APPLIED SIGNAL TECHNOLOGY, INC.

Notes to Financial Statements
(unaudited)

January 27, 1995

NOTE 1 -- BASIS OF PRESENTATION

The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and 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 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 27, 1995 are not necessarily indicative of the results that may be expected for the year ending October 31, 1995. For further information, refer to the consolidated financial statements and footnotes thereto included in the Registrant Company's annual report on Form 10-K for the year ended October 31, 1994.

NOTE 2 -- INVENTORY

The components of inventories consist of the following (in thousands):

                                   January 27, 1995     October 31, 1994

          Raw Materials               $   655               $   253

          Work in Process               3,174                 2,174

          Finished Goods                  974                   231
                                      _______               _______

                                        4,803                 2,658

          Precontract Costs               602                    56
                                      _______               _______

                                      $ 5,405               $ 2,714
Under the Company's accounting practice, the Company records contract revenues and costs for interim reporting purposes based on annual targeted indirect (overhead and general and administrative) 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 income statement as they become known. At January 27, 1995, the inventoried variance was approximately $1,671,000 ($125,000 at January 28, 1994) and was included in work in process. At October 31, 1994 and 1993, the variance was zero since all revenues and costs were recorded at the actual indirect rates for each fiscal year end.

NOTE 3 -- EARNINGS PER SHARE

Net income per share is computed using the weighted average number of shares of common stock outstanding, common equivalent shares from convertible preferred stock (using the if-converted method) and common equivalent shares from stock options (using the treasury stock method). Common equivalent shares from warrants are excluded from the computation as their effect is antidilutive. Warrants outstanding at January 27, 1995 were for 318,476 shares at an effective exercise price of $7.23. All warrants expire on March 26, 1995.