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 April 30, 2004

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(State or other jurisdiction of incorporation or organization)                                                                                                                                             
|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.



|ü   |  |   
|--- |  | --
|Yes |  | No



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).



|ü   |  |   
|--- |  | --
|Yes |  | 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, 11,011,295 shares outstanding
  as of April 30, 2004.

---



Index	
Applied Signal Technology, Inc.

Part I. Financial Information



Item 1: Condensed Financial Statements (Unaudited)

Balance Sheets  April 30, 2004 and October 31, 2003

Statements of Operations  Three and six months ended April
      30, 2004 and May 2, 2003

Statements of Cash Flows Six months ended April 30, 2004
      and May 2, 2003

Notes to Condensed Financial Statements  April 30, 2004

Item 2: Managements Discussion and Analysis of Financial Condition
      and Results of Operations

Item 3: Quantitative and Qualitative Disclosures About Market Risk

Item 4: Controls and Procedures

---

Part II. Other Information

Item 1: Legal Proceedings

Item 2: Changes in Securities, Use of Proceeds, and
        Issuer Purchases of Equity Securities

Item 3: Defaults Upon Senior Securities

Item 4: Submission of Matter to a Vote of Security
        Holders

Item 5: Other Information

Item 6: Exhibits and Reports on Form 8-K

Signatures

Index to Exhibits

---



Part I.	Financial Information

Item 1:	Condensed Financial Statements



Applied Signal Technology, Inc.
 Balance Sheets(In thousands, except share data)



|Assets                                    | April 30, 2004 (Unaudited)     |  | October 31, 2003 (Note)             
|----------------------------------------- | ------------------------------ |  | ------------------------------------
|Current assets:                           |                                |  |                                     
|Cash and cash equivalents                 | $26,881                        |  | $5,372                              
|Short term investments                    | 21,139                         |  | 34,747                              
|Accounts receivable:                      |                                |  |                                     
|Billed                                    | 19,206                         |  | 16,335                              
|Unbilled                                  | 11,601__________               |  | 10,227__________                    
|Total accounts receivable                 | 30,807                         |  | 26,562                              
|Inventory                                 | 5,869                          |  | 6,875                               
|Prepaid and other current assets          | 3,606__________                |  | 3,545 
          __________         
|Total current assets                      | 88,302                         |  | 77,101                              
|                                          |                                |  |                                     
|Property and equipment, at cost:          |                                |  |                                     
|Machinery and equipment                   | 45,810                         |  | 44,127                              
|Furniture and fixtures                    | 4,798                          |  | 4,742                               
|Leasehold improvements                    | 10,243                         |  | 10,236                              
|Construction in process                   | 44 
          __________       |  | 33 
          __________            
|                                          | 60,895                         |  | 59,138                              
|Accumulated depreciation and amortization | (48,961) 
          __________ |  | (46,897)__________                  
|Net property and equipment                | 11,934                         |  | 12,241                              
|                                          |                                |  |                                     
|Other assets                              | 1,950                          |  | 605                                 
|                                          |                                |  |                                     
|Total assets                              | $102,186 
          =======    |  | $89,947
          
          =======





Applied Signal Technology, Inc.
 Balance Sheets (continued)(In thousands, except share data)



|Liabilities and Shareholders Equity                                                                                                              | April 30, 2004 (Unaudited)   |  | October 31, 2003
          (Note)
|------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------- |  | ---------------------------------
|Current liabilities:                                                                                                                              |                              |  |                                  
|Accounts payable                                                                                                                                  | $5,000                       |  | $3,022                           
|Accrued payroll
          and related benefits                                                                                                    | 8,566                        |  | 7,557                            
|Accrued rent                                                                                                                                      | 1,169                        |  | 1,190                            
|Other accrued liabilities                                                                                                                         | 2,271                        |  | 1,643                            
|Income taxes payable                                                                                                                              | 2,715 
          __________  |  | 134 
          __________        
|Total current liabilities                                                                                                                         | 19,721                       |  | 13,546                           
|                                                                                                                                                  |                              |  |                                  
|Other liabilities                                                                                                                                 | 275                          |  | 183                              
|                                                                                                                                                  |                              |  |                                  
|Shareholders
          equity:                                                                                                                   |                              |  |                                  
|Common stock, no par value: 20,000,000 shares authorized; issued and outstanding: 11,011,295 at April 30, 2004 and 10,767,145 at October 31, 2003 | 33,829                       |  | 31,132                           
|Retained earnings                                                                                                                                 | 48,367                       |  | 45,021                           
|Accumulated comprehensive
            income                                                                                                      | (6)__________                |  | 65__________                     
|Total shareholders
          equity                                                                                                              | 82,190__________             |  | 76,218__________                 
|                                                                                                                                                  |                              |  |                                  
|Total liabilities
            and shareholders equity                                                                                            | $102,186 
          ======== |  | $89,947 
          ========      





Note: The balance sheet at October 31, 2003 has been derived from the audited financial statements at that date but does not include all of the information required by accounting principles generally accepted in the United States for complete financial statements.

See Notes to Condensed Financial Statements.



Applied Signal Technology, Inc.
 Statements of Operations
(Unaudited)(In thousands, except per share data)



|                                                                  | Three
          Months Ended |                         | Six
          Months Ended
|----------------------------------------------------------------- | ---------------------------- | ----------------------- | --------------------------
|                                                                  | April
          30, 2004     |                         | May
          2, 2003     
|Revenues from contracts                                           | $                            | 36,811                  |                           
|                                                                  |                              |                         |                           
|Operating expenses:                                               |                              |                         |                           
|Contract costs                                                    |                              | 24,146                  |                           
|Research and development                                          |                              | 3,419                   |                           
|General and administrative                                        |                              | 4,534 
          _____  |                           
|                                                                  |                              |                         |                           
|Total
          operating expenses                                |                              | 32,099 
          _____ |                           
|                                                                  |                              |                         |                           
|Operating income                                                  |                              | 4,712                   |                           
|Interest income, net                                              |                              | 137 
          _____    |                           
|Income before provision for income taxes                          |                              | 4,849                   |                           
|Provision for income taxes                                        |                              | 912 
          _____    |                           
|                                                                  |                              |                         |                           
|Net income                                                        | $                            | 3,937
          ======= |                           
|                                                                  |                              |                         |                           
|Net income per common share:                                      |                              |                         |                           
|Basic                                                             | $                            | 0.36                    |                           
|Diluted                                                           | $                            | 0.34                    |                           
|                                                                  |                              |                         |                           
|Number of shares used in calculating net income per common share: |                              |                         |                           
|Basic                                                             |                              | 10,990                  |                           
|Diluted                                                           |                              | 11,565                  |                           





See Notes to Condensed Financial Statements.



Applied Signal Technology, Inc.
 Statements of Cash Flows
Increase (decrease) in cash and cash equivalents
(Unaudited)(In thousands)



|                                                                                              | Six Months Ended         
|--------------------------------------------------------------------------------------------- | -------------------------
|                                                                                              | April 30, 2004           
|Operating Activities:                                                                         |                          
|Net income                                                                                    | $6,093                   
|Adjustments to reconcile net income to net
   cash
          provided by operating activities |                          
|Depreciation and amortization                                                                 | 2,210                    
|Changes in:                                                                                   |                          
|Accounts receivable                                                                           | (4,245)                  
|Inventory, prepaids, and other assets                                                         | (400)                    
|Accounts payable, taxes payable, and accrued expenses                                         | 5,564 
          ______  
|Net cash provided by operating activities                                                     | 9,222                    
|                                                                                              |                          
|Investing Activities:                                                                         |                          
|Purchases of available-for-sale securities                                                    | (24,781)                 
|Maturities of available-for-sale securities                                                   | 38,317                   
|Additions to property and equipment                                                           | (1,903)
          ______ 
|Net cash provided by (used in)  investing activities                                          | 11,633                   
|                                                                                              |                          
|Financing Activities:                                                                         |                          
|Issuance of common stock                                                                      | 2,698                    
|Dividends paid                                                                                | (2,044)
          ______ 
|Net cash provided by financing activities                                                     | 654                      
|Net increase (decrease) in cash and cash equivalents                                          | 21,509                   
|Cash and cash equivalents, beginning of period                                                | 5,372 
          _____   
|Cash and cash equivalents, end of period                                                      | $26,881 
          ======
|                                                                                              |                          
|Supplemental disclosures of cash flow information:                                            |                          
|Interest paid                                                                                 | $75                      
|Income taxes paid                                                                             | $359                     





See Notes to Condensed Financial Statements.

---



Applied Signal Technology, Inc.
  Notes to Condensed Financial Statements
(unaudited)April 30, 2004

Note 1:	Summary of Significant Accounting Policies

Description of Business and Basis of Presentation

Applied Signal Technology, Inc. was incorporated
  in California on January 12, 1984. We provide advanced digital signal processing
  products, systems, and services used in reconnaissance of telecommunications
  signals for intelligence gathering, a process referred to as signal intelligence.
  Our primary customer is the United States Government. Substantially all of our
  revenues were from contracts with the United States Government, its agencies,
  or prime contractors for the United States Government.

The accompanying unaudited condensed financial
  statements have been prepared in accordance with accounting principles generally
  accepted in the United States 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 accounting principles
  generally accepted in the United States for complete financial statements, and
  should be read in conjunction with the financial statements and footnotes thereto
  included in our Annual Report on Form 10-K for the year ended October 31, 2003.
  In the opinion of management, all adjustments (consisting of normal recurring
  adjustments) considered necessary for a fair presentation have been included.
  Operating results for the three-month and six-month periods ending April 30,
  2004 are not necessarily indicative of the results that may be expected for
  the year ending October 31, 2004.

Estimates

In order for us to prepare financial statements in
  conformity with accounting principles generally accepted in the United States,
  management is required to make estimates and assumptions that affect the amounts
  reported in the financial statements and accompanying notes. Actual results
  could differ significantly from those estimates.

Revenues and Contract Accounting

Revenues and cost recognition.
  The majority of our contracts are accounted for in accordance with the American
  Institute of Certified Public Accountants Statement of Opinion 81-1, Accounting
  for Performance of Construction-Type and Production-Type Contracts.These
  contracts are executed using written contractual arrangements, most of which
  require us to design, develop, manufacture and/or modify our complex products,
  and perform related services according to specifications provided by the customer.

We account for cost-reimbursement contracts by
  charging actual labor, materials, and other direct costs, plus estimated indirect
  costs of operations as incurred. Indirect costs include overhead, research and
  development, and general and administrative expenses. General and administrative
  costs are not applied to certain subcontract costs associated with our cost-reimbursable
  contracts. These subcontracts must be in excess of $250,000 and must meet certain
  other predetermined criteria.

We recognize contract revenues and profits on cost-reimbursement
  contracts by applying an estimated fee rate to all costs incurred on an individual
  contract basis. Fee calculations are based on either negotiated fee amounts
  or managements assessment of the fee amounts that are likely to be earned.

Our policy for recognizing interim award fees on
  our cost-plus-award-fee contracts is based on managements assessment as
  to the likelihood that the award fee or an incremental portion thereof will
  be earned, on a contract-by-contract basis. Managements assessments are
  based on numerous factors including: contract terms, nature of the work to be
  performed, our relationship and history with the customer, our history with
  similar types of projects, and our current and anticipated performance on the
  specific contract. No award fee is recognized in whole or in part until management
  determines that it is probable that the award fee or portion thereof will be
  earned. If managements assessment is incorrect, the adjustment to profits
  resulting from such revisions may affect future period earnings.

Our engineering services contracts are typically
  performed on a level-of-effort basis. Revenue is recognized in accordance with
  our policy regarding cost-reimbursement contracts.

We account for fixed-price contracts by using the
  percentage-of-completion method of accounting. Under this method, labor, materials,
  and other direct costs, plus estimated indirect costs of operations are charged
  as incurred. A portion of the contract revenue, 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 revenue each period. Unexpected
  increases in the cost to develop or manufacture a product under a fixed-price
  contract, whether due to inaccurate estimates in the bidding process, unanticipated
  increases in material costs, inefficiencies, or other factors, are borne by
  us, and could have a material, adverse effect on our results of operations.

The following table represents the revenue concentration
  by contract type:





|                             | Three
          Months Ended |  | Six
          Months Ended
|---------------------------- | ---------------------------- |  | --------------------------
|                             | April 30, 2004               |  | May 2, 2003               
|Cost-reimbursement contracts | 76%                          |  | 77%                       
|Fixed-price contracts        | 24%                          |  | 23%                       



For those contracts in which all of the terms have
  not yet been finalized, revenue does not include an estimated fee rate on cost.

Management reviews contract performance, costs
  incurred, and estimated completion costs regularly. Revenues and profits are
  adjusted on all contracts in the period in which changes, including anticipated
  losses, become determinable.

Revenues from our software licenses are accounted
  for under AICPA Statement of Position 97-2, Software Recognition. Revenues
  from our software licenses have been insignificant in all periods presented.

Indirect rate variance adjustments to operations.
  We record contract revenues and costs of operations for interim reporting purposes
  based on annual targeted indirect rates. At year-end, the revenues and costs
  are adjusted for actual indirect rates. During our interim reporting periods,
  variances may accumulate between the actual indirect rates and the annual targeted
  rates. All timing-related indirect spending variances are removed from contract
  costs, research and development, and general and administrative expenses, and
  are included in inventory as part of work in process during these interim reporting
  periods. These rates are reviewed regularly, and we record reserves for any
  material, permanent variances in the period they become determinable.

Our accounting policy for recording indirect rate
  variances is based on managements belief that variances accumulated during
  interim reporting periods will be absorbed by expected contract activities during
  the remainder of the year. We consider the rate variance to be unfavorable when
  our actual indirect rates are greater than our annual targeted rates. In contrast,
  a favorable rate variance occurs when our actual indirect rates are lower than
  our annual targeted rates. During interim reporting periods, unfavorable rate
  variances are recorded as reductions to operating expenses and increases to
  work in process inventory. Favorable rate variances are recorded as increases
  to operating expenses and decreases to work in process inventory. Please refer
  to "Notes to Condensed Financial Statements, Note 2: Inventory" for
  the current year inventoried indirect rate variance.

If we anticipate that actual contract activities
  will be different than planned levels, there are alternatives we can utilize
  to absorb the variance: we can adjust our planned indirect spending during the
  year, modify our billing rates to our customers, or record adjustments to expense
  based on estimates of future contract activities.

If our rate variance is unfavorable, the modification
  of our billing rates will likely increase revenue and operating expenses, and
  decrease inventory. Fee percentages on fixed-price and cost-reimbursable contracts
  will generally decline as a result of any increase to indirect costs. If our
  rate variance is favorable, the modification of our billing rates will decrease
  revenue and operating expenses, and increase inventory. In this event, fee percentages
  on fixed price contracts will generally increase. Fee percentages on cost-reimbursable
  contracts will generally be unaffected as a result of any reduction to indirect
  costs, due to the fact that programs will typically expend all of the funds
  available. Any impact on operating income, however, will depend on a number
  of other factors, including mix of contract types, contract terms, anticipated
  performance on specific contracts, and anticipated changes in inventory.

Accounts receivable. Accounts receivable
  are segregated between billed and unbilled accounts. For cost-reimbursement
  contracts, we bill actual labor, materials, and estimated indirect costs,
  and a portion of our fees on a regular basis. Under fixed-price contracts, we
  either regularly progress bill 90% of incurred costs or bill contract costs
  on a milestone or unit of delivery basis. Unbilled amounts result from recognition
  of contract revenue in advance of contractual billing or progress billing terms.

Income taxes. Our income tax expense
  at interim reporting periods is based on an estimated effective tax rate. This
  estimated tax rate is calculated based on the projected net income at the end
  of the fiscal year, and is reviewed at each reporting period. At the end of
  the fiscal year, income tax expense is adjusted for actual results. Our effective
  tax rate can differ from the statutory rate as a result of expected benefits
  from R&D credits and the reversals of valuation allowances. Please refer
  to "Notes to Condensed Financial Statements, Note 5: Provision for Income
  Taxes" for the current year effective tax rate.

Price Redetermination

As a government contractor, we are subject to price
  redetermination on certain fixed-price contracts if the government determines
  that we did not price our products and services consistent with the requirements
  of the Federal Acquisition Regulations. During the first six months of fiscal
  years 2004 and 2003, we did not incur any price redeterminations on any of our
  contracts.

Cash Equivalents and Investments

We consider all highly liquid debt instruments
  purchased with an original maturity date of three months or less to be cash
  equivalents.

Short-term investments include all securities that
  are classified as available-for-sale and are carried at fair market value. At
  the time of purchase, management determines the appropriate classification of
  these securities and re-evaluates such designation as of each balance sheet
  date. Unrealized gains and losses, net of tax, are reported in shareholders
  equity as part of retained earnings. The cost of securities sold is based on
  the specific identification method. Realized gains and losses on sales of available-for-sale
  securities were not material in the first six months of fiscal years 2004 and
  2003.

The October 31, 2002 balance sheet was changed
  in our Annual Report on Form 10-K for our fiscal year ended October 31, 2003
  in order to correct a misclassification between cash equivalents and short-term
  investments. The misclassification had no impact on our statement of operations
  for any period. The statement of cash flows for the first six months of fiscal
  year 2003 has been changed in this report to reflect the correct beginning cash
  balance for fiscal year 2003.

The following tables summarize our cash, cash equivalents,
  and short-term securities (in thousands):

|                                           | April 30, 2004 
        _______________________________________________________________
|------------------------------------------ | ---------------------------------------------------------------------------------------
|                                           | Amortized Cost 
        ___________                                                    
|Cash and cash equivalents                  | $26,881                                                                                
|Short-term, available-for-sale securities: |                                                                                        
|Asset-backed securities                    | 7,046                                                                                  
|Corporate securities                       | 4,715                                                                                  
|Government securities                      | 7,793                                                                                  
|Money market securities                    | 1,591 
        ________                                                                
|                                           | $48,026 
        ========                                                              





|                                           | October 31, 2003 
        ____________________________________________________
|------------------------------------------ | ------------------------------------------------------------------------------
|                                           | Amortized Cost
        ________                                               
|Cash and cash equivalents                  | $5,372                                                                        
|Short-term, available-for-sale securities: |                                                                               
|Asset-backed securities                    | 7,255                                                                         
|Corporate securities                       | 8,996                                                                         
|Government securities                      | 16,442                                                                        
|Money market securities                    | 1,989 
        _______                                                        
|                                           | $40,054 
        =======                                                      



The following table summarizes the maturities of our investments (in thousands):



|                          | April 30, 2004            |  | October 31, 2003         
|------------------------- | ------------------------- |  | -------------------------
|Due in one year or less   | $16,903                   |  | $18,100                  
|Due in one to three years | 4,236 
          ______   |  | 16,647 
          ______ 
|                          | $21,139 
          ====== |  | $34,747 
          ======

Per Share Data

Basic net income per share is determined
    by dividing net income by the weighted average number of common shares outstanding
    during the period. Diluted net income per share is determined by dividing
    net income by the weighted average number of common shares used in the basic
    earnings per share calculation, plus the number of common shares that would
    be issued assuming conversion of all potentially dilutive securities outstanding
    under the treasury stock method.

The per share data is as follows
    (in thousands, except per share amounts):



|                                                             | Three Months Ended                       |                        | Six Months Ended                             
|------------------------------------------------------------ | ---------------------------------------- | ---------------------- | ---------------------------------------------
|                                                             | April
        30, 2004 
        ________ |                        | May
        2,
        2003 
        ________
|Numerator:                                                   |                                          |                        |                                              
|Net income                                                   | $                                        | 3,937 
        ======  |                                              
|Denominator:                                                 |                                          |                        |                                              
|Shares used to compute net income per common share  basic   |                                          | 10,990                 |                                              
|Effect of dilutive stock options                             |                                          | 575 
        ______    |                                              
|Shares used to compute net income per common share  diluted |                                          | 11,565 
        ====== |                                              
|                                                             |                                          |                        |                                              
|Net income per common share  basic                          | $                                        | 0.36                   |                                              
|Net income per common share  diluted                        | $                                        | 0.34                   |                                              



We excluded approximately 5,000 and 50,000 antidilutive
  potential common shares from diluted net income per common share computation
  for the second quarter and first six months of fiscal year 2004, respectively.
  For the same periods in fiscal year 2003 we excluded approximately 181,000 and
  403,000 antidilutive potential common shares from diluted net income per common
  share computation.



Comprehensive Income

The components of comprehensive income, net of
  tax, are as follows (in thousands):

|                                     | Three Months Ended                    |                      | Six Months Ended                  
|------------------------------------ | ------------------------------------- | -------------------- | ----------------------------------
|                                     | April 30, 2004
        
        _____ |                      | May 2, 2003
        
        _____
|Net income                           | $                                     | 3,937                |                                   
|Unrealized gain (loss) on securities |                                       | (73) 
        _____  |                                   
|Comprehensive income                 | $                                     | 3,864 
        ===== |                                   



As of April 30, 2004, net unrealized loss on securities
  was approximately$6,000. As of October 31, 2003, net unrealized
  gain on securities was approximately $65,000.

Dividends

As of April 30, 2004, we have an annual dividend
  of $0.50 per share, payable over four quarters at the rate of $0.125 per share
  per quarter. Dividends were paid on February 13, 2004 and May 14, 2004, and
  are payable on August 13, 2004 and November 12, 2004 for shareholders of record
  at January 30, 2004, April 30, 2004, July 30, 2004, and October 31, 2004, respectively,
  and on such future dates that the Board of Directors may determine.

We paid dividends of approximately $2,044,000 during
  the first six months of fiscal year 2004. We did not pay any dividends during
  the first six months of fiscal year 2003.

At April 30, 2004 and October 31, 2003, accrued
  dividends of approximately $1,376,000 and $673,000, respectively, were included
  in other accrued liabilities in the accompanying balance sheet.





Stock-Based Compensation

We apply Accounting Principles Board Opinion No.
  25 and related Interpretations in accounting for our stock option plans. We
  have opted, under SFAS No. 123, Accounting for Stock-Based Compensation,
  as amended by SFAS 148, to disclose our stock-based compensation with no financial
  statement effect. Under APB 25, no stock-based compensation expense is charged
  for options granted at an exercise price equal to the fair market value of the
  underlying common stock on the date of grant. Had compensation expense for our
  stock plans been determined based upon the fair value at the grant date for
  awards under these plans consistent with the methodology prescribed under SFAS
  123, our pro forma net income and net income per share would have been as follows
  (in thousands, except per share data):



|                                                                                                     |   | Three Months Ended                         |  | Six Months Ended                       
|---------------------------------------------------------------------------------------------------- | - | ------------------------------------------ |  | ---------------------------------------
|                                                                                                     |   | April 30, 2004
          
          ______ |  | May 2, 2003
          
          ______
|Net income, as reported                                                                              | $ | 3,937                                      |  | $                                      
|Deduct: total stock-based compensation
          expense determined at the fair value for all awards |   | (673) 
          ____                      |  |                                        
|Pro forma net income                                                                                 |   | $3,264 
          ====                     |  |                                        
|Net income per share                                                                                 |   |                                            |  |                                        
|Basic	 As reported                                                                                  | $ | 0.36                                       |  | $                                      
| Pro forma                                                                                          | $ | 0.30                                       |  | $                                      
|Diluted	 As
          reported                                                                      | $ | 0.34                                       |  | $                                      
| Pro forma                                                                                          | $ | 0.28                                       |  | $                                      





Note 2: Inventory

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



|                  | April 30, 2004        |  | October 31, 2003     
|----------------- | --------------------- |  | ---------------------
|Raw materials     | $1,027                |  | $775                 
|Work in process   | 3,670                 |  | 5,603                
|Finished goods    | 422 
          ______ |  | 494 
          ______
|                  | 5,119                 |  | 6,872                
|Precontract costs | 750
          ______  |  | 3 
          ______  
|                  | $5,869                |  | $6,875               





At April 30, 2004, the favorable inventoried indirect
  rate variance reduced work in process by approximately $2,572,000. At May 2,
  2003, the unfavorable inventoried indirect rate variance increased work in process
  by approximately $440,000. For further information on our accounting policy
  for this inventoried variance, see "Notes to Condensed Financial Statements,
  Note 1: Summary of Significant Accounting Policies."

Precontract costs represent costs incurred in anticipation
  of specific expected future contract awards, and cost incurred in connection
  with ongoing contracts for which contract modifications have not been defined.

We provide advanced digital signal processing products
  and systems to the US government. Typical life cycles of these products are
  eight to ten years or more. In addition, we maintain spare parts in order to
  repair the equipment. We evaluate our inventory quarterly at interim reporting
  periods, and assess our ability to sell the equipment. Historically, we have
  sold our inventory at full cost so there is no decrement in valuation. If it
  is determined that the product has reached the end of its life cycle or there
  is no longer a need for the equipment, the remaining inventory is scrapped.
  Historically, we dispose of inventory at approximately the same time that the
  scrap is recorded and we do not hold inventory reserves.

The charges associated with disposed work in process
  and finished goods are included in contract costs in our Statement of Operations.
  Raw material that is disposed of represents a minor amount of scrap and is included
  in general and administrative expenses on the Statement of Operations due to
  the fact that raw materials could be used in a variety of situations other than
  contract costs, including R&D.

Inventory activities during the first six months
  of fiscal year 2004 and fiscal year 2003 included the scrapping of approximately
  $1,000,000and $104,000, respectively, of obsolete products. The scrapped
  items included units in various stages of completion.

Note 3: Line of Credit

At April 30, 2004, we had a cash-secured line of
  credit with a bank in the amount of $2,000,000. Borrowings under the line of
  credit bear interest at the banks reference rate (4.00% at April 30, 2004)
  and accrued interest on those borrowings were payable monthly.There
  were no fees associated with the unused portion of the committed amount. The
  line of credit will expire on March 1, 2005.

Under the line of credit we had two standby letters
  of credit totaling approximately $1,370,000. One letter of credit, related to
  our facilities lease, was approximately $1,220,000 at April 30, 2004 and $1,218,000
  at October 31, 2003. The second letter of credit was obtained during the first
  quarter of fiscal year 2004 as a requirement of our workers compensation insurance,
  and was approximately $150,000 at April 30, 2004. At both April 30, 2004 and
  October 31, 2003, there were no other borrowings.

Note 4: Segment Reporting

The financial information relating toApplied
  Signal Technology is reviewed and evaluated by the chief operating decision-maker
  as a whole. Divisional financial information is not available belowthegross margin level. Thus, there is only one reportable segment during the
  first six months of fiscal years 2004 and 2003.

Note 5: Provision for Income Taxes

Our provision for income taxes for the first six
  months of fiscal year 2004 was approximately $2,073,000, and included a reduction
  to income tax expense of approximately $803,000 associated with the reversal
  of our valuation allowance on our deferred tax assets. This reduction lowered
  our effective tax rate for the second quarter and first six months of fiscal
  year 2004 to 18.8% and 25.4%, respectively. We estimate that our tax rate for
  each of the two remaining quarters could be 35% or greater, which could result
  in an annual tax rate in the range of 30% to 35%. Our provision for income taxes
  for the first six months of fiscal year 2003 was approximately $708,000, representing
  an effective tax rate of 15%. Our projected annual effective tax rate for fiscal
  year 2003 differed from the statutory rate primarily due to anticipated benefits
  from the utilization of deferred tax assets.

Note 6: Contingencies

Product Warranties

Our products, including associated firmware and
  software, are warranted against defective workmanship and materials for a period
  of one year from the date of acceptance by the original purchaser. In addition,
  we offer extended warranties at a cost equal to a percentage of the purchase
  price. An additional six-month warranty may be purchased for 3% of the unit
  or system purchase price. Alternatively, one-year warranty coverage is 5% of
  the unit or system purchase price. Warranty costs were approximately $31,000
  and $72,000 for the second quarter and first six months of fiscal year 2004,
  respectively. Fiscal year 2003 warranty costs were approximately $46,000 and
  $89,000 during the second quarter and first six months, respectively.

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 condensed financial statements and notes thereto, as well
  as our Annual Report on Form 10-K for the year ended October 31, 2003.

This quarterly report on Form 10-Q contains forward-looking
  statements made pursuant to the provisions of Section 21E of the Securities
  Exchange Act of 1934. These forward-looking statements are based on managements
  current expectations and beliefs, including estimates and projections about
  our industry. Forward-looking statements may be identified by the use of terms
  such as "anticipates," "expects," "intends," "plans,"
  "seeks," "estimates," "believes," and similar
  expressions, although some forward-looking statements are expressed differently.
  Statements concerning financial position, business strategy, and plans or objectives
  for future operations are forward-looking statements. These statements are not
  guarantees of future performance and are subject to certain risks, uncertainties,
  and assumptions that are difficult to predict and may cause actual results to
  differ materially from managements current expectations. Such risks and
  uncertainties include those set forth in this document under "Summary of
  Business Considerations and Certain Factors that May Affect Future Operating
  Results and/or Stock Price." The forward-looking statements in this report
  speak only as of the time they are made and do not necessarily reflect managements
  outlook at any other point in time. We undertake no obligation to update publicly
  any forward-looking statements, whether as a result of new information, future
  events, or for any other reason. However, readers should carefully review the
  risk factors set forth in other reports or documents we file from time to time
  with the Securities and Exchange Commission (SEC).

Description of the Business

Applied Signal Technology, Inc. provides advanced
  digital signal processing products, systems, and services used in reconnaissance
  of telecommunications signals for intelligence gathering, a process referred
  to as signal intelligence. Our primary customer is the United States Government.
  We develop and manufacture equipment for both the collection and processing
  of signals. Our signal collection equipment consists of sophisticated receivers
  that scan through potentially thousands of cellular telephone, microwave, ship-to-shore,
  and military transmissions in the radio frequency (RF) spectrum with the goal
  of collecting certain specific signals. Our signal processing equipment uses
  advanced software and hardware to evaluate characteristics of the collected
  signals and selects those most likely to contain relevant information. At inception,
  our efforts were primarily focused on processing equipment. Over time, we have
  broadened our scope to add specialized collection equipment and complete signal
  processing systems.

We were incorporated in California in 1984. Our principal
  executive offices are located at 400 West California Ave., Sunnyvale, CA, 94086,
  and our telephone number is (408) 749-1888. Our web site address iswww.appsig.com.
  The information posted on our web site is not incorporated into this quarterly
  report.However, investors can obtain a copy of this report, previous
  quarterly reports on Form 10-Q, our latest Annual Report on Form 10-K, current
  reports on Form 8-K, and amendments to such reports filed or furnished with
  the SEC on our web site free of charge. In addition, hard copies can be obtained
  free of charge through our investor relations department.

Critical Accounting Policies and Estimates

General. Our
  discussion and analysis of our financial condition and results of operations
  are based upon our financial statements. These financial statements are prepared
  in accordance with accounting principles generally accepted in the United States,
  which require management to make estimates and assumptions that affect the amounts
  reported in the financial statements and accompanying notes. Actual results
  could differ significantly from those estimates. We believe that the estimates,
  assumptions, and judgments involved in the accounting policies described below
  have the greatest potential impact on our financial statements and, therefore,
  consider these to be critical accounting policies. See Note 1 to condensed
  financial statements included elsewhere in this report for more information
  about these critical accounting policies, as well as descriptions of other significant
  accounting policies.

Revenue and cost recognition. The
  majority of our contracts are accounted for in accordance with the American
  Institute of Certified Public Accountants Statement of Opinion 81-1, Accounting
  for Performance of Construction-Type and Production-Type Contracts.These
  contracts are executed using written contractual arrangements, most of which
  require us to design, develop, manufacture and/or modify our complex products,
  and perform related services according to specifications provided by the customer.

We account for cost-reimbursement contracts by
  charging actual labor, materials, and other direct costs, plus estimated indirect
  costs of operations as incurred. Indirect costs include overhead, research and
  development, and general and administrative expenses. General and administrative
  costs are not applied to certain subcontract costs associated with our cost-reimbursable
  contracts. These subcontracts must be in excess of $250,000 and must meet certain
  other predetermined criteria. We recognize contract revenues and profits on
  cost-reimbursement contracts by applying an estimated fee rate to all costs
  incurred on an individual contract basis. Fee calculations are based on either
  negotiated fee amounts or managements assessment of the fee amounts that
  are likely to be earned.

Our policy for recognizing interim fees on our
  cost-plus-award-fee contracts is based on managements assessment as to
  the likelihood that the award fee or an incremental portion of the award fee
  will be earned, on a contract-by-contract basis. Managements assessments
  are based on numerous factors including: contract terms, nature of the work
  to be performed, our relationship and history with the customer, our history
  with similar types of projects, and our current and anticipated performance
  on the specific contract. No award fee is recognized until management determines
  that it is probable that an award fee or a portion thereof will be earned. Managements
  estimates are typically consistent with actual fees awarded. However, changes
  could arise within an award fee period causing management to either lower or
  raise the award fee estimate in the period in which it occurs.

Our engineering services contracts are typically
  performed on a level-of-effort basis. Revenue is recognized in accordance with
  our policy regarding cost-reimbursement contracts.

We account for fixed-price contracts by using the
  percentage-of-completion method of accounting. Under this method, labor, materials,
  and other direct costs, plus estimated indirect costs of operations are charged
  as incurred. A portion of the contract revenue, 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 revenue each period.

For those contracts in which all of the terms have
  not yet been finalized, revenue does not include an estimated fee rate on cost.

Management reviews contract performance, costs
  incurred, and estimated completion costs regularly. Revenues and profits are
  adjusted on all contracts in the period in which changes, including anticipated
  losses, become determinable. Unexpected increases in the cost to develop or
  manufacture a product, whether due to inaccurate estimates in the bidding process,
  unanticipated increases in material costs, inefficiencies, or other factors,
  are borne by us on fixed-price contracts, and could have a material adverse
  effect on results of operations and financial condition.Unexpected cost
  increases in cost-reimbursement contracts may be borne by us for purposes of
  maintaining customer relationships.Historically, the effect on operating
  results and financial condition from cost-reimbursement losses has been minimal.

Indirect rate variance adjustment to operations.
  We record contract revenues and costs of operations for interim reporting purposes
  based on annual targeted indirect rates. During our interim reporting periods,
  variances may accumulate between the actual indirect rates and the annual targeted
  rates. All timing-related indirect spending variances are removed from contract
  costs, research and development, and general and administrative expenses and
  are included in inventory as part of work in process during these interim reporting
  periods. These rates are reviewed regularly, and we record adjustments for any
  material, permanent variances in the period they become determinable. We have
  determined that this estimate is the preferred practice used within our industry.
  At year-end, the revenues and costs are adjusted for actual indirect rates.

Our accounting policy for recording the indirect
  rate variance is based on managements belief that variances accumulated
  during interim reporting periods will be absorbed by expected contract activities
  during the remainder of the year. We consider the rate variance to be unfavorable
  when our actual indirect rates are greater than our annual targeted rates. In
  contrast, a favorable rate variance occurs when our actual indirect rates are
  lower than our annual targeted rates. During interim reporting periods, unfavorable
  rate variances are recorded as reductions to operating expenses and increases
  to work in process inventory. Favorable rate variances are recorded as increases
  to operating expenses and decreases to work in process inventory.

If we anticipate that actual contract activities
  will be different than planned levels, there are alternatives we can utilize
  to reduce the variance: we can adjust some of our planned indirect spending
  during the year, modify our billing rates to our customers, or record adjustments
  to expense based on estimates of future contract activities. At April 30, 2004,
  the favorable inventoried indirect rate variance was approximately $2,572,000.
  At May 2, 2003, the unfavorable inventoried rate variance was approximately
  $440,000.

If our rate variance is unfavorable, the modification
  of our billing rates will likely increase revenue and operating expenses, and
  decrease inventory. Fee percentages on fixed-price and cost-reimbursement contracts
  will generally decline as a result of any increase to indirect costs. If our
  rate variance is favorable, the modification of our billing rates will decrease
  revenue and operating expenses, and increase inventory. In this event, fee percentages
  on fixed-price contracts will generally increase. Fee percentages on cost-reimbursable
  contracts will generally be unaffected as a result of any reduction to indirect
  costs, due to the fact that programs will typically expend all of the funds
  available. Any impact on operating income, however, depends on a number of other
  factors, including mix of contract types, contract terms, and anticipated performance
  on specific contracts, and anticipated changes in inventory.

We expect to absorb the current positive indirect
  rate variance through certain contract activities. However, if these activities
  do not absorb the positive indirect rate variance, we may have to modify our
  billing rates during the remaining six months of fiscal year 2004. In the event
  that our rates decline, our revenues and contract costs could decline creating
  a marginal increase in fees, overall. This is due to the fact that we believe
  our largest portion of revenues will be from cost-reimbursement contracts, whose
  fee percentages will be unaffected, since these programs will likely expend
  the total funds available. However, we also believe that we will experience
  a marginal increase in operating income due to the increased profitability on
  our fixed-price contracts.

Income taxes. Our income tax expense
  at interim reporting periods is based on an estimated effective tax rate. This
  estimated tax rate is calculated based on the projected net income at the end
  of the fiscal year, and is reviewed at each reporting period. At the end of
  the fiscal year, income tax expense is adjusted for actual results. Our effective
  tax rate can differ from the statutory rate as a result of expected benefits
  from R&D credits and the reversals of valuation allowances.

Price Redetermination. As a government
  contractor, we are subject to price redetermination on certain fixed-price contracts
  if it is determined that we did not price our products and services consistent
  with the requirements of the Federal Acquisition Regulations. During the first
  six months of fiscal years 2004 and 2003, we did not incur any price redeterminations
  on any of our contracts.

Overview

As of April 30, 2004, we continue to believe that
  there is a renewed interest in signal intelligence by the US government to respond
  to the threat of terrorist activities and the war against terrorism. We also
  believe that our company is well positioned to benefit from the spending that
  might result.

A significant portion of our revenue is generated
  by cost-reimbursable contracts. These contracts tend to be developmental in
  nature, and require highly specialized, technical skill sets. We believe that
  this trend will continue through the end of fiscal year 2004.

Three and Six Months Ended April 30, 2004 Compared to
  Three and Six Months Ended 
  May 2, 2003

Revenues and backlog. Revenues
  for the second quarter of fiscal year 2004 were approximately $36,811,000, a
  66.7% increase from revenues of approximately $22,081,000 recorded in the second
  quarter of fiscal year 2003. Revenues for the first six months of fiscal year
  2004 were approximately $65,105,000, a 61.7% increase from revenues of approximately
  $40,259,000 recognized during the first six months of fiscal year 2003. It is
  our belief that the increase in revenues recorded during the second quarter
  and first six months of fiscal year 2004, when compared to the same periods
  in fiscal year 2003, is due to an emphasis by the US government on intelligence
  to support the war against terrorism.

New orders received for the second quarter and
  first six months of fiscal year 2004 were approximately$28,636,000,
  and $93,185,000, respectively, compared to approximately $19,479,000 and $31,523,000
  received during the same periods in fiscal year 2003. New orders were greater
  during the second quarter of fiscal year 2004 when compared to the second quarter
  of fiscal year 2003 due to what we believe to be the US governments emphasis
  on intelligence. The significant increase in new orders during the first six
  months of fiscal year 2004 was primarily due to a major modification of our
  largest contract.

Our backlog consists of the uncompleted portions
  of existing contracts (excluding unexercised options). At April 30, 2004, ending
  backlog was approximately $113,832,000, representing a 30.7% increase from ending
  backlog of approximately $87,074,000 at October 31, 2003.

Cost-reimbursement contracts typically do not return
  as high a profit margin asfixed-price contracts and accordingly our profit
  margin will be affected by the mix of our orders by contract type. The following
  table represents the revenue concentration by contract type:

|                                     | Three
        Months Ended | Six
        Months Ended |                             | Twelve
        Months Ended   
|------------------------------------ | -------------------------- | ------------------------ | --------------------------- | ------------------------------
|                                     | April
        30, 2004     |                          | May
        2,
        2003 | April
        30,
        2004
|Cost-reimbursement
        contracts | 76%                        |                          | 77%                         | 75%                           
|Fixed-price contracts                | 24%                        |                          | 23%                         | 25%                           





We currently anticipate that the mix of contract
  types for fiscal year 2004 will be similar to that experienced in fiscal year
  2003.

Our single largest contract represented 21% of
  revenues for the second quarter and first six months of fiscal year 2004. For
  the second quarter and first six months of fiscal year 2003 our single largest
  contract represented 22% and 20% of revenues, respectively. In addition, another
  significant program represented approximately 10% and 9% for the second quarter
  and first six months of fiscal year 2004, respectively. This program did not
  recognize any revenues during the same periods of fiscal year 2003, since it
  did not begin until the fourth quarter of fiscal year 2003.

Contract costs. Contract costs consist
  of direct costs incurred in the performance of the contract, including labor,
  materials, and estimated overhead costs. Contract costs were approximately $24,146,000,
  or 65.6%, of revenues for the second quarter of fiscal year 2004 compared to
  approximately $13,856,000, or 62.8%, of revenues for the same period of fiscal
  year 2003. During the first six months of fiscal year 2004, we incurred contract
  costs of approximately $42,446,000, or 65.2% of revenues, compared to contract
  costs incurred during the first six months of fiscal year 2003 of approximately
  $25,412,000, or 63.1% of revenues. Contract costs increased as a percentage
  of revenue during the first six months of fiscal year 2004 primarily due to
  the mix of program types. In addition, contract costs, as a percentage of revenues
  during the first six months of fiscal year 2004, were within historical levels.

Research and development (R&D).
  Company-directed investment in research and development consists of expenditures
  recoverable from customers through our billing rates and expenditures funded
  from earnings. For interim reporting periods R&D expenses include labor,
  materials and estimated overhead costs, R&D expenses were approximately$3,419,000, or 9.3%, of revenues for the second quarter of fiscal year
  2004 compared to approximately $1,900,000, or 8.6%, of revenues for the
  same period of fiscal year 2003. During the first six months of fiscal year
  2004, R&D expenses were approximately $5,556,000, or 8.5%, of revenues compared
  to approximately $3,601,000, or 8.9%, of revenues incurred during the first
  six months of fiscal year 2003. R&D expenses grew in absolute dollars based
  on managements decision to try to maintain R&D spending as a percent
  of projected revenues at levels comparable to historical levels.

General and administrative. General
  and administrative expenses include administrative salaries, costs related to
  marketing and proposal activities, costs associated with product warranties,
  and other administrative costs. We record general and administrative expenses
  based on annual targeted indirect rates applied to the quarterly revenue base,
  for interim reporting periods. General and administrative expenses were approximately
  $4,534,000, or 12.3%, of revenues for the second quarter of fiscal year
  2004 compared to approximately $3,805,000, or 17.2%, of revenues for the same
  period of fiscal year 2003. General and administrative expenses incurred during
  the first six months of fiscal year 2004 were approximately $9,215,000, or 14.2%,of revenues compared to approximately $6,726,000, or 16.7%, of revenues
  incurred during the first six months of fiscal year 2003. General and administrative
  expenses were higher in absolute dollars during the second quarter and first
  six months of fiscal year 2004 primarily due to our annual targeted indirect
  rate applied to a higher revenue base. General and administrative expenses were
  lower as a percentage of revenue due to our ability to significantly grow revenues
  without having to proportionately increase our general and administrative expenditures.
  However, we believe that our rapid growth in revenue could cause additional
  general and administrative expenditures during the remaining six months of fiscal
  year 2004, and bring general and administrative expenses up to historical levels
  by the end of fiscal year 2004.

Product warranties. Our products,
  including associated firmware and software, are warranted against defective
  workmanship and materials for a period of one year from the date of acceptance
  by the original purchaser. In addition, we offer extended warranties as a percentage
  of the purchase price. An additional six-month warranty may be purchased for
  3% of the unit or system purchase price. Alternatively, one-year warranty coverage
  is 5% of the unit or system purchase price. Warranty costs were approximately
  $31,000 and $72,000 for the second quarter and first six months of fiscal year
  2004, respectively. Fiscal year 2003 warranty costs were approximately $46,000
  and $89,000 during the second quarter and first six months, respectively.

Interest income (expense), net. Net
  interest income for the second quarter of fiscal year 2004 was approximately
  $137,000 compared to net interest income of approximately $100,000 for the second
  quarter of fiscal year 2003. Net interest income recognized during the first
  six months of fiscal year 2004 was approximately $278,000 compared to approximately
  $200,000 recognized during the same period of fiscal year 2003. Interest income
  increased during the second quarter and first six months of fiscal year 2004
  as a result of higher cash and investment balances at the beginning of fiscal
  year 2004 when compared to the beginning of fiscal year 2003.

Provision for income taxes. Our provision
  for income taxes for the first six months of fiscal year 2004 was approximately
  $2,073,000 and included a reduction of approximately $803,000 of income tax
  expense associated with the reversal of our valuation allowance on our deferred
  tax assets. This reduction lowered our effective tax rate for the second quarter
  and first six months of fiscal year 2004 to 18.8% and 25.4%, respectively. We
  estimate that our tax rate for each of the two remaining quarters could be 35%
  or greater, which could result in an annual tax rate in the range of 30% to
  35%. Our provision for income taxes for the first six months of fiscal year
  2003 was approximately $708,000, representing an effective tax rate of 15%.
  Our provision for income taxes for the first six months of fiscal year 2003
  was approximately $708,000, representing an effective tax rate of 15%. Our projected
  annual effective tax rate for fiscal year 2003 differed from the statutory rate
  primarily due to anticipated benefits from the utilization of deferred tax assets.

Analysis of Liquidity and Capital Resources

Our primary sources of liquidity during the first
  six months of fiscal year 2004 were cash flows generated from operations and
  the issuance of common stock through our employee stock option plans and purchase
  plan.

The October 31, 2002 balance sheet was changed
  in our Annual Report on Form 10-K for our fiscal year ended October 31, 2003
  in order to correct a misclassification between cash equivalents and short-term
  investments. The misclassification had no impact on our statement of operations
  for any period. The statement of cash flows for the first six months of fiscal
  year 2003 has been changed in this report to reflect the correct beginning cash
  balance for fiscal year 2003.

Net cash from operating activities.
  Net cash provided by operating activities has varied significantly from quarter
  to quarter. These quarter-to-quarter variances are primarily the result of changes
  in net income and operating assets and liabilities. Operating activities provided
  approximately $9,222,000and $8,275,000 during the first six months of
  fiscal years 2004 and 2003, respectively. Net income for the first six months
  of fiscal year 2004 was approximately$6,093,000 compared to a net income
  of approximately $4,012,000 for the comparable period of fiscal year 2003. This
  increase in net income is due in part to our growth in revenues and in part
  to an increase in program profitability at the completion of certain production
  programs.

Accounts receivable balances increased during the
  first six months of fiscal year 2004 by approximately $4,245,000, whereas during
  the comparable period of fiscal year 2003 accounts receivable balances decreased
  by approximately $4,033,000. Accounts receivable balances increased during the
  first six months of fiscal year 2004 due to the significant revenue generated
  during this period.In contrast, the revenues generated during
  the first six months of fiscal year 2003 were less than the cash received on
  collections of accounts receivable, which caused our accounts receivable balances
  to decrease during the first six months of fiscal year 2003. The significant
  amount of cash received during the first six months of fiscal year 2003 was
  primarily the result of an improved payment process of one of our significant
  customers.

Cash used to support inventory, prepaid expenses,
  and other assets was approximately $400,000 and $3,012,000 during the first
  six months of fiscal years 2004 and 2003, respectively. The primary fluctuation
  in cash used between the first six months of fiscal year 2004 and the first
  six months of fiscal year 2003 is due to the difference in the rate variance
  between those two periods.In the first six months of fiscal year
  2004, the favorable rate variance decreased inventory balances by approximately
  $2,572,000.During the same period of fiscal year 2003, the unfavorable
  rate variance increased inventory balances by approximately $440,000.

The change in accounts payable, taxes payable and
  accrued liabilities balances resulted in a net increase of approximately $5,564,000
  and $868,000 during the first six months of fiscal years 2004 and 2003, respectively.
  Income taxes payable increased approximately $2,581,000 during the first six
  months of fiscal year 2004, compared to no change during the first six months
  of fiscal year 2003. The difference in the income taxes payable activities between
  fiscal years 2004 and 2003 is the difference in the effective tax rate (35%
  for fiscal year to date 2004 and 15% for fiscal year 2003). Accrued payroll
  liabilities increased approximately $1,009,000 during the first six months of
  fiscal year 2004 and approximately $509,000 during the first six months of fiscal
  year 2003. The primary fluctuation between accrued payroll activities is the
  significant increase to our staff during the first six months of fiscal year
  2004, when compared to the same period of fiscal year 2003. Accounts payable
  and other accrued liabilities increased approximately $1,974,000 and $359,000
  during the first six months of fiscal years 2004 and 2003, respectively. The
  difference between accounts payable activities during the first six months of
  fiscal years 2004 and 2003 is due to a significant increase in contract activity.

Net cash from investing activities.
  During the first six months of fiscal year 2004 investing activities provided
  cash of approximately $11,633,000, and used cash of approximately $13,425,000
  during the first six months of fiscal year 2003. The primary difference between
  fiscal years 2004 and 2003 was the significant proceeds received from the sales
  of short term investments during the first six months of fiscal year 2004. The
  company adopted an investment policy with a shorter average maturity date resulting
  in the sale of longer term securities.

Net cash from financing activities.
  Financing activities provided cash of approximately $654,000 during the first
  six months of fiscal year 2004 and approximately $1,263,000 during the same
  period in fiscal year 2003. The source of cash provided by financing activities
  in both periods was the issuance of common stock under our employee stock purchase
  plan and stock option plans. Cash from our stock option exercises increased
  during the first six months of fiscal year 2004, when compared to fiscal year
  2003, by approximately $1,314,000. We believe our employees exercised more options
  during the first six months of fiscal year 2004 due to the increase in market
  value of our common stock. However, cash from the issuance of common stock in
  the first six months of fiscal year 2004 was offset by dividend payments of
  $2,044,000. We did not pay any dividends during the first six months of fiscal
  year 2003.

Cash is generated primarily from operating activities,
  employee stock activities, and investing activities. Our investment portfolio
  includes a variety of low-risk investments. We believe the primary risk to liquidity
  is the potential decrease in demand for our products and services. Historically,
  this demand has been influenced by the needs of the United States intelligence
  community.

At April 30, 2004, we had a cash-secured line of
  credit with a bank in the amount of $2,000,000. Borrowings under the line of
  credit bear interest at the banks reference rate (4.00% at April 30, 2004)
  and accrued interest on those borrowings were payable monthly. There were no
  fees associated with the unused portion of the committed amount. This line of
  credit will expire on March 1, 2005.

Under the line of credit we had two standby letters
  of credit totaling approximately $1,370,000. One letter of credit, related to
  our facilities lease, was approximately $1,220,000 and $1,218,000 at April 30,
  2004 and October 31, 2003, respectively. The second letter of credit was obtained
  during the first quarter of fiscal year 2004 as a requirement of our workers
  compensation insurance, and was approximately $150,000 at April 30, 2004. At
  both April 30, 2004 and October 31, 2003, there were no other borrowings.

We believe that the funds generated from operations,
  existing working capital, and the amount available under our existing line of
  credit will be sufficient to meet our cash needs for the next twelve months.

Summary of Business Considerations and Certain
  Factors That May Affect Future Results of Operations and/or Stock Price

Our future performance is subject to a variety
  of risks. If any of the following risks actually occur, our business could be
  harmed and the trading price of our common stock could decline. In addition
  to the following disclosures, please refer to the other information contained
  in this report, including financial statements and the related notes.

Any reduction in government spending on signal
  intelligence could materially adversely impact our revenues, results of operations,
  and financial condition.Historically, defense and intelligence agencies
  of the United States Government have accounted for almost all of our revenues.
  There are risks associated with programs that are subject to appropriation by
  Congress, which could be potential targets for reductions in funding to pay
  for other programs. Future reductions in United States Government spending on
  signal intelligence or future changes in the kind of signal intelligence products
  or services required by the United States Government agencies could limit demand
  for our products and services, which would have a material adverse effect on
  our operating results and financial condition.

Also, potential shifts in responsibilities and
  functions within the defense and intelligence communities could result in a
  reduction of orders for signal intelligence by the defense and intelligence
  agencies that have historically been our major customers. We believe that the
  United States Government may compensate for reduced order flow by these agencies
  with increases in spending for signal intelligence by other Government agencies.
  However, our relationships with other Government agencies are not as strong
  as our relationships with current customer agencies. A reduction in contracts
  from our customer agencies may not be offset by contracts from other United
  States Government agencies. Even if other agencies increase spending for signal
  intelligence, we may not secure the same amount of work from such other agencies.
  As a result, demand for our products and services could decline, resulting in
  a decrease in revenues, and could adversely affect our operating results and
  financial condition materially.

If we are unable to comply with complex government
  regulations governing security and contracting practices, we could be disqualified
  as a supplier to the United States Government.As a supplier to United
  States Government defense and intelligence agencies, we must comply with numerous
  regulations, including those governing security and contracting practices. Failure
  to comply with these procurement regulations and practices could result in fines
  being imposed against us or our suspension for a period of time from eligibility
  for bidding on, or for award of, new government contracts. If we are disqualified
  as a supplier to government agencies, we will lose most, if not all, of our
  customers, revenues from sales of our products would decline significantly,
  and our ability to continue operations would be seriously jeopardized. Among
  the causes for disqualification are violations of various statutes, including
  those related to procurement integrity, export control, US government security
  regulations, employment practices, protection of the environment, accuracy of
  records in the recording of costs, and foreign corruption. The government may
  investigate and make inquiries of our business practices and conduct audits
  of contract performance and cost accounting. Depending on the results of these
  audits and investigations, the government may make claims against us, and if
  they prevail, certain incurred costs would not be recoverable.

We depend on revenues from a few significant
  contracts, and any loss, cancellation, reduction, or delay in these contracts
  could harm our business. From
  time to time, including recent periods, we have derived a material portion of
  our revenue from one or more individual contracts that could be terminated by
  the customer at the customers discretion. We expect that in future periods
  we may again enter into individual contracts with significant revenue concentrations.
  If such contracts were terminated, revenues and net income would significantly
  decline. Our success will depend on our continued ability to develop and manage
  relationships with significant customers. Although we are attempting to expand
  our customer base, we expect that our customer concentration will not change
  significantly in the near future. The markets in which we sell our products
  are dominated by a relatively small number of governmental agencies and allies
  of the United States Government, thereby limiting the number of potential customers.
  Our dependence on large orders from a relatively small number of customers makes
  our relationship with each customer critical to our business. We cannot be sure
  that we will be able to retain our largest customers, that we will be able to
  attract additional customers, or that our customers will continue to buy our
  products in the same amounts as in prior years. The loss of one or more of our
  largest customers, any reduction or delay in sales to these customers, our inability
  to successfully develop relationships with additional customers, or future price
  concessions that we may have to make could significantly harm our business.

Continued competition in our markets may lead to a reduction
  in our revenues and market share. The
  signal intelligence market is highly competitive and we expect that competition
  will increase in the future. Our current competitors have significantly greater
  technical, manufacturing, financial, and marketing resources than we do. We
  expect that more companies will enter the market for signal intelligence. We
  may not be able to compete successfully against either current or future competitors.
  Increased competition could result in reduced revenue, lower margins, or loss
  of market share, any of which could significantly harm our business. Our competitors
  may introduce improved products with lower prices, and we will have to do the
  same to remain competitive.

If we are unable to recruit, train, and retain
  key personnel with required security clearances, our ability to develop, introduce,
  and sell our products may be adversely impacted. Our ability to execute
  our business plan is contingent upon successfully attracting and retaining qualified
  employees who obtain, or are able to obtain, necessary government security clearances.
  If we fail to attract and retain qualified employees who can obtain the necessary
  security clearances, our business could be significantly harmed. The loss of
  the services of any of our qualified employees, the inability to attract or
  retain qualified personnel in the future, or delays in hiring required personnel
  could negatively impact our ability to develop, introduce, and sell our products.
  In addition, employees may leave us and subsequently compete against us.

Many of the personnel we hire will need US government
  security clearances in order to perform tasks we require on our government contracts.
  We have found that there is a shortage of qualified personnel possessing the
  necessary clearances, and new security clearances are taking longer to be granted.
  If we are not able to obtain security clearances for our personnel where required,
  they will be unable to perform tasks requiring clearances, and we may be unable
  to satisfy the terms of our contracts, resulting in customer dissatisfaction
  and possible loss of current or future contracts.

Unexpected increases in the cost to develop
  or manufacture our products under fixed-price contracts may cause us to experience
  unreimbursed cost overruns. A significant portion of our revenue is
  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 us. We have experienced cost
  overruns in the past that have resulted in losses on certain contracts, and
  may experience additional cost overruns in the future. Such cost overruns would
  increase our operating expenses, reduce our net income and earnings per share,
  and have a materially adverse effect on our future results of operations and
  financial condition.

Unexpected contract terminations could negatively
  impact our operating results and financial condition.Almost all of
  our contracts contain termination clauses that permit contract termination upon
  our default or for the convenience of the other contracting party. In either
  case, termination could adversely affect our operating results and financial
  condition. For example, in fiscal year 2001, we received unanticipated contract
  closeout notifications on three significant engineering contracts for the convenience
  of the other contracting party. These closeouts contributed, in part, to our
  need to reduce our cost structure during fiscal year 2001. There were no such
  notifications in subsequent years.

Our future revenues are inherently unpredictable, our operating
  results are likely to fluctuate from period to period, and if we fail to meet
  the expectations of securities analysts or investors, our stock price could
  decline significantly.Our quarterly and annual
  operating results have fluctuated in the past and are likely to fluctuate significantly
  in the future due to a variety of factors, some of which are outside our control.
  Accordingly, we believe that period-to-period comparisons of our results of
  operations are not meaningful and should not be relied upon as indications of
  future performance. Some of the factors that could cause our quarterly or annual
  operating results to fluctuate includeconditions
  inherent in government contracting and our business such as the timing of cost
  and expense recognition for contracts, the United States Government contracting
  and budget cycles, and contract closeouts.Because we base
  our operating expenses on anticipated revenue trends and a high percentage of
  our expenses are fixed in the short term, any delay in generating or recognizing
  forecasted revenues could significantly harm our business.Fluctuations
  in quarterly results, competition, or announcements of extraordinary events
  such as acquisitions or litigation may cause revenues to
  fall below the expectations of securities analysts and investors. In this event,
  the trading price of our common stock could significantly decline.In addition, there can be no assurance that an active trading market will be
  sustained for our common stock. The stock market in recent years has experienced
  extreme price and volume fluctuations that have particularly affected the market
  prices of many technology companies. These fluctuations, as well as general
  economic and market conditions, may adversely affect the future market price
  of our common stock.

Our market is subject to rapid technological
  change, and to compete effectively, we must continually introduce new products
  or enhancements that achieve market acceptance.The market for our products
  is characterized by rapidly changing technology,frequent
  new product introductions, changes in customer requirements, and evolving industry
  standards.We believe that we have been successful
  to date in identifying certain signal intelligence needs early, investing in
  research and development to meet these needs, and delivering products before
  our competitors. We believe that our future success will depend upon continued
  development and timely introduction of products capable of collecting or processing
  new types of telecommunications signals. However, we expect
  that new technologies will continue to emerge. Our future performance will depend
  on the successful development, introduction, and market acceptance of new and
  enhanced products that address these changes as well as current and potential
  customer requirements. The introduction of new and enhanced products may cause
  our customers to defer or cancel orders for existing products.There
  can be no assurance that we 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 our products or technologies noncompetitive or obsolete.

We also may not be able to develop the underlying
  core technologies necessary to create new products and enhancements or to license
  these technologies from third parties. Product development delays may result
  from numerous factors, including:

- Changing product specifications and customer
    requirements
- Difficulties in hiring and retaining necessary
    technical personnel
- Difficulties in reallocating engineering resources
    and overcoming resource limitations
- Difficulties with contract manufacturers
- Changing market or competitive product requirements
- Unanticipated engineering complexities

The development of new,
  technologically advanced products is a complex and uncertain process requiring
  high levels of innovation and highly skilled engineering and development personnel,
  as well as the accurate anticipation of technological and market trends. We
  cannot ensure that we will be able to identify, develop, manufacture, market,
  or support new or enhanced products successfully, if at all, or on a timely
  basis. Further, we cannot ensure that our new products will gain market acceptance
  or that we will be able to respond effectively to product announcements by competitors,
  technological changes, or emerging industry standards. Any failure to respond
  to technological change would significantly harm our business.

Our results of operations could be negatively
  impacted if we are required to write off inventory deemed not saleable or usable.Some of our products or raw materials may become obsolete or unusable while
  in inventory. This could be due to changing customer specifications, decreases
  in demand for existing products, or changes in government spending on signal
  intelligence. Work in process deemed not saleable is written off to contract
  costs in our Statement of Operations, while unusable raw materials are written
  off to general and administrative expenses.

We may lose sales if our suppliers fail to meet our needs.Although we procure most of our parts
  and components from multiple sources or believe 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. While we believe that
  substitute components or assemblies could be obtained, use of substitutes would
  require development of new suppliers or would require us to re-engineer our
  products, or both, which could delay shipment of our products and could have
  a material adverse effect on our operating results and financial condition.

Our headquarters and most of our operations
  are located in California where natural disasters may occur, resulting in disruption
  to our business. Our corporate headquarters, including most of our research
  and development operations and production facilities, are located in the Silicon
  Valley area of Northern California, a region known for being vulnerable to natural
  disasters and other risks, such as earthquakes, fires, and floods, which at
  times have disrupted the local economy and posed physical risks to our property.
  A significant earthquake could materially affect operating results. We are not
  insured for most losses and business interruptions of this kind, and do not
  presently have redundant, multiple site capacity in the event of a natural disaster.
  In the event of such disaster, our business would suffer.

Delays in the receipt of engineering contracts
  could negatively impact our business. During our history, we have experienced
  delays in the receipt of certain contracts. While we work closely with our customers
  to try to capture what we believe to be sole-source orders, delays in the receipt
  of such orders could result in revenues falling short of estimates. In addition,
  gross margins and net income will decrease if we elect to hold our cost structure
  in place while awaiting the award of delayed contracts.

Our failure to protect our intellectual property
  may significantly harm our business.Our
  success and ability to compete is dependent in part on our proprietary technology.
  We rely on a combination of patent, copyright, trademark, and trade secret laws,
  as well as confidentiality agreements to establish and protect our proprietary
  rights. We license certain of our proprietary technology to customers, and we
  rely largely on provisions of our licensing agreements to protect our intellectual
  property rights in this technology. To date, we have relied primarily on proprietary
  processes and know-how to protect our intellectual property. Although we have
  filed applications for several patents, two of which we currently hold, we cannot
  ensure that any patents will be issued as a result of pending patent applications
  or that our issued patents will be upheld. Any infringement of our proprietary
  rights could result in significant litigation costs, and any failure to adequately
  protect our proprietary rights could result in our competitors offering similar
  products, potentially resulting in loss of a competitive advantage and decreased
  revenues. Despite our efforts to protect our proprietary rights, existing patent,
  copyright, trademark, and trade secret laws afford only limited protection.
  In addition, the laws of some foreign countries do not protect our proprietary
  rights to the same extent as do the laws of the United States. Attempts may
  be made to copy or reverse engineer aspects of our products or to obtain and
  use information that we regard as proprietary. Accordingly, we may not be able
  to prevent misappropriation of our technology or deter others from developing
  similar technology. Furthermore, policing the unauthorized use of our products
  is difficult. Litigation may be necessary in the future to enforce our intellectual
  property rights or to determine the validity and scope of the proprietary rights
  of others. This litigation could result in substantial costs and diversion of
  resources, and could significantly harm our business.

Claims that we infringe third-party intellectual
  property rights could result in significant expenses or restrictions on our
  ability to sell our products.It is possible that from time to time,
  other parties may assert patent, copyright, trademark, and other intellectual
  property rights to technologies and in various jurisdictions that are important
  to our business. Any claims asserting that our products infringe or may infringe
  proprietary rights of third parties, if determined adverse to us, could significantly
  harm our business. Any claims, with or without merit, could result in costly
  litigation, divert the efforts of our technical and management personnel, cause
  product shipment delays, or require us to enter into royalty or licensing agreements,
  any of which could significantly harm our business. Royalty or licensing agreements,
  if required, may not be available on terms acceptable to us, if at all. In addition,
  our agreements with our customers typically require us to indemnify our customers
  from any expense or liability resulting from claimed infringement of third-party
  intellectual property rights. In the event a claim against us was successful
  and we could not obtain a license to the relevant technology on acceptable terms,
  license a substitute technology, or redesign our products to avoid infringement,
  our business would be significantly harmed.

Item 3: Quantitative and Qualitative Disclosures
        About Market Risk

Interest rate risk.Our interest income is sensitive to changes in the general level of US interest
  rates, particularly since the majority of our investments are in short-term
  instruments. The average maturity of our investment portfolio is 100days.
  Due to the short-term nature of these cash investments, we do not believe that
  there is a material interest rate risk. As of April 30, 2004, our total cash
  and investments balance that was sensitive to interest rate risk was approximately
  $48,020,000. The sensitivity of our portfolio is: if yields were to fluctuate
  by 100 basis points, the total effect to the investment portfolio balance would
  be approximately $128,000.

The following table summarizes our cash, cash equivalents,
  and short-term securities, at fair value, that are sensitive to interest rate
  risk (in thousands):



|                                           | April 30, 2004           |  | October 31, 2003       
|------------------------------------------ | ------------------------ |  | -----------------------
|Cash and cash equivalents                  | $26,881                  |  | $5,372                 
|Short-term, available-for-sale securities: |                          |  |                        
|Asset-backed securities                    | 7,040                    |  | 7,260                  
|Corporate securities                       | 4,715                    |  | 9,030                  
|Government securities                      | 7,793                    |  | 16,468                 
|Money market securities                    | 1,591 
          _______ |  | 1,989 
          ______
|                                           | $48,020                  |  | $40,119                





Item 4: Controls and Procedures

Evaluation of disclosure controls and procedures.
  Under the supervision and with the participation of management,
  including our principal executive officer and principal financial officer, we
  evaluated the effectiveness of the design and operation of our disclosure controls
  and procedures, as such term is defined in Rule 13a-15(e) promulgated under
  the Securities Exchange Act of 1934 (the "Exchange Act"), as amended.
  Based on this evaluation, our principal executive officer and principal financial
  officer concluded that our disclosure controls and procedures were effective
  as of the end of the period covered by this quarterly report.

Changes in internal controls over financial
  reporting.Since the most recent evaluation of internal controls over financial reporting
  by ourprincipal executive officerandprincipal financial officer,
  there have been no significant changes to these internal controls that have
  materially affected, or are reasonably likely to materially affect, our internal
  control over financial reporting.

Limitations of the effectiveness of internal
  controls. A control system, no matter how well conceived and operated,
  can provide only reasonable, not absolute, assurance that the objectives of
  the internal control system are met. Because of the inherent limitations of
  any internal control system, no evaluation of controls can provide absolute
  assurance that all control issues, if any, within a company have been detected.



Part II.	Other Information

Item 1:	Legal Proceedings

We are subject to litigation, from time to time,
  in the ordinary course of business including, but not limited to, allegations
  of wrongful termination or discrimination or governmental agency investigations.
  Although the amount of any liability with respect to such litigation cannot
  currently be determined, we are not party to any pending legal proceedings,
  which, in the opinion of management, are material to our business or financial
  condition. As a government contractor, we may also be subject to investigations
  by the United States Government for alleged violations of procurement or other
  federal laws. Under present government procurement regulations, if judged in
  violation of procurement or other federal civil laws, we could be suspended
  or barred from eligibility for awards of new government contracts.

Item 2:	Changes in Securities, Use of Proceeds,
        and Issuer Purchases of Equity Securities

None.

Item 3: Defaults Upon Senior Securities

None.

Item 4: Submission of Matter to a Vote of Security
        Holders

At the annual meeting of our shareholders held
  on March 10, 2004, the following matters were considered and voted upon:

The following nominees were elected as Class II
  directors to serve on our Board of Directors for a two-year term expiring at
  the 2006 annual meeting of stockholders and until their successors are duly
  elected and qualified. The number of shares voted and withheld for such nominees
  were as follows:



|Name                      | For       |  | Withheld
|------------------------- | --------- |  | --------
|Milton E. Cooper          | 9,370,940 |  | 309,103 
|John R. Treichler         | 9,349,465 |  | 330,578 
|Stuart G. Whittelsey, Jr. | 9,219,796 |  | 460,247 



A proposal to adopt the 2004 Stock Incentive Plan was approved and ratified
  by a vote of 6,039,353 shares for, 1,198,397 shares against, and 9,073 shares
  abstaining.

The appointment of Ernst & Young LLP as our
  independent auditors for the fiscal year ending October 31, 2004 was approved
  and ratified by a vote of 9,380,625 shares for, 293,902 shares against, and
  5,516 shares abstaining.

Item 5: Other Information

None.

Item 6:	Exhibits and Reports on Form 8-K

Exhibits  See Index to Exhibits

Reports on Form 8-K  Reports on Form 8-K
  filed or furnished during the three months ended April 30, 2004.

- Form 8-K furnished on February 26, 2004 containing
    the February 24, 2004 press release and conference call transcript related
    to our announcement of our first quarter results for fiscal year 2004.

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 thereunto duly authorized.

Applied Signal Technology, Inc.

|/James E. Doyle/                                                                                                       |  | June 8, 2004
|---------------------------------------------------------------------------------------------------------------------- |  | ------------
|James E. Doyle
        Vice President and Chief Financial Officer
        (Principal Financial and Accounting Officer) |  |             







Applied Signal Technology, Inc.
  Index to Exhibits



|3.1   | Second Amended and Restated Articles of Incorporation                                                                                                            
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.2   | Amended and Restated Bylaws                                                                                                                                      
|4.1   | Specimen Common Stock Certificate                                                                                                                                
|10.26 | Amendment to Line of Credit Agreement, dated
        February 12, 2004 with Wells Fargo Bank, National Association                                               
|10.27 | Security Agreement dated February 12, 2004
        with Wells Fargo Bank, National Association                                                                   
|10.28 | Applied Signal Technology, Inc. 2004 Stock
        Incentive Plan                                                                                                
|31.1  | Certification of Chief Executive Officer
        Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                       
|31.2  | Certification of Chief Financial Officer
        Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                       
|32.1  | Certification of Chief Executive Officer
        Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906
        of the Sarbanes-Oxley Act of 2002
|32.2  | Certification of Chief Financial Officer
        Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906
        of the Sarbanes-Oxley Act of 2002