| **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 February 1, 2008**

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)         | **77-0015491**        (I.R.S. Employer        Identification No.) |
| **400 West California Avenue, Sunnyvale, CA 94086**        (Address of principal executive offices) |
| **(408) 749-1888**(Registrant’s telephone number, including area code)                        |

| Indicate by checkmark 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one): |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                       | **Large accelerated filer** | ü**Accelerated filer** | **Non-accelerated filer** |

| Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). |
|---------------------------------------------------------------------------------------------------------|
|                                                                                                    | **Yes** | ü**No** |

| The          number of shares of the Registrant’s common        stock outstanding as of February 1, 2008, was 12,588,917. |
|---------------------------------------------------------------------------------------------------------------------------------|

 

----

**Index**Applied Signal Technology, Inc.**

| Part    I. Financial Information |
|----------------------------------|
|                             | Item    1: Condensed Consolidated Financial Statements |
|                             |   | Condensed          Consolidated Statements of Operations (unaudited) – Three months    ended February 1, 2008, and February 2, 2007 |
|                             |   | Condensed          Consolidated Balance Sheets – February 1, 2008, (unaudited) and    October 31, 2007 |
|                             |   | Condensed          Consolidated Statements of Cash Flows (unaudited) – Three months    ended February 1, 2008, and February 2, 2007 |
|                             |   | Notes          to Condensed Consolidated Financial Statements (unaudited) – February    1, 2008 |
|                             | 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    1A: Risk Factors |
|                             | Item    2: Unregistered Sales of Equity Securities and Use of Proceeds |
|                             | Item    3: Defaults Upon Senior Securities |
|                             | Item    4: Submission of Matters to a Vote of Security Holders |
|                             | Item    5: Other Information |
|                             | Item    6: Exhibits |
| Signatures                       |
| Index    to Exhibits             |

 

----

**Part I. Financial Information**

**Item 1: Condensed ConsolidatedFinancial Statements**

**Applied Signal Technology, Inc.  Statements of Operations (unaudited)**(in thousands, except per-share data

|                                                                                 | **—— Three      Months Ended****——**                                                                                 |
|--------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                 | **February 1,     2008**                                                                                                                     | **February 2,     2007** |
| Revenues from contracts                                                              | $42,725                                                                                    | $43,544           |
| Operating expenses:                                                                  |                                                                                                                                         |   |
|      Contract costs                                         | 29,371                                                                                     | 28,860           |
|      Research and development                               | 2,979                                                                                      | 3,585           |
|      General and administrative                             | 7,995              -----------           | 7,959          -----------           |
|           Total operating expenses | 40,345          -----------              | 40,404          -----------           |
| Operating income                                                                     | 2,380                                                                                      | 3,140           |
| Interest income and other, net                                                       | 372                                                                                        | 333           |
| Interest expense                                                                     | 139          -----------                 | 173          -----------           |
| Income before provision for income taxes                                             | 2,613                                                                                      | 3,300           |
| Provision for income taxes                                                           | 1,125          -----------               | 1,437          -----------           |
| Net income                                                                           | $1,488                =======            | $1,863          =======           |
| Net income per common share:                                                         |                                                                                                                                         |   |
|      Basic                                                  | $0.12                                                                                      | $0.16           |
|      Diluted                                                | $0.12                                                                                      | $0.15           |
| Number of shares used in calculating net        income per common share:             |                                                                                                                                         |   |
|      Basic                                                  | 12,344                                                                                     | 11,973           |
|      Diluted                                                | 12,517                                                                                     | 12,171           |

See “Notes to CondensedConsolidated Financial Statements.”

 

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

| **Assets**                                                                                                                                                                           | **February            1,        2008    (unaudited)**                                                                                     | **October    31,    2007†**                                                                                                        |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------|
| Current assets:                                                                                                                                                                      |                                                                                                                                      |                                                                                                                                      |
|      Cash and cash equivalents                                                                                                                              | $6,196                                                                                  | $5,250                                                                                  |
|      Short term investments                                                                                                                                 | 31,172          -----------           | 29,683          -----------           |
|           Total cash, cash equivalents, and               short-term investments | 37,368                                                                                  | 34,933                                                                                  |
|      Accounts receivable:                                                                                                                                   |                                                                                                                                      |                                                                                                                                      |
|           Billed                                                                                                                   | 21,113                                                                                  | 25,097                                                                                  |
|           Unbilled                                                                                                                 | 21,865          -----------           | 19,379          -----------           |
|           Total accounts receivable                                                                                                | 42,978                                                                                  | 44,476                                                                                  |
| Inventory                                                                                                                                                                            | 7,747                                                                                   | 5,944                                                                                   |
| Refundable income taxes                                                                                                                                                              | 722                                                                                     | 647                                                                                     |
| Prepaid and other current assets                                                                                                                                                     | 8,807          -----------            | 9,760          -----------            |
|      Total current assets                                                                                                                                   | 97,622                                                                                  | 95,760                                                                                  |
| Property and equipment, at cost:                                                                                                                                                     |                                                                                                                                      |                                                                                                                                      |
|      Machinery and equipment                                                                                                                                | 41,600                                                                                  | 41,075                                                                                  |
|      Furniture and fixtures                                                                                                                                 | 4,710                                                                                   | 4,676                                                                                   |
|      Leasehold improvements                                                                                                                                 | 17,100                                                                                  | 14,584                                                                                  |
|      Construction in process                                                                                                                                | 172          -----------              | 2,230          -----------            |
|                                                                                                                                                                                 | 63,582                                                                                  | 62,565                                                                                  |
| Accumulated depreciation and amortization                                                                                                                                            | (47,311)         -----------               | (46,096)         -----------               |
|      Property and equipment, net                                                                                                                            | 16,271                                                                                  | 16,469                                                                                  |
| Long-term investments                                                                                                                                                                | 6,108                                                                                   | 4,114                                                                                   |
| Goodwill                                                                                                                                                                             | 19,964                                                                                  | 19,964                                                                                  |
| Intangible assets, net of accumulated    amortization                                                                                                                                | 454                                                                                     | 616                                                                                     |
| Long-term deferred tax asset                                                                                                                                                         | 5,225                                                                                   | 5,021                                                                                   |
| Other assets                                                                                                                                                                         | 783          -----------              | 789          -----------              |
| Total assets                                                                                                                                                                         | $146,427          =======             | $142,733          =======             |

 

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

| **Liabilities    and Shareholders’ Equity**                                                                                                                                                                                                                                                                                                                            | **February            1,        2008        (unaudited)**                                                                                  | **October    31,    2007†**                                                                                                         |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------|
| Current liabilities:                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                       |                                                                                                                                       |
|      Accounts payable                                                                                                                                                                                                                                                                                                                               | $3,611                                                                                   | $3,848                                                                                   |
|      Accrued payroll and related benefits                                                                                                                                                                                                                                                                                                           | 12,193                                                                                   | 13,135                                                                                   |
|      Note payable                                                                                                                                                                                                                                                                                                                                   | 1,429                                                                                    | 1,429                                                                                    |
|      Income taxes payable                                                                                                                                                                                                                                                                                                                           | 638                                                                                      | 14                                                                                       |
|      Other accrued liabilities                                                                                                                                                                                                                                                                                                                      | 2,416          -----------             | 1,997          -----------             |
|           Total current liabilities                                                                                                                                                                                                                                                                                        | 20,287                                                                                   | 20,423                                                                                   |
| Long-term note payable                                                                                                                                                                                                                                                                                                                                                       | 4,881                                                                                    | 5,357                                                                                    |
| Accrued rent                                                                                                                                                                                                                                                                                                                                                                 | 2,620                                                                                    | 1,658                                                                                    |
| Other long-term liabilities                                                                                                                                                                                                                                                                                                                                                  | 626                                                                                      | 459                                                                                      |
| Shareholders’ equity:                                                                                                                                                                                                                                                                                                                                                  | ** **                                                                                                                                 |                                                                                                                                       |
|      Common stock and additional paid-in capital,             no par value: 20,000,000 shares authorized;             issued and outstanding shares:             12,588,917 at February 1, 2008, and             12,388,422 at October 31, 2007 | 65,140                                                                                   | 61,849                                                                                   |
|      Retained earnings                                                                                                                                                                                                                                                                                                                              | 52,867                                                                                   | 52,953                                                                                   |
|      Accumulated other comprehensive income                                                                                                                                                                                                                                                                                                         | 6          -----------                 | 34          -----------                |
| Total    shareholders’ equity                                                                                                                                                                                                                                                                                                                                          | 118,013          -----------           | 114,836          -----------           |
|      Total    liabilities and shareholders’ equity                                                                                                                                                                                                                                                                                            | $146,427          =======              | $142,733          =======              |

† The balance    sheet at October 31, 2007, 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 CondensedConsolidated Financial Statements.”

 

**Applied Signal Technology, Inc.  Statements of Cash Flows (unaudited)**  (in thousands) 

|                                                                                                                                                                                      | **—— Three      Months Ended****——**                                                                             |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                      | **February          1,    2008**                                                                                                         | **February          2,    2007** |
| **Operating Activities**                                                                                                                                                                  |                                                                                                                                     |   |
|      Net income                                                                                                                                                  | $1,488                                                                                 | $1,863           |
|      Adjustments to reconcile net income to             net cash provided by (used in) operating activities:                            |                                                                                                                                     |   |
|           Depreciation and amortization                                                                                                 | 1,499                                                                                  | 1,386           |
|           Stock-based compensation                                                                                                      | 1,631                                                                                  | 1,146           |
|           Excess          tax benefits from stock-based          payment arrangements | (17)                                                                                        | (15)          |
|      Changes in:                                                                                                                                                 | ** **                                                                                                                               | ** ** |
|           Accounts receivable                                                                                                           | 1,498                                                                                  | (4,680)          |
|           Refundable income taxes                                                                                                       | (75)                                                                                        | —           |
|           Inventory, prepaid expenses, and other        assets                                                                          | (1,064)                                                                                     | 448           |
|           Accrued  lease          incentives                                                                                            | 877                                                                                    | —           |
|           Accounts payable, taxes payable,        and accrued liabilities                                                               | (284)         -----------                 | (4,082)         -----------           |
|           Net cash provided by (used in) operating        activities                                                                    | 5,553                                                                                  | (3,934)          |
| **Investing Activities**                                                                                                                                                                  | ** **                                                                                                                               | ** ** |
|      Purchases of available-for-sale securities                                                                                                                  | (22,928)                                                                                    | (23,174)          |
|      Maturities of available-for-sale securities                                                                                                                 | 19,450                                                                                 | 27,440           |
|      Additions to property and equipment                                                                                                                         | (828)         -----------                 | (355)         -----------           |
|           Net cash (used in) provided by investing        activities                                                                    | (4,306)                                                                                     | 3,911           |
| **Financing Activities**                                                                                                                                                                  | ** **                                                                                                                               | ** ** |
|      Issuances of common stock                                                                                                                                   | 1,707                                                                                  | 2,128           |
|      Excess tax benefits from stock-based        payment arrangements                                                                                            | 17                                                                                     | 15           |
|      Term loan                                                                                                                                                   | (476)                                                                                       | (477)          |
|      Dividends paid                                                                                                                                              | (1,549)         -----------               | (1,491)         -----------           |
|      Net cash (used in) provided by financing        activities                                                                                                  | (301)                                                                                       | 175           |
|      Net increase in cash and cash equivalents                                                                                                                   | 946                                                                                    | 152           |
|      Cash and cash equivalents, beginning        of period                                                                                                       | 5,250          -----------           | 4,194          -----------           |
|      Cash and cash equivalents, end of period                                                                                                                    | $6,196          =======              | $4,346          =======           |
| Supplemental disclosures of cash flow        information:                                                                                                                                 | ** **                                                                                                                               | ** ** |
|      Interest paid                                                                                                                                               | $110                                                                                   | $145           |
|      Income taxes paid                                                                                                                                           | $744                                                                                   | $36           |

See “Notes to CondensedConsolidated Financial Statements.”

 

**Applied Signal Technology, Inc.  Notes to Condensed Consolidated Financial Statements (unaudited)  February 1, 2008**

**Note 1: Summary of Significant Accounting Policies**

**Description of Business and Basis of Presentation**

Applied Signal Technology, Inc. (AST) provides advanced digital signal processing  products, systems, and services in support of intelligence, surveillance, and  reconnaissance (ISR) for global security. We provide processing of both man-made  and naturally occurring signals. The processing of man-made signals includes  communications intelligence (COMINT) and electronic intelligence (ELINT). The  processing of natural signatures includes the use of sonar, radar, magnetic,  and chemical sensors to detect changes in the environmental phenomenology.  Our primary customer is the United States Government. We develop and manufacture  sophisticated receivers and signal processing equipment that use advanced software.

The majority of all of our revenues were from contracts with the United States  Government or prime contractors for the United States Government.

The accompanying unaudited,    condensed consolidated 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, 2007. 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 period ended February 1, 2008, are not necessarily    indicative of the results that may be expected for the year ending October    31, 2008. The balance sheet at October 31, 2007, 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.

**Estimates**

The preparation of consolidated financial statements in conformity with generally  accepted accounting principles requires management to make estimates and assumptions  that affect the amounts reported in the consolidated financial statements and  accompanying notes. Actual results could differ significantly from those estimates.

**Principles of Consolidation**

The financial statements include the accounts of AST and its wholly owned  subsidiary, Dynamics Technology, Inc. (DTI). All significant intercompany transactions  have been eliminated.

**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 (AICPA) Statement of Opinion 81-1, *Accounting for Performance  of Construction-Type and Production-Type Contracts.*These contracts are  executed by 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. A limited  number of standalone software contracts are recognized in accordance with the  AICPA Statement of Opinion 97-2, *Software Revenue Recognition*(SOP  97-2). In accordance with SOP 97-2, we may, at times, record an amount of deferred  revenue associated with contracts that are billed and for which customers have  paid in advance of performance requirements set forth in these contracts.

As a supplier to United States Government, we are required to 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. Among  the causes for the suspension are violations of various statutes, including  those related to procurement integrity, export control, United States 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. The government  audits and investigations can take several years to complete. Depending on  the results of these audits and investigations, the government may make claims  against us or take exception to certain costs we determined to be recoverable.  In the period management determines recoverability is not likely, operating  income would be reduced.

We account for cost-reimbursement contracts by charging actual labor, materials,  and other direct costs, plus estimated indirect costs of operations as incurred  (incurred costs), including overhead, research and development, and general  and administrative expenses. We do not apply indirect costs to subcontract  costs that are in excess of $250,000 and meet certain other predetermined criteria.

We recognize contract    revenues and profits on cost-reimbursement contracts by applying an estimated    fee rate to all incurred costs 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. On cost-reimbursement  contracts, we may bear unexpected cost increases for purposes of maintaining  customer relationships. Historically, the effect on operating results and financial  condition from cost-reimbursement losses has been minimal.

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 bases its assessments 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. Historically, management’s  estimates have generally been consistent with the actual fees awarded. However,  changes in facts and circumstances could arise within an award fee period,  causing management to either lower or raise the award fee estimate in the period  in which the changes occur.

Some of our contracts are performed under time-and-materials contracts on  a level-of-effort basis. We recognize revenue for these contracts by applying  a negotiated billing rate to the level of effort.

We account for fixed-price contracts by using the percentage-of-completion  method. Under this method, we charge labor, materials, and other direct costs,  plus estimated indirect costs of operations, as they are incurred. Each period,  we recognize as revenue 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 costs incurred and the estimated costs to complete. On fixed-price  contracts, we bear the risk of any 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, and these costs could have a materially adverse effect on our results  of operations.

The following table represents  our revenue concentration during the respective periods by contract type.

|                         | **—— Three    Months Ended****——**                                                                                                        |
|------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                         | **February          1,    2008**                                                                                                                                  | **February          2,    2007** |
| Cost-reimbursement contracts | 71%                                                                                                   | 76%             |
| Fixed-price contracts        | 9%                                                                                                    | 18%             |
| Time-and-materials contracts | 20%                ----------             | 6%            ----------             |
|                         | 100%                  ======              | 100%            ======             |

Five contracts represented an aggregate of 59% of revenues for the three-month  period ended February 1, 2008. Three of these contracts were indefinite-delivery-indefinite-quantity  contracts. Four contracts represented an aggregate of 51% of revenues for the  three-month period ended February 2, 2007. Three of these contracts were indefinite-delivery-indefinite-quantity  contracts. In addition, one of the five contracts in fiscal year 2008 was a  time-and-materials contract. All of the other contracts referenced were cost-reimbursementcontracts.

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.

Precontract costs represent costs incurred in anticipation of specific expected  future contract awards and costs incurred in connection with ongoing contracts  for which contract modifications have not been defined or completed at the  end of the reporting date. These costs are included in other current assets  on the balance sheet. Precontract costs for the periods ended February 1, 2008,  and October 31, 2007, were approximately $3,003,000 and $4,465,000, respectively.  Approximately $2,996,000 of the October 31, 2007, balance was recognized asrevenue during the three months ended February 1, 2008.

***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 adjustments 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.

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 through the Defense Contract Audit Agency in accordance with  Federal Acquisition Regulations, or record adjustments to expense based on  estimates of future contract activities for the remainder of the fiscal year.

If our rate variance is unfavorable, the modification of our billing rates  will likely increase revenue and operating expenses, and decrease the unfavorable  indirect rate variance accumulated in inventory. Fee percentages on fixed-price  and time-and-materials contracts will generally decline as a result of any  increase to indirect costs. Fee percentages on active cost-reimbursable contracts  will generally be unaffected as a result of any increase to indirect costs.  Fee percentages on completed cost-reimbursable contracts will generally be  reduced. If our rate variance is favorable, the modification of our billing  rates will decrease revenue and operating expenses, and decrease the favorable  indirect rate variance accumulated in inventory. In this event, fee percentages  on fixed-price and time-and-materials 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.

At February 1, 2008, the unfavorable rate variance was approximately $754,000  and at February 2, 2007, the unfavorable rate variance was approximately $2,760,000.

***Accounts receivable and allowance for bad debt***.  Accounts receivable are segregated between billed and unbilled accounts. For  cost-reimbursement contracts, we bill incurred 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 our recognition of contract revenue  in advance of contractual billing or progress billing terms.

When evaluating our need for a bad debt allowance, we consider our customer  base and their payment history. The majority of our revenues are generated  from the United States Government and therefore credit risk is minimal. We  record allowances for bad debt as a reduction to accounts receivable and an  increase to bad debt expense. These allowances are recorded in the period a  specific collection problem is identified. Once the receivable is deemed uncollectible,  the allowance is reversed and the receivable is written off to bad debt expense.

There was no charge to bad debt expense during the first three months of fiscal  year 2008 or fiscal year 2007.

***Inventory valuation and disposal***. Typical life cycles  of our equipment 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 our products,  which includes raw materials. Historically, we have sold our inventory at or  above cost, so there is typically no decrement in valuation. In addition, when  we determine that a product has reached the end of its life cycle or there  is no longer a need for a certain product, typically, we will dispose of any  remaining inventory, and record the associated reduction to inventory.

The charges associated    with these reductions to work in process and finished goods are included    in contract costs in our statement of operations. Disposals associated with    our raw material represent a minor amount, which 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. Disposals of inventory were not significant  during the first three months of fiscal years 2008 and 2007.

**Income Taxes**

Our income tax expense    at interim reporting periods is based on our estimated annual effective tax    rate and any discrete items that occur during any interim period. We calculate    this estimated tax rate based on the projected net income at the end of the    fiscal year, and review it at each reporting period. At the end of the fiscal    year, we adjust income tax expense for actual results. Our effective tax    rate can differ from the statutory rate primarily due to the non-deductible    nature of certain types of stock-based compensation expense. Please refer    to “Note 7: 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 it is determined that we did not price our products  and services consistent with the requirements of the Federal Acquisition Regulations.  We did not incur any price redeterminations on any of our contracts during  the first three months of fiscal year 2008 or the full fiscal year of 2007.

**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.

Our remaining securities    are classified as available for sale and are carried at fair market value    in short-term and long-term investments. At February 1, 2008, all of our    short-term and long-term investments consisted of municipal securities. Substantially    all of our investments in the municipal securities are with A-1/SP-1/AAA    (Standard & Poor’s), P-1/MIG-1/Aaa (Moody’s)  and F-1/AA/AAA (Fitch) rated issuers.

Our investment policy prohibits our investment in auction rate securities,  mortgage-backed securities, and asset-backed securities. Insured municipal  notes or bonds are also prohibited, with the exception of daily and weekly  variable rate demand notes that contain a hard put feature.

Based on our ability to liquidate our investment portfolio and our expected  operating cash flows, we do not anticipate any liquidity constraints as a result  of the current credit environment.

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 comprehensive income. The cost of securities sold is based on the  specific identification method. The fair value of short-term and long-term  investments is determined based on quoted market prices for the respective  securities. Realized gains and losses on sales of available-for-sale securities  were not material for the first three months of fiscal year 2008 or fiscal  year 2007.

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

|                                                | **————————— February      1, 2008****—————————**         |
|-----------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                | **Amortized Cost**                                                                                                                                                   | **Gross Unrealized        Gains** | **Estimated Fair        Market Value** |
| Cash and cash equivalents                           | $6,196                                                                                                   | $—             | $6,196             |
| Available-for-sale securities:                      |                                                                                                                                                                 |   |   |
|      Short-term tax exempt | 31,118                                                                                                   | 54             | 31,172             |
|      Long-term tax exempt  | 6,048                -----------             | 60            -----------             | 6,108            -----------             |
|                                                | $43,362            =======                   | $114            =======             | $43,476            =======             |

 

|                                                | ****—————————— October      31, 2007****——————————**** |
|-----------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                | **Amortized Cost**                                                                                                                                                             | **Gross Unrealized Gains** | **Estimated Fair Market Value** |
| Cash and cash equivalents                           | $5,250                                                                                                             | $—             | $5,250             |
| Available-for-sale securities:                      |                                                                                                                                                                           |   |   |
|      Short-term tax exempt | 29,671                                                                                                             | 12             | 29,683             |
|      Long-term tax exempt  | 4,108            -----------                           | 6            -----------             | 4,114            -----------             |
|                                                | $39,029                =======                         | $18            =======             | $39,047            =======             |

  

The following table summarizes the effective maturities of our available-for-sale  investments (in thousands).

|                    | **February          1,    2008**                                                                                                           | **October          31,    2007**                                                                                                         |
|-------------------------|--------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------|
| Due in one year or less | $31,172                                                                                  | $29,683                                                                                |
| Due in one to two years | 6,108          -----------             | 4,114          -----------           |
|                    | $37,280              =======           | $33,797          =======             |

**Restricted Cash**

We had restricted cash balances of approximately $539,000 and $562,000 at  February 1, 2008, and at October 31, 2007, respectively. These balances include  contributions made by our employees residing in California for disability funds.  These contributions were paid in lieu of participating in the state-sponsored  disability program.

Approximately $206,000    and $194,000 was included in prepaids and other current assets at February    1, 2008, and at October 31, 2007, respectively. Approximately $333,000 and    $368,000 was included in other assets at February 1, 2008,  and at October 31, 2007, respectively.

**Property and Equipment**

Machinery and equipment, as well as furniture and fixtures, are depreciated  by using the straight-line method over the estimated useful lives of the assets,  ranging up to five years. Leasehold improvements are amortized by using the  straight-line method over the lesser of the useful life of the assets or the  lease term. Construction in process includes costs incurred to build a portion  of our leasehold improvements and test equipment.

**Goodwill and Long-Lived Asset Valuation**

***Goodwill valuation***. We test goodwill for possible  impairment on an annual basis and at any other time if events occur or circumstances  indicate that the current carrying amount of goodwill may not be recoverable.  Circumstances that could trigger an impairment test include, but are not limited  to, a significant adverse change in the business climate or legal factors,  an adverse action or assessment by a regulator, unanticipated competition,  and loss of key personnel.

To perform the goodwill    impairment test, we determine the fair value of the reporting unit and compare    the fair value to the reporting unit’s carrying  value. We believe AST is one reporting unit, and therefore, we compare the  fair value of AST to the total net asset value on our balance sheet. If our  total net asset value were to exceed our fair value, we would perform the second  step of the impairment test. In the second step, we would compare the implied  fair value of our goodwill to our carrying amount. If no impairment exists  under step one, then step two is not necessary.

No indicators of impairment were identified at February 1, 2008.

***Long-lived asset valuation (property, plant and equipment, and      intangible assets)***. We will test long-lived assets or asset      groups for recoverability when events or changes in circumstances indicate      that their carrying amount may not be recoverable. Circumstances that could      trigger a review include, but are not limited to, significant decreases      in the market price of the asset, significant adverse changes in the business      climate or legal factors, accumulation of costs significantly in excess      of the amount originally expected for the acquisition or construction of      the asset, current period cash flow or operating losses combined with a      history of losses or a forecast of continuing losses associated with the      use of the asset, and current expectation that the asset will more likely      than not be sold or disposed of significantly before the end of its estimated      useful life.

We assess recoverability based on the carrying amount of the asset and its  fair value, which is generally determined based on the sum of the undiscounted  cash flows expected to result from the use and the eventual disposal of the  asset. We recognize an impairment loss when the carrying amount is not recoverable  and exceeds fair value.

No indicators of impairment were identified at February 1, 2008.

**Net Income 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):

|                                                                                                                                                                                                                   | **February          1,    2008**                                                                                                       | **February          2,    2007**                                                                                                       |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------|
| **Numerator**                                                                                                                                                                                                          |                                                                                                                                   |                                                                                                                                   |
|      Net income                                                                                                                                                                               | $1,488          =======            | $1,863          =======            |
| **Denominator**                                                                                                                                                                                                        |                                                                                                                                   |                                                                                                                                   |
|      Weighted average number of common shares             outstanding used to compute net income per             common share – basic | 12,344                                                                               | 11,973                                                                               |
|      Effect of dilutive stock options                                                                                                                                                         | 173          -----------           | 198          -----------           |
|      Shares used to compute net income per       common share – diluted                                                                                        | 12,517          =======            | 12,171          =======            |
|      Net    income per common share – basic                                                                                                                                             | $0.12                                                                                | $0.16                                                                                |
|      Net    income per common share – diluted                                                                                                                                           | $0.12                                                                                | $0.15                                                                                |

 We excluded approximately 1,025,000 and 984,000 potential common shares for  the first quarters of fiscal years 2008 and 2007, from the diluted net income  per common share computation for the respective periods, as their effect wouldbe antidilutive.

**Comprehensive Income**

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

|                                                      | **—— Three      Months Ended ——**                                                                          |
|-----------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------|
|                                                      | **February          1,    2008**                                                                                                   | **February          2,    2007** |
| Net income                                                | $1,488                                                                           | $1,863           |
| Unrealized          gain (loss) on securities, net of tax | 96                                                                               | (4)          |
| Unrealized gain (loss) on derivative,        net of tax   | (124)         ----------            | 25              ----------           |
| Comprehensive income                                      | $1,460                                                                           | $1,884           |

The accumulated other comprehensive income balance as of February 1, 2008,was approximately $6,000, and as of October 31, 2007, was approximately $34,000.

**Dividends**

We have paid dividends    at the rate of $0.50 per share per annum, payable quarterly, since fiscal    year 2004. However, the dividend is subject to approval by the Board of Directors    and is reviewed quarterly. Dividends were paid on February 15, 2008, to shareholders    of record at February 1, 2008, and are expected to be paid on May 16, 2008,    August 15, 2008, and November 14, 2008, to shareholders  of record at May 2, 2008, August 1, 2008, and October 31, 2008.

We paid dividends of approximately $1,549,000 during the first three months  of fiscal year 2008 and approximately $1,491,000 during the first three months  of fiscal year 2007.

At February 1, 2008, and October 31, 2007, accrued dividends of approximately  $1,574,000 and $1,549,000, respectively, were included in other accrued liabilities  on the accompanying balance sheet.

**Stock-Based Compensation**

We have stock-based compensation programs that enable our Board of Directors  to award employee equity incentives. These programs include restricted stock  awards and incentive and non-statutory stock options granted under various  plans. Restrictions on the restricted stock awards typically lapse in four  equal annual installments, on each anniversary of the grant date, conditioned  on continued employment. The restrictions for the majority of the fiscal year  2007 awards to non-employee directors will lapse in three equal annual installments.  Stock options, granted in 2006 and prior years, are generally time based, typically  vesting 20% on each anniversary of the grant date over five years, and expiring  eight or ten years from the grant date, conditioned on continued employment.

Additionally, we have an Employee Stock Purchase Plan (ESPP) that allows employees  to purchase shares of common stock at 85% of the fair market value at the lower  of either the date of enrollment or the date of purchase. For offering periods  beginning prior to June 1, 2007, our ESPP had a twenty-four-month offering  period with four six-month purchase periods within each offering period. If  the fair market value on the purchase date was lower than the fair market value  on the offering date, all participants were withdrawn from the offering period  and re-enrolled into a new offering period. Effective, May 31, 2007, we modified  our ESPP such that the length of all offering periods, beginning June 1, 2007,  is six months. Consequently, there is no reset feature associated with the  new offering periods. As a result of the modification to the ESPP, the December  1, 2006, offering period, originally scheduled to end on November 30, 2008,  was the final twenty-four-month offering.

Our closing stock price    on the November 30, 2007, ESPP purchase date was lower than the closing stock    price on the December 1, 2006, offering date. Therefore, 361 participants    were re-enrolled from the original twenty-four- month offering period ending    on November 30, 2008, into a new six-month offering period, beginning December 1, 2007, and ending May 31, 2008. This re-enrollment effectively  canceled the final six-month purchase period of the original twenty-four-month  offering. Therefore, the remaining unamortized compensation amount associated  with this final purchase period of approximately $382,000 was immediately recognized  on December 1, 2007. In addition, as a result of the modification, approximately  $91,000 of incremental compensation cost was generated at December 1, 2007,  of which $32,000 was recognized during the first quarter of fiscal year 2008.

On November 15, 2007, one of our non-employee directors retired. Immediately  prior to his retirement, we accelerated the vesting of all unvested shares  of his restricted stock and stock option awards. In addition, we extended the  remaining exercise period of all vested and unexercised options from ninety  days to one year. As a result, our stock compensation expense associated with  these modified equity awards, was approximately $80,000 higher than it would  have been had the awards not been modified.

As of February 1, 2008, there were a total of approximately 618,605 shares  reserved for future issuance under the equity incentive and ESPP plans.

We adopted the provisions of SFAS 123 (revised 2004), *Share-Based Payment* (SFAS  123R), in fiscal year 2006, using the modified prospective transition method.  Stock-based compensation expense for awards granted subsequent to November  1, 2005, was based on the grant-date fair value estimated in accordance with  the provisions of SFAS 123R. For awards granted prior to, but not yet vested,  as of November 1, 2005, stock-based compensation expense was based on the grant-date  fair value previously estimated in accordance with the original provisions  of SFAS 123. We recognize the stock compensation expense on a straight-line  basis over the requisite service period of the award, which generally equals  the vesting period of each grant.

The following table sets forth the total stock-based compensation expense  resulting from the grant of stock options, restricted stock awards, and purchases  under ESPP included in our condensed consolidated statements of operations  (in thousands, except share data).

|                                                        | **Three Months Ended        February 1, 2008**                                                                                                                                                                                                                     | **Three Months Ended        February 2, 2007**                                                                                                                                                                                                                 |
|-------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Contract costs                                              | $993                                                                                                                                                           | $644                                                                                                                                                       |
| Research and development                                    | 54                                                                                                                                                             | 54                                                                                                                                                         |
| General and administrative                                  | 584                        -----------                     | 448                    -----------                     |
| Stock-based compensation expense before income        taxes | $1,631                                                                                                                                                         | $1,146                                                                                                                                                     |
| Income taxes                                                | 260                    -----------                         | 243                    -----------                     |
| Stock-based compensation expense after income        taxes  | $1,371                                                                                                                                                         | $903                                                                                                                                                       |
| Reduction to basic net income per share                     | $0.11                                                                                                                                                          | $0.08                                                                                                                                                      |
| Reduction to diluted net income per share                   | $0.11                                                                                                                                                          | $0.07                                                                                                                                                      |

 There were no options granted during the first three months of fiscal year  2008 or fiscal year 2007. The fair value of offering periods for future purchases  under the ESPP was estimated based on the Black-Scholes valuation model byusing the following weighted average assumptions:

|                        | **———— Employee      Stock Purchase Plan————** |
|-----------------------------|------------------------------------------------------------------------------------------------|
|                        | **Three Months Ended        February 1, 2008**                                                 | **Three Months Ended        February 2, 2007** |
| Risk-free interest rate     | 3.3%                                                                                           | 4.8% |
| Expected life (years)       | 0.50                                                                                           | 1.25 |
| Expected volatility         | 49%                                                                                            | 37% |
| Expected dividends          | 3.5%                                                                                           | 2.8% |
| Weighted average fair value | $3.61                                                                                          | $4.87 |

Our determination of the grant date fair value of stock-based compensation  using an option pricing model and the resulting compensation expense that is  recognized are affected by our stock price as well as assumptions regarding  a number of complex and subjective variables. These factors include, but are  not limited to, our expected stock price volatility, the projected life of  the stock option, the expected dividend yield, and the risk-free interest rate.  Changes in the subjective assumptions can materially affect the estimated valueof the stock options and the expense recognized.

The risk-free interest    rate is based on the Federal Reserve Bank’s constant  maturities daily interest rate in effect at the ESPP offering date.

For our ESPP offering periods beginning prior to June 1, 2007, the expected  life was based on the six-month purchase periods within each twenty-four-month  offering period. Offering periods beginning after that date have a single six-month  purchase period and we use an expected life of six months.

Our computation of expected volatility reflects a combination of historical  and market-based implied volatility consistent with SFAS 123R and Staff Accounting  Bulletin 107. We determined that the combination of historical and market-based  implied volatility provides a more accurate reflection of our market conditions  and is more representative of future stock price trends than employing solely  historical volatility.

The expected dividend yield is calculated by taking the total expected annual  dividend payout divided by the average stock price.

Stock-based compensation expense recognized in the consolidated statement  of operations in the first quarters of fiscal years 2008 and 2007 reflects  estimated forfeitures, which are based on historical option forfeitures. The  net cash proceeds associated with our ESPP were $1,554,000 for the three-month  period ended February 1, 2008, and $1,805,000 for the three-month period ended  February 2, 2007. Unrecognized compensation cost associated with our ESPP as  of February 1, 2008, is approximately $630,000 and is expected to be recognized  over a weighted average period of 0.33 years.

Stock option activity for the three months ended February 1, 2008 is as follows:

|                            | **Shares**                                                                                              | **Weighted Average Exercise Price** |
|---------------------------------|---------------------------------------------------------------------------------------------------------|-------------------------------------|
| Outstanding at October 31, 2007 | 1,409,724                                                            | $18.33                              |
| Grants                          | —                                                              |                                |
| Exercised                       | (14,467)                                                                  | $10.63                              |
| Forfeitures or expirations      | (19,227)          -------------        | $17.98                              |
| Outstanding at February 1, 2008 | 1,376,030                                                            | $18.42                              |
| Exercisable at February 1, 2008 | 985,166                                                              | $17.15                              |

Net cash proceeds from    the exercise of stock options were approximately $154,000 for the three-month    period ended February 1, 2008, and approximately $324,000 for the three-month    period ended February 2, 2007. The income tax benefit realized from stock    option exercises during the first quarter of fiscal year 2008 was approximately    $6,000 and was approximately $30,000 during the same period of fiscal year    2007. In accordance with SFAS 123R, we present excess tax benefits from the    exercise of stock options, if any, as financing cash flows rather than operating    cash flows.

As of February 1, 2008, approximately $ 3,210,000 of total unrecognized compensation  costs related to unvested stock options is expected to be recognized over a  weighted average period of 2.47 years. 

The following table summarizes our restricted stock grant activity for the  three months ended February 1, 2008.

| **Nonvested Shares**          | **Shares**                                                                                       | **Weighted Average Grant Date Fair Value        Per Share** |
|-------------------------------|--------------------------------------------------------------------------------------------------|-------------------------------------------------------------|
| Nonvested at October 31, 2007 | 163,266                                                       | $17.35                                                      |
| Grants                        | 47,000                                                        | $14.20                                                      |
| Vested                        | (15,845)                                                           | $14.11                                                      |
| Forfeitures                   | (400)      -------------        | $18.06                                                      |
| Nonvested at February 1, 2008 | 194,021                                                       | $16.71                                                      |

The fair value of our restricted stock is based on our closing stock price  on the date of grant. Our unrecognized compensation cost related to nonvested  (restricted) stock is $2,582,000, and is expected to be recognized over a weightedaverage period of 2.99 years.

**Recent Accounting Pronouncements**

In September 2006, the FASB issued SFAS 157, *Fair Value Measurement*.  SFAS 157 defines fair value, establishes a framework for measuring fair value,  and enhances disclosures about fair value measurements. The statement will  be effective for our fiscal year beginning November 1, 2008. We are evaluating  the impact adopting SFAS 157 will have on our financial statements.

On February 15, 2007, the FASB issued SFAS 159, *The Fair Value Option    for Financial Assets and Financial Liabilities*. SFAS 159 provides companies    with an option to report selected financial assets and liabilities at fair    value. It also establishes presentation and disclosure requirements to facilitate    comparisons between companies using different measurement attributes for    similar types of assets and liabilities. The statement will be effective    for our fiscal year beginning November 1, 2008. We are evaluating the impact    adopting SFAS 159 will have on our financial statements.

 In June 2007, the FASB    ratified Emerging Issues Task Force (EITF) Issue  No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services  to Be Used in Future Research and Development Activities (EITF 07-3). EITF  07-3 requires non-refundable advance payments for goods and services to be  used in future research and development activities to be recorded as an asset,  with the payments expensed when the research and development activities are  performed. EITF 07-3 applies to new contractual arrangements entered into in  fiscal years beginning after December 15, 2007. We believe that adoption  of EITF 07-3 will not have a material effect on our financial position, results  of operations, or cash flows. 

**Note 2: Inventory**

Inventories are stated at the lower of average cost or market and consisted  of the following (in thousands):

|            | **February          1,    2008**                                                                                                        | **October          31,    2007**                                                                                                        |
|-----------------|-----------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------|
| Raw materials   | $905                                                                                  | $904                                                                                  |
| Work in process | 6,321                                                                                 | 4,597                                                                                 |
| Finished goods  | 521           ----------            | 443           ----------            |
|            | $7,747                                                                                | $5,944                                                                                |

At February 1, 2008, the unfavorable indirect rate variance included in workin process was approximately $754,000.

Disposal activities were not significant during the first three months of  fiscal years 2008 and 2007.

**Note 3: Goodwill and Intangible Assets**

***Goodwill***. Under SFAS 142, *Goodwill and Other      Intangible Assets*, goodwill is not subject to amortization. Rather,      we evaluate goodwill for impairment at least annually or more frequently      if events and changes in circumstances suggest that the carrying amount may      not be recoverable. No impairment was recognized in the first quarter of    fiscal year 2008.

***Intangible assets***. Information on our identifiable    intangible assets that are subject to amortization is presented in the table  below (in thousands).

|                                                                    |            | **———————— February      1, 2008****————————**       |
|-------------------------------------------------------------------------|-----------------|------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                    | **Useful Life** | **Gross Carrying Amount**                                                                                                                            | **Accumulated Amortization** | **Net Carrying Amount** |
| Identifiable intangible assets that are subject        to amortization: |            |                                                                                                                                                 |   |   |
|      Customer relationships                    | 3 years         | $1,720                                                                                        | $(1,481)           | $239            |
|      Existing technology                       | 5 years         | 340                                                                                           | (176)           | 164            |
|      Patent                                    | 18 years        | 60               ----------            | (9)          ----------            | 51           ----------            |
|           Total       |            | $2,120                                                                                        | $(1,666)           | $454            |

All of our acquired identifiable intangible assets are subject to amortization  and have originally estimated useful lives as noted in the table above. Amortization  expense associated with our intangible assets was approximately $161,000 duringeach of the periods ended February 1, 2008, and February 2, 2007.

As of February 1, 2008, the estimated future amortization expense for acquiredidentifiable intangible assets is as follows (in thousands):

| **Fiscal Years**                    |                                                         |
|-------------------------------------|--------------------------------------------------------------|
| Remainder of 2008                   | 292                                      |
| 2009                                | 71                                       |
| 2010                                | 49                                       |
| 2011–2023                     | 42        ------     |
|      Total | $454                                     |

The goodwill and identifiable intangible assets are related to our July 2005acquisition of Dynamics Technology, Inc. (DTI).

**Note 4: Borrowing Arrangements**

***Revolving line of credit***. At February 1, 2008, we  had a revolving line of credit (Line of Credit) under which Wells Fargo Bank  (Wells Fargo), could advance funds to us, up to a maximum principal amount  of $3 million. The Line of Credit was renewed on February 21, 2008 and it will  expire on March 1, 2009.

At February 1, 2008, we had two standby letters of credit under the Line of  Credit totaling approximately $1,370,000. One letter of credit, related to  our Sunnyvale, California facilities lease, had a committed balance of approximately  $1,220,000 at February 1, 2008. The second letter of credit was a requirement  of our workers compensation insurance, and had a committed balance of approximately  $150,000 at February 1, 2008. We do not pay interest on the amounts associated  with the standby letters of credit.

As a result of the committed    but unused funds associated with the two letters of credit, the total amount    under the Line of Credit available for borrowing was approximately $1,630,000.    No fees or interest were associated with this unused portion. Borrowings    under the Line of Credit bear interest at Wells Fargo’s reference rate    (6% at February 1, 2008), and interest on those borrowings are payable monthly.    As security for our indebtedness under the Line of Credit, we have granted    to Wells Fargo a security interest in our cash and marketable securities  maintained with an affiliate of Wells Fargo.

***Term loan and interest rate swap***. Effective July  1, 2005, and in connection with the acquisition of DTI, we entered into a term  loan with Wells Fargo in the principal amount of $10 million, plus interest,  the proceeds of which were used for acquisition financing (the Term Loan).  The Term Loan bears interest at a fixed rate per annum equal to 1.750% above  the London Inter-Bank Offered Rate (LIBOR) (3.14% at February 1, 2008). Our  Term Loan is for a seven-year term ending on July 1, 2012, with monthly payments  of principal and interest.

As security for our indebtedness under the Term Loan, we have granted to Wells  Fargo a security interest in our accounts receivable, general intangibles,  inventory, and equipment.

We are required to maintain certain financial covenants setting forth minimum  ratios for quick ratio and fixed charge coverage and maximum ratios for total  liabilities to tangible net worth. As of February 1, 2008, we were in compliance  with these covenants.

We are exposed to market    risk from changes in interest rates on the Term Loan, and manage this exposure    through the use of an interest rate swap agreement with Wells Fargo. By locking    in a fixed rate for the entire term of the loan, this strategy decreases    the variability of earnings and cash flows resulting from interest rate fluctuations    and lowers the overall borrowing costs should interest rates rise. The interest    rate swap is designated as a cash flow hedge and is accounted for under SFAS    133, *Accounting for Derivative Instruments  and Hedging Activities* (SFAS 133). No losses on the agreement due to counterparty  credit issues are anticipated. Under this swap, we pay an interest rate of  4.33%, per annum, over the seven-year term of the loan and receive an average  floating rate of LIBOR on the notional amount of the loan. Thus, we exchanged  a variable rate obligation for a fixed interest obligation, resulting in an  effective interest rate of 6.08%.

The effective portion of the cash flow hedge is reported as other comprehensive  income and reclassified into earnings in the same period during which the hedged  transaction affects earnings. At February 1, 2008, the effective portion of  the cash flow hedge was a deferred net loss of approximately $108,000, net  of taxes. Over the next twelve months, we expect to reclassify approximately  $96,000 of the loss to interest expense as principal on the Term Loan is repaid  and the related swap-instrument notional amount is reduced.

We assess effectiveness of the hedge instrument regularly. The ineffective  portion of the gain or loss, if there is one, would impact earnings as it occurs.  There is no ineffective portion of the outstanding swap as of February 1, 2008.

**Note 5: Contractual Obligations**

The following table sets    forth our contractual obligations, excluding interest payments on our debt,  as of February 1, 2008 (in thousands).

|                                  | **————————————— Payments      Due by Period****—————————————** |
|---------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                  | **Total**                                                                                                                                                                                                                  | **Less than        1 Year** | **1–3        Years** | **3–5        Years** | **More than        5 Years** |
| Operating lease obligations           | $42,416                                                                                                                                                                       | $7,544          | $14,912          | $10,771          | $9,189          |
| Loan    obligations – principal | 6,309                                                                                                                                                                         | 1,429          | 2,857          | 2,023          | —          |
| Purchase obligations                  | 5,979             -----------                                                                                                    | 5,979         -----------          | —         -----------          | —         -----------          | —         -----------          |
| Total                                 | $54,704                =======                                                                                                   | $14,952         =======          | $17,769         =======          | $12,794         =======          | $9,189         =======          |

Our operating lease obligations consist of non-cancelable lease agreements  for our facilities, which expire at various dates between fiscal years 2008  and 2016. Certain leases contain escalation clauses and requirements for the  payment of property taxes, insurance, and maintenance expenses. During the  first quarter of fiscal year 2008, approximately $998,000 of the cost for our  leasehold improvements was funded by the landlord of our new facility in Torrance,  California. This was determined to be a lease incentive. This lease incentive  reduces our rent expense and will be amortized on a straight-line basis over  the remaining period of our operating lease that ends in fiscal year 2015.  This reduction to rent expense is generally equal to the increased amortizationexpense of the associated leasehold improvements.

**Note 6: Segment Reporting**

We have reviewed our business operations and determined that we operate in  a single homogeneous business segment. Each of our divisions sells similar  products and services with similar economic characteristics to similar classes  of customers, primarily to the United States Government, its agencies, or prime  contractors for the United States Government. The technologies and the operations  of our divisions are highly integrated. Revenues and costs are reviewed monthly  by management on an individual contract basis as a single business segment.

**Note 7: Provision for Income Taxes**

We adopted FASB Interpretation Number 48, *Accounting      for Uncertainty in Income Taxes – an Interpretation of FASB Statement      No. 109* (FIN    48) effective November 1, 2007. FIN 48 describes a two-step approach to recognizing    and measuring uncertain tax positions. The first step is to determine whether    it is more likely than not that a tax position accounted for under SFAS 109    will be sustained upon examination. The second step is to measure and recognize    the largest amount of benefit that is greater than 50% likely of being realized    upon ultimate settlement. Upon adoption of FIN 48, we determined that there    were no unrecognized tax benefits to be recorded at February 1, 2008.

We record interest or    penalties related to income taxes as a component of income tax expense in    our financial statements. The amount of net interest recognized during the    three months ended February 1, 2008, and February 2,  2007, as well as the amount of accrued interest at February 1, 2008, was not  material. No penalties were recorded in those periods.

In general, our income tax returns are subject to examination by U.S. federal,  and state tax authorities for fiscal years 2003 and forward.

Our provision for income taxes for the first three months of fiscal year 2008  was approximately $1,125,000, with an estimated annual effective tax rate of  44.9%. Our provision for income taxes for the first three months of fiscal  year 2007 was approximately $1,437,000, representing an estimated annual effective  tax rate of 44.0%.

**Note 8: Contingencies**

***Product warranties***. Our products are warranted against  defective workmanship and materials for a period of one year from the date  of acceptance by the original purchaser. Warranty costs in the first three  months of fiscal year 2008 and fiscal year 2007 were approximately $57,000  and $82,000, respectively.

***Guarantees***. From time to time, we enter into certain  types of contracts that contingently require us to indemnify parties against  third-party claims. These contracts primarily relate to (i) certain real estate  leases, under which we may be required to indemnify property owners for environmental  and other liabilities, and other claims arising from our use of the applicable  premises; and (ii) certain agreements with our officers, directors, and employees  under which we may be required to indemnify such persons for liabilities arising  out of their employment relationship. The terms of such obligations vary. Generally,  a maximum obligation is not explicitly stated. Because the obligated amounts  of these types of agreements often are not explicitly stated, the overall maximum  amount of the obligations cannot be reasonably estimated. Historically, we  have not been obligated to make significant payments for these obligations,  and no liabilities have been recorded for these obligations on the balance  sheets as of February 1, 2008, or October 31, 2007.

***Legal proceedings***. On March 11 and July 19, 2005,  purported securities class action complaints were filed in the United States  District Court, Northern District of California. The cases were considered  as*In re Applied Signal Technology Inc. Securities Litigation*, Master  File No. 4:05-cv-1027 (SBA). The amended consolidated complaint is brought  on behalf of a putative class of persons who purchased our Company’s  securities during a class period of August 24, 2004, through February 22, 2005.  The complaints name us, our Chief Executive Officer, and our Chief Financial  Officer as defendants, and allege that false and misleading statements regarding  us were issued during the class period. On February 8, 2006, the Court dismissed  the case with prejudice and entered judgment in defendants’ favor. Plaintiffs  appealed the judgment of dismissal on March 23, 2006, and the appeal was heard  on December 6, 2007; any future unfavorable outcome of the litigation could  have an adverse impact on our business, financial condition, and results of  operation. At this time we cannot estimate the amount of possible loss or range  of loss that might be incurred as a result of this proceeding.

**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, 2007.

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 “Item  1A, Risk Factors.” 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 Business**

Applied Signal Technology, Inc. (AST) provides advanced digital signal processing  products, systems, and services in support of intelligence, surveillance, and  reconnaissance (ISR) for global security. We provide processing of both man-made  and naturally occurring signals. The processing of man-made signals includes  communications intelligence (COMINT) and electronic intelligence (ELINT). The  processing of natural signatures includes the use of sonar, radar, magnetic,  and chemical sensors to detect changes in the environmental phenomenology.  Our primary customer is the United States Government. We develop and manufacture  equipment for both the collection and processing of signals.

COMINT derives intelligence from telecommunications signals. Our COMINT 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 COMINT 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 COMINT processing equipment. Over time,  we have broadened our scope to add specialized collection equipment and complete  signal processing systems and related services.

ELINT derives intelligence from signals associated with weapons systems. Our  investment in ELINT is directed toward the development of equipment for the  collection and processing of weapons systems signals. This equipment will be  able to scan the radar bands associated with weapons systems and determine  the type of system and its precise location for battlefield characterization  and force protection. The equipment will also analyze the command and control  signals associated with these weapons systems to provide information about  battlefield readiness. Our ELINT initiatives are new and to date we have derived  no revenue from the sale of ELINT products or services.

Sensor signal processing observes changes in physical phenomena that can provide  an indication of activities of concern to global security. Examples of these  phenomena are detection of chemicals that might be used for explosive devices  or the detection of sub-terrain ferrous materials that might indicate an underground  facility for weapon manufacturing. Our sensor processing equipment provides  automatic detection of physical abnormalities in both marine and terrestrial  environments.

The majority of our revenues were from contracts with the United States Government,  its agencies, or prime contractors for the United States Government.

**Critical Accounting Policies and Estimates**

***General***.    Our discussion and analysis of our financial condition and results of operations    are based upon our condensed consolidated financial statements. These condensed    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    materially 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 condensed consolidated financial statements    and, therefore, consider these to be critical accounting policies. See “Notes to Condensed Consolidated Financial Statements,  Note 1: Summary of Significant Accounting Policies,” 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 AICPA Statement of Opinion  81-1, *Accounting for Performance of Construction-Type and Production-Type  Contracts* (SOP 81-1). These contracts are executed by 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. A limited number of standalone software contracts  are recognized in accordance with the AICPA Statement of Opinion 97-2, *Software  Revenue Recognition* (SOP 97-2). In accordance with SOP 97-2, we may, at  times, record an amount of deferred revenue associated with contracts that  are billed and for which customers have paid in advance of performance requirements  set forth in these contracts. 

As a supplier to United    States Government, we are required to 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. Among the causes for the suspension    are violations of various statutes, including those related to procurement    integrity, export control, United States 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. The government audits and investigations    can take several years to complete. Depending on the results of these audits    and investigations, the government may make claims against us or take exception    to certain costs we determined to be recoverable. In the period management  determines recoverability is not likely, operating income would be reduced.

We account for cost-reimbursement    contracts by charging actual labor, materials, and other direct costs, plus    estimated indirect costs of operations as incurred (incurred costs). Indirect    costs include overhead, research and development, and general and administrative    expenses. Stock compensation expense is generally not reimbursable under    these contracts. We do not apply indirect costs to subcontract costs that    are in excess of $250,000 and that meet certain other predetermined criteria.

We recognize contract    revenues and profits on cost-reimbursement contracts by applying an estimated    fee rate to all incurred costs 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. On cost-reimbursement  contracts, we may bear unexpected cost increases for purposes of maintaining  customer relationships. Historically, the effect on operating results and financial  condition from cost-reimbursement losses has been minimal.

 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 bases its assessments 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. Historically, management’s estimates have generally  been consistent with the actual fees awarded. However, changes in facts and  circumstances could arise within an award fee period, causing management to  either lower or raise the award fee estimate in the period in which the changes  occur. 

Some of our engineering services are performed under time-and-materials contracts  on a level-of-effort basis. We recognize revenue for these contracts by applying  a negotiated billing rate to the level of effort.

We account for fixed-price contracts by using the percentage-of-completion  method. Under this method, we charge labor, materials, and other direct costs,  plus estimated indirect costs of operations, as they are incurred (incurred  costs). Each period, we recognize as revenue 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 costs incurred and the estimated total  costs to complete. On fixed-price contracts, we bear any 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, and these costs could have a materially adverse  effect on results of operations and financial condition

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. We adjust revenues and profits on all contracts in the period  in which changes, including anticipated losses, become determinable.

Precontract costs represent costs incurred in anticipation of specific expected  future contract awards and costs incurred in connection with ongoing contracts  for which contract modifications have not been defined or completed at the  end of the reporting date. These costs are included in other current assets  on the balance sheet. Precontract costs for the periods ended February 1, 2008,  and October 31, 2007, were approximately $3,003,000 and $4,465,000, respectively.  Approximately $2,996,000 of the October 31, 2007, balance was recognized as  revenue during the first quarter of fiscal year 2008.

***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. 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  believe that this method is the preferred practice used within our industry.  At year-end, we adjust the revenues and costs 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, we record unfavorable rate variances as    reductions to operating expenses and increases to work-in-process inventory.    We record favorable rate variances 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, request a modification  of our billing rates to our customers through the Defense Contract Audit Agency  any time during the fiscal year in accordance with Federal Acquisition Regulations,  or record adjustments to expense based on estimates of future contract activities  for the remainder of the fiscal year.

If our rate variance is unfavorable, the modification of our billing rates  will likely increase revenue and operating expenses, and decrease the unfavorable  indirect rate variance accumulated in inventory. Fee percentages on fixed-price  and time-and-materials contracts will generally decline as a result of any  increase to indirect costs. Fee percentages on active cost-reimbursable contracts  will generally be unaffected as a result of any increase to indirect costs.  Fee percentages on completed cost-reimbursable contracts will generally be  reduced. If our rate variance is favorable, the modification of our billing  rates will decrease revenue and operating expenses, and decrease the favorable  indirect rate variance accumulated in inventory. In this event, fee percentages  on fixed-price and time-and-materials 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.

At February 1, 2008, the unfavorable inventoried indirect variance was approximately  $754,000. At February 2, 2007, the unfavorable inventoried indirect rate variance  was approximately $2,760,000.

***Income taxes***.    Our income tax expense at interim reporting periods is based on our estimated    annual effective tax rate and any discrete items that occur during any interim    period. We calculate this estimated tax rate based on the projected net income    at the end of the fiscal year, and review it at each reporting period. At    the end of the fiscal year, we adjust income tax expense for actual results.    Our effective tax rate can differ from the statutory rate primarily due to    the non-tax-deductible nature of certain types of stock-based compensation    expense. Please refer to “Notes to  Condensed Consolidated Financial Statements, Note 7: Provision for Income Taxes” for  the current year effective tax rate.

***Allowance for bad debt***. Since the majority of our  revenues are generated from the United States Government, its agencies, or  prime contractors for the United States Government, we regard the credit risk  of our business to be minimal. We record allowances for bad debt as a reduction  to accounts receivable and an increase to bad debt expense. These allowances  are recorded in the period a specific collection problem is identified. Once  the receivable is deemed uncollectible, the allowance is reversed and the receivable  is written off.

There was no charge to bad debt expense during the first quarter of fiscal  years 2008 or 2007.

***Inventory valuation and disposal***.    We provide advanced digital signal processing products and systems to the    United States Government. Typical life cycles of our equipment 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 our equipment, which includes raw    materials. Historically, we have sold our inventory at or above cost, so    there is typically no decrement in valuation. In addition, when we determine    that a product has reached the end of its life cycle or there is no longer    a need for a certain product, typically, we will dispose of any remaining    inventory, and record the associated reduction to inventory.The charges associated    with reductions to work in process and finished goods are included in contract    costs in our statement of operations. Disposals associated with our raw materials    represent a minor amount and are 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.

Disposal activities were not significant during the first three months of  fiscal years 2008 and 2007.

***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  three months of fiscal years 2008 and 2007, we did not incur any price redeterminationson any of our contracts.

***Goodwill valuation***. We test goodwill for possible  impairment on an annual basis and at any other time if events occur or circumstances  indicate that the current carrying amount of goodwill may not be recoverable.  Circumstances that could trigger an impairment test include, but are not limited  to, a significant adverse change in the business climate or legal factors,  an adverse action or assessment by a regulator, unanticipated competition,  and loss of key personnel.

The determination as to whether a write down of goodwill is necessary involves  significant judgment based on the short-term and long-term projections of the  future performance as well as estimating discount rates.

To perform the goodwill    impairment test, we determine the fair value of the reporting unit and compare    the fair value to the reporting unit’s carrying  value. We believe AST is one reporting unit, and therefore, we compare the  fair value of AST to the total net asset value on our balance sheet. If our  total net asset value were to exceed our fair value, we would perform the second  step of the impairment test. In the second step, we would compare the implied  fair value of our goodwill to our carrying amount. If no impairment exists  under step one, then step two is not necessary.

No indicators of impairment were identified at February 1, 2008.

***Long-lived asset valuation (property, plant and equipment, and      intangible assets)***. We will test long-lived assets or asset      groups for recoverability when events or changes in circumstances indicate      that their carrying amount may not be recoverable. Circumstances that could      trigger a review include, but are not limited to, significant decreases      in the market price of the asset, significant adverse changes in the business      climate or legal factors, accumulation of costs significantly in excess      of the amount originally expected for the acquisition or construction of      the asset, current period cash flow or operating losses combined with a      history of losses or a forecast of continuing losses associated with the      use of the asset, and current expectation that the asset will more likely      than not be sold or disposed of significantly before the end of its estimated      useful life.

We assess recoverability based on the carrying amount of the asset and its  fair value, which is generally determined based on the sum of the undiscounted  cash flows expected to result from the use and the eventual disposal of the  asset. We recognize an impairment loss when the carrying amount is not recoverable  and exceeds fair value.

No indicators of impairment were identified at February 1, 2008.

***Share-based payment***. We adopted SFAS 123 (revised  2004), *Share-Based Payment* (SFAS 123R), at the beginning of fiscal  year 2006. Applying this complex standard to value equity-based compensation  requires us to use significant judgment and to make estimates, particularly  for the assumptions used in the Black-Scholes valuation model, such as stock  price volatility and expected option lives, as well as for the expected option  forfeiture rates.

We elected to use the modified prospective transition method. Stock-based  compensation expense for awards granted subsequent to November 1, 2005, was  based on the grant-date fair value estimated in accordance with the provisions  of SFAS 123R. For awards granted prior to, but not yet vested, as of November  1, 2005, stock-based compensation expense was based on the grant-date fair  value previously estimated in accordance with the original provisions of SFAS  123. We recognize the stock compensation expense over the requisite service  period of the award, which generally equals the vesting period of each grant.

We have an Employee Stock Purchase Plan (ESPP) that allows employees to purchase  shares of common stock at 85% of the fair market value at the lower of either  the date of enrollment or the date of purchase. For offering periods beginning  prior to June 1, 2007, our ESPP had a twenty-four month offering period with  four six-month purchase periods within each offering period. If the fair market  value on the purchase date was lower than the fair market value on the offering  date, all participants were withdrawn from the offering period and re-enrolled  into a new offering period. Effective, May 31, 2007, we modified our ESPP such  that the length of all offering periods, beginning June 1, 2007, is six months.  Consequently, there is no reset feature associated with the new offering periods.  As a result of the modification to the ESPP, the December 1, 2006, offering  period, ending on November 30, 2008, was the final twenty-four month offering.

Our closing stock price on the November 30, 2007, ESPP purchase date was lower  than the closing stock price on the December 1, 2006, offering date. Therefore,  361 participants were re-enrolled from the original twenty-four-month offering  period ending on November 30, 2008, into a new six-month offering period, beginning  December 1, 2007, and ending May 31, 2008. This re-enrollment effectively canceled  the final six-month purchase period of the original twenty-four-month offering.  Therefore, the remaining unamortized compensation amount associated with this  final purchase period of approximately $382,000 was immediately recognized  on December 1, 2007. In addition, as a result of the modification, approximately  $91,000 of incremental compensation expense was generated at December 1, 2007,  of which $32,000 was recognized during the first quarter of fiscal year 2008.

On November 15, 2007, one of our non-employee directors retired. Immediately  prior to his retirement, we accelerated the vesting of all unvested shares  of his restricted stock and stock option awards. In addition, we extended the  remaining exercise period of all vested and unexercised options from ninety  days to one year. As a result, our stock compensation expense associated with  these modified equity awards, was approximately $80,000 higher than it would  have been had the awards not been modified upon retirement.

The following table sets forth the total stock-based compensation expense  resulting from stock options, restricted stock, and ESPP included in our condensed  consolidated statements of operations (in thousands, except share data).

|                                                        | **Three Months Ended        February 1, 2008**                                                                                                                                                                                             | **Three Months Ended        February 2, 2007**                                                                                                                                                                                         |
|-------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Contract costs                                              | $993                                                                                                                                             | $644                                                                                                                                         |
| Research and development                                    | 54                                                                                                                                               | 54                                                                                                                                           |
| General and administrative                                  | 584                      -----------                   | 448                  -----------                   |
| Stock-based compensation expense before income        taxes | $1,631                                                                                                                                           | $1,146                                                                                                                                       |
| Income taxes                                                | 260                  -----------                       | 243                  -----------                   |
| Stock-based compensation expense after income        taxes  | $1,371                                                                                                                                           | $903                                                                                                                                         |
| Reduction to basic net income per share                     | $0.11                                                                                                                                            | $0.08                                                                                                                                        |
| Reduction to diluted net income per share                   | $0.11                                                                                                                                            | $0.07                                                                                                                                        |

Assumptions used in the    Black-Scholes model are the expected stock price volatility over the expected    life of the awards, the projected employee stock option’s  life, the expected dividend yield, and the risk-free interest rate. Changes  in the subjective assumptions can materially affect the estimated value of  the stock awards. Historical volatility, market-based implied volatility, or  a combination of both will be considered when projecting the expected stock  price volatility for both stock options and purchases under our ESPP. For the  first quarter of each fiscal years 2008 and 2007, we determined that the combination  of historical and market-based implied volatility provides a more accurate  reflection of our market conditions and is more representative of future stock  price trends than employing solely historical volatility. For our ESPP offering  periods beginning prior to June 1, 2007, the expected life was based on the  six-month purchase periods within each twenty-four-month offering period. Offering  periods beginning after that date have a single six-month purchase period and  we use an expected life of six months. The risk-free interest rate is based  on the Federal Reserve Bank’s constant maturities daily interest rate  in effect at the ESPP offering date.The expected dividend  yield is calculated by taking the total expected annual dividend payout dividedby the average stock price per share.

The fair value of our restricted stock is based on our closing stock price  on the date of grant.

Please refer to “Notes to Condensed Consolidated Financial Statements,  Note 1: Summary of Significant Accounting Policies, Stock-Based Compensation” for  additional information.

**Overview**

We believe that there continues to be an interest in ISR by the United States  Government to respond to the threat of terrorist activities and the war against  terrorism, and that we are well positioned to benefit from the spending that  might result. We believe that our COMINT and sensor processing markets have  strong growth potential and that our move into the ELINT marketplace provides  us an opportunity to diversify into a complementary business. As a result of  this anticipated growth, we expect to make additional investments of capital  and management resources, including additional personnel and facilities.

We continue to focus our operations on assuring program performance, meeting  staffing requirements, maintaining a competitive cost structure, and diversifying  our marketplace. Our customers continue to come to us with new requirements  for ISR solutions, weighted heavily toward new developments. A significant  portion of our revenue continues to be generated by cost-reimbursable contracts  that tend to be developmental in nature, and require highly specialized, technical  skill sets. We believe that this trend will continue in fiscal year 2008.

**Three Months Ended February 1, 2008, Compared to Three Months Ended February  2, 2007**

***Revenues and backlog***. Revenues for the first quarter  of fiscal year 2008 were approximately $42,725,000, a 1.9% decrease from revenues  of approximately $43,544,000 recorded in the first quarter of fiscal year 2007.  Our revenues include royalty income associated with one licensing agreement.  We recorded royalty income of approximately $1,115,000 during the first quarter  of fiscal year 2008 and approximately $247,000 during the same period of fiscal  year 2007. 

New orders received during the first quarter of fiscal year 2008 were approximately  $26,889,000, a decrease of 31.3% from approximately $39,149,000 in new orders  received during the same period of fiscal year 2007. Our backlog consists of  the uncompleted portions of existing contracts (excluding unexercised contract  options). At February 1, 2008, ending backlog was approximately $110,872,000,  representing a 12.5% decrease from ending backlog of approximately $126,708,000  at October 31, 2007. Reported backlog includes both funded and unfunded portions  of contract values. There is no assurance or obligation that contracts will  be fully funded. To the extent that contracts are not fully funded, there will  be a reduction to backlog in a future period.

Our contracts can be fixed-price contracts, where we agree to deliver equipment  for a fixed price and assume the risk of cost overruns; cost-reimbursement  contracts, where we are reimbursed for our direct and indirect costs and paid  a negotiated profit; or time-and-materials contracts, where we recognize revenue  for these contracts by applying a negotiated billing rate to the level-of-effort.  Cost-reimbursement and time-and-materials contracts typically do not return  as high a profit margin as fixed-price contracts, and accordingly, our profit  margin will be affected by the mix of our orders by contract type.

The following table represents our revenue concentration during the respective  periods by contract type.

|                         | **————— Three      Months Ended—————**                                                                                                                | **Twelve      Months Ended**                                                                                                                                                                                 |
|------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                         | **February          1,    2008**                                                                                                                                                                                  | **February          2,    2007**                                                                                                                                                                             | **October          31,    2007** |
| Cost-reimbursement contracts | 71%                                                                                                                               | 76%                                                                                                                          | 71%                 |
| Fixed-price contracts        | 9%                                                                                                                                | 18%                                                                                                                          | 15%                 |
| Time-and-materials contracts | 20%                ----------                     | 6%                ----------                 | 14%                ----------                 |
|                         | 100%                       ======                 | 100%                ======                   | 100%                ======                 |

Five contracts represented an aggregate of 59% of revenues for the three-month  period ended February 1, 2008. Three of these contracts were indefinite-delivery-indefinite-quantity  contracts. Four contracts represented an aggregate of 51% of revenues for the  three-month period ended February 2, 2007. Three of these contracts were indefinite-delivery-indefinite-quantity  contracts. In addition, one of the five contracts in fiscal year 2008 was a  time-and-materials contract. All of the other contracts referenced were cost-reimbursementcontracts.

***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 $29,371,000,  or 68.7% of revenues, for the first quarter of fiscal year 2008 compared to  approximately $28,860,000, or 66.3% of revenues, for the same period of fiscal  year 2007. Contract costs increased in absolute dollars and as a percentage  of revenues during the first quarter of fiscal year 2008 compared to the same  period of fiscal year 2007 primarily due to increased activity with development  programs. 

***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 by us from  operations. For interim reporting periods, R&D expenses include labor,  materials, and estimated overhead costs. R&D expenses were approximately  $2,979,000, or 7.0% of revenues, for the first quarter of fiscal year 2008  compared to approximately $3,585,000, or 8.2% of revenues, for the same period  of fiscal year 2007. R&D expenses decreased in absolute dollars and as  a percentage of revenues during the first three months of fiscal year 2008  primarily due to directing our efforts toward meeting our contractual obligations.

***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 our quarterly revenue base, for interim reporting  periods. General and administrative expenses were approximately $7,995,000,  or 18.7*%* of revenues, for the first quarter of fiscal year 2008, consistent  with general and administrative expenses incurred during the first quarter  of fiscal year 2007 of approximately $7,959,000, or 18.3% of revenues.

***Interest income and other, net***. Net interest income  for the first quarter of fiscal year 2008 was approximately $372,000, representing  an immaterial difference to net interest income of approximately $333,000 for  the first quarter of fiscal year 2007.

***Interest expense***. Interest expense for the first  quarter of fiscal year 2008 was approximately $139,000 compared to approximately  $173,000 of interest expense in the first quarter of fiscal year 2007.

***Provision for income taxes***. Our provision for income  taxes for the first quarter of fiscal year 2008 was approximately $1,125,000,  representing a 44.9% effective tax rate. Our provision for income taxes for  the first three months of fiscal year 2007 was approximately $1,437,000, representing  a 44.0% effective tax rate. The difference in our estimated annual effective  tax rate at February 1, 2008, from our effective tax rate at February 2, 2007,  was primarily due to a projected decrease in our domestic manufacturing credit.

**Analysis of Liquidity and Capital Resources**

Our primary sources of liquidity during the first three months of fiscal year  2008 were cash flows generated from operations, the issuance of common stock  through exercise of options granted under our employee stock option plans,  and stock purchases under our ESPP.

***Net cash from operating activities***. Net cash from  operating activities has varied significantly from quarter to quarter. These  quarter-to-quarter variances are primarily the result of changes in net income  and operating assets and liabilities. Operating activities provided cash of  approximately $5,553,000 and used approximately $3,934,000 during the first  three months of fiscal years 2008 and 2007, respectively. Net income for the  first three months of fiscal year 2008 was approximately $1,488,000 compared  to net income of approximately $1,863,000 for the comparable period of fiscal  year 2007. The decrease in net income is due primarily to an increase in our  stock-based compensation and an increase to our effective income tax rate for  fiscal year 2008.

Accounts receivable balances decreased during the first three months of fiscal  year 2008 by approximately $1,498,000, and increased by approximately $4,680,000  during the same period in fiscal year 2007. During the first quarter of fiscal  year 2008, we generated revenues of approximately $42,725,000 and collected  approximately $44,223,000. During the first quarter of fiscal year 2007, we  generated revenues of approximately $43,544,000 and collected approximately  $38,864,000.

Inventory, prepaid expenses,    and other assets increased during the first quarter of fiscal year 2008 by    approximately $1,064,000 and decreased during the first quarter of fiscal    year 2007 by approximately $448,000. Precontract costs decreased other current    asset balances during the first quarter of fiscal year 2008 by approximately    $1,462,000, which was offset by an increase to the indirect rate variance    included in inventory of approximately $754,000. During the same period of    fiscal year 2007, precontract costs decreased other current assets by approximately  $3,101,000 and the indirect rate variance included in inventory increased by  approximately $2,760,000.

During the first quarter of fiscal year 2008 we received a payment of approximately  $877,000 for lease incentives associated with our facility in Torrance, California.

Accounts payable, taxes    payable, and accrued liabilities balances decreased by approximately $284,000    during the first quarter of fiscal year 2008 and decreased by of approximately    $4,082,000 during the first quarter of fiscal year 2007. Accounts payable    and other accrued liabilities increased by approximately $34,000 during the    first three months of fiscal year 2008. During the same period in fiscal    year 2007, accounts payable and other accrued liabilities balances decreasedby approximately $1,637,000.

Accrued payroll liabilities decreased by approximately $942,000 during the  first three months of fiscal year 2008, and decreased by approximately $2,445,000  during the same period in fiscal year 2007. We paid bonuses, accrued at the  end of fiscal year 2007, of approximately $2,795,000 during the first quarter  of fiscal year 2008, compared to approximately $1,771,000 paid during the first  quarter of fiscal year 2007, which were accrued at the end of fiscal year 2006.  Accrued salaries increased during the first quarter of fiscal year 2008 by  approximately $1,925,000 compared to a decline during the first quarter of  fiscal year 2007 of approximately $516,000. The difference in activities for  accrued salaries was due to the timing of our bi-weekly payroll.

***Net cash from investing activities***. Investing activities  used cash of approximately $4,306,000 during the first quarter of fiscal year  2008. During the same period of fiscal year 2007, investing activities provided  cash of approximately $3,911,000. During the first quarter of fiscal year 2008,  we purchased approximately $22,928,000 of investment securities and approximately  $19,450,000 matured. During the same period of fiscal year 2007, we purchased  approximately $23,174,000 of investment securities and approximately $27,440,000  matured.

***Net cash from financing activities***. Financing activities  used cash of approximately $301,000 during the first three months of fiscal  year 2008 and provided cash of approximately $175,000 during the same period  in fiscal year 2007. The difference in financing activities between the first  three months of fiscal years 2008 and 2007 is due to a decrease in the amount  of proceeds from our employee stock purchase plan and fewer option exercises  during the first quarter of fiscal year 2008.

Cash is generated primarily    from operating activities, employee stock activities, and investing activities.    At February 1, 2008, we held in our investment portfolio approximately $37,280,000    of short-term and long-term municipal securities. Substantially all of our    investments in the municipal securities are with A-1/SP-1/AAA (Standard & Poor’s), P-1/MIG-1/Aaa (Moody’s)  and F-1/AA/AAA (Fitch) rated issuers.

Our investment policy prohibits our investment in auction rate securities,  mortgage-backed securities, and asset-backed securities. Insured municipal  notes or bonds are also prohibited, with the exception of daily and weekly  variable rate demand notes that contain a hard put feature.

Based on our ability to liquidate our investment portfolio and our expected  operating cash flows, we do not anticipate any liquidity constraints as a result  of the current credit environment.

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 ISR needs of the United States Government.

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.

**Borrowing Arrangements**

***Revolving line of credit***. At February 1, 2008, we  had a revolving line of credit (Line of Credit) under which Wells Fargo Bank  (Wells Fargo), could advance funds to us, up to a maximum principal amount  of $3 million. The Line of Credit was renewed on February 21, 2008 and it will  expire on March 1, 2009.

At February 1, 2008, we had two standby letters of credit under the Line of  Credit totaling approximately $1,370,000. One letter of credit, related to  our Sunnyvale, California facilities lease, had a committed balance of approximately  $1,220,000 at February 1, 2008. The second letter of credit was a requirement  of our workers compensation insurance, and had a committed balance of approximately  $150,000 at February 1, 2008. We do not pay interest on the amount associated  with the standby letters of credit.

As a result of the committed    but unused funds associated the two letters of credit, the total amount under    the Line of Credit available for borrowing was approximately $1,630,000.    No fees or interest were associated with this unused portion. Borrowings    under the Line of Credit bear interest at Wells Fargo’s  reference rate (6% at February 1, 2008), and interest on those borrowings  are payable monthly. As security for our indebtedness under the Line of Credit,  we have granted to Wells Fargo a security interest in our cash and marketable  securities maintained with an affiliate of Wells Fargo.

***Term loan and interest rate swap***. Effective July  1, 2005, and in connection with the acquisition of DTI, we entered into a Term  Loan with Wells Fargo, in the principal amount of $10 million, plus interest,  the proceeds of which were used for acquisition financing (the Term Loan).  The Term Loan bears interest at a fixed rate per annum equal to 1.750% above  the London Inter-Bank Offered Rate (LIBOR) (3.14% at February 1, 2008). Our  Term Loan is for a seven-year term ending on July 1, 2012, with monthly payments  of principal and interest.

As security for our indebtedness under the Term Loan, we have granted to Wells  Fargo a security interest in our accounts receivable, general intangibles,  inventory, and equipment.

We are required to maintain certain financial covenants setting forth minimum  ratios for quick ratio and fixed charge coverage and maximum ratios for total  liabilities to tangible net worth. As of February 1, 2008, we were in compliance  with these covenants.

We are exposed to market    risk from changes in interest rates on the Term Loan, and manage this exposure    through the use of an interest rate swap agreement with Wells Fargo. By locking    in a fixed rate for the entire term of the loan, this strategy decreases    the variability of earnings and cash flows resulting from interest rate fluctuations    and lowers the overall borrowing costs should interest rates rise. The interest    rate swap is designated as a cash flow hedge and is accounted for under SFAS    133, *Accounting for Derivative Instruments  and Hedging Activities* (SFAS 133). No losses on the agreement due to counterparty  credit issues are anticipated. Under this swap, we pay an interest rate of  4.33%, per annum, over the seven-year term of the loan and receive an average  floating rate of LIBOR on the notional amount of the loan. Thus, we exchanged  a variable rate obligation for a fixed interest obligation, resulting in an  effective interest rate of 6.08%.

The effective portion of the cash flow hedge is reported as other comprehensive  income and reclassified into earnings in the same period during which the hedged  transaction affects earnings. At February 1, 2008, the effective portion of  the cash flow hedge was a deferred net loss of approximately $108,000, net  of taxes. Over the next twelve months, we expect to reclassify approximately  $96,000 of the loss to interest expense as principal on the Term Loan is repaid  and the related swap-instrument notional amount is reduced.

We assess effectiveness of the hedge instrument regularly. The ineffective  portion of the gain or loss, if there is one, would impact earnings as it occurs.  There is no ineffective portion of the outstanding swap as of February 1, 2008.

**Contractual Obligations**

The following table sets forth our contractual obligations as of February  1, 2008 (in thousands).

|                                        | **————————————— Payments        Due by Period****—————————————** |
|---------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                        | **Total**                                                                                                                                                                                                                    | **Less              than        1 Year** | **1–3        Years** | **3–5        Years** | **More              than        5 Years** |
| Operating          lease obligations        | $42,416                                                                                                                                                                         | $7,544          | $14,912          | $10,771          | $9,189          |
| Loan          obligations – principal | 6,310                                                                                                                                                                           | 1,429          | 2,857          | 2,024          | —          |
| Loan    obligations – interest        | 875                                                                                                                                                                             | 350          | 432          | 93          | —          |
| Purchase          obligations               | 5,979                 -----------                                                                                                  | 5,979                 -----------          | —                 -----------          | —                 -----------          | —                 -----------          |
| Total                                       | $55,580                 =======                                                                                                    | $15,302                 =======          | $18,201                 =======          | $12,888                 =======          | $9,189                 =======          |

Our operating lease obligations consist of non-cancelable lease agreements  for our facilities, which expire at various dates between fiscal years 2008  and 2016. Certain leases contain escalation clauses and requirements for the  payment of property taxes, insurance, and maintenance expenses. During the  first quarter of fiscal year 2008, approximately $998,000 of the cost for our  leasehold improvements was funded by the landlord of our new facility in Torrance,  California. This was determined to be a lease incentive. This lease incentive  reduces our rent expense and will be amortized on a straight-line basis over  the remaining period of our operating lease that ends in fiscal year 2015.  This reduction to rent expense is generally equal to the increased amortizationexpense of the associated leasehold improvements.

We do not have any off-balance sheet arrangements with unconsolidated entities  or related parties, and, accordingly, our liquidity and capital resources are  not subject to off-balance sheet risks from unconsolidated entities.

**Recent Accounting Pronouncements**

In September 2006, the FASB issued SFAS 157, *Fair Value Measurement*.  SFAS 157 defines fair value, establishes a framework for measuring fair value,  and enhances disclosures about fair value measurements. The statement will  be effective for our fiscal year beginning November 1, 2008. We are evaluating  the impact adopting SFAS 157 will have on our financial statements.

In February 2007, the FASB issued SFAS 159, *The Fair Value Option for    Financial Assets and Financial Liabilities.*SFAS 159 provides companies    with an option to report selected financial assets and liabilities at fair    value. It also establishes presentation and disclosure requirements to facilitate    comparisons between companies using different measurement attributes for    similar types of assets and liabilities. The statement will be effective    for our fiscal year beginning November 1, 2008. We are evaluating the impact    on the adoption of SFAS 159 will have on our financial statements.

 In June 2007, the FASB    ratified Emerging Issues Task Force (EITF) Issue  No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services  to Be Used in Future Research and Development Activities (EITF 07-3). EITF  07-3 requires non-refundable advance payments for goods and services to be  used in future research and development activities to be recorded as an asset,  with the payments expensed when the research and development activities are  performed. EITF 07-3 applies to new contractual arrangements entered into in  fiscal years beginning after December 15, 2007. We currently record a  prepaid asset for any non-refundable advance payments and recognize the expense  when the activities are performed. We believe that adoption of EITF 07-3 will  not have a material effect on our financial position, results of operations,  or cash flows. 

**Item 3: Quantitative and  Qualitative Disclosures about Market Risk**

***Interest rate risk***.    Our interest income is sensitive to changes in the general level of United    States interest rates. At February 1, 2008, our short-term and long-term    securities consisted of municipal securities. Substantially all of our investments    in the municipal securities are with A-1/SP-1/AAA (Standard & Poor’s), P-1/MIG-1/Aaa (Moody’s)    and F-1/AA/AAA (Fitch) rated issuers. Our investment policy prohibits our    investment in auction rate securities, mortgage-backed securities, and asset-backed    securities. Insured municipal notes or bonds are also prohibited, with the    exception of daily and weekly variable rate demand notes that contain a hard  put feature.

The average days to maturity of our investment portfolio is 130 days as of  February 1, 2008. Due to the short-term nature of these cash investments and  the ability to liquidate our investment portfolio, we do not believe that there  is a material interest rate risk, associated with the current credit environment.  As of February 1, 2008, our total cash and investments balance that was sensitive  to interest rate risk was approximately $43,476,000. As a measurement of the  sensitivity of our portfolio, if yields were to fluctuate by 100 basis points,  the total effect to the investment portfolio balance would be approximately  $141,000.

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

|                                                | **February          1,    2008**                                                                                                                                     | **October          31,    2007**                                                                                                                                    |
|-----------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Cash and cash equivalents                           | $6,196                                                                                                   | $5,250                                                                                                  |
| Available-for-sale securities:                      |                                                                                                                                                                 |                                                                                                                                                                |
|      Short-term tax exempt | 31,172                                                                                                   | 29,683                                                                                                  |
|      Long-term tax exempt  | 6,108                -----------             | 4,114            -----------                |
|                                                | $43,476            =======                   | $39,047                 =======             |

***Term loan and interest rate swap***. Effective July  1, 2005, and in connection with the acquisition of DTI, we entered into a Term  Loan agreement in the principal amount of $10 million with Wells Fargo Bank,  the proceeds of which were used for acquisition financing. The Term Loan bearsinterest at an annual rate of 1.75% above LIBOR (3.14% at February 1, 2008).

We manage potential market risk from changes in interest rates on the Term  Loan through the use of an interest rate swap agreement designated as a cash  flow hedge. By locking in a fixed rate for the entire term of the loan, this  strategy decreases the variability of earnings and cash flows resulting from  interest rate fluctuations and lowers our overall borrowing costs should interest  rates rise.

Coincident with the Term Loan transaction, we also entered into an interest  rate swap agreement with Wells Fargo whereby we pay interest to Wells Fargo  at a fixed rate of 4.33% and Wells Fargo pays interest to us at a floating  rate tied to the LIBOR index. The combined interest amounts on the Term Loan  and the swap reflect our total monthly interest obligation, which is locked  in at 6.08%.

**Item 4: Controls and Procedures**

***Conclusions regarding disclosure controls and procedure***.  Under the supervision and with the participation of our management, including  our Chief Executive Officer and our Chief Financial Officer, we evaluated the  effectiveness of our disclosure controls and procedures, as such term is defined  under Rule 13a-15(e) promulgated under the Securities Exchange Act of  1934, as amended. Based upon that evaluation, our Chief Executive Officer and  Chief 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 control over financial reporting***.  T here have been no changes in our internal control over financial reporting  during the quarter ended February 1, 2008, that have materially affected, or  are reasonably likely to materially affect, our internal control over financial  reporting. 

***Limitations of the effectiveness of internal control***.  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. Notwithstanding these  limitations, our disclosure controls and procedures are designed to provide  reasonable assurance of achieving their objectives. Our Chief Executive Officer  and Chief Financial Officer have concluded that our disclosure controls and  procedures are, in fact, effective at the “reasonable assurance” level. 

******PartII. Other Information**

******Item 1: LegalProceedings**

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. 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.

On March 11 and July 19, 2005, purported securities class action complaints  were filed in the United States District Court, Northern District of California.  The cases were considered as*In re Applied Signal Technology Inc. Securities  Litigation*, Master File No. 4:05-cv-1027 (SBA). The amended consolidated  complaint is brought on behalf of a putative class of persons who purchased  our Company’s securities during a class period of August 24, 2004, through  February 22, 2005. The complaints name us, our Chief Executive Officer, and  our Chief Financial Officer as defendants, and allege that false and misleading  statements regarding us were issued during the class period. On February 8,  2006, the Court dismissed the case with prejudice and entered judgment in defendants’ favor.  Plaintiffs appealed the judgment of dismissal on March 23, 2006, and the appeal  was heard on December 6, 2007; any future unfavorable outcome of the litigation  could have an adverse impact on our business, financial condition, and results  of operation. At this time we cannot estimate the amount of possible loss or  range of loss that might be incurred as a result of this proceeding.

**Item1A: Risk Factors**

Our future performance is subject to a variety of risks. If any of the following  risks actually occurs, 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 consolidated  financial statements and the related notes.

***We may not be successful in our expansion of our products and      markets, and may not realize the benefits of our investments in these new      markets***. Over the last several years, we have made investments      in other areas complementary to our historic COMINT offerings. As a result      of these investments, including our acquisition of Dynamics Technology,      Inc. (DTI) in July 2005, and our research and development into the ELINT      market, we have expanded our product offerings, approached new customers,      and entered into new markets for advanced digital signal processing products,      systems, and services in support of intelligence, surveillance, and reconnaissance      (ISR) for global security. Our operations during fiscal year 2007 were,      and are expected to continue to be, substantially influenced by the operations      of the businesses we acquired from DTI as well as from our continued investment      in products and markets complementary to our existing and new businesses.      Our entry into new markets, and introduction of new products, subjects      us to a number of risks and uncertainties, including the following:

- We are entering markets in which we have no or limited prior experience, and      are marketing to new customers in addition to our historic customer relationships.      We may not be successful in these markets, and we may be unable to successfully      enter into contracts with new or existing customers for these new business      lines. We may not achieve the strategic objectives and other anticipated potential      benefits of the acquisition of DTI or the investment in other products and      complementary technologies. Our failure to achieve these strategic objectives      could have a material, adverse effect on our ability to grow our business.
- As a result of the acquisition of DTI, we incurred debt in the amount of $10      million, of which $6.3 million remains outstanding as of February 1, 2008.      Our failure to repay this debt when due would materially, adversely affect      our financial condition and results of operations.
- Our diversification into        ELINT, and into new signal processing capabilities, requires us to invest        additional capital, open new facilities, and incur additional R&D expenditures. In addition, diversification results in diversion of      management’s attention from our historic business. Although we believe      that entering into these new business areas will be important to remaining      competitive in the defense electronics marketplace, there can be no assurance      that we will derive benefits from this diversification, our core business could      suffer, and we could incur significant unanticipated costs, which could have      a material impact on our results of operations.

***Any decrease in expected product sales during a period could adversely      impact our revenues, results of operations, and financial condition***.      From time to time, we have derived a significant portion of our revenue      from product sales. In recent periods, however, we have been focusing on      sales of systems and software, and targeting larger programs. In addition,      we have experienced some seasonality in product sales to the United States      Government, with more product sales occurring in the second half of the      fiscal year than in the first. The amount and timing of Government purchases      of products is unpredictable, and fluctuates significantly from period      to period, making it difficult for us to predict the amount of revenue      we will generate from product sales in any particular period, and causing      our revenues to fluctuate from period to period. If we are not able to      generate revenues from product sales as expected in a particular period,      we may fail to meet our revenue expectations and the expectations of industry      analysts and investors, which could cause our stock price to decline.

***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 and retain, 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 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 United States Government security  clearances in order to perform tasks required on our government contracts,  and without such clearances, employees cannot work on the majority of our projects.  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.

***Stop-work orders could negatively impact our operating results      and financial condition***. Almost all of our contracts contain      stop-work clauses that permit the Government or other contracting party,      at any time, by written order, to stop work on all or any part of the work      called for by the contract for a period of ninety days. Within the ninety-day      period, the other contracting party may cancel the stop-work order and      resume work or terminate all or part of the work covered by the stop-work      order. There can be no assurance that stop-work orders will not be received      in future periods. If we receive stop work orders, our orders and backlog      may be reduced, and we may fail to achieve anticipated revenues.

***Any reduction in government spending on ISR 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 global security      or future changes in the kind of products or services required by the United      States Government agencies could limit demand for our products and services,      which could result in failure to achieve anticipated revenues, resulting      in a materially adverse effect on our operating results and financial condition.

In the event there are shifts in responsibilities and functions among the  government agencies responsible for United States defense and intelligence,  it could result in a reduction of orders for global security by the defense  and intelligence agencies that have historically been our major customers.  Our relationships with other Government agencies to which responsibilities  and functions for our contracts have shifted may not be as strong as our relationships  with current customer agencies. Accordingly, 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 global security,  we may not secure the same amount of work from these 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, United States 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. The government audits and investigations      can take several years to complete. Depending on the results of these audits      and investigations, the government may make claims against us or take exception      to certain costs we determined to be recoverable. In the period management      determines recoverability is not likely, operating income would be reduced.

***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 in full or in part at      the customer’s discretion. We have in the past experienced a significant      reduction of, and stop work order on, one of our largest contracts. We      expect that in future periods we may again enter into individual contracts      with significant revenue concentrations. In addition, the majority of our      contracts are with a limited number of government agencies. If our individually      large contracts were terminated or substantially reduced, we could fail      to achieve expected revenues and net income.

***United States Government contracts are generally not fully funded      at inception and funding may be terminated or reduced at any time***.      We act as a prime contractor or subcontractor for many different United      States Government programs. Department of Defense and intelligence contracts      typically involve long lead times for design and development and are subject      to significant changes in contract scheduling. Programs can be partially      funded initially, and additional funds may or may not be allocated. The      termination or reduction of funding for a government program would result      in a loss of anticipated future revenues attributable to that program.

Our backlog as of February 1, 2008, was approximately $110.9 million and includes  orders under awards that in some cases extend several years. The actual receipt  of revenues on awards included in backlog may never occur or may change because  a program schedule could change or the program could be canceled, or a contract  could be reduced, modified, or terminated early.

***Our business depends upon our relationships with, and the performance      of, our prime contractors***. We expect to continue to depend      on relationships with other contractors for a substantial portion of our      revenues in the foreseeable future. Our business, prospects, financial      condition, or operating results could be adversely affected if other contractors      terminate or reduce their subcontracts or relationships with us, either      because they choose to establish relationships with our competitors or      because they choose to directly offer services that compete with our business.      Our business also suffers if the prime contractor fails to win the contract,      or if the Government terminates or reduces these other contractors’ programs      or does not award them new or additional contracts.

In addition, on those    contracts for which we are not the prime contractor, the United States Government    could terminate a prime contract under which we are subcontractor, regardless    of the quality of our performance as a subcontractor. A prime contractor’s    performance deficiencies could adversely affect our status as a subcontractor    on the program, jeopardize our ability to collect award or incentive fees,  cause customers to delay payments, and result in contract terminations.

***We depend on revenues from a few significant customers; the loss      of any significant customer could have an adverse effect on our business***.      Our success will depend on our continued ability to develop and manage      relationships with significant customers. 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 and services 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 ISR may lead to a reduction in our revenues      and market share***. The global security market is highly competitive      and we expect that competition will continue to 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 global security, possibly resulting in pricing      pressures on our products and services. 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 would have to do the same to      remain competitive.

Unexpected increases in the cost to develop or manufacture our products under  fixed-price contracts may cause us to experience unreimbursed cost overruns  resulting in reduced profit margins or increased loss provisions. 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, unfavorable indirect rate variances, 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 could have a material,  adverse effect on our future results of operations and financial condition.

Fixed price contracts use percentage-of-completion accounting to determine  profit margins. Under generally accepted accounting principles unexpected cost  over-runs can change the percentage completion estimates and result in reduced  profit margins and the reversal of previously recognized profits in addition  to reducing future period profits. Although we believe that our profit margins  are fairly stated and that adequate provisions for losses for our fixed-price  contracts are recorded in our financial statements as required under accounting  principles generally accepted within the United States, there can be no assurance  that our contract profit margins will not decrease or our loss provision will  not increase in the future.

***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; however, we received no such terminations in fiscal years 2008      or 2007.

***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 include conditions      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 earnings 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 signal processing solutions      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 global security      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 satisfying emerging global security needs. However,      we expect that new requirements 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 new 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 new requirements, 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, or on  a timely basis, if at all. 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 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 materially adverse effect on our  operating results and financial condition.

***Delays in the receipt of contracts could negatively impact our      business***. During our history, the receipt of certain final      contracts has periodically been delayed to periods later than originally      expected. Delays in the receipt of such orders could result in revenues      falling short of estimates. On some of these contracts, we will make expenditures      in advance of receipt of the final contract in anticipation of meeting      the expected timetables, and will from time to time hire personnel in anticipation      of receipt of the contract. If the contract is delayed, these costs are      not covered. 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, five 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.

***The United States Government has rights to our technology that      limits our intellectual property rights***. Although we seek      to protect the competitive benefits we derive from our patents, proprietary      information, and other intellectual property, we do not have the right      to prohibit the United States Government from using certain technologies      developed or acquired by us or to prohibit third party companies, including      our competitors, from using those technologies in providing products and      services to the United States Government. The United States Government      has the right to royalty-free use of technologies that we have developed      under United States Government contracts. We may commercially exploit those      government-funded technologies and may assert our intellectual property      rights against other non-government users of technology developed by us,      but we may not be successful in our efforts to do so.

***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.

***We derive revenue from royalty payments, the timing of receipt      of which can be difficult to predict and which may be difficult to expand***.      We derive royalty income from the sale of products licensed to other third      parties for sale, and expect to continue to derive royalty income in the      future. Revenue derived from royalty payments provides greater profitability      to us than revenue from sale of our products and services, accordingly,      our operating income and earnings per share will be impacted by the comparative      mix of revenue from our digital signal processing products, systems, and      services and revenue derived from royalty income. Although we have licensed      one of our products for sale by a third party, and expect to increase our      efforts in future periods, we have not historically devoted significant      resources to licensing our technologies. Our future ability to generateroyalty income depends upon:

- Our ability to secure patent coverage for our technologies and enter into      license agreements with potential licensees
- The ability of our licensees to develop and commercialize successful products      that incorporate our technologies
- The rate of adoption of our technologies by, and the incorporation of our      technologies into products of, other parties

In addition, royalty-based income is subject to the willingness and ability  of licensees to design and assemble products using our technology, the pricing  and demand for products incorporating our technology, and our ability to negotiate  and enforce agreements for the determination and payment of royalties. It is  difficult to predict when we will enter into additional license agreements,  if at all. The timing of our receipt of royalty payments, including payments  from our existing royalty-based arrangement, is also difficult to predict,  and may fluctuate from period to period, causing our revenues to fluctuate  from period to period, which may significantly impact our quarterly or annual  operating results. If we are not able to generate royalty income as expected  in a particular period, we may fail to meet our revenue expectations, our operating  income may decline disproportionately, and we may fail to meet the expectations  of industry analysts and investors, which could cause our stock price to decline.

**Item 2: Unregistered Sales  of Equity Securities and Use of Proceeds**

None.

**Item 3: Defaults UponSenior Securities**

None.

**Item 4: Submission ofMatters to a Vote of Security Holders**

None.

**Item 5: Other Information**

None.

**Item 6: Exhibits**

***Exhibits***. See Index to Exhibits.

****

**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/---------------------------------------------------                   | March 10, 2008--------------------------------- |
|----------------------------------------------------------------------------------------------------------------------|-------------------------------------------------|
| James E. Doyle        Vice President and Chief Financial Officer        (Principal Financial and Accounting Officer) |                                            |

 

**Applied Signal Technology, Inc.Index to Exhibits**

| **Exhibit Number** | **Description of Document**                                                                                                                                     |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                | Second Amended and Restated Articles of Incorporation                                                                                                           |
| 3.2                | Amended and Restated Bylaws                                                                                                                                     |
| 4.1                | Specimen Common Stock Certificate                                                                                                                               |
| 10.60              | Second Amendment to Agreement of Lease with        NBP306, LLC                                                                                                  |
| 10.61              | Amendment to Line of Credit Agreement, dated        February 21, 2008, with Wells Fargo Bank, National Association                                              |
| 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 |