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 JANUARY 29, 1999
 
                                       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, 8,346,050 shares outstanding as of March 3, 1998.
<PAGE>
 
 
Part 1.  Financial Information
Item 1.   Financial Statements
 
                         APPLIED SIGNAL TECHNOLOGY, INC.
                                 BALANCE SHEETS
                        (In thousands, except share data)
 
<TABLE>
<CAPTION>
                                                         January 29, October 31
                                                            1999        1998
                                                         ----------  ----------
                                                         (Unaudited) (Note)
<S>                                                      <C>         <C>
                       ASSETS
Current assets:
  Cash and cash equivalents                                $12,067     $14,085
  Short-term investments                                       --        1,029
  Accounts receivable:
    Billed                                                  12,838      14,298
    Unbilled                                                16,968      16,282
                                                         ----------  ----------
     Total accounts receivable                              29,806      30,580
  Inventory                                                  8,291       5,551
  Prepaid and other current assets                           2,935       3,035
                                                         ----------  ----------
    Total current assets                                    53,099      54,280
 
Property and equipment, at cost:
  Machinery and equipment                                   32,111      31,654
  Furniture and fixtures                                     4,245       4,011
  Leasehold improvements                                     6,344       5,813
  Construction in process                                    1,972       1,438
                                                         ----------  ----------
                                                            44,672      42,916
Accumulated depreciation and amortization                  (25,820)    (24,775)
                                                         ----------  ----------
    Net property and equipment                              18,852      18,141
 
Other assets                                                    49          42
                                                         ----------  ----------
 
Total assets                                               $72,000     $72,463
                                                         ==========  ==========
 
       LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
Current liabilities:
  Accounts payable                                          $3,105      $3,842
  Accrued payroll and related benefits                       6,008       6,331
  Other accrued liabilities                                  2,150       2,092
  Income taxes payable                                       3,016       2,300
                                                         ----------  ----------
    Total current liabilities                               14,279      14,565
 
Deferred income taxes                                        1,033       1,033
 
Shareholders' equity:
  Preferred stock, no par value: 2,000,000 shares
  authorized; none issued and outstanding                      --          --
 
  Common stock, no par value: 20,000,000 shares
  authorized; issued and outstanding -- 8,342,750 at
  January 29, 1999 and 8,393,526 at October 31, 1998        17,584      19,154
  Retained earnings                                         39,104      37,711
                                                         ----------  ----------
Total shareholders' equity                                  56,688      56,865
                                                         ----------  ----------
               Total liabilities and
                   shareholders' equity                    $72,000     $72,463
                                                         ==========  ==========
 
</TABLE>
 
Note: The balance sheet at October 31, 1998 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 OPERTIONS
                                  (UNAUDITED)
                      (In thousands, except per share data)
 
<TABLE>
<CAPTION>
                                              Three Months Ended
                                             ---------------------
                                             January 29,January 30,
                                                1999       1998
                                             ---------- ----------
<S>                                          <C>        <C>
Revenues from contracts                        $22,848    $24,361
 
Operating expenses:
  Contract costs                                14,628     15,095
  Research and development                       2,728      2,137
  General and administrative                     3,401      3,661
                                             ---------- ----------
      Total operating expenses                  20,757     20,893
                                             ---------- ----------
 
Operating income                                 2,091      3,468
Interest income(expense), net                      202        147
                                             ---------- ----------
Income before provision
  for income taxes                               2,293      3,615
Provision for income taxes                         871      1,410
                                             ---------- ----------
 
Net income                                      $1,422     $2,205
                                             ========== ==========
Net income per common share
     Basic                                       $0.17      $0.26
     Diluted                                     $0.16      $0.25
 
Number of shares used in calculating
  net income per common share
     Basic                                       8,480      8,480
     Diluted                                     8,793      8,954
 
</TABLE>
 
 
 
                       See notes to financial statements.
 
<PAGE>
 
 
 
                        APPLIED SIGNAL TECHNOLOGY, INC.
                            STATEMENTS OF CASH FLOW
                          INCREASE (DECREASE) IN CASH
                                  (UNAUDITED)
                                 (In thousands)
<TABLE>
<CAPTION>
                                                       Three Months Ended
                                                     ----------------------
                                                     January 29, January 30,
                                                        1999        1998
                                                     ----------  ----------
 
<S>                                                  <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                              $1,422      $2,205
Adjustments to reconcile net income to net cash
  provided by operating activities:
    Depreciation and amortization                        1,045         997
Changes in:
    Accounts receivable                                    774       4,080
    Inventory, prepaids and other current assets        (2,647)     (2,958)
    Accounts payable, income taxes payable and accrued
       liabilities                                        (286)       (347)
                                                       ----------  ----------
      Net cash provided by operating activities            308       3,977
 
INVESTING ACTIVITIES:
  Purchase of available-for-sale securities                --       (5,000)
  Maturity of available-for-sale securities              1,000         400
  Additions to property and equipment                   (1,756)     (1,404)
                                                     ----------  ----------
      Net cash used in investing activities               (756)     (6,004)
 
FINANCING ACTIVITIES:
  Issuances of common stock                              1,173       1,389
  Repurchases of common stock                           (2,743)        (59)
                                                     ----------  ----------
      Net cash provided by (used in) financing
         activities                                     (1,570)      1,330
 
Net increase (decrease) in cash                         (2,018)       (697)
Cash, beginning of period                               14,085       7,403
                                                     ----------  ----------
Cash, end of period                                    $12,067      $6,706
                                                     ==========  ==========
Supplemental disclosures of cash flow information:
    Interest paid                                           $3          $7
    Taxes paid                                            $155        $310
 
</TABLE>
                       See notes to financial statements.
 
<PAGE>
 
 
                         APPLIED SIGNAL TECHNOLOGY, INC.
                         NOTES TO FINANCIAL STATEMENTS
                                  (UNAUDITED)
                               January 29, 1999
 
 
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 the
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included.
Operating results for the three-month period ending January 29, 1999 are
not necessarily indicative of the results that may be expected for the
year ending October 31, 1999.  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, 1998.
 
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.
 
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 revenue,
based on estimated profits and the degree of completion of the contract as
measured by a comparison of the actual and estimated costs, is recognized
as revenue each 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.
 
PER SHARE DATA
 
        Basic earnings per share is based on the weighted effect of all
common shares issued and outstanding, and is calculated by dividing net
income available to common shareholders by the weighted average number of
common shares outstanding during the period.  Diluted earnings per share
is calculated by dividing net income available to common shareholders,
adjusted for the effect, if any, from assumed conversion of all
potentially dilutive common shares outstanding, by the weighted average
number of common shares used in the basic earnings per share calculation,
plus the number of common shares that would be issued assuming conversion
of all potentially dilutive common stock options outstanding.
 
        A reconciliation of common shares used in the calculation of basic
and diluted earnings per share follows (in thousands, except per share
data):
 
<TABLE>
<CAPTION>
                                                    Three Months Ended
                                                   ---------------------
                                                   January 29,January 30,
                                                      1999       1998
                                                    ---------  ---------
<S>                                                <C>        <C>
Net income                                           $ 1,422    $ 2,205
                                                     ========   ========
 
Shares used to compute net income per
   common share - basic                                8,480      8,480
 
Effect of dilutive options                               313        474
                                                     --------   --------
Shares used to compute net income per
   common share - diluted                              8,793      8,954
                                                     ========   ========
 
Net income per common share - basic                    $0.17      $0.26
                                                     ========   ========
 
Net income per common share - diluted                  $0.16      $0.25
                                                     ========   ========
 
</TABLE>
 
 
 
RECLASSIFICATIONS
 
              Certain prior year amounts have been reclassified to the current
year presentation.
 
 
NOTE 2 -- INVENTORY
 
The components of inventory consist of the following (in thousands):
 
<TABLE>
<CAPTION>
                      January 29, 1999      October 31, 1998
                      ----------------      ----------------
<S>                        <C>                 <C>
Raw Materials              $1,087              $1,102
Work in Process             6,899               4,114
Finished Goods                282                 245
                           ------              ------
                            8,268               5,461
Precontract Costs              23                  90
                           ------              ------
                           $8,291              $5,551
                           ======              ======
</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 January 29, 1999, the
inventoried variance was approximately $1,340,000 ($498,000 at January 30, 1998)
and was included in work in process.  At October 31, 1998 and 1997 the
variance was zero since all revenues and costs are 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.
 
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 for reconnaissance of foreign telecommunications
predominantly by the United States Government and allied foreign
governments, for certain industrial applications and for defense
communications systems. 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. Industrial applications include commercial communication
system quality monitoring and data network intrusion detection. Defense
communication equipment provides reliable, high-speed data transfer for
military applications. Since inception, the Company has focused its
efforts primarily on processing equipment, but also provides specialized
collection equipment, as well as complete systems.
 
Signal Reconnaissance
 
     In recent years, accurate and comprehensive information regarding
foreign affairs and developments has become increasingly important to the
United States Government. The reduction of United States military tactical
forces overseas, coupled with political instability in certain regions
such as the Middle East, Eastern Europe, Africa and Central and South
America, has heightened the United States Government's need to be able to
monitor overseas activities. In order to obtain information about
activities within foreign countries, the United States Government gathers
and analyzes telecommunication signals emanating from those countries.
 
     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.
 
Industrial Applications
 
     The volume of data transferred and made available to individuals is
growing exponentially worldwide. This trend dictates maximum efficiency of
frequency spectrum usage by the commercial telecommunication companies.
The spectrum usage is especially critical in the band-limited radio
frequency (RF) environment that personal communication systems (e.g.,
cellular systems) and communication satellite systems (e.g., PanAmSat,
Intelsat, InMarSat) utilize. As these systems attempt to maximize this
usage, there is an increasingly higher probability that data transfer will
be impaired. This creates demand for sophisticated data quality
monitoring.
 
     The Company believes that its signal processing prowess in non-
intrusive signal reconnaissance, developed over the years, positions the
Company to capitalize on this quality monitoring requirement. The Company
believes its knowledge and experience will permit the Company to understand
the data transfer techniques that will be quality monitored in the future.
 
     As the world becomes more reliant upon data transfer and data access
for its day-to-day activities (i.e., e-commerce), it also becomes more
vulnerable to unauthorized data access or manipulation. This creates a
requirement for data system intrusion detection. This intrusion detection
must be performed without impact upon the data transfer.
The Company believes that the technological expertise it has developed for
signal reconnaissance, positions the Company to develop and commercialize
intrusion detection technology. In particular, the Company's signal
processing prowess provides the fundamentals for the development of
intrusion detection equipment.
 
Defense Communications
 
Just as the civilian world is becoming increasingly dependent upon
data transfer and access, so is the military. The military branches
utilize data transfer for guidance, computer-to-computer battlefield
planning, high quality communications, and other applications. Many times
this data transfer must occur under non-ideal transport conditions. The
transport often is in the radio frequency spectrum and must occur under
sub-optimum conditions such as minimal frequency planning for interference
mitigation, inaccurate antenna pointing, and moving platforms.  Defense
communication systems must be able to mitigate these data transfer
anomalies in an automated or semi-automated manner in order to provide
reliable, rapidly deployed communications.
 
     The Company believes that the technological expertise it has
developed for signal reconnaissance systems to adequately process data
collected in non-ideal situations positions the Company to develop
products satisfying these defense communication system requirements. In
particular, the Company's experience in adaptive equalization/demodulation
of sophisticated data telecommunication signals enable the Company to
develop equipment that overcomes these data transport anomalies.
 
Strategy
 
     Applied Signal Technology's objective is to anticipate the needs of
the telecommunication processing marketplace and to invest in research and
development in an effort to provide solutions before the Company's
competitors. In some cases, this involves the development of equipment to
address new telecommunications technologies. In other cases, it involves
the development of equipment that offers smaller size, lower power
consumption, and lower cost than potentially competitive products. The
Company's strategy is to aggressively pursue these objectives in each of
the market areas described above.
 
 
THREE MONTHS ENDED JANUARY 29, 1999 COMPARED TO THREE MONTHS ENDED
JANUARY 30, 1998
 
RESULTS OF OPERATIONS:
 
REVENUES AND BACKLOG:  Revenues for the first quarter of fiscal 1999 were
approximately $22,848,000, down 6% from the first quarter of fiscal 1997
revenues of approximately $24,361,000.  The decrease in first quarter
revenues is attributable to a decrease in the sale of off-the-shelf
products, partially offset by an increase in sales for engineering
services.  The Company believes that part of the decrease in revenue is
attributable to a delay in off-the-shelf awards which is impacting revenue
generation during the first quarter.
 
New order levels for the first quarter of fiscal 1999 were approximately
$7,826,000, down 22% from approximately $10,001,000 for the first quarter
of fiscal 1998.  The decrease in first quarter new order levels is
attributable to a decrease in new orders for engineering services when
compared to the new orders of the same period for fiscal 1998.  The
Company does not believe there has been a systemic change in its
customers' need for signal reconnaissance equipment and thus does not
consider the first quarter award levels indicative of future results.
 
The Company's backlog, which consists of anticipated revenues from the
uncompleted portions of existing contracts (excluding unexercised options)
was approximately $37,937,000 at January 29, 1999, a decrease of 45% when
compared to $68,586,000 at January 30, 1998.  The decrease in new orders
for the two quarters ending January 29, 1999 has lowered the Company's
backlog.
 
CONTRACT COSTS: Contract costs consist of direct costs on contracts,
including materials, labor and manufacturing overhead costs.  Contract
costs as a percentage of revenues were 64.0% for the first quarter of
fiscal 1999 versus 62.0% for the same period of fiscal 1998.  Contract
costs as a percentage of revenues were higher primarily due to the
application of higher indirect expenses.
 
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 bases on annual targeted indirect rates.  (See "Notes to
Financial Statements; Note 2 - Inventory.")  Research and development
expenses as a percentage of revenues were 11.9% and 8.9% for the first
quarter of fiscal years 1999 and 1998, respectively.  The increase in R&D
expenses as a percentage of revenues for the first quarter of fiscal 1999
is primarily due to an increase in research and development activity
during the first quarter of fiscal 1999 compared to the same period of
fiscal 1998.
 
GENERAL AND ADMINISTRATIVE:  General and administrative expenses include
administrative salaries, cost 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
$3,401,000 or 14.9% or revenues for the first quarter of fiscal 1999
compared to approximately $3,661,000 or 15.0% of revenues for the same
period of fiscal 1998.  General and administrative expenses expressed as a
percent of revenues were down during the first quarter of fiscal 1999
versus the same period of fiscal 1998 primarily due to the inventoried
rate variance resulting from the application of the targeted indirect
rates.  (See "Notes to Financial Statement; Note 2 - Inventory".)
 
INTEREST INCOME/(EXPENSE), NET:  For the first quarter ended January 29,
1999, net interest income was approximately $202,000, up from $147,000 net
interest income for the same period of fiscal 1998.  The increase in net
interest income for the first quarter of fiscal 1999 is due primarily to
the Company's improved cash position at the beginning of fiscal 1999 and
allowing the Company to place more of funds in interest bearing accounts.
 
PROVISION FOR INCOME TAXES:  The provision for income taxes as a
percentage of income before income taxes was 38% for the first quarter of
fiscal 1999, compared to 39% for the same period of fiscal 1998. The
decrease in the quarterly tax rate is primarily a result of the decreased
in estimated federal and state tax credits.
 
 
ANALYSIS OF LIQUIDITY AND CAPITAL RESOURCES:
 
The Company's primary source of liquidity during the first quarter of
fiscal 1999 and fiscal 1998 has been the cash flow generated from
operations as well as the issuance of common stock through its employee
stock plans.
 
The Company has a $3,000,000 unsecured, revolving line of credit for
short-term cash requirements bearing interest at the bank's reference rate
(7.75% as of January 29, 1999).  Outstanding amounts on the line of credit
were zero at January 29, 1999 and October 31, 1998.  The line expires on
March 15, 1999; the Company intends to renew the line at that time.
 
NET CASH FROM OPERATING ACTIVITIES:  Net cash from operating activities
has varied significantly from quarter to quarter.  These quarter-to-
quarter variances are primarily the result of changes in net income,
changes in the rate of investment in accounts receivable and the change in
inventories held by the Company.  During the first three months of fiscal
1999, approximately $308,000 was provided by operating activities versus
approximately $3,977,000 provided during the comparable period of fiscal
1998.  The year-to-year decline in net income is primarily due to lower
operating income as a result of higher operating expenses as a percentage
of sales.  During the first quarter of fiscal 1999, cash provided by
accounts receivable was approximately $774,000 as compared to
approximately $4,080,000 provided by accounts receivable during the same
period of fiscal 1998.  The cash generated by accounts receivable in the
first quarter of fiscal 1998 was primarily due to greater collections
received from a one-time billing modification allowed by the United States
Government in the fourth quarter of fiscal 1997.  During the first quarter
of fiscal 1999, the Company increased its rate of investment in
inventories, prepaid expenses and other assets by approximately $2,647,000
in anticipation of future contract awards; this compares to an increase of
approximately $2,958,000 during the same period for fiscal 1998.  Cash
used in accounts payable and other accrued liabilities during the first
quarter of fiscal 1999 was approximately $286,000, slightly down from the
cash used of approximately $347,000 during the comparable period of fiscal
1998.
 
NET CASH FROM INVESTING ACTIVITIES:  Cash used in financing activities
during the first three months of fiscal 1999 was approximately $756,000
compared to approximately $6,004,000 used in investing activities during
the same period of fiscal 1998.  The purchase of $5,000,000 worth of U.S.
Treasury securities in the first quarter of fiscal 1998 is the primary
reason for the decrease when comparing investing activities for the first
quarter of fiscal 1999.  Additions to property and equipment were
approximately $1,756,000 and $404,000 in the first three months of fiscal
1999 and 1998, respectively.
 
NET CASH FROM FINANCING ACTIVITIES:  Cash used in financing activities
during the first three months of fiscal 1999 was approximately $1,570,000
versus approximately $1,330,000 being provided by financing activities
during the same period of fiscal 1998.  The use of cash for financing
activities during the first quarter of fiscal 1999 is primarily
attributable to the increased level of activity under the Company's common
stock repurchase plan.
 
In November 1998, the Company approved a discretionary program to
repurchase up to 250,000 shares of the Company's common stock to offset
potential dilutive effect to earnings per share from the issuances of
stock options.  At the end of the first quarter of fiscal 1999, the
repurchase program had been completed at a total cost of approximately
$2,744,000.
 
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.
 
 
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 regulations governing security and
contracting practices. Failure to comply with these regulations could
disqualify the Company as a supplier of these agencies, which would have a
material adverse effect on the Company's future results of operations and
financial condition.
 
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 three months of fiscal 1999
compared to 19% attributable to the same contract in the first three
months of fiscal 1998.  This contract may be terminated at the convenience
of the United States Government.  If this contract or other large
contracts of the Company were terminated, this could have a material
adverse effect on the Company's future results of operations and financial
condition.
 
Competition: The telecommunication signal processing 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 future 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 new talent in an increasingly
competitive market for qualified personnel. Management believes this is,
in part, attributable to the expanding U.S. economy and, in particular, to
the local California economy where the Company competes 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 recently, 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 future operating results and financial
condition.
 
In addition, almost all of the Company's contracts contain termination
clauses which permit contract termination upon the Company's default or
for the convenience of the other contracting party. In either case,
termination could adversely affect the Company's operating results.
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 future operating results and financial condition.
 
 
Year 2000(Y2K) Risks:
 
The Company has been implementing a program over the last 18 months to
define and minimize risks related to transitioning into the Year 2000 and
beyond.  The program and associated risk assessment is segregated into the
following three main areas: 1)Product Readiness Program, 2)Internal
Infrastructure Readiness Program and 3)Business Partners Readiness
Program.  For each readiness area, the Company is systematically
performing risk assessment and conducting tests and remediation as well as
developing contingency plans to mitigate risk.  Further, the Company is
communicating with its employees, suppliers and customers regarding the
Year 2000 issue in an effort to raise awareness and further mitigate risk
by requesting compliance letters from its key business partners.  The
specific status of each area is as follows:
 
Product Readiness Program
 
Prior to January 1, 1997 (the "Certification Date"), the Company had no
contractual obligation to provide Y2K compliant products/systems.  As is
the nature with most government contractors, the Company either developed
or delivered a product to customer-defined acceptance criteria.  As the
government became more concerned regarding the impact of Y2K on their
systems, they began requiring contractors, as part of the contractual
terms and conditions, to certify all deliveries are Y2K compliant.  The
risk assessment for products and systems delivered prior to and after the
Certification Date is as follows:
 
Products and Systems Delivered Prior to the Certification Date:
 
The Company will bring all products delivered under contracts entered into
prior to the Certification Date into compliance upon the customer's
request.  The Company has performed a risk assessment for the United
States Government so they have an understanding of what previously
delivered products have Y2K exposure.  Since the Company's products and
systems met the original contract acceptance criteria, it is generally
expected that the customers would pay for the necessary upgrades.
the necessary upgrades.
 
Products and Systems Delivered After to the Certification Date:
 
Company personnel have worked with customers to develop a comprehensive
test plan and are now certifying that Company products meet a mutually
agreed upon set of testing criteria for Y2K compliance.
 
 
Internal Infrastructure Readiness Program
 
The Company has embarked on a comprehensive inventory, evaluation,
remediation and/or replacement of all internal applications and hardware
used to run its business.  The Company expects a fully compliant internal
infrastructure by September 1999.  The compliance matrix the Company is
using includes all network switches, hubs, routers, servers, critical
business systems software and hardware, engineering support applications
and tools, desktop systems, and telephone/voicemail systems.
support applications and tools, desktop systems, and
telephone/voicemail systems.
 
 
Business Partners Readiness Program
 
The Company is working with its suppliers and service providers to
minimize risk and provide uninterrupted service including unimpeded flow
of materials to programs.  Specific status is as follows:
 
        Suppliers (Hardware and Software for Programs):
 
The Company has investigated all purchased items which may have an impact
on its products resulting from the suppliers' hardware/software not being
Y2K compliant.  The risk in this area has been reduced to two areas: 1)
key software providers and 2) providers of the single board computers.
and 2) providers of the single board computers.
 
1) Key software providers include Sun Microsystems and
Wind River Systems.  Wind River has provided a
certification of their Y2K compliance.  Sun
Microsystems is implementing a Y2K compliance
program.
 
2) The manufacturers of the Company's single board
computers used in certain products include Force,
Ariel, Actel and Motorola.  All of these
manufacturers have provided certification of Y2K
compliance.
 
        Suppliers (Operational Controls):
 
The Company's goal is to insure the unimpeded flow of materials to its
programs.  A review of all other components than those described above
indicates that there are multiple sources available from which the Company
could procure the items in the event one of the Company's suppliers has an
internal control problem related to Y2K.
 
Other Business Partners:
 
The Company has been in contact with its other critical business partners
(such as its 401K plan carrier and insurance provider) to insure there
will be uninterrupted availability of services.  All critical business
partners have provided compliance letters to the Company.
 
Summary
 
The Company expects to implement successfully the systems and programming
changes necessary to insure continued operations as a normal part of the
Company's activities (upgrades, maintenance, normal communications, etc.).
Additionally, since the programs described in this section are ongoing,
all potential Year 2000 issues may have not been identified.  Therefore,
the potential impact of these issues on the Company's financial condition
are not determinable at this time.
 
Costs related to the Year 2000 compliance program are either borne by
certain contracts which are paid directly by the customer or
administrative costs which are reimbursed indirectly through the Company's
billing rates.  While the Year 2000 administrative costs incurred to date
have not been material, the Company anticipates incurring additional costs
as the phases are completed.  The Company expects to incur total costs of
less than $150,000 for investigating and remedying issues directly related
to Year 2000 compliance.  The Company has not included Year 2000 costs
activities which are accomplished as part of normal system upgrades and/or
improvements since other factors are driving these requirements.
 
The Company 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 has not developed extensive formal contingency plans as backup
to those discussed above.  The Company expects the plans discussed above
to be successful and not limit the ability of the Company to develop and
sell its products and services.
 
 
 
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 its Board of Directors, the Company initiated its own
review of the contract in conjunction with its legal counsel.
 
     Further review of the contracts in question and related contracts
through April 1995 indicated 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 operating results
in anticipation of a settlement with the government on the subject
contracts.  The charge resulted in a reduction for the fiscal 1995
operating income by $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
date of the subpoena related to three products:  the Model 102P Voice
Channel Demodulator, the Model 120 Multichannel Processor, and the Model
150 FAX Scanner.
 
     In February 1998, the company was contacted by one of its primary
customers to negotiate an administrative settlement regarding voluntary
disclosure discussed above.  The Company has provided the necessary
information to the Government.
 
     While management believes the fiscal year 1995 charge is adequate to
cover all potential liabilities associated with this investigation by the
United States Government, the United States 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 three
months ended January 29, 1999.
 
 
 
                                  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/                                  March 15, 1999
------------------------------                     ---------------------------
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
 ------     -----------------------
27.1        Financial Data Schedule