Sunnyvale, CA. May 25, 2004 - Applied Signal Technology, Inc. (NASDAQ - APSG) announced its operating results for the second quarter of fiscal year 2004 ended April 30, 2004.

Revenues for the second quarter of fiscal year 2004 were $36,811,000 representing a 67% increase compared with revenues of $22,081,000 recorded during the second quarter of fiscal year 2003. Revenues for the first six months of fiscal year 2004 were $65,105,000 up 62% from revenues of $40,259,000 recorded during the first six months of fiscal year 2003. It is our belief that the increase in revenues recorded during the second quarter and the first six months of fiscal year 2004, when compared to the same periods of fiscal year 2003, is due to an emphasis by the U.S. Government on intelligence to support the war against terrorism.

Operating income for the second quarter of fiscal year 2004 was $4,712,000 representing an 87% increase when compared with operating income of $2,520,000 recorded during the second quarter of fiscal year 2003. The operating income for the first six months of fiscal year 2004 was $7,888,000 representing a 75% increase when compared with operating income of $4,520,000 recorded during the first six months of fiscal year 2003. The increase in operating income is due, in part, to a growth in revenues and, in part, to an increase in program profitability at the completion of certain production programs.

Net income for the second quarter of fiscal year 2004 was $3,937,000 or $0.34 per diluted share, an increase of 77% when compared to the second quarter of fiscal year 2003 net income of $2,227,000 or $0.21 per diluted share. Net income for the first six months of fiscal year 2004 was $6,093,000 or $0.53 per diluted share, an increase of 52% when compared to net income of $4,012,000 or $0.38 per diluted share for the first six months of fiscal year 2003. Net income did not grow proportionately with operating income during the first six months of fiscal year 2004 when compared to the same period of fiscal year 2003 because our tax rate increased significantly.

During the second quarter of fiscal year 2004, we determined that the valuation allowance against our deferred tax assets was no longer required. We made this determination in accordance with the measurement criteria outlined in FAS 109, Accounting for Income Taxes. This resulted in a credit to our tax provision that lowered our tax rate for the second quarter of fiscal year 2004 to 18.8%. We estimate that our tax rate for each of the two remaining quarters of fiscal year 2004 could be 35% or greater, resulting in an annual tax rate in the range of 30% to 35%.

New orders received during the second quarter of fiscal year 2004 were $28,636,000, up 47% compared to new orders received during the second quarter of fiscal year 2003 of $19,479,000. Order levels for the first six months of fiscal year 2004 were $93,185,000, up 196% when compared to the $31,523,000 reported for the same period of fiscal year 2003. We believe the increase in new orders during the second quarter of fiscal year 2004, when compared to the second quarter of fiscal year 2003, is also due to the U.S. Government's emphasis on intelligence. The significant increase in new orders for the first six months of fiscal year 2004 when compared to the same period of fiscal year 2003 is primarily due to a major modification of our largest single contract.

Regarding the second quarter operating results, Mr. Gary Yancey, President and Chief Executive Officer of the Company, commented, “I am very pleased that we have been able to satisfy our increased commitments created by the large increase in order flow. The greatest challenge has been to meet the hiring requirements. We are finding an adequate number of technically qualified people that we believe will obtain, or in some cases currently hold, security clearances, and have been able to structure our programs to enable new employees to work on tasks not requiring security clearance. This has allowed us to keep up with the challenge offered by this rapid growth.”

Mr. Yancey went on to say, “I believe the U.S. Government will continue to emphasize the importance of intelligence and therefore, they will continue to invest in this area. We are a recognized major asset to the intelligence community and as such, I believe we will continue to face the challenges offered by rapid growth.”

Attached to this news release are unaudited condensed statements of operations and balance sheets.

The Company will host a conference call on Tuesday, May 25, 2004 to discuss second quarter results. If you wish to participate in the conference call, please dial 1-877-407-8035 for domestic callers or 1-201-689-8035 for international callers on May 25, 2004 at 5:00 p.m. EST/2:00 p.m. PST. There is no pass code required. This call may be listened to over PrecisionIR’s Investor Distribution Network, located at www.vcall.com. A rebroadcast of the call will be available upon its completion and will remain available for a limited time.

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.

Except for historical information contained herein, matters discussed in this news release may contain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially. Forward-looking statements discussed in this release include statements as to the Company's continued growth throughout the year and into the foreseeable future; the future spending by the U.S. Government on intelligence gathering; the Company's ability to hire qualified personnel and such personnel's ability to obtain security clearances; the Company's plans for the future, including the steps it may take and the programs it will emphasize; the Company's beliefs concerning marketplace opportunities for its products and services; and beliefs concerning contractual opportunities for orders. The risks and uncertainties associated with these statements include whether orders will be issued by procurers, including the U. S. Government; the timing of any orders placed by procurers; whether the Company will be successful in obtaining contracts for these orders if they are forthcoming; whether any contracts obtained by the Company will be profitable and whether any such contracts might be terminated prior to completion; whether the Company will be able to hire additional qualified staff as needed; the ability to successfully enter new marketplaces; the Company's ability to maintain profitability; and other risks detailed from time to time in the Company's SEC reports including its latest Form 10-K filed for the fiscal year ended October 31, 2003. The Company assumes no obligation to update the information provided in this news release.

APPLIED SIGNAL TECHNOLOGY 
CONDENSED CONSOLIDATED BALANCE SHEETS 
(in thousands)

ASSETS

                                                           April 30,    October 31, 
                                                              2004          2003
                                                           -----------   -----------

                                                           (unaudited)

     Current assets: 
       Cash and cash equivalents                          $  26,881      $  5,372
       Short term investments                                21,139        34,747
       Accounts receivable                                   30,807        26,562
       Inventory                                              5,869         6,875
       Prepaids and other current assets                      3,606         3,545
                                                           --------      --------
         Total current assets                                88,302        77,101


     Property and equipment, at cost                         60,895        59,138
     Accumulated depreciation and amortization              (48,961)      (46,897)
                                                           --------      --------
     Net property and equipment                              11,934        12,241 


     Other assets                                             1,950           605 

                                                           --------      --------
     Total assets                                          $102,186     $  89,947



                         LIABILITIES AND SHAREHOLDERS' EQUITY 


     Current liabilities: 
       Accounts payable, accrued payroll and benefits      $ 13,566     $  10,579
       Other accrued liabilities                              3,440         2,833
       Income taxes payable                                   2,715           134
                                                           --------       ------- 
         Total current liabilities                           19,721        13,546 

       Other liabilities                                        275           183 

     Shareholders' equity                                    82,190        76,218
                                                           --------       -------
     Total liabilities and shareholders' equity            $102,186     $  89,947
                                                           ========      ========

              

                             APPLIED SIGNAL TECHNOLOGY, INC.
                    CONDENSED CONSOLIDATED STATEMENTS OF INCOME

                  FOR THE PERIOD ENDING APRIL 30, 2004 and MAY 2, 2003

                                     (Unaudited)
                        (In thousands except per share data) 

               

               

                                        Three Months Ended         Six Months Ended
                                       April 30,     May 2,      April 30,    May 2,
                                         2004         2003         2004       2003
                                      -----------  ----------   -----------  ----------

Revenues from contracts              $  36,811    $  22,081    $  65,105     $ 40,249
Operating expenses: 
  Contract costs                        24,146       13,856       42,446       25,412 
  Research and development               3,419        1,900        5,556        3,601
  General and administrative             4,534        3,805        9,215        6,726 
                                      --------     --------     --------     --------
    Total operating expenses            32,099       19,561       57,217       35,739
                                      --------     --------     --------     --------

Operating income                         4,712        2,520        7,888        4,520
Interest income (expense), net             137          100          278          200
                                      --------     --------     --------     --------
Income before provision
 for income taxes                        4,849        2,620        8,166        4,720
Provision for income taxes                 912          393        2,073          708
                                      --------     --------     --------     --------
Net income                             $ 3,937    $   2,227    $   6,093    $   4,012
                                      ========     ========     ========     ========

Net income per share - basic             $0.36        $0.22        $0.56        $0.39
Average shares - basic                  10,990       10,062       10,922       10,262

Net Income per share - diluted           $0.34        $0.21        $0.53        $0.38
Average shares - diluted                11,565       10,400       11,500       10,527