(Mark One)

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

or

[   ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Transition Period from ____________________to ____________________.

Commission file number 0-21236

Indicate by a check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.

Common Stock, no par value, 10,054,744 shares outstanding as of August 28, 2002.

This Quarterly Report on Form 10-Q consists of 30 pages.

Note: The balance sheet at October 31, 2001 has been derived from the audited financial statement at that date but does not include all of the information required by accounting principles generally accepted in the United States for complete financial statements.

Historically, the Company’s investment securities, which consist primarily of U.S. Treasury Securities, are classified as available-for-sale and are carried at fair market value. Unrealized gains and losses, net of tax, are reported as a separate component of shareholders’ equity. Realized gains and losses on available-for-sale securities are included in interest income (expense), net. The cost of securities sold is based on the specific identification method. Interest on securities classified as available-for-sale, is included in interest income (expense), net. During the first nine months of fiscal year 2002, the Company did not purchase or own any available-for-sale securities or U.S. treasuries.

The majority of the Company’s contracts are accounted for using the guidance of the American Institute of Certified Public Accountants Statement of Opinion 81-1 Accounting for Performance of Construction-Type and Production-Type Contracts. Applied Signal Technology accounts for fixed price contracts using the percentage-of-completion method of accounting. Under this method, contract costs are charged to operations as incurred. A portion of the contract revenue, based on estimated profits and the degree of completion of the contract as measured by a comparison of the actual and estimated costs, is recognized as revenue each period. The Company accounts for cost reimbursement contracts by charging contract costs to operations as incurred and recognizing contract revenues and profits by applying an estimated fee rate to actual costs on an individual contract basis. Management reviews contract performance, costs incurred and estimated completion costs re gularly and adjusts revenues and profits on contracts in the period in which changes become determinable. Anticipated losses on contracts are also recorded in the period in which they become determinable. At interim periods during the fiscal year, contract costs are stated at target indirect rates, and the variances between actual and target spending is inventoried (for further information see "Note 2 — Inventory").

Basic per share data is based on the weighted effect of all common shares issued and outstanding, and is calculated by dividing net income (loss) available to common shareholders by the weighted average shares outstanding during the period. Diluted per share data is calculated by dividing net income available to common shareholders by the weighted average number of common shares used in the basic earnings per share calculation, plus the number of common shares that would be issued assuming conversion of all potentially dilutive securities outstanding using the treasury stock method. When a net loss occurs, diluted per share data is the same as basic.

A reconciliation of shares used in the calculation of basic and diluted per share data follows (in thousands, except per share data):

Approximately 63,000 and 93,000 stock options were excluded from the number of shares used to compute diluted net loss per common share for the three and nine months ended August 3, 2001, respectively, as their effect would be antidilutive.

On May 17, 2001, the Company’s Board of Directors voted to suspend dividend payments made to shareholders. The Company paid no dividends during the first nine months of fiscal year 2002, and $585,000 and $1,733,000 during the third quarter and first nine months of fiscal year 2001, respectively.

The components of comprehensive income activity, net of tax are as follows (in thousands):

As of August 2, 2002 and October 31, 2001, accumulated unrealized gain (loss) on securities was zero.

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

The Company records contract revenues and costs for interim reporting purposes based on annual targeted indirect 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 the Company records reserves for any permanent variances in the statement of operations in the period they become known. At August 2, 2002 the unfavorable inventoried variance was approximately $2,583,000. At August 3, 2001, the favorable inventoried variance was approximately $867,000. This amount was the result of an actual unfavorable variance of approximately $5,133,000 that was reduced by a management reserve of $6,000,000. The 2001 management reserve reflected the Company’s be lief that contract activities through the end of the year would be lower than previous estimates and would not fully absorb the rate variance. At October 31, 2001 and October 31, 2000, the variance was zero since all revenues and costs were recorded at the actual indirect rates for each fiscal year end. Management believes the rate variance at August 2, 2002 will be absorbed by expected contract activities during the remainder of fiscal year 2002.

Precontract costs represent costs incurred in connection with ongoing contracts for which contract modifications have not been definitized and costs incurred in anticipation of specific expected future contract awards.

In August 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations, for a disposal of a segment of a business. SFAS 144 is effective for fiscal years beginning after December 15, 2001, with earlier application encouraged. The Company will adopt SFAS 144 as of November 1, 2002, and is in the process of evaluating what, if any, impact the adoption will have on its results of operations and financial condition.

In July 2002, the FASB approved SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146 addresses the financial accounting and reporting for obligations associated with an exit activity, including restructuring, or with a disposal of long-lived assets. Exit activities include, but are not limited to, eliminating or reducing product lines, terminating employees and contracts and relocating plant facilities or personnel. SFAS 146 specifies that a company will record a liability for a cost associated with an exit or disposal activity only when that liability is incurred and can be measured at fair value. Therefore, commitment to an exit plan or a plan of disposal expresses only management’s intended future actions and, therefore, does not meet the requirement for recognizing a liability and the related expense. SFAS 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002, with earlier adoption encouraged. The Company does not anticipate that the adoption of SFAS 146 will have a material effect on its financial position or results of operations.

The financial information relating to Applied Signal Technology is reviewed and evaluated by the chief operating decision-maker as a whole, and not its individual divisions. During the second quarter of fiscal year 2001, eNetSecure was reintegrated into Applied Signal Technology, which left one additional reporting segment, Transcendent Technologies. Transcendent Technologies was reintegrated during the fourth quarter of fiscal year 2001. The remaining business activities from these former separate segments are minimal, and divisional financial information for Applied Signal Technology is not available or reviewed by the chief operating decision-maker below the gross margin level. Thus, there is only one reportable segment during the first nine months of fiscal year 2002.

Financial data by segment for the nine-month period ended August 3, 2001 was as follows (in thousands):

The provision for income taxes for the first nine months of fiscal year 2002 is comprised of an estimated annual tax rate of 3% and a reduction to income taxes of approximately $823,000, which includes a reclassification during the third quarter of approximately $97,000 to interest expense and deferred tax assets. The Company’s projected annual effective tax rate for fiscal year 2002 is calculated based on the projected income for the year and reflects the benefit of potential deferred tax assets for which a valuation allowance had been recorded at the end of fiscal year 2001. The reduction to income taxes was the result of a tax law change during the second quarter of fiscal year 2002, which allowed the Company to recover a larger tax refund than previously calculated at the end of fiscal year 2001. The Company’s estimated annual effective tax rate for the nine months ended August 3, 2001 was a benefit rate of 28%.

The following information should be read in conjunction with the attached financial statements and notes thereto.

Forward-looking statements in this report are made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934. In this report, the words "anticipates," "believes," "expects," "future," "intends," and similar expressions identify forward-looking statements. Shareholders are cautioned that all forward-looking statements pertaining to the Company involve risks and uncertainties, including, without limitation, those contained under the caption, "Summary of Business Considerations and Certain Factors that May Affect Future Results of Operations and/or Stock Price," and other risks detailed from time to time in the Company’s periodic reports and other information filed with the Securities and Exchange Commission. Actual events and results may differ materially from the Company’s current expectations and beliefs.

Applied Signal Technology, Inc. ("Applied Signal Technology" or "the Company") provides advanced digital signal processing products, systems, and services used in reconnaissance of foreign telecommunications signals. The Company’s primary customers are the United States Government and its foreign allies. The Company develops and manufactures equipment for both the collection and processing of signals. Its signal collection equipment consists of sophisticated receivers that scan through potentially thousands of cellular telephone, microwave, ship-to-shore, and military transmissions in the radio frequency (RF) spectrum with the goal of collecting certain specific signals. The Company’s signal processing equipment uses advanced software and hardware to evaluate characteristics of the collected signals and selects those most likely to contain relevant information. At its inception in 1984, the Company focused its efforts primarily on processing equipment. Over time, the Company has broadened its scope to add specialized collection equipment and complete signal processing systems.

In recent years, accurate and comprehensive information regarding foreign affairs and developments has become increasingly important to the United States Government. The reduction of United States military tactical forces overseas, coupled with political instability in certain regions such as the Middle East, Eastern Europe, Africa, and Central and South America, has heightened the United States Government’s need to be able to monitor overseas activities. In order to obtain information about activities within foreign countries, the United States Government gathers and analyzes telecommunication signals emanating from those countries.

Additionally, the use of established telecommunication technologies has increased throughout the world, and new telecommunication technologies, supplementing rather than replacing prior technologies, have been developed and commercialized. These trends have led to a significant increase in the overall volume of information communicated and an increase in the density of signals transmitted throughout the RF spectrum. This increase can be seen in the proliferation of facsimile, cellular, and digital signal telecommunications equipment and in the global information network (for example, the Internet) in the last decade, resulting in a significant increase in the amount of information being communicated. These trends have required the development of signal intelligence equipment capable of collecting and processing an increased volume of signals as well as new types of signals.

The Company’s signal intelligence products can be used, with or without further modification, to satisfy requirements of a variety of customers. The Company believes its products can be readily deployed in a wide variety of circumstances to meet current United States Government signal intelligence requirements.

As a result of the tragic events of September 11, 2001, the United States Government announced that it would provide increased funding for counter-terrorism. Counter-terrorism is focused on individuals and groups of individuals, and relies heavily on human intelligence (HUMINT) gathering. Signal intelligence (SIGINT) is a key component of HUMINT. Applied Signal Technology believes it is a pre-eminent resource for SIGINT capabilities providing products, systems, and services that offer state-of-the-art SIGINT.

Applied Signal Technology’s objective is to anticipate the needs of the signal intelligence marketplace and to invest in research and development in an effort to provide solutions before the Company’s competitors. In some cases, this involves the development of equipment or services to address new telecommunications technologies. In other cases, it involves the development of equipment that offers smaller size, lower power consumption, and lower cost than potentially competitive products. The Company’s strategy to accomplish its objectives includes the following elements.

Anticipate marketplace needs. The Company devotes significant resources in order to understand future telecommunications processing needs. The Company monitors technological and commercial advances in telecommunications to identify advances it believes will create new opportunities. The Company obtains information about marketplace needs through its frequent contact with technical and contracting officials of pertinent intelligence community government agencies.

Many times, sole-source contracts are granted by the United States Government when a single contractor is deemed to have expertise or technology that is superior to that of competing contractors. Since the Company’s inception, a significant portion of its revenues has been from sole-source contracts. The Company believes that the large number of sole-source contracts it obtains demonstrates that it often correctly anticipates marketplace needs. There can be no assurance, however, that the Company will correctly anticipate the marketplace needs in the future.

Invest in research and development. The Company invests in research and development it believes will enable it to develop equipment and services that will satisfy the signal intelligence needs of the future. The Company believes that it invests a greater percentage of its revenues in R&D than is typical among its competitors. The Company believes its R&D investments often enable it to offer superior products before its competitors.

Develop flexible products. The Company develops products that can be used, with or without further modification, to satisfy the needs of a variety of customers. The Company uses its prior product development efforts to offer customers cost-effective solutions and to offer these solutions promptly. The Company believes that custom equipment developed by many of its competitors generally cannot be as readily deployed in as wide a variety of circumstances as Applied Signal Technology’s products.

Develop highly integrated products. The Company designs its products to use advanced circuitry and highly integrated components. This enables the Company to offer products that are smaller, consume less power, and cost customers less when multiple units are built than equipment of similar functionality that uses fewer advanced designs and materials. The lower cost of many of the Company’s products appeals to customers with budget constraints, and the smaller size and low power consumption of many of the Company’s products appeal to customers with physical installation constraints.

Focus on signal processing. Since inception, the Company has focused much of its attention on developing signal processing equipment and services. The Company believes that there have been and will continue to be opportunities to develop specialized signal processing equipment and services to satisfy emerging technological requirements.

Increase penetration and broaden customer base. The Company believes that its current customers offer opportunities for sales growth, both in terms of additional units of developed products, the development of new products, and the provision of services, and, accordingly, directs much of its marketing efforts toward these customers in order to increase the Company’s penetration of these markets. The Company continues to try to broaden its customer base by increasing marketing efforts toward military signal intelligence and evaluating local law enforcement opportunities.

Revenue and cost recognition. The majority of the Company’s contracts are accounted for using the guidance of the American Institute of Certified Public Accountants Statement of Opinion 81-1 Accounting for Performance of Construction-Type and Production-Type Contracts. Applied Signal Technology accounts for fixed-price contracts using the percentage-of-completion method of accounting. Under this method, contract costs are charged to operations as incurred. A portion of the contract revenue, based on estimated profits and the degree of completion of the contract as measured by a comparison of the actual and estimated costs, is recognized as revenue each period. The Company accounts for cost-reimbursement contracts by charging contract costs to operations as incurred and recognizing contract revenues and profits by applying an estimated fee rate to actual costs on an individual contract basis. Management reviews contract performance, costs incurred and estimated completion c osts regularly and adjusts revenues and profits on contracts in the period in which changes become determinable. Anticipated losses on cost-reimbursement and fixed-priced contracts are also recorded in the period in which they become determinable. Unexpected increases in the cost to develop or manufacture a product, whether due to inaccurate estimates in the bidding process, unanticipated increases in material costs, inefficiencies, or other factors, are borne by the Company, for fixed-priced contracts, and could have a material adverse effect on the Company’s results of operations and financial condition. Unexpected cost increases in cost-reimbursement contracts may be borne by the Company, for goodwill purposes. Historically, the effect on the Company’s operating results and financial condition from cost-reimbursement losses has been minimal.

Indirect rate variance. The Company records contract revenues and costs for interim reporting purposes based on annual targeted indirect 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 the Company records reserves for any permanent variances in the statement of operations in the period they become known. At August 2, 2002 the unfavorable inventoried variance was approximately $2,583,000. At August 3, 2001, the favorable inventoried variance was approximately $867,000. This amount was the result of an actual unfavorable variance of approximately $5,133,000 that was reduced by a management reserve of $6,000,000. The 2001 management reserve reflected the Compan y’s belief that contract activities through the end of the year would be lower than previous estimates and would not fully absorb the rate variance. Management believes the rate variance at August 2, 2002 will be absorbed by expected contract activities during the remainder of fiscal year 2002.

The Company’s accounting policy, which records the rate variance in inventories, is based on management’s belief that such a variance will be absorbed by expected contract activities during the remainder of the year. If contract activities do not reach planned levels, the Company has alternatives it can utilize to absorb the variance. The Company can adjust downward some of its planned indirect spending during the year; it can increase its billing rates to its customers; or it can record charges to expense based on reduced estimates of future contract activities.

By the end of fiscal year 2001, the Company reintegrated its two wholly owned subsidiaries, eNetSecure and Transcendent Technologies, and restructured Applied Signal Technology in order to better align infrastructure costs with anticipated revenues. The Company believes that the restructuring activities resulted in a cost structure that will permit it to be profitable during fiscal year 2002.

Revenues and backlog. Revenues for the third quarter of fiscal year 2002 were approximately $18,207,000 up 18% compared with the third quarter of fiscal year 2001 revenues of approximately $15,396,000. The increase in revenues in the third quarter of fiscal year 2002 when compared to the third quarter of fiscal year 2001 was primarily due to an increase in the Company’s engineering development work related to signal intelligence efforts for the U.S. Government. Revenues for the first nine months of fiscal year 2002 were $53,022,000, a decrease of 3% from revenues of $54,683,000 recorded during the first nine months of fiscal year 2001. The fiscal year 2002 year-to-date revenue decrease is primarily due to approximately $2.5 million of additional revenues, generated during the first quarter of fiscal year 2001, as a result of certain contract modifications.

The Company’s backlog, which consists of anticipated revenues from new contracts and from the uncompleted portions of existing contracts (excluding unexercised options), was approximately $32,546,000 at August 2, 2002, an increase of 6% when compared to approximately $30,631,000 at August 3, 2001. The increase in backlog for the first nine months of fiscal year 2002 is primarily due to an increase in orders during the first nine months of fiscal year 2002, when compared to the same period of fiscal year 2001.

The award and timing of contracts is critical to revenue generation. The Company has and will continue to experience fluctuations in the flow of contract awards primarily because of the conditions inherent in government contracting. The Company has experienced delays in the awarding of certain engineering development contracts during the past two years. Continued delays in the awarding of these potential orders could have an adverse impact on the Company’s ability to generate revenue.

The Company has experienced a trend in favor of revenue generated from its cost-reimbursement contracts over the last three years. Cost-reimbursement contracts typically do not return as high a profit margin as fixed price contracts. Cost-reimbursement contracts accounted for 68% and 59% of the Company’s revenues during fiscal years 2001 and 2000, respectively, and fixed price contracts accounted for 32% and 41%, respectively. For the first nine months of fiscal year 2002, cost-reimbursement contracts accounted for 61% of the Company’s revenues and fixed price contracts accounted for 39%. The Company currently anticipates that the revenue generated during fiscal year 2002 will have a mix of contract types similar to that experienced in fiscal year 2000.

Contract costs. Contract costs consist of direct costs on contract, including materials, labor, and manufacturing overhead costs. Contract costs were approximately $11,769,000 or 64.6% of revenues for the third quarter of fiscal year 2002 compared to approximately $16,234,000 or 105.4% of revenues for the same period of fiscal year 2001. Contract costs were approximately $33,190,000 or 62.6% of revenues for the first nine months of fiscal year 2002 compared to approximately $43,810,000 or 80.1% of revenues for the same period of fiscal year 2001. Contract costs decreased, in aggregate and as a percentage of revenues, for the third quarter and first nine months of fiscal year 2002 compared to the same periods of fiscal year 2001 primarily because of a lower operating cost structure that resulted from the fiscal year 2001 restructuring activities.

Research and development (R&D). Company-directed investment in research and development consists of expenditures recoverable from customers through the Company’s billing rates and expenditures funded by the Company from earnings. It is the Company’s accounting practice to record R&D expenses based on annual targeted indirect rates. (See "Notes to Consolidated Financial Statements; Note 2 — Inventory.") Research and development expenses were approximately $2,247,000 or 12.3% of revenues for the third quarter of fiscal year 2002 compared to approximately $3,426,000 or 22.3% of revenues for the same period of fiscal year 2001. R&D expenses were approximately $6,701,000 or 12.6% of revenues for the first nine months of fiscal year 2002 compared to approximately $12,741,000 or 23.3% of revenues for the same period of fiscal year 2001. The d ecrease in R&D expenses for the third quarter and first nine months of fiscal year 2002 when compared to the third quarter and first nine months of fiscal year 2001 is due, in part, to management’s decision to return research and development spending to the Company’s historical levels (of approximately 12% of projected fiscal year 2002 revenues), and in part, to the absence of research and development spending (in fiscal year 2002) incurred during the first nine months of fiscal year 2001 by the Company’s reintegrated subsidiary corporations.

General and administrative. General and administrative expenses include administrative salaries, costs related to the Company’s marketing and proposal activities, and other administrative costs. It is the Company’s accounting practice to record general and administrative expenses based on annual targeted indirect rates. (See "Notes to Consolidated Financial Statements; Note 2 — Inventory.") General and administrative expenses were approximately $3,857,000 or 21.2% of revenues for the third quarter of fiscal year 2002 compared to approximately $3,618,000 or 23.5% of revenues for the same period of fiscal year 2001. General and administrative expenses were approximately $10,730,000 or 20.2% of revenues for the first nine months of fiscal year 2002 compared to approximately $13,855,000 or 25.3% of revenues for the same period of fiscal year 2001. Gen eral and administrative expenses were lower during the third quarter and first nine months of fiscal year 2002 compared to the same period of fiscal year 2001 due, in part, to a lower operating cost structure and, in part, to the absence of general and administrative expenses (in fiscal year 2002) incurred during the first nine months of fiscal year 2001 by the Company’s reintegrated subsidiary corporations.

Interest income (expense), net. Net interest expense for the third quarter of fiscal year 2002 was approximately $121,000 compared to net interest income of approximately $71,000 for the third quarter of fiscal year 2001. Net interest expense for the first nine months of fiscal year 2002 was approximately $52,000, compared to net interest income of approximately $330,000 for the first nine months of fiscal year 2001. Net interest expense for the third quarter and first nine months of fiscal year 2002 includes approximately $207,000 for interest paid in an earlier period related to federal and state tax liabilities. Normal interest activities resulted in a net interest income of approximately $86,000 and $155,000 for the third quarter and first nine months of fiscal year 2002, respectively.

Net cash provided by (used in) operating activities. Net cash provided by (used in) operating activities has varied significantly from quarter to quarter. These quarter-to-quarter variances are primarily the result of changes in net income, changes in accounts receivable, and the recovery of previously paid income taxes. During the first nine months of fiscal year 2002, approximately $9,440,000 was provided by operating activities compared to approximately $9,627,000 used during the comparable period of fiscal year 2001. Net income for the first nine months of fiscal year 2002 provided cash of approximately $3,102,000 compared to cash used from a net loss of approximately $12,711,000 for the comparable period of fiscal year 2001. The net income for the first nine months of fiscal year 2002 when compared to the net loss incurred during the first nine months of fiscal year 2001 is due, in part, to the lower operating cost structure that resulted from the fiscal year 2001 restructuring activities and, in part, to the absence of losses incurred by the Company’s reintegrated subsidiary corporations. Cash provided by accounts receivable during the first nine months of fiscal year 2002 was approximately $1,468,000 compared to cash provided of approximately $7,782,000 during the comparable period of fiscal year 2001. The decreased cash provided by accounts receivable in fiscal year 2002 was primarily due to the collections in fiscal year 2001 of higher indirect contract rates for fiscal year 2000. Cash provided by refundable income taxes during the first nine months of fiscal year 2002 was $5,053,000. This included tax refunds of $6,181,000, which includes an adjustment of $1,128,000 to tax expenses of which $823,000 was recorded in fiscal year 2002. The adjustment arose due to a change in federal tax law during the second quarter of fiscal year 2002. During the first nine mon ths of fiscal year 2001, the Company did not receive any refundable income taxes. Cash provided by accounts payable, taxes payable, and accrued liabilities during the first nine months of fiscal year 2002 was approximately $306,000 compared to cash used of approximately $5,494,000 during the comparable period of fiscal year 2001. Changes in accounts payable, taxes payable and other accrued liabilities during the first nine months of fiscal year 2002 when compared to the first nine months of fiscal year 2001, are due, in part, to the payments of accrued payroll and benefits associated with the restructuring activities in fiscal year 2001 and, in part, to the reduction of incomes taxes payable in fiscal year 2001.

Revenue concentration. From time to time, including recent periods, the Company has derived a material portion of its revenue from one or more individual contracts that could be terminated by its customers at their discretion. For example, a single contract accounted for 4% and 10% of the Company’s revenues during the first nine months of fiscal years 2002 and 2001, respectively. The Company expects that in future periods it may again enter into individual contracts with significant revenue concentrations. If such contracts were terminated, this could have a material adverse effect on the Company’s future operating results and financial condition.

Delays in the receipt of engineering contracts. The Company believes it has experienced continued delays in the receipt of certain engineering development contracts. While the Company is working closely with its customers to try to capture what it believes to be sole source orders, continued delays in the receipt of such orders could have a material adverse impact on the Company’s financial condition and operating results.