 2:  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

The following information should be read in conjunction with the attached
financial statements and notes thereto.

This report contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934. Actual results could differ
materially from those projected in the forward-looking statements as a result of
the factors set forth in the "Summary of Business Considerations and Certain
Factors that May Affect Future Results of Operations and/or Stock Price."

BUSINESS ENVIRONMENT/BACKGROUND:

Applied Signal Technology designs, develops, manufactures and markets advanced
digital signal processing equipment to collect and process a wide range of
telecommunication signals for both signal reconnaissance and commercial
applications. This equipment is purchased by the U.S. Government as well as
allied foreign governments and is used for foreign signal reconnaissance. The
Company's commercial telecommunication processing equipment is used in digital
video transmission, cellular radio communication systems and as equipment for a
variety of both cable and wireless communication technologies.

Accurate and comprehensive information regarding foreign affairs and
developments continues to be important to the United States Government. The
reduction of United States military tactical forces overseas and the end of the
Cold War, compounded with political instability in certain regions such as the
Middle East, Eastern Europe, Africa and South America, has heightened the United
States Government's need to be able to monitor overseas activities. In order to
obtain information about activities within foreign countries, the United States
Government gathers and analyzes telecommunication signals emanating from those
countries.

The Company devotes significant resources toward understanding the United States
Government's signal reconnaissance goals, capabilities and perceived future
needs. The Company obtains information about these signal reconnaissance needs
through frequent marketing contact between its employees and technical and
contracting officials of the United States Government. The Company believes that
it has much more marketing contact with customers and potential customers than
is customary among its competitors. In addition, the Company invests in research
and development (R&D) which it anticipates will enable it to develop signal
reconnaissance equipment that meets these needs. The Company believes that it
invests a greater percentage of its revenues in R&D than is typical among its
competitors.

Traditionally, the United States Government has addressed its signal
reconnaissance needs with custom signal processing solutions which tend to be
both expensive and have long delivery times. These factors, combined with
budgetary constraints, have caused many government agencies to search for more
flexible and cost-effective signal reconnaissance solutions that can be deployed
promptly. The Company's signal reconnaissance products can be used, with or
without further modification, to satisfy requirements of a variety of customers.
The Company believes that custom equipment generally cannot be as readily
deployed in as wide a variety of circumstances as the Company's products. The
Company designs its products to use advanced circuitry, including
Company-designed application-specific integrated circuits 



                                       9
<PAGE>   10
(ASICs). This enables the Company to offer products that are smaller, consume
less power and cost customers less when multiple units are built.

Through a combination of customer and internally funded development, the Company
is judiciously seeking opportunities to expand its market reach. This is being
accomplished by capitalizing on the Company's accumulated knowledge of advanced
digital signal processing and telecommunications technologies in an effort to
either license the technology to the commercial sector or perform low-to-medium
volume manufacturing on select commercial subsystems.

The following table sets forth selected commercial telecommunications projects
for which the Company is currently in development and identifies the primary
customers:

<TABLE>
<CAPTION>
     PRODUCT                        DESCRIPTION                   CUSTOMER(S)
     -------                        -----------                   -----------
<S>                      <C>                                      <C>
QAMalyzer(TM)            Digital test equipment for cable         TCI,
                         service providers                        Southwestern Bell
                                                                  
Cell Phone Modem         Modem chip design for the Ericsson    
                         "Freeset 1900(TM)" PCS cellular phone    Ericsson
</TABLE>

SUMMARY OF BUSINESS CONSIDERATIONS AND CERTAIN FACTORS THAT MAY AFFECT FUTURE
RESULTS OF OPERATIONS AND/OR STOCK PRICE:

The Company's future business, results of operations, and stock price may be
adversely affected in a material way due to the following factors:

CUSTOMER CONCENTRATION: Historically, U.S. Government defense and intelligence
agencies have accounted for almost all of the Company's revenues. Future
reductions in United States Government spending on signal reconnaissance
equipment or future changes in the kind of signal reconnaissance products or
services required by the United States Government agencies could limit demand
for the Company's products, which would have a material adverse effect on the
Company's future results of operations and financial condition.

Due to the award of certain larger contracts, the Company is experiencing a
higher concentration of revenues from a single contract. Revenue related to a
single contract comprised 23.6% of revenues for the first six months of fiscal
1997. This compares to 21.5% of revenue attributable to the single contract for
all of fiscal 1996.

COMPETITION: The signal reconnaissance equipment market is highly competitive
and the Company expects that competition will increase in the future. Some of
the Company's current and potential competitors have significantly greater
technical, manufacturing, financial and marketing resources than the Company.
Substantial competition could have a material adverse effect on the Company's
future operating results and financial condition.




                                       10
<PAGE>   11
DEPENDENCE UPON PERSONNEL: The Company believes its employees are its most
valuable resource and, accordingly, focuses much of its attention on attracting
and retaining staff members. During the last year, the Company experienced an
increase in its attrition rate as well as difficulty in attracting new talent
into the Company due to increased competition for qualified personnel.
Management believes these effects are attributable to the expanding U.S. economy
and, in particular, the local California economy where the Company must compete
for new talent in the rapidly expanding telecommunications sector. The Company
has implemented a more aggressive recruiting program and an employee referral
program aimed at countering this environment. The Company's ability to execute
its business plan is contingent upon attracting and retaining qualified
employees. While the Company believes progress has been made during the most
recent quarters, there can be no assurance that the Company will be successful
at attracting and retaining sufficient personnel. Failure to do so will have a
material adverse effect on the Company's future results of operations and
financial condition.

DEPENDENCE UPON FIXED PRICE CONTRACTS; RISK OF CONTRACT TERMINATION: A
significant portion of the Company's revenues are derived from fixed-price
contracts. Under fixed-price contracts, unexpected increases in the cost to
develop or manufacture a product, whether due to inaccurate estimates in the
bidding process, unanticipated increases in materials costs, inefficiencies or
other factors, are borne by the Company. The Company has experienced cost
overruns in the past that have resulted in losses to the Company on contracts.
There can be no assurance that the Company will not experience cost overruns in
the future or that such overruns will not have a material adverse effect on the
Company's results of operations.

In addition, almost all of the Company's contracts contain termination clauses
which permit contract termination upon the Company's default or for the
convenience of the other contracting party. In either case, termination could
adversely affect the Company's operating results. Although the Company has not
experienced any material cancellations to date, there can be no assurance that
such cancellations will not occur in the future.

NARROW OPERATING MARGINS: The Company has experienced some constraint in
earnings resulting from lower average profitability on its production jobs. This
is due, in part, to the unfavorable adjustments in estimated costs-to-complete
on production jobs recorded during the prior fiscal year and due, in part, to
absorbing unrecoverable indirect costs at a rate higher than was provided for in
the contract prices of particular projects. The Company has taken several steps
aimed at improving its contract margins. These steps include revising prices of
its products and services, reviewing operational processes for efficiency and
examining cost structures. Although the Company believes improvements are
apparent in the operating results for the recent quarters, there can be no
assurances that these steps will result in improved future margins.

POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS AND MARKET VOLATILITY: The Company
has experienced significant fluctuations in operating results from quarter to
quarter and expects that it will continue to experience such fluctuations in the
future. These fluctuations are caused by, among other factors, conditions
inherent in government contracting and the Company's business, such as the
timing of cost and expense recognition for contracts and the United States
Government contracting and budget cycles. Fluctuations in quarterly results may
cause the price of the Company's common stock to fluctuate substantially. In
addition, there can be no assurance that an active trading market will be
sustained for the Company's common stock. The stock market in recent years has
experienced extreme price and volume fluctuations that have 



                                       11
<PAGE>   12
particularly affected the market prices of many technology companies and that
have been unrelated or disproportionately related to the operating performance
of such companies. These fluctuations, as well as general economic and market
conditions, may adversely affect the future market price of the Company's common
stock.

RAPID TECHNOLOGICAL CHANGE: The market for the Company's products is
characterized by rapidly changing technology. The Company believes that it has
been successful to date in identifying United States Government signal
reconnaissance needs early, investing in research and development to meet these
needs and delivering products before the Company's competitors. The Company
believes that its future success will depend upon continuing to develop and
introduce, in a timely manner, products capable of collecting or processing new
types of telecommunications signals. There can be no assurance that the Company
will be able to develop and market new products successfully in the future or
respond effectively to technological changes, such as data encryption technology
and others, or that new products introduced by others will not render the
Company's products or technologies noncompetitive or obsolete.

DEPENDENCE UPON CERTAIN SUPPLIERS: Although the Company procures most of its
parts and components from multiple sources or believes that these components are
readily available from numerous other sources, certain components are available
only from sole sources or from a limited number of sources. A number of the
Company's products contain critical components like single board computers
available solely from Motorola and Force Computers and digital signal processing
integrated circuits available solely from Texas Instruments. While the Company
believes that substitute components or assemblies could be obtained, use of
substitutes would require development of new suppliers or would require the
Company to re-engineer its products, or both, which could delay the Company's
shipment of its products and could have a material adverse effect on the
Company's results of operations.

EXPLORATION OF NEW MARKET OPPORTUNITIES: The Company has had numerous
discussions with companies in the commercial cable TV/video compression and
telecommunications marketplaces. The Company's primary business strategy in this
area is to capitalize on its experience as a technology company and to explore
areas where current or newly developed technology can be licensed or products
can be manufactured and sold into the commercial marketplace. To date, revenues
from the commercial marketplace have been less than 5% of the Company's revenues
and have consisted primarily of product development fees. There can be no
assurance that the Company's commercial marketplace strategy will be successful
or that the Company will maintain or increase revenues from the commercial
marketplace.




                                       12
<PAGE>   13
THREE MONTHS AND SIX MONTHS ENDED MAY 2, 1997 COMPARED TO THREE MONTHS AND SIX
MONTHS ENDED MAY 3, 1996:

RESULTS OF OPERATIONS:

REVENUES AND BACKLOG: Revenues for the second quarter of fiscal 1997 were
$23,987,000, representing a 41% increase over the second quarter of fiscal 1996
revenues of $16,970,000. Revenues for the six months ended May 2, 1997 were
$44,071,000, up 34% from $32,768,000 for the first six months of fiscal 1996.
The increase in the second quarter and year-to-date revenues of fiscal 1997
reflects the continued demand for the Company's products and services and the
increased contract activity resulting from hiring new staff members during the
last half of fiscal 1996.

New order levels for the second quarter were $24,181,000, down 62% from record
order levels of $64,044,000 reported for the second quarter of fiscal 1996.
Included in the second quarter orders for fiscal 1997 is a subcontract award,
the second largest award in the Company's history, for development of special
signal processing subsystems to support the Joint SIGINT Avionics Family Low
Band Subsystem recently awarded to Sanders, a Lockheed Martin Company. For
comparison purposes, the Company recorded the Scalpel program multi-year
competitive award of $51,035,000--the largest in the Company's history during
the second quarter of fiscal 1996. New orders for the first six months of fiscal
1997 were $32,875,000 compared to $78,173,000 reported for the same period of
fiscal 1996.

The Company's backlog, which consists of anticipated revenues from the
uncompleted portions of existing contracts (excluding unexercised options) was
$71,923,000 at May 2, 1997, a decrease of 4% when compared to $75,110,000 at May
3, 1996.

CONTRACT COSTS: Contract costs consist of direct costs on contracts, including
materials and labor, and manufacturing overhead costs. Contract costs as a
percentage of revenues were 65.6% for the second quarter of fiscal 1997 versus
71.8% for the same period of fiscal 1996. Contract costs as a percentage of
revenues for the six months ended May 2, 1997 were 65.5% versus 70.2% for the
first six months of fiscal 1996. Contract costs as a percentage of revenues for
the second quarter and first six months of fiscal 1997 were down primarily due
to price decreases realized for component parts as well as efficiencies related
to larger production runs on certain contracts. Further, contract costs as a
percentage of revenues for the six months of fiscal 1996 were abnormally high
due primarily to unfavorable adjustments in estimated costs-to-complete on
production jobs.

RESEARCH AND DEVELOPMENT (R&D): Company-directed investment in research and
development consists of expenditures recoverable from customers through the
Company's billing rates and expenditures funded by the Company from earnings. It
is the Company's accounting practice to record R&D expenses based on annual
targeted indirect rates. (See "Notes to Financial Statements; Note 2 -
Inventory.") Research and development expenses as a percentage of revenues were
10.0% and 12.7% for the second quarter of fiscal years 1997 and 1996,
respectively. For the first six months of fiscal years 1997 and 1996, research
and development expenses as a percentage of revenues were 11.0% and 12.4%,
respectively. While R&D spending increased in absolute dollars, the lower R&D
spending as a percentage of revenues for the quarter and the six month periods
of fiscal 1997 reflect a shift in labor resources directed toward the increased
contract activity compared to the same periods of fiscal 1996.




                                       13
<PAGE>   14
The Company-funded investment in R&D for the first six months of fiscal 1997 was
$962,000 or 2.2% of revenues compared to $1,476,000 or 4.5% of revenues for the
first six months of fiscal 1996. During fiscal 1997, the Company made a decision
to recover more of its R&D spending in its billing rates.

GENERAL AND ADMINISTRATIVE: General and administrative expenses include
administrative salaries, costs related to the Company's marketing and proposal
activities and other administrative costs. It is the Company's accounting
practice to record general and administrative expenses based on annual targeted
indirect rates. (See "Notes to Financial Statements; Note 2 - Inventory.")
General and administrative expenses were $3,171,000 or 13.2% of revenues for the
second quarter of fiscal 1997 compared to $2,528,000 or 14.9% of revenues for
the second quarter of fiscal 1996. General and administrative expenses were
$6,353,000 or 14.4% and $5,368,000 or 16.4% of revenues for the six months ended
May 2, 1997 and May 3, 1996, respectively.

Although spending for general and administrative expenses increased for the
second quarter and first six months of fiscal 1997 over the first six months of
fiscal 1996, the percentage to revenues decreased. The decrease is due primarily
to the higher revenue volume recorded during these time periods (see "Contract
Costs" above).

INTEREST INCOME/(EXPENSE): For the quarter ended May 2, 1997, interest income
was $37,000, up from $4,000 interest expense for the same period of fiscal 1996.
Interest income for the first six months of fiscal 1997 was $98,000 compared to
interest income of $15,000 for the same period of fiscal 1996. The increase in
interest income for the second quarter and for the first six months of fiscal
1997 is due primarily to the Company's ability to generate cash from operations
due to improved margins. In addition, the Company was able to generate interest
income on investments without any offsetting interest expense from the use of
bank lines of credit.

PROVISION FOR INCOME TAXES: The provision for income taxes as a percentage of
income before income taxes was 36.5% for the second quarter of fiscal 1997,
compared to 23.3% for the same period of fiscal 1996. The effective tax rate for
the six months ended May 2, 1997 and May 3, 1996 was 36.5% and 35.0%,
respectively. The increase in the quarter and year-to-date tax rate is primarily
a result of the increased federal and state tax liability as a result of the
increase in profitability and offset by state income tax credits.



                                       14
<PAGE>   15
ANALYSIS OF LIQUIDITY AND CAPITAL RESOURCES:

The Company's primary source of liquidity in fiscal 1997 has been the cash flow
generated from operations as well as issuance of common stock through its
employee stock plans.

The Company has a bank credit agreement to augment cash flow needs and to
provide term financing for capital investments. The Company maintains a
$6,000,000 unsecured, revolving line of credit for short-term cash requirements
and a $1,000,000 line of credit for use in purchasing capital investments. The
unsecured, revolving line of credit bears interest at the bank's reference rate
(8.5% as of May 2, 1997). The line of credit for use in purchasing capital
investments bears interest at the bank's reference rate plus one-half percent
(9.0% as of May 2, 1997). Outstanding amounts on the unsecured, revolving line
of credit were zero at May 2, 1997 and October 31, 1996. Outstanding amounts on
the line of credit for use in purchasing capital investments were zero at May 2,
1997 and October 31, 1996. Both lines expire March 1, 1998.

NET CASH FROM OPERATING ACTIVITIES: Net cash from operating activities has
varied significantly from quarter to quarter. These quarter-to-quarter variances
are primarily the result of changes in net income, changes in the rate of
investment in accounts receivable and the change in inventories held by the
Company. During the first six months of fiscal 1997, $1,008,000 was provided by
operating activities versus $1,717,000 during the comparable period of fiscal
1996. Although net income of $2,587,000 was considerably higher for the first
six months of fiscal 1997 as compared to the net income of $220,000 reported for
the same period of fiscal 1996, the decrease in cash from operating activities
in the first six months of fiscal 1997 is primarily due to the increase in
accounts receivable and inventories. During the first six months of fiscal 1997,
accounts receivable grew by $1,552,000 compared to a $4,878,000 decrease in
accounts receivable during the same period of fiscal 1996. The cash generated by
accounts receivable is due, in part, to greater contract activity and, in part,
to a slight increase in the time to collect outstanding invoices. Cash used in
the investment in inventories, prepaids and other current assets during the
first six months of fiscal 1997 was $2,533,000, compared to $3,801,000 of cash
used during the comparable period of fiscal 1996. This reduction is in part due
to the reduction of timing-related targeted indirect rate variances (See "Notes
to Financial Statements; Note 2 - Inventory") and, in part, to a management
initiative to more aggressively manage the Company's investment in inventory.

NET CASH FROM INVESTING ACTIVITIES: Cash used in investing activities during the
first six months of fiscal 1997 was $3,137,000 compared to $3,170,000 used in
investing activities during the same period of fiscal 1996, all attributable to
additions to property and equipment. Capital investment continues to be driven
by an increase in the number of contracts awarded and by the level of
development-type contracts that have required test and computing equipment.

NET CASH FROM FINANCING ACTIVITIES: Cash provided by financing activities during
the first six months of fiscal 1997 was $570,000 versus $1,084,000 provided
during the same period of fiscal 1996. The reduction in cash provided by
financing activities during the first six months of fiscal 1997 is primarily
attributable to the absence of borrowings under the bank line of credit; such
borrowings were $500,000 in the fiscal 1996 period.

The Company believes that the funds generated from operations, existing working
capital and amounts available under existing lines of credit will be sufficient
to meet its cash needs for the next twelve months.


                                       15
<PAGE>   16
PART II. OTHER INFORMATION

Item 1. Legal Proceedings

               In April 1994, the Company was served with a subpoena by the
Department of Defense Office of Inspector General (OIG) in connection with
approximately six contracts, several of which had been audited by the Defense
Contract Audit Agency (DCAA) the previous year. As is routine in such matters
involving government contracts, the OIG referred the matter to another
government agency which also had contracts with the Company. Shortly thereafter,
this second agency issued a request for information related to nine additional
contracts. To date, the Company has not received any allegations of wrong-doing
from the OIG or the other agency. At the request of the Board of Directors, the
Company initiated its own review of the contracts in conjunction with its legal
counsel.

               Further review of the contracts in question and related contracts
through April 1995 indicates the Company was not compliant with Public Law
87-653, Truth in Negotiations Act, which requires disclosure of all actual costs
available on the date of cost certification on certain contracts performed
during the 1989 and 1990 timeframe. These findings have resulted in a voluntary
disclosure to the government which is expected to result in a downward price
adjustment on certain contracts. In June 1995, the Company announced it was
taking a charge against the fiscal 1995 third quarter operating results in
anticipation of a settlement with the government on the subject contracts. The
charge resulted in a reduction of the fiscal 1995 third quarter's operating
income of $1.2 million.

               In April 1996, the Company was served with a second subpoena by
the OIG in connection with all contracts entered into between 1990 and the
present related to three products: the Model 102P Voice Channel Demodulator, the
Model 120 Multichannel Processor, and the Model 150 FAX Scanner. The Company is
presently in discussions with the OIG to determine the scope of the subpoena and
intends to fully comply with the request.

               While management believes the fiscal 1995 third quarter charge is
adequate to cover all related risks, the government has not concluded its
investigation or agreed to a settlement with the Company. There can be no
assurances the Company will not be required to take additional charges in
connection with this matter in future periods. However, management believes that
any such charges would not have a material effect on the operating results and
financial condition of the Company.



                                       16
<PAGE>   17
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

    The annual meeting of shareholders of the Company was held March 6, 1997.

         The shareholders approved a proposal to elect three Class I Directors
of the Board of Directors of the Company to serve until the 1999 Annual Meeting
of Shareholders and/or until their respective successors are duly elected and
qualified. The proposal received the following votes:
<TABLE>
<CAPTION>

                         FOR                WITHHELD     ABSTENTIONS    BROKER NON-VOTES
                         ---                --------     -----------    ----------------
<S>                    <C>                  <C>    
John P. Devine         6,333,416            541,513
David D. Elliman       6,337,316            537,613
Gary L. Yancey         6,331,439            543,490

</TABLE>

         The shareholders ratified the appointment of Ernst & Young LLP as
independent public accountants of the Company for the fiscal year ending October
31, 1997. The proposal received the following votes:
<TABLE>
<CAPTION>

                  FOR      AGAINST   WITHHELD       ABSTENTIONS    BROKER NON-VOTES
                  ---      -------   --------       -----------    ----------------
            <S>             <C>                     <C>                    
            6,802,229       63,141                  9,559

</TABLE>

         The shareholders approved a proposal to amend the Company's 1991 Stock
Option Plan (the "Option Plan") to (i) increase by 500,000 shares the number of
shares of the Company's Common Stock reserved for issuance under its Option Plan
and (ii) limit to 400,000 shares the number of shares of Common Stock for which
options may be granted to any one employee during any fiscal year of the
Company. The proposal received the following votes:

<TABLE>
<CAPTION>
                  FOR      AGAINST      WITHHELD     ABSTENTIONS    BROKER NON-VOTES
                  ---      -------      --------     -----------    ----------------
            <S>          <C>                         <C>               <C>      
            3,430,243    1,280,396                   56,393            2,107,987

</TABLE>


         The shareholders also approved a proposal to amend the Company's 1993
Employee Stock Purchase Plan (the "Stock Purchase Plan") to increase by 600,000
shares the number of shares of Common Stock reserved for issuance under the
Stock Purchase Plan. The proposal received the following votes:

<TABLE>
<CAPTION>
                  FOR      AGAINST  WITHHELD            ABSTENTIONS    BROKER NON-VOTES
                  ---      -------  --------            -----------    ----------------
<S>         <C>            <C>                          <C>               <C>      
            3,948,092      872,423                      27,369            2,027,045

</TABLE>



                                       17
<PAGE>   18
Item 6.        Exhibits and Reports on Form 8-K


               Exhibits -- See Index to Exhibits on page 20

               Reports on Form 8-K -- The Company did not file any reports on
               Form 8-K during the six months ended May 2, 1997.


                                       18
<PAGE>   19
SIGNATURES

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


Applied Signal Technology, Inc.



/Brian M. Offi/                                   June 12, 1997
-----------------------------                     ---------------------------
Brian M. Offi
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)


                                       19
<PAGE>   20
                            APPLIED SIGNAL TECHNOLOGY

                                INDEX TO EXHIBITS


<TABLE>
<CAPTION>
 EXHIBIT                                 
 NUMBER                                  DESCRIPTION OF DOCUMENT
 ------                                  -----------------------
<S>         <C>                               
10.15       Commercial Credit Agreement dated March 3, 1997 with Sanwa Bank California
10.16       Certified Corporate Resolution to borrow dated March 3, 1997 with Sanwa Bank
            California
10.17       1991 Stock Option Plan as Amended January 25, 1997
10.18       1993 Employee Stock Purchase Plan as Amended January 25, 1997
11.1        Computation of Net Income Per Share
27.1        Financial Data Schedule
</TABLE>


                                       20