United States
Securities and Exchange Commission
Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the Period Ended May 3, 2002

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.



|X   |  |   
|--- |  | --
|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, 9,799,699 shares outstanding as of May 28, 2002.

This Quarterly Report on Form 10-Q consists of 27 pages.

---



Index
Applied Signal Technology, Inc.

Part I.	Financial Information

Item 1: Financial Statements
  (Unaudited)

Consolidated
  Balance Sheets  May 3, 2002 and October 31, 2001

Consolidated
  Statements of Cash Flows  Three and six months ended May 3, 2002 and
  May 4, 2001

Notes
  to Consolidated Financial Statements  May 3, 2002

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

Part II.	Other Information

Item 1: Legal Proceedings

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

Item 6: Exhibits and Reports
  on Form 8-K

Signatures

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Part I.	Financial Information

Item 1:	Financial Statements



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



|Assets                                    | May 3, 2002 (Unaudited) |                               | October 31, 2001 (Note)
|----------------------------------------- | ----------------------- | ----------------------------- | -----------------------
|Current assets:                           |                         |                               |                        
|Cash and cash equivalents                 | $                       | 17,098                        |                        
|Accounts
        receivable:              |                         |                               |                        
|Billed                                    |                         | 12,898                        |                        
|Unbilled                                  |                         | 10,581
          ----------   |                        
|Total
        accounts receivable         |                         | 23,479                        |                        
|Inventory                                 |                         | 11,586                        |                        
|Refundable income taxes                   |                         | 305                           |                        
|Prepaid and other current assets          |                         | 2,451
          ----------    |                        
|Total
        current assets              |                         | 54,919                        |                        
|                                          |                         |                               |                        
|Property and equipment, at cost:          |                         |                               |                        
|Machinery and equipment                   |                         | 40,888                        |                        
|Furniture and fixtures                    |                         | 4,970                         |                        
|Leasehold improvements                    |                         | 10,169                        |                        
|Construction in process                   |                         | 197                           |                        
|                                          |                         | 56,224                        |                        
|Accumulated depreciation and amortization |                         | (40,142)
          ---------- |                        
|Net property and equipment                |                         | 16,082                        |                        
|                                          |                         |                               |                        
|Other assets                              |                         | 412
          ----------      |                        
|                                          |                         |                               |                        
|Total assets                              | $                       | 71,413
          ======       |                        



---



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




|Liabilities and Shareholders Equity                                                                                                                                                                        | May 3, 2002 (Unaudited) |                            | October 31, 2001
          (Note)
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------- | -------------------------- | ---------------------------------
|Current liabilities:                                                                                                                                                                                        |                         |                            |                                  
|Accounts payable                                                                                                                                                                                            | $                       | 1,275                      |                                  
|Accrued payroll and related benefits                                                                                                                                                                        |                         | 5,052                      |                                  
|Other accrued liabilities                                                                                                                                                                                   |                         | 1,932
          ---------- |                                  
|Total current liabilities                                                                                                                                                                                   |                         | 8,259                      |                                  
|                                                                                                                                                                                                            |                         |                            |                                  
|Other Liabilities                                                                                                                                                                                           |                         | 146                        |                                  
|                                                                                                                                                                                                            |                         |                            |                                  
|Shareholders equity:                                                                                                                                                                                       |                         |                            |                                  
|Common stock, no par value: 20,000,000
                 shares authorized; issued and 
                 outstanding: 9,798,315 at May 3,
          2002 
                 and 9,604,026 at October 31, 2001 |                         | 25,594                     |                                  
|Retained earnings                                                                                                                                                                                           |                         | 37,414----------           |                                  
|Total shareholders equity                                                                                                                                                                                  |                         | 63,008----------           |                                  
|                                                                                                                                                                                                            |                         |                            |                                  
|Total liabilities and shareholders equity                                                                                                                                                                  | $                       | 71,413
          ======    |                                  





Note: The balance sheet at October 31, 2001 has been derived from the audited financial statement 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 Consolidated Financial Statements.

---



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

|                                                                         | Three Months Ended |                            | Six Months Ended
|------------------------------------------------------------------------ | ------------------ | -------------------------- | ----------------
|                                                                         | May 3, 2002        |                            | May 4, 2001     
|Revenues from contracts                                                  | $                  | 18,584                     |                 
|                                                                         |                    |                            |                 
|Operating expenses:                                                      |                    |                            |                 
|Contract costs                                                           |                    | 11,662                     |                 
|Research and 
             development                                   |                    | 2,537                      |                 
|General and 
            administrative                                  |                    | 4,173
        ----------   |                 
|                                                                         |                    |                            |                 
|Total operating 
                expenses                                |                    | 18,372
        ----------  |                 
|                                                                         |                    |                            |                 
|Operating income (loss)                                                  |                    | 212                        |                 
|Interest income (expense), net                                           |                    | 45----------               |                 
|Income (loss) before (benefit) for income taxes                          |                    | 257                        |                 
|(Benefit) for income taxes                                               |                    | (1,044)
        ---------- |                 
|                                                                         |                    |                            |                 
|Net income (loss)                                                        | $                  | 1,301
        ======       |                 
|                                                                         |                    |                            |                 
|Net income (loss) per common share:                                      |                    |                            |                 
|Basic                                                                    | $                  | 0.13                       |                 
|Diluted                                                                  | $                  | 0.13                       |                 
|                                                                         |                    |                            |                 
|Number of shares used in calculating net income (loss) per common share: |                    |                            |                 
|Basic                                                                    |                    | 9,797                      |                 
|Diluted                                                                  |                    | 9,964                      |                 



See Notes to Consolidated Financial Statements.

---



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

|                                                                                                          | Six Months Ended
|--------------------------------------------------------------------------------------------------------- | ----------------
|                                                                                                          | May 3, 2002     
|Operating Activities:                                                                                     |                 
|Net income (loss)                                                                                         | $               
|Adjustments to reconcile net income (loss) to net cash provided by (used
        in) operating activities |                 
|Depreciation and amortization                                                                             |                 
|Changes in:                                                                                               |                 
|Accounts receivable                                                                                       |                 
|Refundable income taxes                                                                                   |                 
|Inventory, prepaids and other assets                                                                      |                 
|Accounts payable, taxes payable and 
            accrued expenses                                         |                 
|Net cash provided by (used in) 
            operating activities                                          |                 
|                                                                                                          |                 
|Investing Activities:                                                                                     |                 
|Maturities of available-for-sale securities                                                               |                 
|Additions to property and equipment                                                                       |                 
|Net cash used in investing
        activities                                                             |                 
|                                                                                                          |                 
|Financing Activities:                                                                                     |                 
|Issuance of common stock                                                                                  |                 
|Dividends paid                                                                                            |                 
|Net cash provided by
        financing activities                                                         |                 
|Net increase (decrease) in cash and cash 
            equivalents                                         |                 
|Cash and cash equivalents, beginning 
            of period                                               |                 
|Cash and cash equivalents, end of period                                                                  |                 
|                                                                                                          |                 
|Supplemental disclosures of cash flow information:                                                        |                 
|Interest paid                                                                                             | $               
|Income taxes paid                                                                                         | $               



See Notes to Consolidated Financial Statements.

---



Applied Signal
  Technology, Inc.
  Notes to Consolidated Financial Statements
  (unaudited)May 3, 2002

Note 1:	Summary of Significant Accounting Policies

Description of Business and Basis of Presentation

Applied Signal Technology, Inc. ("Applied Signal Technology" or "the Company") provides advanced digital signal processing products, systems, and services used in reconnaissance of foreign telecommunications signals. The Companys primary customers are the United States Government and its foreign allies. In fiscal year 2001, the Company reintegrated its wholly owned subsidiaries, Transcendent Technologies, Inc. ("Transcendent Technologies") and eNetSecure, Inc. ("eNetSecure") into Applied Signal Technology. Transcendent Technologies was a provider of sophisticated network management and spectrum monitoring systems, and eNetSecure was a developer and provider of network monitoring services for both intrusion detection and policy enforcement.

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the six-month period ending May 3, 2002 are not necessarily indicative of the results that may be expected for the year ending October 31, 2002. For further information, refer to the consolidated financial statements and footnotes thereto included in the Companys Annual Report on Form 10-K for the year ended October 31, 2001.

Principles of Consolidation

The consolidated financial statements of Applied Signal Technology, Inc. include the accounts of the Company and its reintegrated subsidiaries. All significant intercompany balances and transactions have been eliminated.

Estimates

Applied Signal Technology Inc.s consolidated 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.

Investments

The Companys investment securities, which consist primarily of U.S. Treasury Securities, are classified as available-for-sale and are carried at fair market value. Unrealized gains and losses, net of tax, are reported as a separate component of shareholders equity. Realized gains and losses on available-for-sale securities are included in interest income (expense), net. The cost of securities sold is based on the specific identification method. Interest on securities classified as available-for-sale, is included in interest income (expense), net. During the first six months of fiscal year 2002, the Company did not purchase or own any available-for-sale securities or U.S. treasuries.

Revenues from Contracts

The majority of the Companys contracts are accounted for using the guidance of the American Institute of Certified Public Accountants Statement of Opinion 81-1 Accounting for Performance of Construction-Type and Production-Type Contracts.Applied Signal Technology accounts for fixed price contracts using the percentage-of-completion method of accounting. Under this method, contract costs are charged to operations 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. The Company accounts for cost reimbursement contracts by charging contract costs to operations as incurred and recognizing contract revenues and profits by applying an estimated fee rate to actual costs on an individual contract basis. Management reviews contract performance, costs incurred and estimated completion costs regularly and adjusts revenues and profits on contracts in the period in which changes become determinable. Anticipated losses on contracts are also recorded in the period in which they become determinable. At interim periods during the fiscal year, contract costs are stated at target indirect rates, and the variances between actual and target spending is inventoried (for further information see "Note 2  Inventory").

Per Share Data

Basic per share data is based on the weighted effect of all common shares issued
  and outstanding, and is calculated by dividing net income (loss) available to
  common shareholders by the weighted average shares outstanding during the period.
  Diluted per share data is calculated by dividing net income available to common
  shareholders 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
  using the treasury stock method. When a net loss occurs, diluted per share data
  is the same as basic.

A reconciliation of shares used in the calculation of basic and diluted per
  share data follows (in thousands, except per share data):

|                                                                  | Three Months Ended |                        | Six Months Ended
|----------------------------------------------------------------- | ------------------ | ---------------------- | ----------------
|                                                                  | May 3, 2002        |                        | May 4, 2001     
|Numerator:                                                        |                    |                        |                 
|Net income (loss)                                                 | $                  | 1,301
        ======   |                 
|Denominator:                                                      |                    |                        |                 
|Shares used to compute net income (loss) per common share-basic   |                    | 9,797                  |                 
|Effect of dilutive stock options                                  |                    | 167
        ---------- |                 
|Shares used to compute net income (loss) per common share-diluted |                    | 9,964
        ======   |                 
|                                                                  |                    |                        |                 
|Net income (loss) per common share-basic                          | $                  | 0.13                   |                 
|Net income (loss) per common share-diluted                        | $                  | 0.13                   |                 



Approximately 104,000 and 244,000stock options were excluded from the number of shares used to compute diluted net loss per common share for the three and six months ended May 4, 2001, respectively, as their effect would be antidilutive.

Dividends

On May 17, 2001, the Companys Board of Directors voted to suspend dividend payments made to shareholders. The Company paid no dividends during the first six months of fiscal year 2002, and $582,000 and $1,148,000 during the second quarter and first six months of fiscal year 2001, respectively.

Comprehensive Income

As of May 3, 2002 and October 31, 2001, accumulated comprehensive income (loss)
  was zero.

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

|                                     | Three Months Ended |                      | Six Months Ended
|------------------------------------ | ------------------ | -------------------- | ----------------
|                                     | May 3, 2002        |                      | May 4, 2001     
|Net income (loss)                    | $                  | 1,301                |                 
|Unrealized gain (loss) on securities |                    | 
        ---------- |                 
|Comprehensive income (loss)          | $                  | 1,301
        ====== |                 



Note 2: Inventory

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



|                  | May 3, 2002
          (unaudited) |                          | October 31, 2001
|----------------- | --------------------------------- | ------------------------ | ----------------
|Raw materials     | $                                 | 1,130                    |                 
|Work in process   |                                   | 9,379                    |                 
|Finished goods    |                                   | 787
          ---------- |                 
|                  |                                   | 11,296                   |                 
|Precontract costs |                                   | 290
          ---------- |                 
|                  | $                                 | 11,586
          ======  |                 





The Company records contract revenues and costs for interim reporting purposes based on annual targeted indirect rates. At year-end, the revenues and costs are adjusted for actual indirect rates. During the interim reporting periods, variances may accumulate between the actual indirect rates and the annual targeted rates. All timing-related indirect spending variances are inventoried as part of work in process during these interim reporting periods. These rates are reviewed regularly, and the Company records reserves for any permanent variances in the statement of operations in the period they become known. At May 3, 2002 the unfavorable inventoried variance was approximately $2,672,000. At May 4, 2001, the unfavorable inventoried variance was approximately $2,091,000. At October 31, 2001, the variance was zero since all revenues and costs were recorded at the actual indirect rates for each fiscal year end. Management believes the rate variance at May 3, 2002 will be absorbed by expected contract activities during the remainder of fiscal year 2002.

Precontract costs represent costs incurred in connection with ongoing level-of-effort
  contracts for which contract modifications have not been definitized and costs
  incurred in anticipation of specific expected future contract awards.

Note 3: Recent Accounting Pronouncements

In August 2001, the Financial Accounting Standards Board issued Statement of
  Financial Accounting Standards No. 144, Accounting for the Impairment or
  Disposal of Long-Lived Assets (SFAS 144), which addresses financial accounting
  and reporting for the impairment or disposal of long-lived assets and supersedes
  SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
  Assets to be Disposed Of, and the accounting and reporting provisions of
  APB Opinion No. 30, Reporting the Results of Operations, for a disposal
  of a segment of a business. SFAS 144 is effective for fiscal years beginning
  after December 15, 2001, with earlier application encouraged. The Company will
  adopt FAS 144 as of November 1, 2002, and the Company is in the process of evaluating
  what, if any, impact adoption will have on its results of operations and financial
  condition.

Note 4: Segment Reporting

The financial information relating toApplied Signal Technology is reviewed
  and evaluated by the chief operating decision-maker as a whole, and not its
  individual divisions. During the second quarter of fiscal year 2001, eNetSecure
  was reintegrated into Applied Signal Technology, which left one additional reporting
  segment, Transcendent Technologies. Transcendent Technologies was reintegrated
  during the fourth quarter of fiscal year 2001. The remaining business activities
  from these former separate segments are minimal, and divisional financial information
  for Applied Signal Technology is not available or reviewed by the chief operating
  decision-maker belowthegross margin level. Thus, there is only
  one reportable segment during the first six months of fiscal year 2002.

Financial data by segment for the six-month period ended May 4, 2001 was as
  follows (in thousands):



|                    |  | Applied Signal Technology |                          | Transcendent Technologies |   | Consolidated Total      
|------------------- |  | ------------------------- | ------------------------ | ------------------------- | - | ------------------------
|Revenues:           |  | $                         | 39,112
          ======  |                           | $ | 175
          ======    
|                    |  |                           |                          |                           |   |                         
|Operating expenses: |  | $                         | 45,220
          ======  |                           | $ | 2,585
          ======  
|                    |  |                           |                          |                           |   |                         
|Interest income:    |  | $                         | 292
          ======     |                           | $ | 18
          ======     
|                    |  |                           |                          |                           |   |                         
|Interest expense:   |  | $                         | (48)
          ======    |                           | $ | (3)
          ======    
|                    |  |                           |                          |                           |   |                         
|Net income (loss):  |  | $                         | (3,552)
          ====== |                           | $ | (2,395)
          ======
|                    |  |                           |                          |                           |   |                         
|Total assets:       |  | $                         | 75,443
          ======  |                           | $ | 864
          ======    





Note 5: Income Taxes

The provision for income taxes for the first six months of fiscal year 2002 includes an estimated annual effective tax rate of 3% and a reduction to income taxes of approximately $920,000. The Companys projected annual effective tax rate for fiscal year 2002 is calculated based on the projected income for the year and reflects the benefit of potential deferred tax assets for which a valuation allowance had been recorded at the end of fiscal year 2001. The reduction to income taxes was the result of a tax law change during the second quarter of fiscal year 2002, which allowed the Company to recover a larger tax refund than previously calculated at the end of fiscal year 2001. The Companys estimated annual effective tax rate for the six months ended May 4, 2001 was a benefit rate of 28%.

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

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

Forward-looking statements in this report are made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934. In this report, the words "anticipates," "believes," "expects," "future," "intends," and similar expressions identify forward-looking statements. Shareholders are cautioned that all forward-looking statements pertaining to the Company involve risks and uncertainties, including, without limitation, those contained under the caption, "Summary of Business Considerations and Certain Factors that May Affect Future Results of Operations and/or Stock Price," and other risks detailed from time to time in the Companys periodic reports and other information filed with the Securities and Exchange Commission. Actual events and results may differ materially from the Companys current expectations and beliefs.

Description of the Business

Applied Signal Technology, Inc. ("Applied Signal Technology" or "the Company") provides advanced digital signal processing products, systems, and services used in reconnaissance of foreign telecommunications signals. The Companys primary customers are the United States Government and its foreign allies. The Company develops and manufactures equipment for both the collection and processing of signals. Its 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. The Companys 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 its inception in 1984, the Company focused its efforts primarily on processing equipment. Over time, the Company has broadened its scope to add specialized collection equipment and complete signal processing systems. The Companys subsidiary corporations were reintegrated into Applied Signal Technology during fiscal year 2001.

Signal Intelligence

In recent years, accurate and comprehensive information regarding foreign affairs and developments has become increasingly important to the United States Government. The reduction of United States military tactical forces overseas, coupled with political instability in certain regions such as the Middle East, Eastern Europe, Africa, and Central and South America, has heightened the United States Governments need to be able to monitor overseas activities. In order to obtain information about activities within foreign countries, the United States Government gathers and analyzes telecommunication signals emanating from those countries.

Additionally, the use of established telecommunication technologies has increased throughout the world, and new telecommunication technologies, supplementing rather than replacing prior technologies, have been developed and commercialized. These trends have led to a significant increase in the overall volume of information communicated and an increase in the density of signals transmitted throughout the RF spectrum. This increase can be seen in the proliferation of facsimile, cellular, and digital signal telecommunications equipment and in the global information network (for example, the Internet) in the last decade, resulting in a significant increase in the amount of information being communicated. These trends have required the development of signal intelligence equipment capable of collecting and processing an increased volume of signals as well as new types of signals.

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

The Companys signal intelligence products can be used, with or without further modification, to satisfy requirements of a variety of customers. The Company believes its products can be readily deployed in a wide variety of circumstances to meet current United States Government signal intelligence requirements.

As a result of the tragic events of September 11, 2001, the United States Government
  announced that it would provide increased funding for counter-terrorism. Counter-terrorism
  is focused on individuals and groups of individuals, and relies heavily on human
  intelligence (HUMINT) gathering. Signal intelligence (SIGINT) is a key component
  of HUMINT. Applied Signal Technology believes it is a pre-eminent resource for
  SIGINT capabilities providing products, systems, and services that offer state-of-the-art
  SIGINT.

Strategy

Applied Signal Technologys objective is to anticipate the needs of the
  signal intelligence marketplace and to invest in research and development in
  an effort to provide solutions before the Companys competitors. In some
  cases, this involves the development of equipment or services to address new
  telecommunications technologies. In other cases, it involves the development
  of equipment that offers smaller size, lower power consumption, and lower cost
  than potentially competitive products. The Companys strategy to accomplish
  its objectives includes the following elements.

Anticipate marketplace needs. The Company devotes significant
  resources in order to understand perceived future telecommunications processing
  needs. The Company monitors technological and commercial advances in telecommunications
  to identify advances it believes will create new opportunities. The Company
  obtains information about marketplace needs through its frequent contact with
  technical and contracting officials of pertinent intelligence community government
  agencies.

Many times, sole-source contracts are granted by the United States Government
  when a single contractor is deemed to have expertise or technology that is superior
  to that of competing contractors. Since the Companys inception, a significant
  portion of its revenues has been from sole-source contracts. The Company believes
  that the large number of sole-source contracts it obtains demonstrates that
  it often correctly anticipates marketplace needs. There can be no assurance,
  however, that the Company will correctly anticipate the marketplace needs in
  the future.

Invest in research and development. The Company invests in research
  and development it believes will enable it to develop equipment and services
  that will satisfy the signal intelligence needs of the future. The Company believes
  that it invests a greater percentage of its revenues in R&D than is typical
  among its competitors. The Company believes its R&D investments often enable
  it to offer superior products before its competitors.

Develop flexible products. The Company develops products that
  can be used, with or without further modification, to satisfy the needs of a
  variety of customers. The Company uses its prior product development efforts
  to offer customers cost-effective solutions and to offer these solutions promptly.
  The Company believes that custom equipment developed by many of its competitors
  generally cannot be as readily deployed in as wide a variety of circumstances
  as Applied Signal Technologys products.

Develop highly integrated products. The Company designs its products
  to use advanced circuitry and highly integrated components. This enables the
  Company to offer products that are smaller, consume less power, and cost customers
  less when multiple units are built than equipment of similar functionality that
  uses fewer advanced designs and materials. The lower cost of many of the Companys
  products appeals to customers with budget constraints, and the smaller size
  and low power consumption of many of the Companys products appeal to customers
  with physical installation constraints.

Focus on signal processing. Since inception, the Company has
  focused much of its attention on developing signal processing equipment and
  services. The Company believes that there have been and will continue to be
  opportunities to develop specialized signal processing equipment and services
  to satisfy emerging technological requirements.

Increase penetration and broaden customer base. The Company believes
  that its current customers offer opportunities for sales growth, both in terms
  of additional units of developed products, the development of new products,
  and the provision of services, and, accordingly, directs much of its marketing
  efforts toward these customers in order to increase the Companys penetration
  of these markets. The Company continues to try to broaden its customer base
  by increasing marketing efforts toward military signal intelligence and evaluating
  local law enforcement opportunities.

Critical Accounting Policies and Estimates

General. Applied Signal Technologys discussion and analysis of its results and operations are based upon Applied Signal Technologys consolidated 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.

Revenue and cost recognition. The majority of the Companys contracts are accounted for using the guidance of the American Institute of Certified Public Accountants Statement of Opinion 81-1 Accounting for Performance of Construction-Type and Production-Type Contracts.Applied Signal Technology accounts for fixed-price contracts using the percentage-of-completion method of accounting. Under this method, contract costs are charged to operations 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. The Company accounts for cost-reimbursement contracts by charging contract costs to operations as incurred and recognizing contract revenues and profits by applying an estimated fee rate to actual costs on an individual contract basis. Management reviews contract performance, costs incurred and estimated completion costs regularly and adjusts revenues and profits on contracts in the period in which changes become determinable. Anticipated losses on cost-reimbursement and fixed-priced contracts are also recorded in the period in which they 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 the Company, for fixed-priced contracts, and could have a material adverse effect on the Companys results of operations and financial condition.Unexpected cost increases in cost-reimbursement contracts may be borne by the Company, for goodwill purposes.Historically, the effect on the Companys operating results and financial condition from cost-reimbursement losses has been minimal.

Indirect rate variance. The Company records contract revenues and costs for interim reporting purposes based on annual targeted indirect rates. At year-end, the revenues and costs are adjusted for actual indirect rates. During the interim reporting periods, variances may accumulate between the actual indirect rates and the annual targeted rates. All timing-related indirect spending variances are inventoried as part of work in process during these interim reporting periods. These rates are reviewed regularly, and the Company records reserves for any permanent variances in the statement of operations in the period they become known. At May 3, 2002 the unfavorable inventoried variance was approximately $2,672,000. At May 4, 2001, the unfavorable inventoried variance was approximately $2,091,000.

The Company has typically experienced a negative rate variance during thefirst three quarters of each fiscal year primarily because of the cyclical nature of government spending and the timing of certain expenses incurred by the Company duringthe fiscal year.

The Companys accounting policy, which records the rate variance in inventories, is based on managements belief that such a variance will be absorbed by expected contract activities during the remainder of the year. If contract activities do not reach planned levels, the Company has alternatives it can utilize to absorb the variance. The Company can adjust downward some of its planned indirect spending during the year; it can increase its billing rates to its customers; or it can record charges to expense based on reduced estimates of future contract activities.

In fiscal year 2001, the decline in revenues required the Company to record a charge to profit to absorb the unfavorable indirect rate variance.During the second quarter of fiscal year 2002, management has determined that a portion of the indirect expenses will not be absorbed by expected contract activities.Consequently, a charge to profit of approximately $1,198,000 was recorded and the indirect rate variance balance was reduced.Management currently believes the remaining balance of the indirect rate variance at May 3, 2002 will beabsorbed by expected contract activities during the remainder of fiscal year 2002.

Three and Six Months Ended May 3, 2002 Compared to Three and Six Months Ended May 4, 2001

Results of Operations

By the end of fiscal year 2001, the Company reintegrated its two wholly owned
  subsidiaries, eNetSecure and Transcendent Technologies, and restructured Applied
  Signal Technology in order to better align infrastructure costs withanticipated
  revenues.The Company believes that the restructuring activities
  resulted in a cost structure that will permit it to be profitable during fiscal
  year 2002, and there will be an attendant need to hire staff.

Outlook.The Company recently revised its financial projections
  for fiscal year 2002, and currently projects that revenues will be consistent
  with fiscal year 2001 while orders will grow approximately 15% over fiscal year
  2001. The expected revenue is dependent on the timing of contract awards. The
  Company also currently projects fiscal year 2002 net income of approximately
  6% of annual revenues compared to the net loss experienced in fiscal year 2001.

Revenues and backlog.Revenues for the second quarter of fiscal
  year 2002 were approximately $18,584,000, up 6% compared with the second quarter
  of fiscal year 2001 revenues of approximately $17,590,000. Revenues for the
  first six months of fiscal year 2002 were approximately $34,815,000 down 11%
  from revenues of $39,287,000 in the same period of fiscal year 2001. The increase
  in revenues recorded during the second quarter of fiscal year 2002 when compared
  to the second quarter of fiscal year 2001 is due to an increase in the sale
  of the Companys standard products. The reduction in revenues recorded
  during the first six months of fiscal year 2002 when compared to the first six
  months of fiscal year 2001 is due, in part, to a reduction in labor required
  to satisfy the Companys contractual commitments under its engineering
  development contracts and, in part, to approximately $2,500,000 of additional
  revenues, generated during the first quarter of fiscal year 2001, as a result
  of certain contract modifications.

New orders levels for the second quarter of fiscal year 2002 were approximately
  $17,219,000 down41% from approximately $29,113,000 in the second quarter
  of fiscal year 2001. Order levels for the first six months of fiscal year 2002
  were approximately $30,381,000, down 27% compared to approximately $41,431,000,
  reported for the same period in fiscal year 2001. The reduction in orders during
  the first six months of fiscal year 2002 when compared to the same period of
  fiscal year 2001 was due primarily to what the Company believes to be timing-related
  issues in the awarding of certain follow-on contracts.

The Companys backlog, which consists of anticipated revenues from new
  contracts and from the uncompleted portions of existing contracts (excluding
  unexercised options), was approximately $26,636,000 at May 3, 2002, a decrease
  of23% when compared to approximately $34,636,000 at May 4, 2001. Backlog
  decreased during the first six months of fiscal year 2002 when compared to the
  same period of fiscal year 2001 primarily because of fewer orders received during
  the second quarter of fiscal year 2002, when compared to the second quarter
  of fiscal year 2001.

The award and timing of contracts is critical to revenue generation. The Company has and will continue to experience fluctuations in the flow of contract awards primarily because of the conditions inherent in government contracting. The Company has experienced delays in the awarding of certain engineering development contracts during the past two years.Continued delays in the awarding of these potential orders could have an adverse impact on the Companys ability to generate revenue.

As a result of the tragic events of September 11, 2001, the United States Government announced that it would provide increased funding for counter-terrorism. Counter-terrorism is focused on individuals and groups of individuals, and relies heavily on human intelligence (HUMINT) gathering. Signal intelligence (SIGINT) is a key component of HUMINT. Applied Signal Technology believes it is a pre-eminent resource for SIGINT capabilities providing products, systems, and services that offer state-of-the-art SIGINT. The Company believes it would benefit from the increased spending on counter-terrorism. However, the Company does not yet know whether such spending will occur or, if it does, the extent or timing of any such spending.

The Company has experienced a shift in favor of revenue generated from its cost-reimbursement contracts. Cost-reimbursement contracts typically do not return as high a profit margin asfixed price contracts. Cost-reimbursement contracts accounted for 68% and 59% of the Companys revenues during fiscal years 2001 and 2000, respectively, and fixed price contracts accounted for 32% and 41%, respectively.For the first six months of fiscal year 2002, cost-reimbursement contracts accounted for 55% of the Companys revenues and fixed price contracts accounted for 45%. The Company currently anticipates that the revenue generated during fiscal year 2002 will have a mix of contract types similar to that experienced in fiscal years 2001 and 2000.

Contract costs. Contract costs consist of direct costs on contract, including materials, labor, and manufacturing overhead costs. Contract costs were approximately $11,662,000 or 62.8% of revenues for the second quarter of fiscal year 2002 compared to approximately $12,743,000 or 72.4% of revenues for the same period of fiscal year 2001. Contract costs were approximately $21,421,000 or 61.5% of revenues for the first six months of fiscal year 2002 compared to approximately $27,791,000 or 70.7% of revenues for the same period of fiscal year 2001. Contract costs decreased, in aggregate and as a percentage of revenues, for the second quarter and first six months of fiscal year 2002 compared to the same period of fiscal 2001 primarily because of a lower operating cost structure that resulted from the fiscal year 2001 restructuring activities.

Research and development (R&D). Company-directed investment in research and development consists of expenditures recoverable from customers through the Companys billing rates and expenditures funded by the Company from earnings. It is the Companys accounting practice to record R&D expenses based on annual targeted indirect rates. (See "Notes to Consolidated Financial Statements; Note 2  Inventory.") Research and development expenses were approximately $2,537,000 or 13.7% of revenues for the second quarter of fiscal year 2002 compared to approximately $4,745,000 or 27.0% of revenues for the same period of fiscal year 2001. R&D expenses were approximately $4,454,000 or 12.8% of revenues for the first six months of fiscal year 2002 compared to approximately $9,398,000 or 23.9% of revenues for the same period of fiscal year 2001. The decrease in R&D expenses for the second quarter and first six months of fiscal year 2002 when compared to the second quarter and first six months of fiscal year 2001 is due, in part, to managements decision to return research and development spending to the Companys historical levels (of approximately 12% of projected fiscal year 2002 revenues), and in part, to the absence of research and development spending incurred during the first six months of fiscal year 2001 by the Companys reintegrated subsidiary corporations.During the second quarter of fiscal year 2002, the Company decided to invest approximately $1.1 million of Company funds to certain R&D efforts.

General and administrative. General and administrative expenses include administrative salaries, costs related to the Companys marketing and proposal activities, and other administrative costs. It is the Companys accounting practice to record general and administrative expenses based on annual targeted indirect rates. (See "Notes to Consolidated Financial Statements; Note 2  Inventory.") General and administrative expenses were approximately $4,173,000 or 22.5% of revenues for the second quarter of fiscal year 2002 compared to approximately $4,527,000 or 25.7% of revenues for the same period of fiscal year 2001. General and administrative expenses were approximately $6,873,000 or 19.7 % of revenues for the first six months of fiscal year 2002 compared to approximately $10,616,000 or 27.0% of revenues for the same period of fiscal year 2001. General and administrative expenses were lower during the second quarter and first six months of fiscal year 2002 compared to the same period of fiscal year 2001 due, in part, to a lower operating cost structure and, in part, to the absence of general and administrative expenses incurred during the first six months of fiscal year 2001 by the Companys reintegrated subsidiary corporations.

Interest income (expense), net. Net interest income for the second quarter of fiscal year 2002 was approximately $45,000 down 64.0% from net interest income of approximately $125,000 for the second quarter of fiscal year 2001. Net interest income for the first six months of fiscal year 2002 was approximately $69,000, down 73.4% from net interest income of approximately $259,000 for the first six months of fiscal year 2001. The decrease in net interest income for the second quarter and first six months of fiscal year 2002 is due to lower average interest rates in the current year period when compared to the same period of fiscal year 2001.

Provision for income taxes. The provision for income taxes for
  the first six months of fiscal year 2002 includes an estimated annual effective
  tax rate of 3% and a reduction to income taxes of approximately $920,000. The
  Companys projected annual effective tax rate for fiscal year 2002 is calculated
  based on the projected income for the year and reflects the benefit of potential
  deferred tax assets for which a valuation allowance had been recorded at the
  end of fiscal year 2001. The reduction to income taxes was the result of a tax
  law change during the second quarter of fiscal year 2002, which allowed the
  Company to recover a larger tax refund than previously calculated at the end
  of fiscal year 2001. The Companys estimated annual effective tax rate
  for the six months ended May 4, 2001 was a benefit rate of 28%.

Analysis of Liquidity and Capital Resources

The Companys primary sources of liquidity during the second quarter and
  first six months of fiscal year 2002 were the cash flows generated from net
  income, refundable income taxes and the issuance of common stock through the
  Companys employee stock purchase plans.

The Company has a $3,000,000 secured, revolving bank line of credit for short-term
  cash requirements bearing interest at the banks reference rate (4.75%
  as of May 3, 2002). At both May 3, 2002 and October 31, 2001 the Company was
  in compliance with all restrictions and covenants, and this facility had not
  been utilized. The line of credit expires on March 15, 2003.

Net cash provided by (used in) operating activities. Net cash
  provided by (used in) operating activities has varied significantly from quarter
  to quarter. These quarter-to-quarter variances are primarily the result of changes
  in net income, changes in accounts receivable, and the recovery of previously
  paid income taxes. During the first six months of fiscal year 2002, approximately
  $7,171,000 was provided by operating activities compared to approximately $4,348,000
  used during the comparable period of fiscal year 2001. Net income for the first
  six months of fiscal year 2002 provided cash of approximately $2,992,000 compared
  to cash used from a net loss of approximately $5,947,000 for the comparable
  period of fiscal year 2001. The net income for the first six months of fiscal
  year 2002 when compared to the net loss incurred during the first six months
  of fiscal year 2001 is due, in part, to the lower operating cost structure that
  resulted from the fiscal year 2001 restructuring activities and, in part, to
  the absence of losses incurred by the Companys reintegrated subsidiary
  corporations. Cash provided by accounts receivable during the first six months
  of fiscal year 2002 was approximately $558,000 compared to cash provided of
  approximately $6,440,000 during the comparable period of fiscal year 2001. The
  increased cash provided by accounts receivable in fiscal year 2001, was due
  to the collections of higher indirect contract rates for fiscal year 2000. Cash
  provided by refundable income taxes during the first six months of fiscal year
  2002 was $4,748,000. This included a federal tax refund of $5,876,000, which
  is partially offset by an adjustment of $1,128,000 to tax receivables due to
  a change in federal tax law during the second quarter of fiscal year 2002. During
  the first six months of fiscal year 2001, the Company did not receive any refundable
  income taxes. Cash provided by accounts payable, taxes payable, and accrued
  liabilities during the first six months of fiscal year 2002 was approximately
  $789,000 compared to cash used of approximately $3,039,000 during the comparable
  period of fiscal year 2001. Changes in accounts payable, taxes payable and other
  accrued liabilities during the first six months of fiscal year 2002 when compared
  to the first six months of fiscal year 2001, are due, in part, to the payments
  of accrued payroll and benefits associated with the restructuring activities
  in fiscal year 2001 and, in part, to the reduction of incomes taxes payable
  in fiscal year 2001.

Net cash used in investing activities. Cash used in investing
  activities during the first six months of fiscal year 2002 was approximately
  $515,000 compared to approximately $157,000 used in investing activities during
  the same period of fiscal year 2001. Historically, the Company has engaged in
  investing in certain available-for-sale securities, either money market accounts
  or U.S. treasuries. During the first six months of fiscal year 2002, the Company
  did not purchase or own any available-for-sale securities or U.S. treasuries.
  However, during the comparable period of fiscal year 2001, the maturity of available-for-sale
  securities did provide cash of approximately $4,029,000. Additions to property
  and equipment were approximately $515,000 and $4,186,000 during the first six
  months of fiscal year 2002 and 2001. During the first six months of fiscal year
  2001, the Company added a new facility, in accordance with the terms of the
  original lease agreement, and acquired property and equipment to support the
  operations of the Companys two reintegrated subsidiaries.

Net cash provided by financing activities. Cash provided by financing
  activities during the first six months of fiscal year 2002 was approximately
  $699,000 compared to cash provided by financing activities of approximately
  $141,000 during the same period of fiscal year 2001. The source of cash provided
  by financing activities in both periods was the issuance of common stock under
  the Companys employee stock purchase plan, which was partially offset
  by dividend payments of $1,148,000 during the first six months of fiscal year
  2001. In an effort to reduce future cash expenditures, the Companys Board
  of Directors voted on May 17, 2001 to suspend future dividend payments.

Cash is generated primarily from operating activities, employee stock purchase
  activities, and investing activities. The Companys investing activities
  are limited to money market accounts and U.S. treasuries. The Company believes
  the primary risk to liquidity is the potential decrease in demand for the Companys
  products and services. Historically, the Companys demand has been influenced
  by the needs of the U.S. intelligence community.

The Company believes that the funds generated from operations and existing
  working capital will be sufficient to meet its 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

Applied Signal Technologys future operating results and stock price may
  be subject to volatility, particularly on a quarterly basis, due to the following.

Customer concentration. Historically, defense and intelligence
  agencies of the United States Government have accounted for almost all of Applied
  Signal Technologys revenues. 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 the Companys products and services, which would have
  a material adverse effect on the Companys operating results and financial
  condition.

Also, potential shifts in responsibilities and functions within the defense
  and intelligence communities could result in a reduction of spending on signal
  intelligence by the defense and intelligence agencies that have historically
  been the Companys major customers. The Company believes that the United
  States Government may compensate for reductions in spending by these agencies
  with increases in spending for signal intelligence by other Government agencies.
  However, the Companys relationships with other Government agencies are
  not as strong as they are with the agencies with which it has historically dealt.
  There is no assurance that any reduction in spending by the agencies with which
  the Company has historically dealt will be offset by other United States Government
  agencies, and even if other agencies increase spending for signal intelligence,
  there is no assurance that the Company will secure the same amount of work from
  such other agencies. As a result, demand for the Companys products and
  services could decline, which would have a material adverse effect on the Companys
  operating results and financial condition.

Government security and contracting regulations. As a supplier
  of United States Government defense and intelligence agencies, the Company must
  comply with numerous regulations, including regulations governing security and
  contracting practices. Failure to comply with these regulations could disqualify
  the Company as a supplier of these agencies, which would have a material adverse
  effect on the Companys operating results and financial condition.

Revenue concentration. From time to time, including recent periods,
  the Company has derived a material portion of its revenue from one or more individual
  contracts that could be terminated by its customers at their discretion. For
  example, a single contract accounted for 5% and 11% of the Companys revenues
  during the first six months of fiscal years 2002 and 2001, respectively. The
  Company expects that in future periods it may again enter into individual contracts
  with significant revenue concentrations. If such contracts were terminated,
  this could have a material adverse effect on the Companys future operating
  results and financial condition.

Competition. The signal intelligence market is highly competitive
  and Applied Signal Technology expects that competition will increase in the
  future. Some of the Companys current and potential competitors have significantly
  greater technical, manufacturing, financial, and marketing resources than the
  Company. Substantial competition could have a material adverse effect on the
  Companys future operating results and financial condition.

Dependence upon personnel. Applied Signal Technologys ability
  to execute its business plan is contingent upon successfully attracting and
  retaining qualified employees. Management believes that there has been a change
  in the local California economy where the Company must compete for talent in
  the telecommunications sector. In California, it should not be as difficult
  to recruit new staff capable of obtaining the necessary security clearance in
  fiscal year 2002 as in prior years. The Company maintains offices in Annapolis
  Junction, Maryland; Herndon, Virginia; Hillsboro, Oregon; and Salt Lake City,
  Utah, providing it the ability to attract and retain qualified personnel in
  areas outside of California. The Company believes the offices should allow it
  to successfully attract and retain qualified employees. However, management
  believes that it is becoming increasingly difficult in the Annapolis Junction,
  Maryland office to attract and hire qualified candidates due to security clearance
  requirements and current labor market conditions. Failure to do so could have
  a material adverse effect on the Companys operating results and financial
  condition.

Risk of fixed price, cost reimbursable, and contract terminations.
  A material portion of Applied Signal Technologys revenue is derived from
  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 material costs, inefficiencies, or other factors, are borne by
  the Company, for fixed-priced contracts, and could have a material adverse effect
  on the Companys results of operations and financial condition. Unexpected
  cost increases in cost-reimbursement contracts may be borne by the Company,
  for goodwill purposes. Historically, the effect to the Companys operating
  results and financial condition from cost-reimbursement losses has been minimal.

The Company has experienced cost overruns in the past that have resulted in
  losses on certain contracts. There can be no assurance that the Company will
  not experience cost overruns in the future or that such overruns will not have
  a material adverse effect on the Companys future results of operations
  and financial condition.

In addition, almost all of the Companys contracts contain termination
  clauses, which permit contract termination upon the Companys default or
  for the convenience of the other contracting party. In either case, termination
  could adversely affect the Companys operating results. During fiscal year
  2001, the Company received unanticipated contract closeout notifications on
  three significant engineering contracts for the convenience of the other contracting
  party. These closeouts contributed, in part, to the need for the Company to
  reduce its cost structure during fiscal year 2001. There can be no assurance
  that such terminations will not occur in the future.

Potential fluctuations in quarterly results and market volatility.
  Applied Signal Technology has experienced significant fluctuations in operating
  results from quarter to quarter and expects that it will continue to experience
  such fluctuations in the future. These fluctuations are caused by, among other
  factors, conditions inherent in government contracting and the Companys
  business, such as the timing of cost and expense recognition for contracts,
  the United States Government contracting and budget cycles and contract closeouts.
  Fluctuations in quarterly results, shortfalls in revenues or earnings from levels
  forecast by securities analysts, changes in estimates by analysts, competition,
  or announcements of extraordinary events such as acquisitions or litigation
  may cause the price of the Companys common stock to fluctuate substantially.
  In addition, there can be no assurance that an active trading market will be
  sustained for the Companys common stock. The stock market in recent years
  has experienced extreme price and volume fluctuations that have particularly
  affected the market prices of many technology companies and that have been unrelated
  or disproportionately related to the operating performance of such companies.
  These fluctuations as well as general economic and market conditions may adversely
  affect the future market price of the Companys common stock.

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

Dependence upon certain suppliers. Although Applied Signal Technology
  procures most of its parts and components from multiple sources or believes
  that these components are readily available from numerous other sources, certain
  components are available only from sole sources or from a limited number of
  sources. While the Company believes that substitute components or assemblies
  could be obtained, use of substitutes would require development of new suppliers
  or would require the Company to re-engineer its products, or both, which could
  delay the Companys shipment of its products and could have a material
  adverse effect on the Companys operating results and financial condition.

Business disruption. Applied Signal Technologys corporate
  headquarters, including most of its research and development operations and
  production facilities, are located in the Silicon Valley area of Northern California,
  a region known for seismic activity. A significant earthquake could materially
  affect operating results. The Company is not insured for most losses and business
  interruptions of this kind.

Delays in the receipt of engineering contracts. The Company believes it has experienced continued delays in the receipt of certain engineering development contracts.While the Company is working closely with its customers to try to capture what it believes to be sole source orders, continued delays in the receipt of such orders could have a material adverse impact on the Companys financial condition and operating results.

Restructuring. The Company believes that the restructuring activities
  in fiscal year 2001 were sufficient to return the Company to profitability in
  fiscal year 2002. However, the delay in receipt of anticipated government procurements
  could cause a material, adverse effect on the Companys profitability,
  financial condition, and operating results.

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Part II.	Other Information

Item 1:	Legal Proceedings

The Company, from time to time, is engaged in various legal actions including, but not limited to, wrongful termination allegations, governmental agency investigations, and employee discrimination allegations. The Company believes that these legal actions will not, either individually or in aggregate, have a material adverse affect on the operating results or financial condition of the Company.

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

The annual meeting of shareholders of the Company was held March 14, 2002.

The shareholders approved a proposal to elect three Class II Directors of the Board of Directors of the Company to serve until the 2004 Annual Meeting of Shareholders and/or until their respective successors are duly elected and qualified. The proposal received the following votes:



|                    |  | For       |  | Withheld |  | Broker Non-Votes
|------------------- |  | --------- |  | -------- |  | ----------------
|James F. Collins    |  | 7,979,802 |  | 812,816  |  |                 
|John R. Treichler   |  | 7,981,979 |  | 810,639  |  |                 
|Stuart G.Whittelsey |  | 8,734,382 |  | 58,236   |  |                 





The shareholders ratified the appointment of Ernst & Young LLP as independent auditors of the Company for the fiscal year ending October 31, 2002. The proposal received the following votes:



|For       |  | Against |  | Abstentions |  | Broker Non-Votes
|--------- |  | ------- |  | ----------- |  | ----------------
|8,739,111 |  | 44,795  |  | 8,712       |  |                 





Item 6:	Exhibits and Reports on Form 8-K

Exhibits  See Index to Exhibits

Reports on Form 8-K  The Company did not file any reports on Form 8-K during the six months ended May 3, 2002.

Signatures

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

Applied Signal Technology, Inc.

/James E. Doyle/	June 14, 2002

James E. Doyle
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)

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Applied Signal Technology, Inc.

Index to Exhibits



10.20     Second Amendment to Line of Credit Agreement
  dated March 12, 2002 with United California Bank