UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

                                   (Mark One)

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

                        FOR THE PERIOD ENDED AUGUST 1, 1997

                                       or

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

Commission file number 0-21236

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

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

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

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

Indicate by a check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days     YES [X]  NO [ ]

                      Applicable Only to Corporate Issuers

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

Common Stock, no par value, 8,312,396 shares outstanding as of August 29, 1997.
<PAGE>


Part 1.  Financial Information
Item 1.   Financial Statements

                         APPLIED SIGNAL TECHNOLOGY, INC.
                                 BALANCE SHEETS
                        (In thousands, except share data)

<TABLE>
<CAPTION>
                                                        August 1,    Oct. 31,
                                                        1997         1996
                                                        ----------   ----------
                                                        (Unaudited)  (Note)
<S>                                                     <C>          <C>
                       ASSETS  
Current assets:
  Cash and cash equivalents                                $3,001       $1,559
  Short-term investments                                    1,718          767
  Accounts receivable:
    Billed                                                 13,116       14,491
    Unbilled                                               18,310       15,527
                                                        ----------   ----------
  Total accounts receivable                                31,426       30,018
  Inventory                                                 7,104        3,208
  Prepaid and other current assets                          2,574        2,236
                                                        ----------   ----------
    Total current assets                                   45,823       37,788

Property and equipment, at cost:
  Machinery and equipment                                  26,070       23,221
  Furniture and fixtures                                    3,601        3,301
  Leasehold improvements                                    4,521        3,356
  Construction in process                                     411          191
                                                        ----------   ----------
                                                           34,603       30,069
Accumulated depreciation and amortization                 (20,163)     (17,198)
                                                        ----------   ----------
    Net property and equipment                             14,440       12,871

Long-term investments                                        --          1,326

Other assets                                                   67          118
                                                        ----------   ----------

Total assets                                              $60,330      $52,103
                                                        ==========   ==========

       LIABILITIES AND SHAREHOLDERS' EQUITY 


Current liabilities:
  Accounts payable                                         $3,360       $3,045
  Accrued payroll and related benefits                      5,329        4,337
  Other accrued liabilities                                 2,730        1,900
  Income taxes payable                                      1,847        2,029
                                                        ----------   ----------
    Total current liabilities                              13,266       11,311

Deferred income taxes                                         827          827

Shareholders' equity:
  Common stock, no par value: 20,000,000 shares
  authorized; issued and outstanding -- 8,282,576 at
  August 1, 1997 and 7,873,347 at October 31, 1996         21,617       20,099
  Retained earnings                                        24,601       19,872
  Net unrealized gain/(loss) on securities                     19           (6)
                                                        ----------   ----------
Total shareholders' equity                                 46,237       39,965
                                                        ----------   ----------
               Total liabilities and
                   shareholders' equity                   $60,330      $52,103
                                                        ==========   ==========

</TABLE>

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

                       See notes to financial statements.
<PAGE>


                        APPLIED SIGNAL TECHNOLOGY, INC.
                            STATEMENTS OF INCOME
                                  (UNAUDITED)
                      (In thousands except per share data)

<TABLE>
<CAPTION>
                                              Three Months Ended   Nine Months Ended
                                             -------------------  -------------------
                                             August 1, August 2,  August 1, August 2,
                                             1997      1996       1997      1996
                                             --------- ---------  --------- ---------
<S>                                          <C>       <C>        <C>       <C>
Revenues from contracts                       $22,600   $19,504    $66,671   $52,272

Operating expenses:
  Contract costs                               13,793    12,624     42,672    35,619
  Research and development                      2,269     2,281      7,133     6,348
  General and administrative                    3,062     2,877      9,415     8,245
                                             --------- ---------  --------- ---------
      Total operating expenses                 19,124    17,782     59,220    50,212
                                             --------- ---------  --------- ---------

Operating income                                3,476     1,722      7,451     2,060
Interest income/(expense), net                     18        23        116        38
                                             --------- ---------  --------- ---------
Income before provision 
  for income taxes                              3,494     1,745      7,567     2,098
Provision for income taxes                      1,351       610      2,838       734
                                             --------- ---------  --------- ---------

Net income                                     $2,143    $1,135     $4,729    $1,364
                                             ========= =========  ========= =========

Net income per common share                     $0.25     $0.14      $0.57     $0.17
                                             ========= =========  ========= =========

Number of shares used in calculating
  net income per common share                   8,517     8,062      8,286     7,901
                                             ========= =========  ========= =========

</TABLE>

                       See notes to financial statements.

<PAGE>










                        APPLIED SIGNAL TECHNOLOGY, INC.
                            STATEMENTS OF CASH FLOW
                          INCREASE (DECREASE) IN CASH
                                  (UNAUDITED)
                                 (In thousands)
<TABLE>
<CAPTION>
                                                       NINE MONTHS ENDED
                                                     --------------------
                                                     August 1,  August 2,
                                                     1997       1996
                                                     ---------  ---------
                                                         (UNAUDITED)
<S>                                                  <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                             $4,729     $1,364
Adjustments to reconcile net income to net cash
  provided by (used in) operating activities:
    Depreciation and amortization                       2,965      2,732
    Accounts receivable                                (1,408)     3,552
    Inventory, prepaids and other current assets       (4,234)    (3,958)
    Other assets                                           51         55
    Accounts payable and accrued liabilities            1,955     (1,241)
                                                     ---------  ---------
      Net cash provided by operating activities         4,058      2,504

INVESTING ACTIVITIES:
  Maturity of investments                                 400         --
  Additions to property and equipment                  (4,534)    (4,575)
                                                     ---------  ---------
      Net cash used in investing activities            (4,134)    (4,575)

FINANCING ACTIVITIES:
  Borrowings under bank line of credit                     --        600
  Issuance of common stock                              1,518      1,102
  Repurchase of common stock                               --         -- 
                                                     ---------  ---------
      Net cash provided by financing activities         1,518      1,702

Net increase (decrease) in cash and cash equivalents    1,442       (369)
Cash and cash equivalents, beginning of period          1,559        369
                                                     ---------  ---------
Cash and cash equivalents, end of period               $3,001         $0
                                                     =========  =========
Supplemental disclosures of cash flow information:
    Interest paid                                         $36        $59


</TABLE>
                       See notes to financial statements.

<PAGE>




                         APPLIED SIGNAL TECHNOLOGY, INC.
                         NOTES TO FINANCIAL STATEMENTS
                                  (UNAUDITED)
                                 August 1, 1997


NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


BASIS OF PRESENTATION

        The accompanying unaudited condensed financial statements have been 
prepared in accordance with generally accepted accounting principles for 
interim financial information and with the instructions to Form 10-Q and 
Article 10 of Regulation S-X. Accordingly, they do not include all of the 
information and footnotes required by generally accepted accounting 
principles for complete financial statements. In the opinion of 
management, all adjustments (consisting of normal recurring adjustments) 
considered necessary for a fair presentation have been included. 
Operating results for the nine month period ending August 1, 1997 are not 
necessarily indicative of the results that may be expected for the year 
ending October 31, 1997. For further information, refer to the 
consolidated financial statements and footnotes thereto included in the 
Company's annual report on Form 10-K for the year ended October 31, 1996.

INVESTMENTS

        The Company's investment securities, which consist primarily of 
U.S. Treasury securities, are classified as available-for-sale and are 
carried at fair market value.  Unrealized gains and losses, net of tax, 
are reported in shareholders' equity as part of retained earnings.  
Realized gains and losses on available-for-sale securities are included 
in interest income (expense), net.  The cost of securities sold is based 
on the specific identification method.  Interest  on securities 
classified as available-for-sale are included in interest income 
(expense), net.  At August 1, 1997, the contractual maturities of the 
debt securities will occur by June 30, 1998.  

REVENUES FROM CONTRACTS

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

EARNINGS PER SHARE

        Earnings per share (EPS) are based on the weighted average number 
of common and common equivalent shares outstanding.  Common equivalent 
shares result from the assumed exercise of outstanding stock options that 
have a dilutive effect when applying the treasury stock method.  Earnings 
per share is calculated using the weighted average number of common 
shares outstanding during the period.
        In February 1997, the Financial Accounting Standards Board issued 
Statement No. 128 (SFAS 128), "Earning per Share."  This Statement is 
effective for periods ending after December 15, 1997, at which time the 
Company will be required to change the method currently used to compute 
EPS.  SFAS 128 will require entities to report "basic" and "diluted" 
earnings per share.  For the Company, the "basic" earnings per share 
calculation is equivalent to its present EPS calculation, excluding the 
effect of dilutive stock options.  The "diluted" earnings per share 
calculation is equivalent to the existing "fully diluted" EPS 
calculation.  The Company has determined that, on a pro forma basis, 
"basic" earnings per share would have been $0.27 and $0.15 for the three 
months ended August 1, 1997 and August 2, 1996 respectively, and $0.61 
and $0.18 for the nine month period ending on those respective dates.

ACCOUNTING FOR STOCK-BASED COMPENSATION

        In October 1995, the Financial Accounting Standards Board issued 
Statement No. 123 (SFAS 123), "Accounting for Stock Based Compensation."  
SFAS 123 encourages entities to adopt a fair value based method of 
accounting for employee stock compensation plans, however, it also allows 
an entity to continue to measure compensation cost for those plans using 
the intrinsic value method of accounting as prescribed in Accounting 
Principle Board Opinion No. 25.  Under the intrinsic value based method, 
many companies, including Applied Signal Technology, Inc., have not 
recognized compensation cost for stock options granted to their 
employees.
        During fiscal year 1997, the Company will adopt the disclosure 
provisions as outlined in SFAS.  While the Company has not yet determined 
the total effect of adopting SFAS 123, it believes that the adoption of 
the standard will not result in material charges to operations in fiscal 
1997 and thereafter.






NOTE 2 -- INVENTORY

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

<TABLE>
<CAPTION>
                        AUGUST 1, 1997      OCTOBER 31, 1996
                        --------------      ----------------
<S>                        <C>                 <C>   
Raw Materials             $ 1,227              $  591
Work in Process             2,424               2,195
Finished Goods              3,348                 322
                           ------              ------
                            6,999               3,108
Precontract Costs             105                 100
                           ------              ------
                           $7,104              $3,208
                           ======              ======
</TABLE>                             

The Company records contract revenues and costs for interim reporting 
purposes based on annual targeted indirect rates. At year end, the 
revenues and costs are adjusted for actual indirect rates. During the 
interim reporting periods variances may accumulate between the actual 
indirect rates and the annual targeted rates. All timing-related indirect 
spending variances are inventoried as part of work in process during 
these interim reporting periods. These rates are reviewed regularly and 
any permanent variances are reflected in the statement of income as they 
become known. At August 1, 1997, the inventoried variance was 
approximately $1,227,000 ($2,043,000 at August 2, 1996) and was included 
in work in process.  At October 31, 1996 the variance was zero since all 
revenues and costs were recorded at the actual indirect rates for each 
fiscal year end.



ITEM 2:  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
           AND RESULTS OF OPERATIONS

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

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

Business Environment/Background:

Applied Signal Technology designs, develops, manufactures and markets 
advanced digital signal processing equipment to collect and process a wide 
range of telecommunication signals.  This equipment is purchased by the U.S. 
Government as well as allied foreign governments and, to a lesser extent, 
the commercial sector.   Equipment is purchased by the U.S. Government is 
used for both signal reconnaissance and tactical communication systems.  
Equipment purchased by the commercial sector is used in both cable and 
wireless applications as described below.

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

Further, the rapidly changing global environment coupled with the explosion 
in telecommunication technologies has necessitated an upgrade in the 
communications systems used by the armed services.  These new systems must 
also be capable of rapid deployment and, in some cases, must be capable of 
on-the-move-communications.

It is within this background that the Company pursues its business model.

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

Traditionally, the United States Government has addressed its signal 
reconnaissance and communication systems needs with custom signal processing 
solutions which tend to be both expensive and have long delivery times. 
These factors, combined with budgetary constraints and the changing 
political and economic landscape since the end of the Cold War, have caused 
many agencies to search for more flexible and cost-effective solutions that 
can be deployed promptly.  It is this trend which is compelling the United 
States Government to make maximum use of commercial, off-the-shelf (COTS) 
technology.  

The Company's signal reconnaissance products can be used, with or without 
further modification, to satisfy requirements of a variety of customers. The 
Company believes that custom equipment generally cannot be as readily 
deployed in as wide a variety of circumstances as the Company's products. 
The Company designs its products to use advanced circuitry, including 
Company-designed application-specific integrated circuits (ASICs). This 
enables the Company to offer products that are smaller, consume less power 
and cost customers less when multiple units are built.

Over the last two years through a combination of customer and internally 
funded development, the Company has sought opportunities to expand its 
market reach by moving into the commercial sector.  This was being 
accomplished by capitalizing on the Company's accumulated knowledge of 
advanced digital signal processing and telecommunications technologies in an 
effort to either license the technology to the commercial sector or perform 
low-to-medium volume manufacturing on select subsystems.

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

<TABLE>
<CAPTION>
     PRODUCT                        DESCRIPTION                   CUSTOMER(S)
     -------                        -----------                   -----------
<S>                      <C>                                      <C>
QAMalyzer(TM)            Digital test equipment for cable         TCI,
                         service providers                        Southwestern Bell

Cell Phone Modem         Modem chip design for the Ericsson    
                         "Freeset 1900(TM)" PCS cellular phone    Ericsson
</TABLE>

To date, this strategy has provided limited success.  Further, the Company 
is finding greater opportunities in its core business.  As a result, the 
Company anticipates making a more limited investment of its research and 
development resources into this area in the future.  The Company will 
continue to pursue its existing commercial initiatives and, where 
appropriate, will also perform customer funded development in this area.




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

The Company's future earnings and stock price may be subject to volatility, 
particularly on a quarterly basis, due to the following:

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

Revenue Concentration:  Due to the award of certain larger contracts, the 
Company is experiencing a higher concentration of revenues from a single 
contract.  Revenue related to a single contract comprised 23.5% of revenue 
for both the quarter ending August 1, 1997 and the first nine months of 
fiscal 1997.  This compares to 21.5% attributable to the single contract in 
fiscal 1996.

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

Dependence Upon Personnel:  The Company believes its employees are its 
most valuable resource and, accordingly, focuses much of its attention on 
attracting and retaining staff members.  During the last year, the Company 
experienced difficulty in attracting new talent due to an increasingly 
competitive market for qualified personnel.  Management believes these 
effects are attributable to the expanding U.S. economy and, in particular, 
the local California economy where the Company must compete for new talent 
in the rapidly expanding telecommunications sector.  In response, the 
Company has implemented a more aggressive recruiting program.  The Company's 
ability to execute its business plan is contingent upon attracting and 
retaining qualified employees.  While the Company believes progress has been 
made over the last year, there can be no assurance that the Company will be 
successful at attracting and retaining sufficient personnel.  Failure to do 
so could have a material adverse effect on the Company's future operating 
results and financial condition. 

Dependence Upon Government Contracts and Contractual Relationships:  A 
significant portion of the Company's revenues are derived from fixed-price 
contracts.  Under fixed-price contracts, unexpected increases in the cost to 
develop or manufacture a product, whether due to inaccurate estimates in the 
bidding process, unanticipated increases in materials costs, inefficiencies 
or other factors, are borne by the Company.  The Company has experienced 
cost overruns in the past that have resulted in losses on certain contracts.  
There can be no assurance that the Company will not experience cost overruns 
in the future or that such overruns will not have a material adverse effect 
on the Company's operating results. 

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

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

Potential Fluctuations in Quarterly Results and Market Volatility:  The 
Company has experienced significant fluctuations in operating results from 
quarter to quarter and expects that it will continue to experience such 
fluctuations in the future.  These fluctuations are caused by, among other 
factors, conditions inherent in government contracting and the Company's 
business, such as the timing of cost and expense recognition for contracts 
and the United States Government contracting and budget cycles.  
Fluctuations in quarterly results may cause the price of the Company's 
common stock to fluctuate substantially.  In addition, there can be no 
assurance that an active trading market will be sustained for the Company's 
common stock.  The stock market in recent years has experienced extreme 
price and volume fluctuations that have particularly affected the market 
prices of many technology companies and that have been unrelated or 
disproportionately related to the operating performance of such companies.  
These fluctuations, as well as general economic and market conditions, may 
adversely affect the future market price of the Company's common stock.

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

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



Quarter and Nine Months Ended August 1, 1997 Compared to Quarter and 
Nine Months Ended August 2, 1996:

Results of Operations:

Revenues and Backlog:  Revenues for the third quarter of fiscal 1997 were 
$22,600,000, representing a 16% increase over the third quarter of fiscal 
1996 revenues of $19,504,000.  Revenues for the nine months ended August 1, 
1997 were $66,671,000, up 28% from $52,272,000 for the first nine months of 
fiscal 1996.  The increase in the third quarter and year-to-date revenues 
reflects  an increase in both development contract sales and in product 
sales and in part due to an increase in average fees being recorded on 
production contracts.

New order levels for the third quarter were $27,889,000, up 102% from order 
levels of $13,609,000 reported for the third quarter of fiscal 1996.  
Included in the third quarter orders for fiscal 1997 is an award totaling 
$7,200,000 from the Department of Defense, which represents the largest 
production contract award in the Company's history.  New orders for the 
first nine months of fiscal 1997 were $60,764,000 compared to $91,781,000 
reported for the same period of fiscal 1996.  For comparison purposes, the 
Company recorded the Scalpel Program multi-year competitive award of 
$51,035,000 - the largest in the Company's history - during the second 
quarter of fiscal 1996.  Due to the multi-year nature of the Scalpel Program 
award in fiscal 96, management is not concerned regarding the reduction in 
order level experienced in fiscal 97 versus fiscal 96.

The Company's backlog, which consists of anticipated revenues from the 
uncompleted portions of existing contracts (excluding unexercised contract 
options) was $76,980,000 at August 1, 1997, an increase of 11% when compared 
to $69,214,000 at August 2, 1996.  

Contract Costs: Contract costs consist of direct costs on contracts, 
including materials and labor, and manufacturing overhead costs. Contract 
costs as a percentage of revenue were 61.0% for the third quarter of fiscal 
1997 versus 64.7% for the same period of fiscal 1996.  Contract costs for 
the nine months ended August 1, 1997 were 64.0% versus 68.1% for the first 
nine months of fiscal 1996.  Contract costs expressed as a percentage of 
revenue for the third quarter and first nine months of fiscal 1997 were down 
primarily due to price decreases realized for component parts as well as 
economic gains related to larger production runs on certain contracts.  
Further, contract costs expressed as a percentage of revenues for the same 
periods of fiscal 1996 were abnormally high due primarily to unfavorable 
adjustments in estimated costs-to-complete on production jobs that occurred 
in the first half of that year.

Research and Development (R&D): Company-directed investment in research 
and development consists of expenditures recoverable from customers through 
the Company's billing rates and expenditures funded by the Company from 
earnings. It is the Company's accounting practice to record R&D expenses 
based on annual targeted indirect rates. (See "Notes to Financial 
Statements; Note 2 - Inventory.") Research and development expenses as a 
percentage of revenues were 10.0% and 11.7% for the third quarter of fiscal 
years 1997 and 1996, respectively.  For the first nine months of fiscal 
years 1997 and 1996, research and development expenses as a percentage of 
revenues were  10.7% and 12.1%, respectively.  The lower R&D spending for 
the third quarter and the first nine months of fiscal 1997 compared to the 
same periods of fiscal 1996 reflect a shift of labor resources toward the 
Company's increased contract activity, in part due to the inability to 
increase staff.

The Company-funded investment in R&D for the most recent nine months was 
2.2% of revenues versus 4.0% for the same period during fiscal 1996. During 
fiscal 1997, the Company made a decision  to recover more of its R&D 
spending in its billing rates, and therefore, has less expense taken out of 
profit contribution.

General and Administrative:  General and administrative expenses include 
administrative salaries, costs related to the Company's marketing and 
proposal activities and other administrative costs. It is the Company's 
accounting practice to record general and administrative expenses based on 
annual targeted indirect rates. (See "Notes to Financial Statements; Note 2 
- Inventory.") General and administrative expenses were  $3,062,000 or 
13.5% of revenues for the third quarter of fiscal 1997 compared to 
$2,877,000 or 14.8% of revenues for the third quarter of fiscal 1996.  
General and administrative expenses were $9,415,000 or 14.1% of revenues and 
$8,245,000 or 15.8% of revenues for the nine months ended August 1, 1997 and 
August 2, 1996, respectively.

The decrease in general and administrative expenses as a percentage of 
revenue  for the third quarter and for the first nine months of fiscal 1997 
as compared to the corresponding periods of fiscal 1996  are due primarily 
to the higher profit volume recorded during the respective time periods (see 
"Contract Costs" above).

Interest Income/(Expense):  Net interest income for the first nine months 
of fiscal 1997 was $116,000 compared to $38,000 for the same period of 
fiscal 1996.  The increase in interest income for the first nine months of 
fiscal 1997 is due primarily to the Company's ability to generate cash from 
operations due to improved margins.  During the first nine months of fiscal 
1996, less interest income was realized due to offsetting interest expense 
incurred from borrowing funds on bank lines of credit.

Provision for Income Taxes: The provision for income taxes as a percentage 
of net income before income taxes was 38.7% for the third quarter of fiscal 
1997, compared to 35.0% for the same period of fiscal 1996.  The effective 
tax rates for the nine months ended August 1, 1997 and August 2, 1996 was 
37.5% and 35.0%, respectively.  The increase in the quarter and year-to-date 
effective tax rate is primarily a result of the increase of federal and 
state tax liabilities as a result of the increase in profitability.






Analysis of Liquidity and Capital Resources:

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

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

Net cash from operating activities: Net cash provided by operating 
activities varies significantly from quarter to quarter. These quarter-to-
quarter variances are primarily the result of changes in net income, changes 
in the rate of investment in accounts receivable and the change in 
inventories held by the Company. During the first nine months of fiscal 
1997, $4,058,000 was provided by operating activities versus $2,504,000 
during the comparable period of fiscal 1996. Net income of $4,729,000 was 
considerably higher for the first nine months of fiscal 1997 as compared to 
the net income of $1,364,000 reported for the same period  of fiscal 1996, 
and contributed significantly to the increase in year-to-year change in cash 
from operating activities.  This is primarily due to greater contract 
margins being realized in fiscal 1997 because of lower material acquisition 
costs.  During the first nine months of fiscal 1997, accounts receivable 
increased by $1,408,000 as compared to a decrease in accounts receivable of 
$3,552,000 for the first nine months of fiscal 1996.  The increase in 
accounts receivable is due, in part, to greater contract activity and, in 
part, to certain limitations and terms stipulated in certain engineering and 
production contracts. Cash used in the investment  in inventories, prepaids 
and other current assets during the first nine months of fiscal 1997 was 
$4,234,000, compared to $3,958,000 cash used during the comparable period of 
fiscal 1996. This slight increase in inventories, prepaids and other current 
assists is primarily due to the impact  of facility lease payments on the 
balance sheet in the prepaid section.  During the first nine months of 
fiscal 1997, $1,955,000 was provided by the increase in accounts payable and 
accrued expenses as compared to $1,241,000 being used in accounts payable 
and accrued expenses in fiscal 1996.  The change in this line item between 
the two periods  is primarily due to quarter-end timing differences related 
to the payment of payroll and related expenses.

Net cash from investing activities:  Cash used in investing activities 
during the first nine months of fiscal 1997 was $4,134,000 compared to 
$4,575,000 used in investing activities during the same period of fiscal 
1996.  Cash used in investing activities during the first nine months of 
fiscal 1997 is primarily attributed to additions to property and equipment 
in both periods.  Capital investment continues to be driven by an increase 
in the number of contracts awarded and due to the level of development-type 
contracts that typically to require higher-priced test and computing 
equipment.  During the first nine months of fiscal 1997, a U.S. Treasury 
security matured and contributed $400,000 to the Company's cash flow. 

Net cash from financing activities: Cash provided by financing activities 
during the first nine months of fiscal 1997 was $1,518,000 versus $1,702,000 
provided during the same period of fiscal 1996. The reduction in cash 
provided by financing activities during the first nine months of fiscal 1997 
is, attributable to the decrease in borrowings under the bank line of credit 
and, offset by an increase in stock purchased by employees via the Employee 
Stock Purchase Plan and Employee Stock Option programs.

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



Part II.        Other Information

Item 1.         Legal Proceedings

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

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

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

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




Item 6.        Exhibits and Reports on Form 8-K

               Exhibits -- See Index to Exhibits

               Reports on Form 8-K -- The Company did not file any reports on
               Form 8-K during the nine months ended August 1, 1997.


















































                                  SIGNATURES

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


Applied Signal Technology, Inc.



/s/ Brian M. Offi/                                  September 11, 1997
------------------------------                     ---------------------------
Brian M. Offi
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)









































                            APPLIED SIGNAL TECHNOLOGY

                                INDEX TO EXHIBITS


 EXHIBIT                                 
 NUMBER     DESCRIPTION OF DOCUMENT
 ------     -----------------------
11.1        Computation of Net Income Per Share
27.1        Financial Data Schedule