Applied Signal Technology, Inc. Announces Fiscal 2006 Operating Results

Applied Signal Technology, Inc. Announces Fiscal 2006 Operating Results,
Record Fiscal Year Revenues, and Continuation of Dividends

Sunnyvale, CA. December 18, 2006 - Applied Signal Technology, Inc. (NASDAQ - APSG) announced its operating results for the fourth quarter of fiscal year 2006 and the fiscal year ended October 31, 2006. The Company announced that it generated a record $161.9 million in revenues during fiscal 2006. In addition, the Company announced the continuation during fiscal 2007 of the annual dividend payments to shareholders of $0.50 per share.

Results of Operations

Revenues for the fourth quarter of fiscal year 2006 were $45,385,000 compared with revenues of $57,615,000 recorded during the fourth quarter of fiscal year 2005. At October 31, 2006 there was approximately $5,667,000 of pre-contract costs on the balance sheet that the Company anticipates will convert to revenues in future periods. At least $3.9 million of these pre-contract costs will be recognized as revenue during the first quarter of fiscal year 2007. Revenues for fiscal year 2006 were $161,913,000 compared with revenues of $156,061,000 recorded during fiscal year 2005.

Operating income for the fourth quarter and fiscal year 2006 was $1,829,000 and $8,872,000, respectively, compared with operating income of $5,080,000 and $14,831,000 for the fourth quarter and fiscal year 2005, respectively. Operating income was reduced by approximately $1.3 million during the fourth quarter due to previously unanticipated increases in our billing rates. Net income for the fourth quarter and fiscal year 2006 was $568,000 or $0.05 per diluted share and $4,327,000 or $0.36 per diluted share, respectively, compared with net income for the fourth quarter and fiscal year 2005 of $3,106,000 or $0.26 per diluted share and $9,244,000 or $0.79 per diluted share, respectively. Both operating and net income decreased due to stock-based compensation expense incurred as a result of our adoption of Statement of Financial Accounting Standard (SFAS) No. 123R, “Share-Based Payment”. The stock based compensation expense for the fourth quarter and fiscal year 2006 was approximately $1.1 million and $4.3 million, respectively. Our effective tax rate for fiscal year 2006 is estimated to be 52.9% compared to our fiscal year 2005 effective tax rate of 40.3%. Our estimated effective tax rate increased as a result of non-deductible stock-based compensation charges incurred due to the adoption of SFAS 123R.

New orders received during the fourth quarter of fiscal year 2006 were $37,039,000 compared to new orders of $72,581,000 received during the fourth quarter of fiscal year 2005. Orders for fiscal year 2006 were $124,481,000 compared to $127,663,000 reported for fiscal year 2005.

The Company announced the continuation of its current dividend. The Company will pay an annual dividend of $0.50 per share, payable quarterly at a rate of $0.125 per share, to shareholders over the next twelve months. The quarterly dividends will be payable on February 16, 2007, May 18, 2007, August 17, 2007 and November 16, 2007 to shareholders of record at February 2, 2007, May 4, 2007, August 3, 2007 and October 31, 2007, respectively.

Management Commentary

Mr. Gary Yancey, President and Chief Executive Officer of Applied Signal Technology, Inc., commented, “We anticipated a book-to-bill ratio for fiscal 2006 close to 1.0. This was predicated upon the completion of negotiations of an indefinite delivery/indefinite quantity (IDIQ) type contract with one of our government agency customers and the anticipated subsequent delivery orders. This IDIQ contract did not get awarded until the first quarter of fiscal 2007. It is a three-year contract with a $45 million delivery order limit. We expect subsequent delivery orders on this contract.”

“The fiscal 2006 book-to-bill ratio of approximately 0.77 is not uncommon compared to our historical results and does not concern us with respect to our growth prospects. These delays in orders are not uncommon in government contracting.”

Mr. Yancey concluded his remarks, “I believe the Global War on Terror is placing new requirements on intelligence, surveillance and reconnaissance and that drives our marketplace. I also believe the military will be a major provider of intelligence, surveillance and reconnaissance. We are expanding our role as a supplier to the military and that is expanding our marketplace.”

Attached to this news release are condensed statements of operations and balance sheets for the fourth quarter and fiscal year ended October 31, 2006.

The Company will host a conference call on December 18, 2006 to discuss fourth quarter and fiscal 2006 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 December 18, 2006 at 5:00 p.m. eastern time/2:00 p.m. pacific time. There is no pass code required. This call may be listened to simultaneously over the Internet through World Investor Links’ Vcall Website, 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. provides advanced digital signal processing products, systems and services in support of intelligence, surveillance, and reconnaissance for global security. For further information about Applied Signal Technology visit our 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. Statements as to the Company’s future orders and continued growth and the U.S. Government’s demand for our equipment, the increased military role as a major provider of intelligence, surveillance and reconnaissance, the expansion of our role as a supplier to the military, deliveries under our IDIQ contract, as well as performance on current and future programs are forward-looking statements. 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 we will be successful in obtaining contracts for these orders if they are forthcoming; whether any contracts obtained by us will be performed well and be profitable and whether any such contracts might be terminated prior to completion; whether we will be able to hire qualified staff as needed; and other risks detailed from time to time in our SEC reports including our latest Form 10-K filed for the fiscal year ended October 31, 2005. The Company assumes no obligation to update the information provided in this news release.

Applied Signal Technology, Inc.
Condensed Statements of Income
for the Periods Ending October 31, 2006 and October 31, 2005
(in thousands except per share data)