Sunnyvale, CA. May 24, 2005 – Applied Signal Technology, Inc. (NASDAQ - APSG) announced it has entered into a definitive agreement to acquire Dynamics Technology, Inc. (“DTI”), a privately-held company headquartered in Torrance, California with offices in Anaheim, California and Arlington, Virginia. DTI is a world-class provider of advanced sensor and signal processing products for advanced space-based, airborne, terrestrial and undersea sensor technologies. The combined company will be a provider of signal processing products and services in support of intelligence, surveillance and reconnaissance for global security.

Applied Signal Technology also announced its operating results for the second quarter of fiscal year 2005 ended April 29, 2005.

Acquisition Plans
Applied Signal Technology has entered into a definitive agreement to acquire DTI for $30 million in cash subject to adjustment based upon DTI’s closing balance sheet, plus all cash received by DTI prior to the closing from the exercise of options to acquire DTI common stock. Applied Signal Technology will fund the purchase price from its current investments and from a $10 million term loan from Wells Fargo Bank. The acquisition is expected to close on or about July 1, 2005 subject to DTI shareholder approval.

Regarding the acquisition, Mr. Gary Yancey, President and Chief Executive Officer of Applied Signal Technology, commented, “The acquisition of Dynamics Technology is a first for our company. It fits in with our strategic plan as we believe that diversification into other areas of defense electronics will provide better stability for our company and opportunity for more growth. DTI has a rich technology development pipeline and this acquisition will expand our support of Department of Defense and intelligence community missions, while providing entry to emerging homeland defense missions with practical technology and advanced systems solutions.”

“Of course, we started this diversification at the beginning of fiscal year 2005 when we formed the Electronic Systems Division in Allen, Texas to pursue opportunities in Electronics Intelligence or ELINT. We are pleased with the progress we are making with our investments in this ELINT marketplace.”

“In our strategic plan, we have set an aggressive goal to enter into new defense electronics business areas that may become a key aspect of our future revenues. Our goal has been to find a business that has opportunities in a marketplace to which our core competencies could enhance growth.”

“We believe that, with this acquisition, we are on our way to meeting these strategic goals. DTI brings very good technical solutions to certain intelligence requirements and with our ability to bring state-of-the-art technological signal processing solutions to practical solutions, we believe that DTI’s solutions can become fielded solutions.”

Mr. Yancey concluded with, “There are no redundancies in staff, facilities, or capital and no restructuring will be required. Both companies are in a growth mode that is anticipated to continue and therefore we anticipate continued growth for the new APSG.”

Mr. William Van Vleet, President and Chief Executive Officer of Dynamics Technology, who plans on joining Applied Signal Technology as the Executive Vice-President of the Sensor Signal Processing Group said he sees this acquisition as fulfilling what had been planned in the company’s evolution. “We believe this acquisition increases the value to our customers by ensuring sustained access to key technology innovation and enhancing our ability to deliver integrated hardware and software products. APSG has the mature engineering design, development, production and support services to successfully transition our advanced technologies to the user community.”

Operating Results
Revenues for the second quarter of fiscal year 2005 were $32,053,000 compared with revenues of $36,811,000 for the second quarter of fiscal year 2004. Revenues for the first six months of fiscal year 2005 were $62,163,000 compared to revenues of $65,105,000 for the first six months of fiscal year 2004. The decrease in revenues for the second quarter and the first six months of fiscal year 2005 when compared to the same period of fiscal year 2004 is due, in part, to less product sales and in part, to a reduction in revenues from our largest contract primarily as a result of the stop work notice we received on a portion of the contract during fiscal year 2004.

Operating income for the second quarter of fiscal year 2005 was $3,727,000 compared with operating income of $4,712,000 for the second quarter of fiscal year 2004. The operating income for the first six months of fiscal year 2005 was $6,999,000 compared with operating income of $7,888,000 for the first six months of fiscal year 2004. The decrease in operating income during the second quarter and the first six months of fiscal year 2005 when compared with the same periods in fiscal year 2004 is due, in part, to a decrease in revenues and in part, to greater program profitability generated from the completion of certain production programs during the second quarter of fiscal year 2004.

Net income for the second quarter of fiscal year 2005 was $2,327,000 or $0.20 per diluted share compared to net income for the second quarter of fiscal year 2004 of $3,937,000 or $0.34 per diluted share. Net income for the first six months of fiscal year 2005 was $4,354,000 or $0.37 per diluted share compared to net income of $6,093,000 or $0.53 per diluted share for the first six months of fiscal year 2004. The decline in net income during the second quarter and the first six months of fiscal 2005 when compared to the same periods of fiscal 2004 is primarily due to a significantly higher tax rate in fiscal year 2005. During the second quarter of fiscal year 2004, we determined that the valuation allowance against our deferred tax assets was no longer required. 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%. Our effective tax rate for the second quarter of fiscal year 2005 is 41%.

New orders received during the second quarter of fiscal year 2005 were $21,284,000 compared to new orders received during the second quarter of fiscal year 2004 of $28,636,000. Order levels for the first six months of fiscal year 2005 were $32,410,000 compared to order levels of $93,185,000 for the same period of fiscal year 2004. The level of new orders for the first six months of fiscal year 2004 were significantly higher than the same period in fiscal year 2005 as a result of a major modification resulting in an increase to our largest contract of approximately $48,524,000 received during the first quarter of fiscal year 2004.

Regarding the operating results, Mr. Yancey commented, “The stop work on our largest contract that we announced previously did contribute to the decrease in revenue for the second quarter of fiscal year 2005 compared to the same period for fiscal year 2004. We do feel that this effect will be offset by the recently announced award of a new development program. As was announced, this initial $5 million award was a letter contract to start the development effort and we expect to negotiate the final terms of the contract, which was proposed at $35 million, in the near future. We are still observing a strong demand from our U.S. Government customers for intelligence capabilities. We continue to have strong proposal activities and a large portion of these proposals are for sole source opportunities. We are in an aggressive hiring mode because a majority of our backlog is engineering development work which is manpower intensive. We have been successful in being able to attract technical talent at all of our locations.”

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

The Company will host a conference call on Tuesday, May 24, 2005 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 24, 2005 at 9:00 a.m. Eastern (6:00 a.m. Pacific). There is no pass code required. This call is being web cast by Vcall and can be accessed at Applied Signal Technology, Inc.’s website at www.appsig.com. Investors can also access the web cast 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 our ability to complete the acquisition of DTI and achieve expected benefits of the acquisition, including the expansion of products and services offered by the combined company; the ability to cause DTI solutions to become fielded solutions; benefits that may be obtained from a strategy of diversification of our core business and generate expected revenues from new defense electronics business areas; continued progress in the ELINT market; the completion of negotiations on recently announced new development programs and the funding of such program at expected levels; continued strong demand from our U.S. Government customers and the future spending by the U.S. Government on intelligence gathering; and the Company’s ability to hire qualified personnel and such personnel’s ability to obtain security clearances. The risks and uncertainties associated with these statements include the risks that the acquisition will close; and if completed, will be successful and achieve the expected benefits; the success of our strategic plan, including our plans to diversify; whether our ELINT business will generate revenues and become successful in its market; 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; the possibility that product sales could be declining; whether the Company will be able to hire additional qualified staff as needed; the ability to successfully enter new marketplaces; 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, 2004. The Company assumes no obligation to update the information provided in this news release.