Applied Signal Technology, Inc.
Announces Third Quarter Results

Sunnyvale, CA. August 22, 2001 — Applied Signal Technology, Inc. (NASDAQ - APSG) announced its operating results for the third quarter of fiscal 2001 ended August 3, 2001.

Revenues for the third quarter of fiscal year 2001 were $15,396,000 representing a 39% decrease compared with revenues of $25,173,000 recorded during the third quarter of fiscal year 2000.The net loss for the third quarter of fiscal year 2001 was $6,764,000 or $0.71 per share compared to a net loss of $549,000 or $0.06 per share for the same period of fiscal year 2000.

Revenues for the first nine months of fiscal year 2001 were $54,683,000 down 31% from revenues of $78,988,000 recorded during the first nine months of fiscal year 2000. The net loss for the first nine months of fiscal year 2001 was $12,711,000 or $1.36 per share compared to net income of $3,870,000 or $0.43 per share for the same period of fiscal year 2000.

The decline in revenues for the third quarter and the first nine months of fiscal 2001 is due to a lower order flow during fiscal year 2000 and year-to-date 2001 when compared to the same periods in fiscal 1999. This created a lower average backlog during the first nine months of fiscal 2001 compared to the same period in fiscal 2000 from which to generate revenues.

The net loss for the third quarter of fiscal 2001 is primarily due to absorbing approximately $6 million of anticipated unrecoverable indirect costs resulting from slower than anticipated revenue generation. The year-to-date net loss is primarily attributable to absorbing these anticipated unrecoverable indirect costs during the third quarter and to subsidiary losses of approximately $6.5 million.

From the middle of April 2001 through the third quarter of fiscal year 2001, the Company recognized restructuring costs of approximately $2,320,000. These restructuring costs are primarily attributable to severance pay of approximately $1,215,000 and to expensing leasehold improvements of approximately $1,105,000. The leasehold improvements related to two facilities were expensed in the current period because the Company has returned one of its Sunnyvale buildings to the landlord and will return a second Sunnyvale building by October 1, 2001.

New orders received during third quarter of fiscal year 2001 were $9,522,000, down 50% from the $19,033,000 of orders received during the third quarter of fiscal year 2000. Order levels for the first nine months of fiscal year 2001 were $50,953,000, down 4% compared to the $53,010,000 reported for the same period of fiscal year 2000. Included in the third quarter and year-to-date order levels was the de-obligation of approximately $5.2 million of orders on two major contracts. The decrease in new engineering orders during the third quarter is due, in part, to this de-obligation and, in part, to what the Company believes to be continued delays in the awarding of certain engineering efforts. The decrease in product orders is due to a decline in the demand for the Company’s standard products.

Regarding the operating results, Mr. Gary Yancey, President and Chief Executive Officer of the Company commented, “The severity of our third quarter and therefore fiscal year losses could have been reduced if we had started the reductions in operating costs at the beginning of the fiscal year. All indicators to management at the beginning of the year were that order flow would increase significantly in the March-to-April time frame and we would need substantially all the infrastructure we had at the beginning of the year. Therefore, our decision was to incur some of these costs in the first half of fiscal 2001 in order to be positioned to meet the requirements of these anticipated new orders.

As has been stated in previous press releases, these anticipated orders continued to slip and on two significant programs we received contract closure notifications. As these phenomena started occurring, we realized that we would need to down size our infrastructure. As we have also said in previous press releases, the downsizing consists of eliminating some real property, turning back some leased buildings, reducing capital spending, reducing research and development spending and reducing staff.”

Mr. Yancey went on to say, “We feel the reductions are adequate to support our return to profitable operations next fiscal year and we are anticipating growth into the foreseeable future. Much of this anticipated growth will be supported by our expansion into the tactical signal reconnaissance marketplace.”

Applied Signal Technology, Inc., designs, develops, manufactures and markets advanced digital signal processing equipment to collect and process a wide range of telecommunications signals for signal reconnaissance applications. For additional Company-related information, visit the Company’s website at www.appsig.com.