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 JULY 31, 1998
 
                                       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, 8,401,012 shares outstanding as of August 28, 1998.
<PAGE>
 
 
 
 
 
Part 1.  Financial Information
Item 1.   Financial Statements
 
                         APPLIED SIGNAL TECHNOLOGY, INC.
                                 BALANCE SHEETS
                        (In thousands, except share data)
 
<TABLE>
<CAPTION>
                                                         July 31,    October 31
                                                         1998        1997
                                                         ----------  ----------
                                                         (Unaudited) (Note)
<S>                                                      <C>         <C>
                       ASSETS
Current assets:
  Cash                                                      $8,232      $7,403
  Short-term investments                                     2,042       1,331
  Accounts receivable:
    Billed                                                  15,017      20,496
    Unbilled                                                15,430      12,152
                                                         ----------  ----------
     Total accounts receivable                              30,447      32,648
  Inventory                                                  6,986       4,821
  Prepaid and other current assets                           2,436       2,176
                                                         ----------  ----------
    Total current assets                                    50,143      48,379
 
Property and equipment, at cost:
  Machinery and equipment                                   30,857      27,312
  Furniture and fixtures                                     3,983       3,650
  Leasehold improvements                                     5,760       5,310
  Construction in process                                    1,189         419
                                                         ----------  ----------
                                                            41,789      36,691
Accumulated depreciation and amortization                  (24,087)    (20,980)
                                                         ----------  ----------
    Net property and equipment                              17,702      15,711
 
Other assets                                                    43          71
                                                         ----------  ----------
 
Total assets                                               $67,888     $64,161
                                                         ==========  ==========
 
       LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
Current liabilities:
  Accounts payable                                          $2,592      $3,705
  Accrued payroll and related benefits                       5,945       6,295
  Other accrued liabilities                                  2,013       1,877
  Income taxes payable                                       2,253       1,567
                                                         ----------  ----------
    Total current liabilities                               12,803      13,444
 
Deferred income taxes                                          951         951
 
Shareholders' equity:
  Common stock, no par value: 20,000,000 shares
  authorized; issued and outstanding -- 8,401,012 at
  July 31, 1998 and 8,351,629 at October 31, 1997           18,933      22,197
  Retained earnings                                         35,159      27,539
  Net unrealized gain/(loss) on securities                      42          30
                                                         ----------  ----------
Total shareholders' equity                                  54,134      49,766
                                                         ----------  ----------
               Total liabilities and
                   shareholders' equity                    $67,888     $64,161
                                                         ==========  ==========
 
</TABLE>
 
Note: The balance sheet at October 31, 1997 has been derived from the audited
balance sheet at that date but does not include all of the information
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
                                             ---------------------  -------------------
                                              July 31,   August 1,   July 31,  August 1,
                                                1998       1997       1998      1997
                                             ---------- ----------  --------- ---------
<S>                                          <C>        <C>         <C>       <C>
Revenues from contracts                        $27,373    $22,600    $79,467   $66,671
 
Operating expenses:
  Contract costs                                16,695     13,793     49,118    42,672
  Research and development                       1,742      2,269      5,158     7,133
  General and administrative                     4,604      3,062     13,333     9,415
                                             ---------- ----------  --------- ---------
      Total operating expenses                  23,041     19,124     67,609    59,220
                                             ---------- ----------  --------- ---------
 
Operating income                                 4,332      3,476     11,858     7,451
Interest income(expense), net                      140         18        432       116
                                             ---------- ----------  --------- ---------
Income before provision
  for income taxes                               4,472      3,494     12,290     7,567
Provision for income taxes                       1,621      1,351      4,670     2,838
                                             ---------- ----------  --------- ---------
 
Net income                                      $2,851     $2,143     $7,620    $4,729
                                             ========== ==========  ========= =========
 
Earnings per share - basic                       $0.34      $0.26      $0.90     $0.59
Weighted average shares - basic                  8,429      8,188      8,495     8,065
 
Earnings per share - diluted                     $0.32      $0.25      $0.86     $0.57
Weighted average shares - diluted                8,776      8,517      8,909     8,286
 
 
</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
                                                     ----------------------
                                                     July 31,    August 1,
                                                     1998        1997
                                                     ----------  ----------
                                                           (UNAUDITED)
<S>                                                  <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                              $7,620      $4,729
Adjustments to reconcile net income to net cash
  provided by (used in) operating activities:
    Depreciation and amortization                        3,107       2,965
    Changes in:
    Accounts receivable                                  2,201      (1,408)
    Inventory, prepaids and other assets                (2,396)     (4,183)
    Accounts payable and accrued liabilities              (640)      1,955
                                                     ----------  ----------
      Net cash provided by operating activities          9,892       4,058
 
INVESTING ACTIVITIES:
  Purchases of investments                              (5,000)        --
  Maturities of investments                              4,300         400
  Additions to property and equipment                   (5,099)     (4,534)
                                                     ----------  ----------
      Net cash used in investing activities             (5,799)     (4,134)
 
FINANCING ACTIVITIES:
  Issuance of common stock                               2,707       1,518
  Repurchase of common stock                            (5,971)        --
                                                     ----------  ----------
      Net cash provided by (used in) financing activi   (3,264)      1,518
 
Net increase in cash                                       829       1,442
Cash, beginning of period                                7,403       1,559
                                                     ----------  ----------
Cash, end of period                                     $8,232      $3,001
                                                     ==========  ==========
Supplemental disclosures of cash flow information:
    Interest paid                                          $23         $36
    Income taxes paid                                   $2,084      $3,020
</TABLE>
                       See notes to financial statements.
 
<PAGE>
 
 
                         APPLIED SIGNAL TECHNOLOGY, INC.
                         NOTES TO FINANCIAL STATEMENTS
                                  (UNAUDITED)
                                 July 31, 1998
 
 
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 
BASIS OF PRESENTATION
 
               The accompanying unaudited financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation have been included. Operating results for
the nine month period ending July 31, 1998 are not necessarily indicative
of the results that may be expected for the year ending October 31, 1998. For
further information, refer to the financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the year ended
October 31, 1997.
 
INVESTMENTS
 
               The Company's investment securities, which consist primarily
of U.S. Treasury Securities, are classified as available-for-sale and are
carried at fair market value. Unrealized gains and losses, net of tax, are
reported as a separate component of  shareholders' equity. Realized gains and
losses on available-for-sale securities are included in interest income
(expense), net. The cost of securities sold is based on the specific
identification method. Interest on securities classified as
available-for-sale is included in interest income (expense), net. As of
July 31, 1998, the contractual maturities of the debt securities are
staggered to mature by November 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.  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
on an individual contract basis.  Management reviews contract performance,
costs incurred and estimated completion costs regularly and adjusts revenues
and profits on contracts in the month in which changes become determinable.
 
EARNINGS PER SHARE
 
               In 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards Number 128, "Earnings per Share."
("Statement 128").  Statement 128  replaced the previously reported primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutieve effects of options, warrants, and convertible securities.  Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share.  All earnings per share amounts for all periods have been
presented and, where necessary, restated to conform to Statement 128
requirements.
 
              A reconciliation of shares used in the calculation of basic
and diluted earnings per share follows (in thousands, except per share data):
 
<TABLE>
<CAPTION>
                                                    Three Months Ended       Nine Months Ended
                                                   --------------------- -------------------
                                                    July 31,  August 1,  July 31,  August 1,
                                                      1998       1997      1998      1997
                                                    ---------  --------- --------- ---------
<S>                                                <C>        <C>        <C>       <C>
Net income                                            $2,851     $2,143    $7,620    $4,729
                                                      =======    =======   =======   =======
 
Weighted average shares outstanding                    8,429      8,188     8,495     8,065
Basic net income per share                             $0.34      $0.26     $0.90     $0.59
                                                      =======    =======   =======   =======
 
Shares used in computing basic net income per share    8,429      8,188     8,495     8,065
Dilutive stock options                                   347        329       414       221
                                                    ---------  --------- --------- ---------
Weighted average shares-diltued                        8,776      8,517     8,909     8,286
Diluted net income per share                           $0.32      $0.25     $0.86     $0.57
                                                      =======    =======   =======   =======
 
</TABLE>
 
 
NOTE 2 -- INVENTORY
 
The components of inventory consist of the following (in thousands):
 
<TABLE>
<CAPTION>
                       July 31, 1998         OCTOBER 31, 1997
                      ----------------      ----------------
<S>                        <C>                 <C>
Raw Materials              $1,202              $1,121
Work in Process             5,383               3,131
Finished Goods                392                 279
                           ------              ------
                            6,977               4,531
Precontract Costs               9                 290
                           ------              ------
                           $6,986              $4,821
                           ======              ======
</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 operations as they become known. At July 31, 1998, the
unfavorable inventoried variance was approximately $337,000 while at August 1,
1997, the unfavorable inventoried variance was approximately $1,227,000; each
variance was included in work in process.  At October 31, 1997, the variance
was zero since all revenues and costs were recorded at the actual indirect
rates for the 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.
 
Forward-looking statements in this report are made pursuant to the safe harbor
provisions of Section 21E of the Securities Exchange Act of 1934.  In this
report, the words "anticipates," "believes," "expects," "future," "intends,"
and similar expressions identify forward-looking statements.  Shareholders
are cautioned that all forward-looking statements pertaining to the Company
involve risks and uncertainties, including, without limitation, those
contained under the caption, "Summary of Business Considerations and Certain
Factors that May Affect Future Results of Operations and/or Stock Price"
and other risks detailed from time to time in the Company's periodic reports
and other information filed with the Securities and Exchange Commission.
Actual events and results may differ materially from the Company's current
expectations and beliefs.
 
BUSINESS ENVIRONMENT/BACKGROUND:
 
       Applied Signal Technology, Inc. (Applied Signal Technology or the
Company) designs, develops, and manufactures signal processing
equipment to collect and process a wide range of telecommunication
signals. This equipment is used predominantly by the United States Govern-
ment and allied foreign governments for reconnaissance of foreign tele-
communications.  Signal reconnaissance systems are composed of
collection equipment and processing equipment. Collection equipment
consists of sophisticated receivers that scan the radio frequency (RF)
spectrum (cellular telephone, microwave, ship-to-shore, and military
transmissions) to collect certain signals from, potentially, thousands
of signals within the RF spectrum. Signal processing equipment, using
sophisticated software and hardware, evaluates the characteristics of
the collected signals and selects signals that are likely to contain
relevant information. Since inception, the Company has focused its
efforts primarily on processing equipment, but also provides
specialized collection equipment, as well as complete signal
reconnaissance systems.
 
       Accurate and comprehensive information regarding foreign
affairs and developments has become increasingly important to
the United States Government. The reduction of United States military
tactical forces overseas, coupled with political instability in
certain regions such as the Middle East, Eastern Europe, Africa and
South America, has heightened the United States Government's need to
be able to monitor overseas activities. In order to obtain information
about activities within foreign countries, the United States
Government gathers and analyzes telecommunication signals emanating
from those countries.
 
       The Company devotes significant resources toward understanding the
United States Government's signal reconnaissance goals, capabilities
and perceived future needs. The Company obtains information about
these signal reconnaissance needs through frequent marketing contact
between its employees and technical and contracting officials of the
United States Government. The Company believes that it has more
marketing contact with customers and potential customers than is
customary among its competitors. In addition, the Company invests in
research and development (R&D) which it anticipates will enable it to
develop signal reconnaissance equipment that meets these needs. The
Company believes that it invests a greater percentage of its revenues
in R&D than is typical among its competitors. (See "Research and
Development.")
 
       Budgetary constraints and critical time-to-deployment requirements
have caused many United States Government agencies to search for more
flexible and cost-effective signal reconnaissance solutions that can
be deployed promptly. The Company's signal reconnaissance products can
be used, with or without further modification, to satisfy requirements
of a variety of customers. The Company believes its products can be
readily deployed in a wide variety of circumstances to meet current
United States Government signal reconnaissance requirements. The
Company designs its products to use advanced circuitry and highly
integrated components, 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 than equipment of similar functionality
that use fewer advanced designs and materials.
 
 
 
 
QUARTER AND NINE MONTHS ENDED JULY 31, 1998 COMPARED TO
QUARTER AND NINE MONTHS ENDED AUGUST 1, 1997:
 
RESULTS OF OPERATIONS:
 
REVENUES AND BACKLOG:  Revenues for the third quarter
of fiscal 1998 were approximately $27,373,000,
representing a 21% increase over the third quarter of
fiscal 1997 revenues of approximately $22,600,000.
Revenues for the nine months ended July 31, 1998 were
approximately $79,467,000, up 19% from approximately
$66,671,000 for the first nine months of fiscal 1997.
The increase in the third quarter and year-to-date revenues
is primarily attributable to the increased contract activity on
both development contracts as well as product sales, and due
to the Company's ability to attract and retain personnel,
which has been difficult in recent years because of the
competitive market for qualified employees in the expanding
local California economy.
 
 
New order levels for the third quarter were
approximately $25,079,000, down 10% from order
levels of approximately $27,889,000 reported for the
third quarter of fiscal 1997.  New orders for the first
nine months of fiscal 1998 were approximately
$51,430,000, down 15% compared to the $60,764,000
reported for the same period of fiscal 1997.  The Company
believes that the decrease in orders experienced for the
quarter and nine month periods of fiscal 1998 is due
in part to delays experienced in the award of new
development contracts and in part due to a reduced number
of awards for off-the-shelf products.  While management
believes that the demand for global intelligence gathering
products should continue, there can be no assurances that the
reduced order flow experienced through July 31, 1998 will
not have an impact on future-year revenue.  Management is
assessing the factors causing the apparent delay in
orders in order to determine the appropriate response.
 
The Company's backlog, which consists of anticipated
revenues from the uncompleted portions of existing
contracts (excluding unexercised options) was
approximately $55,106,000 at July 31, 1998, a decrease of
28% when compared to the backlog of approximately
$76,980,000 at August 1, 1997.  The decrease in backlog as
of the third quarter of fiscal 1998 is due in part to
the low order levels experienced in the first nine months
of fiscal 1998 and, in part, due to completion of
certain multi-year contracts.
 
 
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 1998 and for the same period of fiscal 1997.
Contract costs as a percentage of revenues for the nine
months ended July 31, 1998 were 61.8% versus 64.0% for
the first nine months of fiscal 1997.  Contract costs as a
percentage of revenue for the first nine months of fiscal
1998 were down primarily due to economic gains related
to larger production runs on certain contracts as well as
greater profit margins realized on certain engineering projects
and off-the-shelf products.  Further, contract costs as a
percentage of revenues for the first nine months of fiscal
1997 were abnormally high due primarily to recording a
reserve in the second quarter of fiscal 1997 in anticipation
of unfavorable indirect spending variances.
 
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 6.4% and 10.0% for the
third quarter of fiscal years 1998 and 1997,
respectively.  For the first nine months of fiscal years
1998 and 1997 research and development expenses as a
percentage of revenues were  6.5% and 10.7%,
respectively.  R&D as a percent of revenue is down for the
quarter and first nine months of fiscal 1998 compared to fiscal
1997 due to the timing of related spending variance recorded
during the interim reporting periods.  For fiscal year 1998,
management has targeted approximately 10% of revenue for
the overall spending of R&D expenses and believes this is
attainable.
 
During fiscal 1998, the Company made a decision to
recover more of its R&D spending in its billing rates.
Accordingly, the Company did not fund out of earnings
any investment in R&D for the first nine months of fiscal
1998 as compared to 2.2% of revenues funded for the first
nine months of fiscal 1997.  The Company intends to make
substantial investments in research and development in an
effort to meet customers' needs before its competitors; however,
there can be no assurances that the Company will be able
to develop and market new products successfully in the
future.
 
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 approximately
$4,604,000 or 16.8% of revenues for the third quarter of
fiscal 1998 compared to approximately $3,062,000 or
13.5% of revenues for the third quarter of fiscal 1997.
General and administrative expenses were approximately
$13,333,000 or 16.8% of revenues and approximately
$9,415,000 or 14.1% of revenues for the nine months ended
July 31, 1998 and August 1, 1997, respectively.  The increase
in general and administrative expenses as a percent of
revenue is due to timing related spending variances which will
be restated at year-end to actuals consistent with the Company's
accounting policy.
 
INTEREST INCOME/(EXPENSE):  For the quarter ended July 31,
1998, interest income was approximately $140,000 up from
approximately $18,000 interest income for the same
period of fiscal 1997.  Interest income for the first
nine months of fiscal 1998 was approximately $432,000
compared to interest income of approximately $116,000 for
the same period of fiscal 1997.  The  increase in
interest income for the third quarter and for the first
nine months of fiscal 1998 is due primarily to the
Company's ability to generate cash from operations because
of improved margins as well as from additional efforts expended
to collect outstanding receivable balances.
 
PROVISION FOR INCOME TAXES: The provision for income
taxes as a percentage of net income before income taxes
was 36.2% for the third quarter of fiscal 1998 compared to
38.7% for the third quarter of fiscal 1997.  The effective tax
rate for the nine months ended July 31, 1997 and August 1,
1997 was 38.0% and 37.5%, respectively.  The decrease
in the rate for the third quarter of fiscal 1998 was primarily the
result of the cumulative effect of a year-to-date adjustment made
in the third quarter from a previously recognized 39.0% combined
tax rate during the first two quarters of fiscal 1998 to a 38%
combined tax rate projected for fiscal 1998.  The increase in
year-to-date tax rate for fiscal 1998 as compared to the tax rate
for the same period in fiscal 1997 is the a result of the increase in
estimated federal and state tax liability as a result of the increase
in profitability.
 
 
 
ANALYSIS OF LIQUIDITY AND CAPITAL RESOURCES:
 
        At July 31, 1998 cash and short-term investments
totaled approximately $10,274,000.  Historically, the
Company's primary source of liquidity has been the cash
flow generated from operations as well as from the issuance
of common stock through its employee stock plans.
 
NET CASH PROVIDED FROM OPERATING ACTIVITIES:
Net cash provided by operating activities has varied
significantly from quarter to quarter. These variances
are primarily the result of changes in net income,
changes in the rate of investment in accounts receivable
and the changes in inventories held by the Company.
During the first nine months of fiscal 1998,
approximately $9,892,000 was provided by operating
activities versus approximately $4,058,000 during the
comparable period of fiscal 1997.  Net income of
approximately $7,620,000 was considerably higher for
the first nine months of fiscal 1998 as compared to the net
income of approximately $4,729,000 reported for the same
period  of fiscal 1997 is primarily due to higher contract revenue
recorded on the Company's contracts.  During the first nine
months of fiscal 1998, accounts receivable decreased by
approximately $2,201,000 when compared to an approximate
increase of $1,408,000 in accounts receivable during the
same period of fiscal 1997.  The cash generated by
accounts receivable is due, in part to greater collections
efforts and, in part, due to collections received from a one-time
billing modification in the fourth quarter of fiscal 1997 authorized
by the U.S. Government.   Cash used in the investment  in inventories,
prepaids and other current assets during the first nine
months of fiscal 1998 was approximately $2,396,000,
compared to approximately $4,183,000 of cash used during
the comparable period of fiscal 1997. This reduction is
due primarily to the reduction of timing-related
targeted indirect rate variances (See "Notes to
Financial Statements; Note 2 - Inventory").
 
NET CASH FROM INVESTING ACTIVITIES:  Cash used in
investing activities during the first nine months of
fiscal 1998 was approximately $5,799,000 compared to
approximately $4,134,000 used by investing activities
during the same period of fiscal 1997.  The primary
activities for the first nine months of fiscal 1998 were
due to the purchases and the maturities of short-term
investments, as well as acquiring property and
equipment.  The Company's capital investment continues
to be driven by an increase in the number of new
employees and by the level of development-type contracts
that have required test and computing equipment.
 
NET CASH FROM FINANCING ACTIVITIES: Cash used in
financing activities during the first nine months of
fiscal 1998 was approximately $3,264,000 versus
approximately $1,518,000 being provided by financing
activities during the same period of fiscal 1997. The
use of cash for financing activities during the nine
months of fiscal 1998 is primarily attributable to the
repurchase of the Company's common stock.
 
In November 1997, the Company approved a
discretionary program to repurchase up to $3,300,000 of
the Company's common stock to offset potential dilutive
effects to earnings per share from the issuance of stock
options.  In May 1998, the Company further authorized
the repurchase of 250,000 shares.  The Company intended
to use existing cash and short-term investments to
finance any stock repurchases.  By August 3, 1998, both
repurchase programs had been fully executed with approximately
487,000 shares purchased at a cumulative price of approximately
$6,207,000.
 
The Company has a bank credit agreement to augment
cash flow needs and to provide term financing for
capital investments. The Company maintains a $3,000,000
unsecured, revolving line of credit for short-term cash
requirements which expires March 15, 1999.  The
unsecured, revolving line of credit bears interest at
the bank's reference rate (8.5% as of July 31, 1998).
Outstanding amounts on the unsecured, revolving line of
credit were zero at July 31, 1998 and October 31, 1997.
 
The Company believes that the funds generated from
operations, existing working capital and amounts
available under its existing line of credit will be
sufficient to meet its cash needs for the next twelve
months.
 
 
 
 
SUMMARY OF BUSINESS CONSIDERATIONS AND CERTAIN FACTORS THAT MAY AFFECT FUTURE
RESULTS OF OPERATIONS AND/OR STOCK PRICE:
 
       The Company's future operating results and stock price may be subject
to volatility, particularly on a quarterly basis, due to the following:
 
       Customer Concentration: Historically, defense and intelligence
agencies of the United States Government have accounted for almost all
of 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. In addition, as a supplier of these
agencies, the Company must comply with numerous regulations, including
regulation governing security and contracting practices. Failure to
comply with these regulations could disqualify the Company as a
supplier of these agencies, which would have a material adverse effect
on the Company's results of operation.
 
       Revenue Concentration: Due to the award of certain larger contracts,
the Company has experienced a significant concentration of revenues
from a single contract in recent periods. Revenue related to a single
contract comprised 20% of revenue for the first nine months of fiscal 1998
compared to 24% attributable to the same contract in the first nine months of
fiscal 1997.
 
       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's ability to execute its
business plan is contingent upon successfully attracting and retaining
qualified employees. During the last two years, the Company has
experienced difficulty in attracting and retaining employees due to an
increasingly competitive market for qualified personnel. Management believes
this effect is, in part, 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 and, in part, due to the difficulty in recruiting new staff
capable of obtaining the necessary security clearance.  While the Company
believes progress in attracting and retaining sufficient personnel
 has been made over the last year, there can be no assurance that the
Company will continue to 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.
 
       Risk of Fixed Price and Contract Terminations: 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.
 
       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,
shortfalls in revenues or earnings from levels forecast by securities
analysts, changes in estimates by analysts, competition, or
announcements of extraordinary events such as acquisitions or
litigation may cause the price of the Company's common stock to
fluctuate substantially. In addition, there can be no assurance that
an active trading market will be sustained for the Company's common
stock. The stock market in recent years has experienced extreme price
and volume fluctuations that have particularly affected the market
prices of many technology companies and that have been unrelated or
disproportionately related to the operating performance of such
companies. These fluctuations, as well as general economic and market
conditions, may adversely affect the future market price of the
Company's common stock.
 
       Rapid Technological Change: The market for 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.
 
       Year 2000:  Many computer systems experience problems handling dates
beyond the year 1999. Therefore, some computer hardware and software will
need to be modified prior to the year 2000 in order to remain functional.
The Company is assessing both the internal readiness of its computer systems
and the compliance of its computer products and software sold to customers
for handling the year 2000.  The Company expects to implement successfully
the systems and programming changes necessary to address year 2000 issues,
and does not believe that the cost of such actions will have a material
effect on the Company's results of operations or financial condition.
There can be no assurance, however, that there will not be a delay in, or
increased costs associated with, the implementation of such changes, and
the Company's inability to implement such changes could have an adverse
effect on future results of operations.
 
       The Company is also assessing the possible effects on the Company's
operations of the year 2000 readiness of key suppliers and subcontractors.
The Company's reliance on suppliers and subcontractors, and, therefore,
on the proper functioning of their information systems and software, means
that failure to address year 2000 issues could have a material impact on
the Company's operations and financial results; however, the potential
impact and related costs are not known at this time.
 
 
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.
 
               In February 1998, the Company was contacted by one of its primary
customers to negotiate an administrative settlement regarding the voluntary
disclosure discussed above.  The Company has provided the necessary information
to the Government and intends to enter into good faith negotiations during
fiscal 1998 regarding the voluntary disclosure.
 
               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 quarter ended July 31, 1998.
 
 
 
 
                                  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 10, 1998
------------------------------                     ---------------------------
Brian M. Offi
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
 
 
                            APPLIED SIGNAL TECHNOLOGY
 
                                INDEX TO EXHIBITS
 
 
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27.1        Financial Data Schedule
 
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