[OUTSIDE FRONT COVER]
                                     TRACOR
                                  ANNUAL REPORT
                                      1997

[INSIDE FRONT COVER]
Profile
On land, at sea, and in space, Tracor, Inc. provides leading-edge technology to
government and commercial customers worldwide in the areas of information
systems, aerospace, and systems engineering. Tracor is one of America's fastest
growing defense companies and employs more than 10,700 people at approximately
150 locations.

<PAGE>

<TABLE>

Stock Performance

[GRAPH APPEARS HERE]

<CAPTION>

Value of $100 investment made December 31, 1992, including dividends

    Measurement        DJ Defense &       Nasdaq          Tracor
      Period            Aerospace       Stock Market       Inc.
    <S>                   <C>             <C>             <C>
    4th Quarter '92       100.00          100.00          100.00
    1st Quarter '93       102.62          101.88           78.13
    2nd Quarter '93       111.87          103.83          153.13
    3rd Quarter '93       117.49          112.58          167.19
    4th Quarter '93       129.22          114.80          225.00
    1st Quarter '94       133.68          109.97          196.88
    2nd Quarter '94       135.35          104.83          187.50
    3rd Quarter '94       138.34          113.51          203.13
    4th Quarter '94       145.32          112.21          303.13
    1st Quarter '95       167.74          122.33          287.50
    2nd Quarter '95       200.64          139.93          340.63
    3rd Quarter '95       220.63          156.79          412.50
    4th Quarter '95       252.71          158.70          362.50
    1st Quarter '96       270.94          166.10          435.94
    2nd Quarter '96       284.70          179.66          431.25
    3rd Quarter '96       307.91          186.05          515.63
    4th Quarter '96       335.83          195.19          531.25
    1st Quarter '97       314.75          184.61          581.25
    2nd Quarter '97       356.30          218.45          628.13
    3rd Quarter '97       384.94          255.40          768.75
    4th Quarter '97       353.18          239.53          759.38

</TABLE>

Contents
     2  Financial Highlights and Sales by Market
     3  Message to Shareholders and Employees
     8  Segments at a Glance
     9  Business Review 
    10  Tracor Information Systems
    14  Tracor Aerospace 
    18  Tracor Systems Technologies 
    22  Management's Discussion and Analysis
    25  Financial Report 
    42  Principal Locations
    43  Board of Directors and Management Team
    45  Shareholder Information

<PAGE>   2

<TABLE>

Financial Highlights

<CAPTION>

(dollars in thousands, except per share amounts)

                          1992       1993(1)      1994(1)       1995        1996(2)       1997
                        --------   ----------   ----------   ----------   ----------   ----------
<S>                     <C>          <C>          <C>          <C>        <C>          <C>
Net sales               $261,835     $407,495     $694,037     $886,920   $1,082,505   $1,265,686
Earnings before 
  interest, income 
  taxes, and 
  extraordinary item     $11,126      $23,754      $47,816      $68,190      $92,590     $101,906
Income before 
  extraordinary item      $4,530       $9,277      $18,547      $27,863      $36,614      $44,391
Income per common share 
  before extraordinary
  item - assuming 
  dilution (3)             $0.44        $0.72        $1.15        $1.29        $1.47        $1.65
Customer-funded research
  and development        $59,555      $71,759     $104,872     $132,347     $157,524     $161,186
Company-funded research
  and development         $2,859       $3,538       $4,672       $5,404      $11,110      $10,102
Bookings (new orders)   $276,436     $321,113     $659,575   $1,006,980   $1,075,826   $1,505,788
Capital expenditures      $7,360       $8,435      $11,007      $13,676      $19,623      $22,160
Firm backlog (funded
  and unfunded)         $301,502     $590,366     $806,228     $923,978   $1,030,472   $1,272,091
Unfunded contract
  options               $450,635   $1,120,268   $1,015,795     $948,854   $1,614,640   $1,901,076
Total assets            $139,771     $305,733     $444,086     $467,456     $744,954     $717,609
Working capital          $45,977      $87,140      $95,392     $129,129     $140,430     $163,352
Shareholders' equity     $52,345      $63,167      $90,592     $136,965     $222,917     $259,215
Shares outstanding 
  (in thousands)          10,000       10,612       11,657       14,151       24,754       25,149
Current ratio                2.4          2.0          2.0          2.3          1.8          2.1
Long-term debt to 
  equity ratio              0.93         2.15         2.15         1.32         1.31(4)     
1.04(4)
Book value per 
  outstanding share        $5.23        $5.95        $7.77        $9.68        $9.01       $10.31
Employees                  3,400        8,900        9,700        9,400       10,450       10,740
Common stock shareholders 
  (estimated)              1,000        1,500        4,000        5,000        5,750        8,920

<FN>

(1)  Reflects the acquisitions of Vitro Corporation on August 25, 1993, and GDE
     Holdings, Inc. on November 17, 1994.
(2)  Reflects the acquisitions of AEL Industries, Inc. on February 22, 1996,
     and Cordant Holdings, Inc. on September 26, 1996.
(3)  Amounts have been restated in accordance with Statement of Financial
     Accounting Standards No. 128, Earnings Per Share. See notes to the
     Consolidated Financial Statements.
(4)  Includes $31.5 million in 1996 and $26.3 million in 1997 of fully cash
     collateralized promissory notes payable issued in conjunction with the
     acquisition of Cordant. Excluding the promissory notes payable, the ratio
     is 1.18 in 1996 and .96 in 1997.

</TABLE>

<TABLE>

Sales by Market

[GRAPH APPEARS HERE]

<CAPTION>

(dollars in thousands)

                1996                       1997
     _________________________   _________________________
       Total      % of   % of      Total      % of   % of
       Sales      DOD    Total     Sales      DOD    Total
     __________   ____   _____   __________   ____   _____   ___________________________________
<S>  <C>          <C>     <C>    <C>          <C>    <C>     <C>
                                                             Domestic
                                                               U.S. Government Defense
     $  457,002   54%            $  494,960   53%                Navy
        216,861   26%               250,285   27%                Air Force
         83,638   10%                94,489   10%                Army
         87,087   10%                91,865   10%                Other
     ___________________________________________________________________________________________
        844,588           78%       931,599           74%          Total U.S. Government Defense
     ___________________________________________________________________________________________
         81,373            8%       121,396           10%      U.S. Government Nondefense
     ___________________________________________________________________________________________
        925,961           86%     1,052,995           84%        Total U.S. Government
          8,514            1%        17,754            1%      State/Local Government
         43,253            3%        64,528            5%      Commercial
     ___________________________________________________________________________________________
        977,728           90%     1,135,277           90%    Total Domestic
        104,777           10%       130,409           10%    Foreign
     ___________________________________________________________________________________________
     $1,082,505          100%    $1,265,686          100%    Total Sales

</TABLE>

<PAGE>   3

[PHOTO OF JAMES B. SKAGGS, PRESIDENT, APPEARS ALONG ENTIRE RIGHT SIDE OF PAGE]

Message to Shareholders and Employees

Your company continued to achieve outstanding performance, growth, and
shareholder value during 1997. We are proud to report record-high sales,
bookings, backlog, and earnings before an extraordinary item. Tracor's stock
price increased 43 percent during the year, giving us the best stock price
performance of any major company in the aerospace and defense industry. Internal
growth remained strong at 7 percent, and we made good progress in continuing the
company's diversification trends. Our non-U.S. Department of Defense (DOD) sales
reached 26 percent of the total, driven by impressive increases of 55 percent in
sales to other government customers and 49 percent in commercial markets. Sales
to foreign customers also grew, remaining at 10 percent of total sales.

Our accomplishments were noted in the January 1998 issue of Forbes magazine,
which listed Tracor as the best performer in sales and earnings per share growth
in the aerospace and defense industry over the past five years. This growth in
the midst of a consolidating defense industry propelled Tracor to become the
14th largest defense company in the United States.

In 1997, we won our largest total contract, including options - $342 million
for eight years - to continue providing technical support for the Eglin Air
Force Base Test Range. We also won our largest firm contract - a $200 million
classified contract in our Information Systems segment. These wins contributed
to record-high bookings during the year, which were 40-percent higher than in
1996, and to impressive backlog figures of $1.3 billion in firm orders, a
23-percent increase over last year, and, including options, a total of
$3.2 billion, a 20-percent increase. This backlog provides us confidence in our
ability to continue our solid internal growth.

Financial Results

Sales for 1997 reached an all-time high of $1,265.7 million, a 17-percent
increase over 1996 sales. Income before the extraordinary item was $44.4
million, a 29-percent increase over 1996, excluding the effect of a nonrecurring
gain in 1996. Income per share before the extraordinary item was $1.65 (assuming
dilution), a 19-percent increase over 1996 before the nonrecurring gain. The
extraordinary item, occurring in the first and third quarters, related to 
the company's decision in 1997 to reduce our interest expense. The company
entered into a new bank agreement, issued new 8 1/2% Senior Subordinated Notes
due 2007, and redeemed the outstanding 10 7/8% Senior Subordinated Notes due
2001. These transactions  resulted in substantially lower interest expense. The
extraordinary item, relating to the debt refinancing, reduced 1997 net income to
$34.2 million, or $1.27 per share (assuming dilution). In addition to reducing
interest cost, the company also succeeded in lowering its effective tax rate.

Defense Environment

Sales of products, systems, and services to DOD customers rose 10 percent in
1997 over 1996 and represented approximately 74 percent of Tracor's total sales.

While the defense budget has decreased dramatically over the past decade, it
is no longer declining and remains at more than $250 billion per year. Most
industry analysts indicate U.S. defense procurement account spending will rise
slowly as the year 2000 approaches, and we believe Tracor is well positioned to
benefit from this upturn. In any event, we believe the defense budget will
remain stable and reasonably predictable, especially when compared with many
other industries.

A number of studies have indicated the need to transform the U.S. military
into a substantially different armed force than exists today. While the debate
will continue regarding the specific requirements for the future, there seems to
be general agreement that the future force will place greater emphasis on
information warfare driven by rapid advances in information and information-
related technologies. This includes automation and protected systems
architectures capable of rapidly disseminating information and integrating the
actions of widely dispersed and dissimilar units. Further, there is a need for
greater mobility, precision, speed, stealth, and strike distances with more
efficient logistics support. This transformation must be achieved while
effectively supporting near-term U.S. efforts.

Tracor is well positioned with core competencies in leading-edge technologies
and an extensive understanding of military operations to be a major participant
in supporting both near-term efforts and the future transformation of our
military forces for the 21st century.

Operating in a dynamic industry and customer environment, Tracor has
maintained a disciplined focus on its successful strategies: protect and
strengthen core businesses, diversify to new customers and markets, and acquire
companies which complement and enhance our capabilities. These strategies,
coupled with our dedication to improving our operating efficiency each year,
have produced a high-performance level with extraordinary growth and continued
diversification. 

To better achieve our objectives, we realigned our businesses during the year
into three major segments - Information Systems, Aerospace, and Systems
Technologies. This has resulted in a better focus in the marketplace and more
efficient operations, thus reducing operating expenses from 10.3 percent of
sales in 1996 to 9.3 percent of sales in 1997. 

We will continue to examine these strategies in view of the projected
environment with the ever-present objective of producing superior shareholder
returns.

Protect and Strengthen Core Businesses

Tracor holds leadership positions - number one or two - in most of its core
defense business areas. These top positions are maintained by outstanding
performance and the application of technology innovation to products, systems,
and services providing the best value to our customers, the largest being the
DOD. 

The company was somewhat insulated from previous cutbacks in the defense
budget because of the nature of our work supporting critical, high-priority
programs, many of which are funded by the more stable Operations and Maintenance
segment of the defense budget. The replacement of many of our nation's defense
systems will be extended well beyond the time originally contemplated. Tracor
will continue to play an important role in current key programs which are
dedicated to upgrading systems capabilities to improve their effectiveness and
extend their useful lives.

During the year, we performed well in all of our segments, with an impressive
record of winning follow-on, recompeted contracts, as well as important new
ones.

In recognition of Tracor's commitment to high-performance standards, we
continued to receive numerous letters of commendation and awards from our
customers, as well as high award fees. 

Three of Tracor's business units have now earned the Software Engineering
Institute (SEI) Level 3 rating for implementing world-class software development
processes. The rating places these three units in the elite top 16 percent of
all software organizations in the SEI's database. In addition, many of our
operations have achieved varying levels of ISO certification, enabling us to
reduce costs associated with the requirements of military specifications and to
comply with the requirements of many foreign customers.

Diversify to New Customers and Markets

Tracor's diversifications are a major component of internal growth. We have
been successful in identifying new, high-priority market areas which are
undergoing substantial transformation and in applying innovative technologies
and processes to provide more effective solutions. These programs offer
opportunities for leadership in other strong, long-term niche markets.

Several diversification initiatives resulted in new programs in 1997,
including contracts for state-of-the-art, Tracor-developed camouflage systems
for the U.S. military and sophisticated imagery information technology products
for the National Imagery and Mapping Agency. Tracor also continued its work as a
key participant in developing the next-generation mine detection and
neutralization systems.

Expansion of work in new areas continued during the year, resulting in the
49-percent increase in sales to commercial customers. For example, Tracor's
participation in the Boeing 717-200 aircraft program expanded in 1997 with a
contract to manufacture the Y-Barrel assembly for this new-generation 100-seat
airplane designed to meet more stringent noise and emission requirements and
lower operating costs for the airlines.

In addition to these business expansions and diversifications, we are
developing new products with promising growth potential. In response to the
projected requirements for the 21st century battlefield, Tracor is developing
several expendable sensor products to support the military's real-time data
acquisition requirements. Products include sensors to measure weather conditions
and to determine the presence and type of chemical warfare agents in the air.
Early in 1998, the company won a program to develop the next-generation chemical
warfare agent detector for use by the U.S. armed forces. The detector will
identify the presence of hazardous airborne chemical warfare agents and alert
soldiers to take preventive action.

Acquire Complementary Businesses

A key element in our growth has been the acquisition of businesses which
expand or enhance our current lines of products and services. During 1997, we
completed two such purchases. While both acquisitions were relatively small,
they added valuable new capabilities, which complement and strengthen existing
Tracor product areas. 

The acquisition of the Military Products Group of Calspan SRL Corporation
makes Tracor the number one producer of heads-up display systems used with night
vision equipment on board various military helicopters and brings other
information display capabilities to the company. The addition of the Visual
Information Technology (VITec) division of Connectware, Inc. expands Tracor's
commercial mapping product line with image-processing software which allows
analysts to review, annotate, enhance, and output digital pictures from a
variety of sources.

The pursuit of acquisitions which meet both our operational and financial
criteria has become more challenging as seller price expectations have remained
high following the premium prices paid by others in earlier major acquisitions.
Nonetheless, we believe the defense industry consolidation will continue as will
our search for acquisition opportunities, which will add value to Tracor's
shareholders. 

Our well-crafted and tested plan for growth has led to yet another strong
year. One of the keys to Tracor's success has been its size - large enough to
enjoy cost efficiencies and compete effectively with the industry behemoths, but
small and nimble enough to respond to the dynamic environment.

Tracor's excellent position will continue to be enhanced by its talented and
committed employees, backed by a growing shareholder base. 

Together, we have succeeded in setting records  to preserve and enhance
shareholder value. We continue to be dedicated to the vision focused on being
the employer, supplier, and investment of choice.

Very truly yours,

/s/James B. Skaggs

James B. Skaggs
Chairman and President

February 25, 1998

[MARGIN NOTES APPEAR WITHIN THE PREVIOUS TEXT]

Most industry analysts indicate U.S. defense procurement account spending will
rise slowly as the year 2000 approaches, and we believe Tracor is well
positioned to benefit from this upturn.

Tracor holds leadership positions - number one or two - in most of its core
defense business areas.

We have been successful in identifying new, high-priority, market areas which
are undergoing substantial transformation and in applying innovative
technologies and processes to provide more effective solutions.

Together, we have succeeded in setting records to preserve and enhance
shareholder value.

[BAR GRAPHS ALSO APPEAR WITHIN THE PRECEDING TEXT]

Net Sales (in thousands)
  1997 -- $1,265,686
  1996 -- $1,082,505
  1995 --   $886,920
  1994 --   $694,037
  1993 --   $407,495
  1992 --   $261,835

Operating Income (in thousands)
  1997 -- $101,906
  1996 --  $92,590
  1995 --  $68,190
  1994 --  $47,816
  1993 --  $23,754
  1992 --  $11,126

Income Before Extraordinary Item (in thousands)
  1997 -- $44,391
  1996 -- $36,614
  1995 -- $27,863
  1994 -- $18,547
  1993 --  $9,277
  1992 --  $4,530

Income Per Common Share Before Extraordinary Item (assuming dilution)
  1997 -- $1.65
  1996 -- $1.47
  1995 -- $1.29
  1994 -- $1.15
  1993 -- $0.72
  1992 -- $0.44

Total Backlog (in thousands)
 [shaded to show Firm Backlog and to show Unexercised Options, as listed on the
 Financial Highlights table on page 2 above]
  1997 -- $3,173,167
  1996 -- $2,645,112
  1995 -- $1,872,832
  1994 -- $1,822,023
  1993 -- $1,710,634
  1992 --   $752,137

Bookings (in thousands)
  1997 -- $1,505,788
  1996 -- $1,075,826
  1995 -- $1,006,980
  1994 --   $659,575
  1993 --   $321,113
  1992 --   $276,436

Shareholders' Equity (in thousands)
  1997 -- $259,215
  1996 -- $222,917
  1995 -- $136,965
  1994 --  $90,592
  1993 --  $63,167
  1992 --  $52,345

Return on Average Shareholders' Equity
  1997 -- 18% *
  1996 -- 20%
  1995 -- 25%
  1994 -- 24%
  1993 -- 16%
  1992 -- 10%
     * Calculation excludes the effect of the extraordinary item.

<PAGE>   8

Segments at a Glance

Tracor Information Systems      Number of employees:  2,870

  Program Areas
    Softcopy imagery exploitation, processing, and archiving systems
    Digital photogrammetric workstations
    Commercial imagery and mapping products and services
    Automated mission planning systems
    Mission rehearsal and training systems
    Targeting systems for precision weapons
    Test equipment for avionics and munitions
    Test equipment for satellite and telecommunications systems
    Avionics for space launch vehicles
    Buried object detection systems
    Optical/digital-based records management systems
    Commercial information systems acquisition, integration, and deployment
    Web-based, workflow-enabled client/server solutions
    Software validation and testing, including Year 2000 solutions
    Network design, operations, security, administration, and customer support
    Training and computer-based training 
    Broadband integrated services/video teleconferencing

                             (in thousands)
                        1997      1996      1995
                      ________  ________  ________
  Net sales           $469,653  $351,785  $274,461
  Operating profit     $42,932   $32,538   $22,752

[GRAPH APPEARS HERE]

       Enterprise systems:      38%
       Mission management:      26%
       Imagery:                 18%
       Test and space systems:  18%

Tracor Aerospace                Number of employees:  2,150
  Program Areas
    Countermeasures dispenser systems
    Chaff and flare expendables
    Communications countermeasures
    Radar warning receivers
    Night vision heads-up displays and beacons
    Aerial targets
    Commercial aircraft hush kits
    Aircraft structures and modification
    Aircraft operations, maintenance, and certification
    Underwater acoustic signal processing
    Airport noise monitoring systems
    Mine countermeasures
    Camouflage and signature management systems 
    Electronic shelter integration
    Decision support systems
    Chemical detection systems
    Laser-warning systems

                             (in thousands)
                        1997      1996      1995
                      ________  ________  ________
  Net sales           $328,067  $259,955  $153,180
  Operating profit     $30,600   $35,197   $18,691

[GRAPH APPEARS HERE]

       Electronic warfare:  69%
       Flight systems:      31%

Tracor Systems Technologies     Number of employees:  5,640

  Program Areas
    Naval surface combatant systems
    Missile weapon systems
    Strategic undersea systems
    Air defense systems
    Fleet battle management systems
    Submarine fire control systems
    Radio communication systems
    Test range operation management and instrumentation
    Radar and optical tracking systems
    Air traffic control and landing systems
    Identification detection systems
    Electronic shelter integration
    Logistics engineering
    Signals intelligence and electronic warfare systems
    FAA radar systems
    Space and terrestrial communications systems
    Physical security systems

                             (in thousands)
                        1997      1996      1995
                      ________  ________  ________
  Net sales           $467,966  $470,765  $459,279
  Operating profit     $28,374   $24,447   $26,747

[GRAPH APPEARS HERE]

       Shipboard combat systems integration:              53%
       Command, control, and communications engineering:  28%
       Range systems and support:                         19%

<PAGE>   9

Tracor Postured for More Growth

Achieving strong growth in a consolidating defense environment places Tracor
among the best in the industry and has elevated the company to its current
position as the 14th largest defense company in the nation.  

This sales growth stems from both acquisitions and internal initiatives.
Earnings growth outpaced sales growth and reflected our success in implementing
more efficient methods for running our business. 

While the U.S. defense budget is not increasing in real dollars, opportunities
for Tracor remain strong.  

Our blueprint for growth, which has already guided us through several years of
extraordinary results, starts with three main strategies: to expand and protect
our important work for the U.S. Department of Defense; to diversify our
offerings into new government, commercial, and foreign areas; and to acquire
businesses which enhance our existing products and programs or which bring
important new complementary capabilities to the company. Our success has
resulted in Tracor's becoming the fastest growing major defense contractor in
the United States, providing high-quality products, systems, and services to its
customers.  

In order to better focus our resources in the marketplace and improve
operational efficiencies, Tracor realigned its businesses in 1997 into
three major segments and is now managing and reporting financial results by
these areas. The most rapidly growing area is Information Systems; next is
Aerospace; and the third segment, Systems Technologies, while experiencing a
lesser growth trend, remains steady and consistent.  

Regrouping ourselves has laid the groundwork for improved results and optimizes
our position for continued growth.

[GRAPH APPEARS HERE]

       Systems Technologies:  37%
       Information Systems:   37%
       Aerospace:             26%

<PAGE>   10

Tracor Information Systems

Tracor's goal is to remain on the forefront of the rapidly unfolding information
age, supplying innovative information technology and earth information solutions
to meet the demanding needs of government, commercial, and international
customers.

[THREE PHOTOS APPEAR HERE]

1. Tracor-developed digital mapping software has evolved from military
   applications to the commercial industry and is now used in more than 50
   countries.  
2. Tracor's full-service mission planning products aid the military
   with precision targeting of tactical and strategic aircraft and weapon
   systems.
3. As the largest supplier of automatic test equipment to the U.S. Air Force,
   Tracor is also providing these mobile systems to Japan for the F-2 fighter
   program.

Tracor Information Systems provides enterprise-wide solutions to satisfy an
increasing demand for state-of-the-art information systems in target markets.

Backed by years of experience in working closely with a variety of customers,
Tracor has mastered the ability to pinpoint needs quickly and develop superior
solutions. Further, this expertise has allowed the company to leverage its
military capabilities into commercial applications.

Tracor's vision includes becoming a preeminent worldwide supplier of earth
information products. The company's core competencies extend to all areas of
this rapidly growing market from hardware systems to software tools, including
data extraction and product generation. For key military applications, Tracor's
mission management systems enable warfighters to precisely locate their targets,
as well as determine an optimal route that minimizes risk of detection. In the
commercial arena, Tracor is providing end-to-end multispectral solutions for
customers engaged in precision farming, tax collection, city mapping, and other
activities. 

Tracor's full-service mission management products for the U.S. Armed Forces
aid military decision-makers, planners, and flight crews with the employment of
front-line tactical and strategic aircraft and the precision targeting of their
weapon systems. The F-117A stealth fighter; B-2 stealth bomber; all long-range
cruise missiles (Tomahawk Missile, Air Launch Cruise Missile, and Advanced
Cruise Missile); and the new family of high-altitude, high-endurance unmanned
aerial vehicles, the Global Hawk and Dark Star, all depend on these Tracor
systems. 

Focusing development efforts on Sensor-to-Shooter programs is a high priority
for Tracor. These programs are designed to funnel real-time intelligence and
targeting information to and from an aircraft. They emphasize the exploitation
of national, theater, and tactical intelligence for real-time use in precision
targeting, mission planning, mission updates, and guided weapons support.
Performing Sensor-to-Shooter development as an adjunct to actual test and
evaluation trials, field operations, and advanced warfighting experiments
ensures full compatibility with joint operational and technological requirements
for the battlefield of the next century.

A notable 1997 milestone for Tracor was the first operational deployment of
the new Tracor-developed mission planning system for U.S. Air Force F-117A
fighters. 

Also during the year, Tracor delivered two state-of-the-art mission
management products to the U.S. Navy for installation on aircraft carriers,
fleet command ships, and amphibious command ships. The first is an improved
version of the Digital Imagery Workstation Suite, which, together with Tracor's
Precision Targeting Workstation, provides imagery-based mission planning for the
Tomahawk and all Navy precision weapons and tactical aircraft. These systems
also were delivered for the first time to the United Kingdom to support the
introduction of the Tomahawk into its inventory. The second was the Tactical
Strike Coordination Manager, a decision support tool which aids commanders in
the planning and coordination of strike missions. 

Tracor's largest 1997 award in mission management was a U.S. Strategic
Command contract for the development and production of the next-generation Air
Vehicle Planning System. Scheduled for deployment in 2002, this system will
replace Tracor's previous product and be used to plan and coordinate the
missions of the entire U.S. strategic bomber, tanker, and cruise missile force.

As an industry leader in the development and integration of imagery and
information systems, the company continues to satisfy challenging customer
requirements for automated image processing. Products include softcopy mapping,
charting, and geodesy (MC&G); image-processing groundstations; and
interpretation and analysis centers. Tracor has installed more than 1,000 MC&G
workstations, and its software is employed in some 200 interpretation and
analysis centers worldwide.

Competitive wins in 1997 solidified Tracor's position as a key contractor for
image processing and storage. For instance, two Tracor units became key team
members on the first award to build ruggedized imaging ground stations for the
U.S. Marine Corps. As a result of other major wins, Tracor will provide imagery
product archives in support of tactical users for the National Imagery and
Mapping Agency's Image Product Library program. 

Tracor is also expanding its commercial array of earth information products.
Under a joint venture with Leica AG, Switzerland, a new entity, LH Systems, LLC,
was formed to market the latest technology for map compilation, engineering
analysis, orthophoto production, digital terrain modeling, and environmental
management through a worldwide sales and distribution network. 

The 1997 acquisition of Visual Information Technology also expands Tracor's
commercial product line with image-processing software which allows analysts to
review, annotate, enhance, and output digital pictures from a variety of
sources. Another subsidiary, ADR, Inc., continues as one of the largest
suppliers of mapping and geospatial products to commercial consumers and state
and local governments.

Additionally, Tracor has leveraged its core competencies into a growing new
market of commercial satellite remote sensing systems. In a joint venture with
Boeing, Farmland Industries, and Agrium Ltd., Tracor has helped create
RESOURCE21, a remote sensing-based information company which plans to operate a
network of imaging satellites at the turn of the century. With an initial focus
on the burgeoning field of precision agriculture, RESOURCE21 will also extract
sophisticated information from multispectral imagery to facilitate resource
management decisions in agriculture, forestry, insurance, commodities, and
environmental industries worldwide. 

Tracor has excelled in the design and production of aircraft avionics test
systems for more than three decades and is the largest supplier of these systems
to the Air Force. In 1997, Tracor received substantial new orders for F-16
aircraft test systems and continues to broaden its international reach with
sales of systems for the Japanese F-2 fighter program. Recent emphasis has been
placed on diversifying into other growing markets, including satellites,
telecommunications, and space launch vehicles.

The company gained solid footholds in the accelerating commercial and
telecommunications satellite support markets in 1997. Motorola placed new orders
for Tracor test systems used in the development of its global communications
satellite system. One of the largest satellite manufacturers, Hughes Space and
Communications, awarded Tracor several contracts for satellite test systems and
engineering services. During the year, Tracor continued to build its long-term
relationship with Lockheed Martin Astronautics, supplying additional space
avionics test systems for the Atlas and Titan launch vehicles. 

In other business areas, Tracor constructs and operates leading-edge network
systems, which improve productivity in data collection, processing, and
dissemination. New contracts have continued to expand and diversify the
company's presence in the intelligence community, as well as other federal and
commercial marketplaces.

Tracor is helping a number of customers resolve their looming Year 2000
computer problems. Using methods which adhere to the software capability
maturity model, Tracor estimates it will perform an independent verification and
validation of a variety of systems with up to 60 million lines of code.
 Building upon a 29-year history of providing information technology solutions
to the federal and commercial marketplaces, Tracor is continuing its work in the
design, development, and integration of commercially available hardware and
software products through various contracts. Some of these include providing
commercial off-the-shelf products to a wide range of Department of Defense and
other government users; hardware, software, and peripherals which can be ordered
and purchased through Tracor's web-based electronic ordering catalog; and other
information technology products for various members of the intelligence
community.

[TWO PHOTOS APPEAR WITHIN THE PRECEDING TEXT]

1. Using structured software development and test methods, Tracor is solving the
   Year 2000 problem for clients with systems ranging from 60,000 to 60 million
   lines of software code. 
2. Digital mapping and geographic information system services provided by Tracor
   are key to a variety of sophisticated commercial and defense applications.

<PAGE>   14

Tracor Aerospace

Tracor enjoys leadership positions in all of its core aerospace product areas
and is continuously expanding the technology envelope to retain and enhance
these positions. Additional growth is achieved by the company's success in
identifying new complementary products.

[THREE PHOTOS APPEAR HERE]

1. Tapping its expertise in signature management, Tracor has diversified into a
   new area with the win of a major contract for advanced woodlands camouflage
   net systems.  
2. The Tracor-developed Band 9/10 transmitter, now being produced, provides
   expanded capabilities for the U.S. Navy's EA-6B aircraft against the latest
   military threats.  
3. Thriving in the commercial marketplace, Tracor is a key aircraft structures
   supplier for the new Boeing 717-200 100-seat twinjet.

As a leading supplier to the U.S. and international armed forces for more
than three decades, Tracor Aerospace has earned the position as a trusted
developer and manufacturer of defense systems which protect platforms and crew
members of U.S. and friendly forces against enemy threats. Through continued
performance excellence over the past several years on existing contracts, Tracor
has won key program recompetes during 1997 in core electronic warfare and flight
systems business areas and continues to leverage its preferred supplier
reputation to diversify into new markets.

Tracor's core business areas span the full spectrum of products and services
required by its customers as they prepare to engage threats to the free world in
the 21st century. 

As a world leader in the countermeasures marketplace, Tracor is best known
for its development and production of the AN/ALE-47 countermeasures dispenser
system, the most advanced system capable of deploying chaff, flares, active
radio frequency decoys, and other decoys from military aircraft. The ALE-47 has
been installed in more than 15 aircraft types for the U.S. Air Force, U.S. Navy,
and more than 15 international customers.

With the win of three flare contracts in 1997, Tracor has also maintained its
position as one of the world's top developers and producers of expendable
decoys. Under these contracts, Tracor has added new flares to its product line,
which includes flares for Air Force F-15, A-10, C-17, C-5, and C-130 aircraft,
as well as U.S. Army AH-64, CH-47, and UH-60 helicopters. These flares are
deployed by the ALE-47 and other dispenser systems to protect aircraft from
heat-seeking missiles. Also, Tracor continues to be the world's largest supplier
of chaff expendables, which decoy radar-guided missiles.

Active countermeasures, which jam enemy communication and radar systems, are
another focus for Tracor in the electronic warfare market. During 1997, Tracor
completed development and began production of Band 9/10 transmitters, which
improve the effectiveness of the AN/ALQ-99 jamming system aboard the Navy's 
EA-6B aircraft. These transmitters provide increased frequency coverage and
enhanced capabilities against the latest military threats. Continuing its
leadership in jamming systems, Tracor won the contract to develop an advanced
technology Low Band Transmitter, also targeted to fly on the EA-6B. Other
electronic attack subsystems are currently in development for the Army, allowing
them to jam modern ground-based communications systems.

Tracor also produces antennas and receivers for several key U.S. threat
warning and jamming systems, which provide an electronic shield for most of the
U.S. military's tactical aircraft, from sophisticated helicopters to the most
advanced fighters. These systems are currently being developed for application
on the Army's AH-64 Apache helicopter, the multi-service V-22 Osprey, and the
Navy's F/A-18E/F Super Hornet fighter.

Another product designed to improve effectiveness and keep air crews safe
during operation of their aircraft is the AN/AVS-7 Heads-up Display System, a
flight display used with night vision equipment on board military helicopters.
With the win of a contract to upgrade an Air Force system and the acquisition of
a related business group, Tracor has become the number one producer of heads-up
display systems for night vision equipment for the U.S. military.

Building on more than 15 years of experience in aircraft structures for
military applications, Tracor has established itself as an emerging supplier in
this area for commercial customers. Tracor first was chosen to join the wing
halves for the B-717-200, which is currently being developed by Boeing and is a
21st century version of the popular and reliable DC-9 twinjet. The outstanding
record of achievement on this program led to the award of another contract to
assemble the Y-Barrel for the B-717-200. Attached to the wings, the Y-Barrel is
part of the fuselage and houses the main landing gear and fuel, hydraulic, and
electrical lines. As a next-generation, 100-passenger airplane, the B-717-200 is
designed to meet more stringent noise and emission requirements and to lower
operating costs for the airlines. Forecasts show the need for at least 2,000
airplanes of this type over the next 20 years.

Backed by more than a quarter century of expertise in the development and
production of unmanned full-scale and sub-scale aerial targets, Tracor products
play an important role in weapon systems testing. As the leading supplier of
full-scale target drones, Tracor was awarded the third production lot in 1997 to
produce the next 24 QF-4 drones. Converted from F-4 aircraft, these aerial
targets are used by the U.S. Armed Forces for technology development and weapons
system testing and evaluation. Also a major producer of sub-scale drones, Tracor
completed flight testing and began production of the MQM-107E. This aerial
target will be used by the Army, Air Force, and foreign customers, including the
Royal Australian Navy.

One of the year's most notable awards was a contract from the Army for the
next-generation camouflage system, which brought to fruition Tracor's decade of
research and development in concealment technology. Tracor is the sole U.S.
provider of this advanced system, which not only conceals personnel and vehicles
from visual detection, but also from infrared sensors and radars. Following
acceptance of the initial test units, full production of the woodlands
Ultralightweight Camouflage Net System will begin in 1998. The company is also
developing desert, arctic, and urban versions of these systems.

The prevalence and danger of landmines, both from newly laid mines and those
left undisturbed from previous conflicts, have become important concerns for
today's soldiers and civilians. The company is currently developing a minefield
breaching system, which features a Tracor-designed, rocket-deployed net with
specially designed munitions. These munitions penetrate the ground to detonate
buried mines, clearing the way for rapid, safe passage for vehicles and
personnel. Complementary to this work are the mine detection programs underway
in the Tracor Information Systems segment, which include hand-held and vehicle-
mounted mine detection systems.

Tracor also won a contract from the Air Force to produce the Tower Restoral
Vehicle, which provides mobile air traffic control tower services at temporary
bases, alternative landing areas, or air bases where permanent facilities have
been disabled. This rapidly deployed system allows air traffic control operators
to assist three aircraft simultaneously.

Tracor is applying its aircraft modification expertise to the development of
C-38A special mission aircraft for the U.S. Air Force and Air National Guard.
Slated for delivery in 1998, these aircraft will provide travelers with secure
communications to major command centers from anywhere in the world.
The company also has more than a decade of experience in the design,
development, and Federal Aviation Administration certification of hush kits,
which reduce aircraft noise during takeoff and landing. Tracor's newest hush
kits enable the Learjet 20 series aircraft to operate within stringent Level III
noise requirements, providing access to a wider range of U.S. and international
airports.

Responding to the growing worldwide interest in information relating to the
21st century digital battlefield, Tracor is developing sensor products which
draw upon the company's dispenser system technology. The sensors are designed to
be deployed from existing dispenser systems aboard aircraft or from ground
systems and report data back to a central collection and analysis location. From
different altitudes, the sensors can measure meteorological conditions, detect
the presence of people or vehicles, and discern the type and concentration of
any chemical agents in the air.

[TWO PHOTOS APPEAR HERE]

1. Expanding to the international arena, Tracor is producing sub-scale aerial
   targets used for weapons testing, evaluation, and training for the Royal
   Australian Navy.  
2. Offering new solutions for mine neutralization, Tracor's expertise in mine
   countermeasures provides safe passage for the U.S. military in combat and
   hazardous environments.

<PAGE>   18

Tracor Systems Technologies

Tracor continues a long tradition of playing a key role in almost all U.S. Navy
high-priority ship and submarine programs and has expanded its engineering
expertise to important U.S. Army, Naval air, Federal Aviation Administration,
and NASA programs.

[THREE PHOTOS APPEAR HERE]

1. For more than 25 years, Tracor has performed systems engineering and
   integration for combat and communication systems on board AEGIS cruisers and
   destroyers, the Navy's most advanced surface combatants.  
2. Tracor develops highly specialized state-of-the-art communication systems for
   installation on aircraft, boats, and vehicles for special operations forces.
3. Tracor has more than a half century of systems engineering and integration
   experience with ballistic missile systems aboard Navy submarines.

As one of the U.S. Navy's largest engineering support contractors, Tracor
Systems Technologies is continuing its legacy of providing systems and software
engineering and integration for high-priority programs.

Coupling its technical expertise with proven management disciplines, the
company supplies its customers with key engineering capabilities critical to the
design, operation, testing, maintenance, and upgrading of major U.S. systems.
Tracor focuses this life-cycle support work on communication systems; undersea,
anti-air, and strike warfare combat systems; air traffic control and
identification systems; strategic weapon systems; transportation systems; and
space systems. Other key company competencies lie in the areas of ship system
design and engineering, test range operations, and special operations.

As disarmament agreements reduce the number of ground-based intercontinental
ballistic missiles, Tracor continues to play a key role in the Navy's submarine
fleet ballistic missile/strategic weapon systems programs. The United States and
United Kingdom depend on submarine ballistic missile systems to serve as their
strategic deterrent, and Tracor has helped maintain a high state of operational
readiness since the mid-1950s by providing systems integration for the POLARIS,
POSEIDON, and TRIDENT missile systems.

Since World War II, Tracor has performed systems engineering for every guided
missile system installed on Navy ships. For more than 25 years, Tracor has
supported the AEGIS weapon and combat system, an automated, highly sophisticated
air defense warfare system being installed on all new Navy cruisers and
destroyers. 

In 1997, the company was awarded a contract to continue providing program
management, ship integration, test and evaluation, and configuration management
support to the AEGIS program office. In addition, Tracor won a contract to
provide radio communication systems and associated engineering for the AEGIS
guided missile destroyers. Since 1975, Tracor has delivered advanced
communication systems for 52 cruisers and destroyers, and current contracts will
continue these efforts through the year 2002. Tracor expanded its command,
control, communication, computers, and intelligence (C4I) integration support to
include turnkey program management and engineering for the Navy's new landing
amphibious transport dock ship. The company is also providing ship design and
integration engineering for the radio communication system to be installed on
the Navy's newest aircraft carrier. The company won an additional contract to
provide lifetime support and in-service engineering of communication systems, as
well as C4I systems, aboard AEGIS and other combatants.

Tracor also provides the U.S. Army with comprehensive systems and software
engineering, systems integration, and C4I support under contracts with both the
Communication and Electronics Command and the Aviation and Missile Command. 

In 1997, Tracor won a contract to provide quality engineering services in
support of various technical programs for the Navy, including those for
launchers and missiles, surface fire support, and theater air defense.
 The company continues to contribute to major Navy initiatives by providing
testing support for the STANDARD Missile II, which is designed to protect U.S.
forces afloat and ashore by intercepting enemy ballistic missiles in the upper
atmosphere.

Continuing its work for the Navy's undersea vehicle programs for more than 20
years, Tracor was awarded a contract for engineering and technical services
required to operate and maintain the Torpedo Test Facility Complex in Rhode
Island. Here, the company provides design, development, test article buildup,
and subsystem/ system testing, as well as performance testing for thermal and
electric engines used in undersea weapons and special-purpose vehicles.

Since 1977, Tracor has provided engineering for the AN/SQQ-89 surface ship
anti-submarine warfare (ASW) combat system project which today equips Navy ships
with the most sophisticated ASW capability in the world. The company's role
involves performing systems engineering and integration for hull-mounted
active/passive sonar systems, helicopter-borne sonobuoys, towed array sensor
systems, and underwater fire control systems. 

Tracor provides essential program management, acquisition, and integration
engineering for the submarine combat weapon system community. Building on this
capability in 1997, Tracor won a subcontract to provide submarine shock
hardening, engineering, and logistics support for the Navy's new attack
submarine program. Designed to ensure continued battle space dominance into the
21st century, the submarine will meet the new challenge of littoral, or 
near-shore, warfare.

Tracor's extensive capabilities in hardware, software, and systems
engineering were instrumental in winning work for two nondefense government
customers: the Federal Aviation Administration (FAA) and NASA. Tracor supplies
systems engineering support to the FAA radar surveillance directorate for the
acquisition of major air traffic control radar systems. In addition, Tracor is
the prime contractor supporting the NASA headquarters Office of Safety and
Mission Assurance in its responsibilities, which include space program safety,
mission assurance, risk management, and risk assessment.

Tracor continues its legacy of meeting the communication and electronics
systems requirements of the U.S. Department of Defense, special operations
forces, and other government agencies for a host of mobile communication systems
including those installed in special-purpose vehicles, boats, planes, and
suitcases.

The company expanded its role in these areas with the win of a Navy contract
for advanced communication-electronics systems. The government also exercised
options on several contracts for the production of highly specialized mobile
communication and intelligence processing systems.

For 40 years, Tracor has provided test range operations support to various
U.S. military installations. In 1997, the company was awarded its largest total
contract to provide operations and maintenance of test range and technical
facilities at Eglin Air Force Base in Florida, supporting the test and
evaluation of defense weapons systems, air armament, and munitions.

The company has a long history of performing operations and maintenance on
high-technology equipment and has supplied logistics and engineering support for
146 radar systems located on 27 test ranges worldwide. Tracor offers a full line
of test range instrumentation systems, including radar and optical tracking
systems in fixed or mobile configurations. For more than 20 years, Tracor has
provided these products to domestic and foreign customers, and more than
70 company-developed precision tracking radars have been installed around the
world.

[TWO PHOTOS APPEAR HERE]

1. Under the company's single largest total contract, Tracor will continue
   providing operations and maintenance of Air Force test ranges and technical
   facilities at Eglin Air Force Base.  
2. Tracor supplies engineering services to the Federal Aviation Administration
   for radars used to operate air traffic control systems.

<PAGE>   22

Management's Discussion and Analysis of Results of Operations and Financial
Condition

Business Environment

Approximately 74% of the products, systems, and services of Tracor, Inc. and its
subsidiaries (Tracor or the Company) are sold to the U.S. Department of Defense
(DOD) through direct contracts or through subcontracts with other U.S.
government contractors. In addition, the majority of foreign sales were in
defense electronics markets.

While the U.S. defense budget has decreased substantially over the past
decade, it is no longer declining and remains at more than $250 billion per
year. Most industry analysts indicate U.S. defense procurement account spending
will rise slowly as the year 2000 approaches. The total budget remains stable
and reasonably predictable.

A number of studies have indicated the need to transform the U.S. military
into a substantially different armed force than exists today. While the debate
will continue regarding the specific requirements for the future, there seems to
be general agreement that the future force will place greater emphasis on
information warfare driven by rapid advances in information and information-
related technologies. This includes automation and protected systems
architectures capable of rapidly disseminating information and integrating the
actions of widely dispersed and dissimilar units. Further, there is a need for
greater mobility, precision, speed, stealth, and strike distances with more
efficient logistics support. This transformation must be achieved while
effectively supporting near-term U.S. efforts. 

Management believes Tracor is well positioned with core competencies in
leading-edge technologies and an extensive understanding of military operations
to be a major participant in supporting both near-term efforts and the future
transformation of our military forces. 

The contraction of the defense budget and the resulting excess capacity and
increase in competition for contracts among defense companies have resulted in a
major consolidation in the industry. Through internal growth and several
acquisitions, the Company has substantially increased its revenue base. It has
also reduced combined overhead costs through staff reductions, facilities
consolidations, process improvements, and the elimination of certain other
duplicative costs. These efficiencies and increased revenue base, along with the
Company's realignment of its businesses into three major segments, have enhanced
Tracor's cost competitiveness in bidding on new contracts and recompetes of
existing contracts. 

While management believes the consolidation within the defense industry will
continue, the pursuit of acquisitions has become more challenging as seller
price expectations remain high following the premium prices paid by others in
earlier acquisitions.

The future defense budget and the industry consolidation cannot be predicted
with certainty; however, management believes Tracor is well positioned to
continue to leverage its strengths and successes in its products, systems, and
services. 

Results of Operations

The Company's results of operations have been impacted by several business
acquisitions in 1997, 1996, and 1995. Each acquired business's results of
operations are included only from its respective date of acquisition. (See Note
B to the Consolidated Financial Statements for a discussion of the
acquisitions.)

     Year Ended December 31, 1997, Versus Year Ended December 31, 1996

                                         1997          1996
     --------------------------------------------------------
                                           (in thousands)
     Net sales:
           Information Systems      $  469,653     $  351,785
           Aerospace                   328,067        259,955
           Systems Technologies        467,966        470,765
     --------------------------------------------------------
     Consolidated net sales         $1,265,686     $1,082,505
     ========================================================
     Earnings before interest, 
       income taxes, and 
       extraordinary item:
           Information Systems        $ 42,932        $32,538
           Aerospace                    30,600         35,197
           Systems Technologies         28,374         24,447
     --------------------------------------------------------
                                       101,906         92,182
     Other                                --              408
     --------------------------------------------------------
     Consolidated earnings before 
       interest, income taxes, and 
       extraordinary item             $101,906        $92,590
     ========================================================

Sales for 1997 increased 17% over 1996 sales. Internal growth represented 7%
of the increase, and 10% of the sales growth was attributable to acquired
businesses. Sales for 1997 grew in both the Information Systems segment (33%)
and the Aerospace segment (26%), while the Systems Technologies segment was down
slightly. Earnings before interest, income taxes, and extraordinary item
increased 14% over the prior year, excluding the effect of a $3.6 million
nonrecurring gain recognized by the Aerospace segment in 1996 attributable to a
negotiated increase to the price of a U.S. government contract for work
performed prior to 1996.

Information Systems segment sales increased 25% reflecting the results of
acquired businesses, while internal growth contributed an 8% increase. Internal
growth was experienced primarily in test and space systems programs, including
automatic test equipment for Japan's F-2 aircraft and in enterprise information
systems programs for customers in the intelligence community. Segment earnings
increased due to these sales increases and improved profit margins on test and
space systems programs and mission management products.

Aerospace segment sales increased 19% from internal growth and 7% due to
acquired businesses. Internal growth reflected increased sales in electronic
warfare programs for heads-up displays and countermeasures, and flight systems
programs for sub-scale aerial targets produced for the Australian government,
C-38A aircraft for the U.S. government, and assembly of airframe structures for
Boeing 717-200 aircraft. Segment earnings, excluding the nonrecurring gain in
1996, decreased approximately 3% in 1997 and decreased as a percentage of sales.
These reductions were due primarily to lower profit margins on certain
electronic warfare production contracts and increased costs on certain flight
systems development contracts. Delays in the award of several key production
contracts also had an adverse effect on profit margins. Contract awards delayed
until late in 1997 included: a $60 million contract, including options, for the
Band 9/10 radar jamming transmitters for the U.S. Navy's EA-6B aircraft; a $12.4
million production order for AN/ALE-47 countermeasures dispenser systems; and, a
$13.3 million production order for QF-4 aerial targets. In addition, production
of MQM-107E sub-scale aerial targets for the U.S. government was delayed due to
program modifications and is expected to begin in the second quarter of 1998.

Systems Technologies segment sales decreased slightly in 1997, while the
long-term trend has shown modest growth. Increases in command, control, and
communications engineering contract revenues were offset by lower revenues from
shipboard combat systems integration contracts and range systems and support
contracts. Segment earnings increased due to the timing of award fees and
profits on certain completed contracts.

Selling, general, and administrative (SG&A) expenses were 10.4% of sales in
1997, down from 11.4% of sales in 1996. Operating expenses, the major component
of SG&A expenses, decreased from 10.3% of sales in 1996 to 9.3% of sales in
1997, due to the increased revenue base, operating efficiencies resulting from
the integration of acquired businesses, and cost savings realized through the
realignment of Tracor's businesses into three operating segments.

Interest expense decreased from $30.2 million in 1996 to $25.9 million in
1997 primarily as the result of the debt refinancing completed in the first
quarter of 1997. (See Financial Condition and Liquidity for a discussion of the
debt refinancing.) Available cash balances were also used to reduce revolving
debt shortly after the refinancing was completed which resulted in lower
investment interest income for the balance of 1997 compared to the prior year.
 Income taxes were incurred at statutory federal, state, and foreign rates.
The effective tax rate decreased from 44.6% in 1996 to 42.1% in 1997. This
decrease was composed of a reduction of approximately 3.5% primarily as a result
of favorable settlements with taxing authorities and tax savings realized upon
export sales, and an increase of approximately 1% due to additional
nondeductible amortization expense of goodwill related to acquisitions completed
in 1996. At December 31, 1997, Tracor had a net deferred income tax asset of
$13.8 million. Based on the Company's taxable income in prior carryback years
and its forecast of future income, management believes, it is more likely than
not, all net deferred income tax assets will be realized. The realization of
deferred tax assets will be evaluated periodically.

The debt refinancing completed by the Company in 1997, resulted in an
extraordinary loss of $10.1 million, net of an income tax benefit of $7.1
million, consisting of a $7.6 million premium to retire the existing notes and a
$9.6 million write-off of unamortized debt issuance costs. Before the 
extraordinary loss in 1997 and a nonrecurring gain of $.08 in 1996, diluted
income per share of $1.65 in 1997 was up 19% over 1996. Diluted net income per
share in 1996 included $.08 attributable to a $2.1 million nonrecurring gain
resulting from a negotiated increase of $3.6 million to the price of a U.S.
government contract for work performed prior to 1996. The weighted average
common shares and dilutive securities increased from 25 million in 1996 to 26.9
million in 1997, due primarily to the issuance of shares in a public offering
completed in July 1996.

     Year Ended December 31, 1997, Versus Year Ended December 31, 1996

                                         1997          1996
     --------------------------------------------------------
                                           (in thousands)
     Net sales:
           Information Systems      $  351,785       $274,461
           Aerospace                   259,955        153,180
           Systems Technologies        470,765        459,279
     --------------------------------------------------------
     Consolidated net sales         $1,082,505       $886,920
     ========================================================
     Earnings before interest and 
       income taxes:
           Information Systems         $32,538        $22,752
           Aerospace                    35,197         18,691
           Systems Technologies         24,447         26,747
     --------------------------------------------------------
                                        92,182         68,190
     Other                                 408           --
     --------------------------------------------------------
     Consolidated earnings before 
       interest and income taxes       $92,590        $68,190
     ========================================================

Tracor experienced a 22% growth in sales compared to the prior year, with
acquired companies contributing 14% and internal growth contributing 8% of the
increase. The most substantial sales growth was in the Aerospace segment (70%),
followed by the Information Systems segment (28%), and the Systems Technologies
segment (2%). Earnings before interest and income taxes increased 31% over the
prior year, excluding the effect of a $3.6 million nonrecurring gain recognized
by the Aerospace segment in 1996 attributable to a negotiated increase to the
price of a U.S. government contract for work performed prior to 1996. Earnings
on internal sales growth contributed 19% of the 1996 earnings growth while
acquired businesses accounted for 12% of the growth.

The Information Systems segment had internal sales growth of 15% over the
prior year. Increased sales occurred in each of the segment's major products and
services. Acquired businesses represented 13% of the segment's sales growth. The
internal growth in sales and improved profit margins on deliveries of mission
management and imagery products resulted in substantial earnings growth for the
segment.

Aerospace segment sales increased 56% in 1996 due to the acquisition of AEL
Industries, Inc. (AEL) in February 1996. Internal sales growth of 14% was
realized in both electronic warfare and flight systems product areas. These
increased sales also resulted in increased earnings, exclusive of the effects of
the acquisition.

Systems Technologies segment sales increased in 1996 in each of its products
and services; however, a change in the contract mix from 1995 to 1996 resulted
in decreased earnings.

SG&A expenses decreased as a percentage of sales from 11.8% in 1995 to 11.4%
in 1996. Operating expenses, the major component of SG&A expenses, decreased
from 10.8% of sales in 1995 to 10.3% of sales in 1996 due to the increased
revenue base and reduced combined overhead costs.

Interest expense increased $7.7 million due primarily to an additional $108
million of senior term debt borrowed in conjunction with the AEL acquisition and
increased amortization expense of related loan costs. The increase in investment
interest income of $700,000 occurred due to higher cash balances during 1996
compared to the prior year.

Income taxes were incurred at statutory federal, state, and foreign rates.
The effective tax rate increased to 44.6% in 1996 compared to 42.7% in 1995, due
to additional nondeductible amortization expense of goodwill. The net deferred
income tax asset at December 31, 1996, was $17.5 million, due primarily to
acquisitions. Based on the Company's taxable income in prior carryback years and
its forecast of future income, management believes, it is more likely than not,
all net deferred income tax assets will be realized. The realization of deferred
tax assets will be evaluated periodically.

Diluted net income per share was $1.47 in 1996, up 14% from $1.29 in 1995. A
portion of the increase, $.08, is attributable to a $2.1 million gain, resulting
from a negotiated increase of $3.6 million in the price of a U.S. government
contract for work performed prior to 1996. The increase in weighted average
common shares and dilutive securities from 21.5 million in 1995 to 25 million in
1996 resulted from the issuance of shares in a public offering completed in July
1996.

Financial Condition and Liquidity 

Working capital was $163.4 million at December 31, 1997, up from $140.4
million at December 31, 1996, and the ratio of current assets to current
liabilities was 2.1 compared to 1.8. Working capital and the current ratio
increased primarily due to a decrease in accounts payable and accrued
liabilities and a reduction in the current portion of long-term debt as the
result of the debt refinancing in March 1997. Cash generated from operations
increased only slightly over the prior year due in large part to an increase in
accounts receivable which include unbilled contract costs and fees. This
increase was due to the timing of billings and collections related to several
production contracts.

Investing activities of $15.7 million for the year included the business
acquisitions of the Visual Information Technology division of Connectware, Inc.
and the Military Products Group of Calspan SRL Corporation, and investments in
two joint ventures. Normal capital expenditures totaling $22.2 million were
incurred during the year. The Company's operations typically do not require
large capital expenditures, and there were no substantial capital commitments at
December 31, 1997.

On March 14, 1997, Tracor completed the sale of $250 million of 8 1/2% Senior
Subordinated Notes (Notes) and entered into a new $200 million bank credit
facility (New Bank Credit Facility). The sale of the Notes resulted in proceeds
of $249 million, and $42 million was borrowed under the New Bank Credit Facility
at the time of the refinancing. These proceeds were used to retire the Company's
existing 10 7/8% Senior Subordinated Notes (Old Notes) plus accrued interest
($117.2 million), retire the existing bank credit facility plus accrued interest
($160.3 million), pay a premium to retire the Old Notes ($7.6 million), and pay
debt issuance costs ($6.8 million). The Company repaid the $42 million borrowed
under the New Bank Credit Facility prior to the end of the first quarter. There
were no revolving borrowings outstanding at December 31, 1997.
 At December 31, 1997, Tracor had outstanding letters of credit totaling $38.4
million. Existing letters of credit secure performance commitments on certain
contracts with foreign customers and serve as collateral on certain insurance
policies.

The Company had firm backlog of $1.3 billion, which included funded and
unfunded contractual commitments at December 31, 1997. Approximately 84% of firm
backlog represents contracts with agencies of the U.S. government or its prime
contractors, and about 86% is expected to be realized as sales within one year.
In addition, Tracor's backlog of unexercised contract options, primarily on U.S.
government contracts, was $1.9 billion at year end.

Management believes cash from operations and amounts available under the $200
million New Bank Credit Facility will provide the necessary resources to allow
the Company to meet its obligations, fund capital equipment requirements, and
pursue its business strategy. In addition, the long-term debt refinancing
completed during the year has provided Tracor with the financial flexibility to
pursue further acquisitions in the ongoing U.S. defense industry consolidation.

Year 2000

Over the past several years, Tracor management has assessed its current major
computer-based information systems, including hardware and software, in each of
its major operations. Tracor's current systems and vendor products were matched
against the Company's information systems requirements. Such requirements
included whether computer systems will properly recognize date-sensitive
information when the year changes to 2000. Tracor made product selections and is
in various stages of implementation with all critical systems scheduled to be in
place by December 31, 1998. Tracor's selections are designed not only to solve
the Year 2000 issue, but also to improve operations with new or upgraded
applications. Management believes these upgrades to existing software and
conversions to new software will preclude Year 2000-related problems for its
computer systems. The cost of the upgrades and conversions have not had and are
not expected to have a material effect upon the results of operations or the
financial condition of the Company. However, if such upgrades and conversions
are not made, or are not completed timely, the Year 2000 issue could have a
material impact on operations.

The Company is in discussions with its vendors in order to determine the
extent to which Tracor's interface systems are vulnerable to those vendors'
failure to remediate their own Year 2000 issues. Although Tracor has received
confirmations of each vendor's plans to address Year 2000 issues, there is no
guarantee the vendor's systems with which the Company's systems interface will
be converted timely and will not have an adverse effect on the Company's
systems. However, Tracor is tracking this issue closely in order to be able to
respond to any potential problems in this area at the earliest possible time.

Management has determined Tracor should have no material exposure to
contingencies related to the Year 2000 issue for the products and services it
has sold.

<PAGE>   25

<TABLE>

<CAPTION>

Selected Financial Data

Years Ended December 31 (in thousands, except per share amounts)

                                 1997          1996(1)         1995         1994(1)       1993(1)
-------------------------------------------------------------------------------------------------
<S>                          <C>             <C>             <C>           <C>           <C>
Income Statement Data:
Net sales                    $1,265,686      $1,082,505      $886,920      $694,037      $407,495
Cost of sales                 1,031,627         866,234       713,802       568,020       333,852
Selling, administrative, 
  and general expenses          132,153         123,681       104,928        78,201        49,889
-------------------------------------------------------------------------------------------------
Earnings before interest, 
  income taxes,
  and extraordinary item        101,906          92,590        68,190        47,816        23,754
Interest expense, net            25,237          26,470        19,496        16,771         8,277
-------------------------------------------------------------------------------------------------
Income before income taxes
  and extraordinary item         76,669          66,120        48,694        31,045        15,477
Income taxes                     32,278          29,506        20,831        12,498         6,200
-------------------------------------------------------------------------------------------------
Income before extraordinary 
  item                           44,391          36,614        27,863        18,547         9,277
Extraordinary loss from early 
  extinguishment of debt,
  net of income tax benefit 
  of $7,057                      10,146             --            --            --            --
-------------------------------------------------------------------------------------------------
Net income                   $   34,245      $   36,614      $ 27,863      $ 18,547      $  9,277
=================================================================================================
Share Data:
Earnings per common share
  - basic (2):
      Income before 
        extraordinary item        $1.78           $1.86         $2.11         $1.79          $.92
      Extraordinary loss           (.41)            --            --            --            --
-------------------------------------------------------------------------------------------------
      Net income per common 
        share - basic             $1.37           $1.86         $2.11         $1.79          $.92
=================================================================================================
Earnings per common share -
  assuming dilution (2):
      Income before 
        extraordinary item        $1.65           $1.47         $1.29         $1.15          $.72
      Extraordinary loss           (.38)            --            --            --            --
-------------------------------------------------------------------------------------------------
      Net income per common 
        share - assuming 
        dilution                  $1.27           $1.47         $1.29         $1.15          $.72
=================================================================================================
Weighted average common 
  shares adjusted for 
  potential dilution (2)         26,890          24,969        21,537        16,086        12,932


Operating and Other Data:
Capital expenditures         $   22,160      $   19,623      $ 13,676      $ 11,007      $  8,435
Depreciation and amortization    32,857          30,361        22,854        14,746         9,614
Firm backlog                  1,272,091       1,030,472       923,978       806,228       590,366

Balance Sheet Data
(at end of period):
Working capital                $163,352        $140,430      $129,129       $95,392       $87,140
Total assets                    717,609         744,954       467,456       444,086       305,733
Long-term debt                  280,967(3)      316,884(3)    191,175       205,738       144,302
Shareholders' equity            259,215         222,917       136,965        90,592        63,167

<FN>
(1)  Reflects the acquisitions of Cordant Holdings, Inc. on September 26, 1996;
     AEL Industries, Inc. on February 22, 1996; GDE Holdings, Inc. on November
     17, 1994; and Vitro Corporation on August 25, 1993.
(2)  Amounts have been restated in accordance with Statement of Financial
     Accounting Standards No. 128, Earnings Per Share. See notes to the
     Consolidated Financial Statements.
(3)  Includes $26.3 million in 1997 and $31.5 million in 1996 of fully cash
     collateralized promissory notes payable issued in conjunction with the
     acquisition of Cordant.

</TABLE>

<PAGE>

Report of Independent Auditors

Shareholders and Board of Directors, Tracor, Inc.

We have audited the consolidated balance sheets of Tracor, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of Tracor's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Tracor, Inc. and
subsidiaries at December 31, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.

/s/ Ernst & Young LLP

Austin, Texas
January 30, 1998

<TABLE>

<CAPTION>

Consolidated Income Statements

Years Ended December 31, 1997, 1996, and 1995 (in thousands, except per share
amounts)

                                              1997           1996         1995
--------------------------------------------------------------------------------
<S>                                       <C>            <C>            <C>
Net sales                                 $1,265,686     $1,082,505     $886,920
Cost of sales                              1,031,627        866,234      713,802
--------------------------------------------------------------------------------
  Gross profit                               234,059        216,271      173,118
Selling, administrative, and 
  general expenses                           132,153        123,681      104,928
-------------------------------------------------------------------------------- 
Earnings before interest, income 
    taxes, and extraordinary item            101,906         92,590       68,190
Interest expense                              25,862         30,156       22,440
Interest income                                  625          3,686        2,944
--------------------------------------------------------------------------------
  Income before income taxes and
    extraordinary item                        76,669         66,120       48,694
Income taxes                                  32,278         29,506       20,831
--------------------------------------------------------------------------------
  Income before extraordinary item            44,391         36,614       27,863
Extraordinary loss from early 
  extinguishment of debt, net of
  income tax benefit of $7,057                10,146            --           --
--------------------------------------------------------------------------------
Net income                                $   34,245     $   36,614     $ 27,863
================================================================================
Earnings per common share - basic:
  Income before extraordinary item             $1.78          $1.86        $2.11
  Extraordinary loss                            (.41)           --           --
--------------------------------------------------------------------------------
  Net income per common share - basic          $1.37          $1.86        $2.11
================================================================================
Earnings per common share - assuming 
  dilution:
  Income before extraordinary item             $1.65          $1.47        $1.29
  Extraordinary loss                            (.38)           --           --
--------------------------------------------------------------------------------
  Net income per common share - 
    assuming dilution                          $1.27          $1.47        $1.29
================================================================================

<FN>
See notes to consolidated financial statements.

</TABLE>

<PAGE>

<TABLE>

<CAPTION>

Consolidated Balance Sheets

December 31, 1997 and 1996 (in thousands, except share amounts)

                                                               1997       1996
--------------------------------------------------------------------------------
<S>                                                        <C>          <C>
Assets

Current assets:
  Cash and cash equivalents                                $     168    $ 36,758
  Accounts receivable                                        267,352     222,899
  Inventories                                                 15,227      12,456
  Prepaid expenses and other                                  15,111      17,542
  Deferred income taxes                                       15,594      26,829
  Net assets held for sale                                     3,530       3,530
--------------------------------------------------------------------------------
    Total current assets                                     316,982     320,014

Property, plant, and equipment                               176,691     165,305
  Less allowances for depreciation and amortization           56,001      47,842
--------------------------------------------------------------------------------
    Net property, plant, and equipment                       120,690     117,463

Goodwill, net of accumulated amortization of 
  $20,801 in 1997 and $11,590 in 1996                        227,815     236,047
Other intangibles, net of accumulated amortization of 
  $18,351 in 1997 and $13,517 in 1996                          8,180      12,947
Restricted cash                                               22,950      30,094
Prepaid pension costs                                          7,237      14,980
Deferred charges and other assets                             13,755      13,409
--------------------------------------------------------------------------------
Total assets                                                $717,609    $744,954
================================================================================
Liabilities and Shareholders' Equity

Current liabilities:
  Accounts payable                                          $ 39,073    $ 47,696
  Accrued liabilities                                        103,933     107,176
  Current portion of long-term debt                           10,624      24,712
--------------------------------------------------------------------------------
    Total current liabilities                                153,630     179,584

Long-term debt, less current portion                         270,343     292,172

Deferred revenue                                               7,882      15,625
Other long-term liabilities                                   26,539      34,656

Shareholders' equity:
  Preferred stock, par value $.01 per share: 
    1,000,000 shares authorized; 
    no shares issued or outstanding                              --          --
  Common stock, par value $.01 per share: 
    53,000,000 shares authorized; 
    shares issued and outstanding: 
    25,148,949 net of 18,169 shares in treasury in 1997
    and 24,754,303 net of 3,411 shares in treasury in 1996       251         247
  Additional capital paid in                                 127,888     125,839
  Retained earnings                                          131,076      96,831
--------------------------------------------------------------------------------
    Total shareholders' equity                               259,215     222,917
--------------------------------------------------------------------------------
Total liabilities and shareholders' equity                  $717,609    $744,954
================================================================================

<FN>
See notes to consolidated financial statements.

</TABLE>

<PAGE>

<TABLE>

<CAPTION>

Consolidated Statements of Shareholders' Equity

Years Ended December 31, 1997, 1996, and 1995 (in thousands, except share amounts)

                                          Common Stock        Additional
                                                      Par       Capital     Retained
                                        Shares       Value      Paid In     Earnings       Total
-------------------------------------------------------------------------------------------------
<S>                                    <C>            <C>      <C>          <C>          <C>
Balance at January 1, 1995             11,657,184     $116     $ 58,122     $ 32,354     $ 90,592
  Issuance of common stock, net of 
    issuance costs                      2,216,875       22       17,857                    17,879
  Exercise of stock options and
    Series A Warrants, net of stock 
    tendered as payment for options 
    exercised                             277,153        4          627                       631
  Net income                                                                  27,863       27,863
-------------------------------------------------------------------------------------------------
Balance at December 31, 1995           14,151,212      142       76,606       60,217      136,965
  Issuance of common stock, net of 
    issuance costs                      3,000,000       30       48,014                    48,044
  Exercise of stock options and 
    Series A Warrants, net of stock 
    tendered as payment for options 
    exercised                             308,114        2          798                       800
  Income tax effect related to stock 
    options and grants                                              292                       292
  Issuance of common stock for 
    Westmark acquisition                7,288,977       73           24                        97
  Issuance of common stock pursuant
    to board of directors stock plan        6,000                   105                       105
  Net income                                                                  36,614       36,614
-------------------------------------------------------------------------------------------------
Balance at December 31, 1996           24,754,303      247      125,839       96,831      222,917
  Exercise of stock options and 
    Series A Warrants, net of stock 
    tendered as payment for options 
    exercised                             388,646        4        1,824                     1,828
  Income tax effect related to stock 
    options and grants                                               59                        59
  Issuance of common stock pursuant to 
    board of directors stock plan           6,000                   166                       166
  Net income                                                                  34,245       34,245
-------------------------------------------------------------------------------------------------
Balance at December 31, 1997           25,148,949     $251     $127,888     $131,076     $259,215
=================================================================================================

<FN>
See notes to consolidated financial statements.

</TABLE>

<PAGE>

<TABLE>

<CAPTION>

Consolidated Statements of Cash Flows

Years Ended December 31, 1997, 1996, and 1995 (in thousands)

                                                                1997          1996         1995
-------------------------------------------------------------------------------------------------
<S>                                                         <C>           <C>           <C>
Operating activities:
  Net income                                                $  34,245     $  36,614     $ 27,863
  Adjustments to reconcile net income to net cash 
    provided by operating activities:
      Extraordinary loss from early extinguishment 
        of debt, net of income tax benefit                     10,146         --           --
      Depreciation of property, plant, and equipment           18,812        18,319       13,524
      Amortization of goodwill                                  9,211         6,371        3,666
      Amortization of other intangibles                         4,834         5,671        5,664
      Decrease in prepaid pension costs                         7,743         8,127       11,686
      Decrease in debt issuance costs                           1,343         3,237        2,054
      Provision for deferred income taxes                       4,648         7,778        2,796
      Decrease in deferred revenue                             (7,743)       (8,127)     (11,686)
      Changes in operating assets and liabilities:
        Increase in accounts receivable                       (41,193)      (17,346)      (4,085)
        (Increase) decrease in inventories and prepaids         4,326        (3,390)       3,220
        Increase (decrease) in accounts payable                (8,623)        1,650        6,869
        Increase (decrease) in advance payments                  (956)        6,195       (2,368)
        Increase (decrease) in accrued expenses                   625       (21,770)      (4,696)
        Other                                                   7,144        (1,494)        (545)
-------------------------------------------------------------------------------------------------
      Net cash provided by operating activities                44,562        41,835       53,962

Investing activities:
  Purchases of property, plant, and equipment                 (22,160)      (19,623)     (13,676)
  Proceeds from sale of property, plant, and equipment            128        14,610        2,382
  Acquisition of businesses, net of cash acquired,
    and investments in joint ventures                         (15,745)     (176,948)     (15,120)
-------------------------------------------------------------------------------------------------
      Net cash used in investing activities                   (37,777)     (181,961)     (26,414)

Financing activities:
  Payments of long-term debt                                 (414,522)     (105,602)     (10,732)
  Proceeds from stock offering, net of stock issuance costs      --          48,044       17,879
  Proceeds from issuance of long-term debt                    383,805       180,000         --
  Payment of debt issuance costs                               (6,840)       (5,836)        --
  Payment of premium to retire long-term debt                  (7,646)         --           --
  Exercise of stock options and warrants                        1,828           800          631
-------------------------------------------------------------------------------------------------
      Net cash provided by (used in) financing activities     (43,375)      117,406        7,778
-------------------------------------------------------------------------------------------------
      Increase (decrease) in cash and cash equivalents        (36,590)      (22,720)      35,326

Cash and cash equivalents at beginning of period               36,758        59,478       24,152
-------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period                   $    168      $ 36,758     $ 59,478
=================================================================================================

<FN>
See notes to consolidated financial statements.

</TABLE>

<PAGE>

Notes to Consolidated Financial Statements   December 31, 1997

Note A - Business Segments

Tracor, Inc. and its subsidiaries (individually and collectively referred to
as Tracor or the Company) provide various products, systems, and services to
their customers in the U.S. Department of Defense (DOD), as well as in
nondefense U.S. government agencies, other governments, and the commercial
marketplace. The Company is organized and reports the results of its operations
in three business segments (Information Systems, Aerospace, and Systems
Technologies) based on the products, systems, and services provided to the
marketplace and customers served by each segment. The Company evaluates
performance and allocates resources based on profit or loss from operations
before interest, income taxes, and extraordinary item. The accounting policies
of the segments are the same as those described in the summary of significant
accounting policies. (See Note C.) Intersegment sales are recorded at cost plus
applicable profit and are eliminated upon consolidation.

Effective December 31, 1997, Tracor adopted the Financial Accounting
Standards Board (FASB) Statement No. 131, Disclosures about Segments of an
Enterprise and Related Information (FAS 131). FAS 131 established standards for
the way public business enterprises report information about operating segments
in annual financial statements. FAS 131 also established standards for related
disclosures about products and services, geographic areas, and major customers.
The adoption of FAS 131 did not affect the Company's results of operations or
financial position. Financial information for Tracor's business segments is as
follows (in thousands):

<TABLE>

                                                1997        1996          1995
--------------------------------------------------------------------------------
<S>                                         <C>          <C>            <C>
Sales:
  Information Systems                       $  472,853   $  352,107     $274,670
  Aerospace                                    330,573      260,134      153,329
  Systems Technologies                         472,684      477,145      464,870
--------------------------------------------------------------------------------
                                             1,276,110    1,089,386      892,869

Intersegment sales:
  Information Systems                            3,200          322          209
  Aerospace                                      2,506          179          149
  Systems Technologies                           4,718        6,380        5,591
--------------------------------------------------------------------------------
                                                10,424        6,881        5,949

Net sales:
  Information Systems                          469,653      351,785      274,461
  Aerospace                                    328,067      259,955      153,180
  Systems Technologies                         467,966      470,765      459,279
--------------------------------------------------------------------------------
Consolidated net sales                      $1,265,686   $1,082,505     $886,920
================================================================================

Earnings before interest, income taxes, 
  and extraordinary item:
    Information Systems                       $ 42,932      $32,538      $22,752
    Aerospace                                   30,600       35,197       18,691
    Systems Technologies                        28,374       24,447       26,747
--------------------------------------------------------------------------------
                                               101,906       92,182       68,190
Other                                             --            408         --
--------------------------------------------------------------------------------
Consolidated earnings before interest, 
  income taxes, and extraordinary 
  item                                         101,906       92,590       68,190
Interest expense, net of interest income        25,237       26,470       19,496
--------------------------------------------------------------------------------
Consolidated income before income taxes 
  and extraordinary item                      $ 76,669      $66,120      $48,694
================================================================================

Depreciation and amortization expense:
  Information Systems                          $13,540      $10,369      $ 9,374
  Aerospace                                     11,679       10,976        5,006
  Systems Technologies                           7,545        8,918        8,379
--------------------------------------------------------------------------------
                                                32,764       30,263       22,759
Other                                               93           98           95
--------------------------------------------------------------------------------
Consolidated depreciation and amortization 
  expense                                      $32,857      $30,361      $22,854
================================================================================
Capital expenditures:
  Information Systems                          $ 4,446      $ 2,435      $ 1,242
  Aerospace                                     14,259       12,133        7,288
  Systems Technologies                           3,202        4,991        5,039
--------------------------------------------------------------------------------
                                                21,907       19,559       13,569
Other                                              253           64          107
--------------------------------------------------------------------------------
Consolidated capital expenditures              $22,160      $19,623      $13,676
================================================================================

</TABLE>

<PAGE>

<TABLE>

<CAPTION>

Assets attributable to each operating segment are as follows (in thousands):

                                         1997         1996
------------------------------------------------------------
<S>                                    <C>          <C>
Assets:
  Information Systems                  $269,200     $265,919
  Aerospace                             285,491      243,134
  Systems Technologies                  121,319      135,870
------------------------------------------------------------
                                        676,010      644,923

Corporate assets:
  Cash                                    4,552       45,372
  Other current assets                    1,869       11,665
  Property, plant, and equipment            969          814
  Restricted cash (see Note B)           27,950       31,844
  Deferred charges and other assets       6,259       10,336
------------------------------------------------------------
Consolidated assets                    $717,609     $744,954
============================================================

</TABLE>

<TABLE>

<CAPTION>

Segment sales derived from various products, systems, and services are as
follows (in thousands):

                                              1997           1996          1995
--------------------------------------------------------------------------------
<S>                                       <C>            <C>            <C>
Information Systems:
  Enterprise systems                      $  180,442     $  101,197     $ 49,852
  Mission management                         121,211        109,503       86,609
  Imagery                                     84,900         73,485       57,900
  Test and space systems                      83,100         67,600       80,100
--------------------------------------------------------------------------------
                                             469,653        351,785      274,461

Aerospace:
  Electronic warfare                         226,740        204,536      114,741
  Flight systems                             101,327         55,419       38,439
--------------------------------------------------------------------------------
                                             328,067        259,955      153,180

Systems Technologies:
  Shipboard combat systems integration       250,056        266,376      262,718
  Command, control, and communications 
    engineering                              130,598        111,532      109,224
  Range systems and support                   87,312         92,857       87,337
--------------------------------------------------------------------------------
                                             467,966        470,765      459,279
--------------------------------------------------------------------------------
Consolidated net sales                    $1,265,686     $1,082,505     $886,920
================================================================================

</TABLE>

Tracor primarily markets and sells its own products, systems, and services.
When marketing and selling to foreign customers, Tracor frequently engages the
assistance of in-country representatives, distributors, or trading companies.
Sales by geographic area, as determined by the location of the customer, are as
follows (in thousands):
 
                                1997          1996          1995
------------------------------------------------------------------
Sales by geographic area:                
 United States              $1,135,277     $  977,728     $799,948
 Foreign countries             130,409        104,777       86,972
------------------------------------------------------------------
Consolidated net sales      $1,265,686     $1,082,505     $886,920
==================================================================

Foreign sales were principally to Pacific Rim, European, and Middle Eastern
customers and to the Australian government. Company assets located outside the
United States and income before income taxes from foreign-based operations were
not material for any of the years presented.

Sales to U.S. government agencies totaled $1 billion in 1997, $926 million in
1996, and $773 million in 1995. The U.S. government, through more than 770
contracts with approximately 100 separate government agencies, was the only
customer accounting for more than 10% of consolidated net sales. Sales to the
DOD were $932 million in 1997, $845 million in 1996, and $717 million in 1995.

Note B - Acquisitions

Cordant Acquisition - On September 26, 1996, Tracor purchased all of the
outstanding shares of Cordant Holdings, Inc. (Cordant), an employee-owned
information systems company. Cordant, now known as Tracor Enterprise Solutions,
Inc., focuses on the design, development, and integration of information systems
for a variety of applications, including mail processing, records management,
and CAD/GIS (computer-aided design/geographic information systems). The purchase
price, $65.7 million, was financed by the use of $34.2 million of cash on hand
and the issuance of two promissory notes totaling $31.5 million. One promissory
note in the amount of $5 million, subject to adjustments for indemnification
claims, is payable March 26, 1998. The other note in the amount of $26.5 million
was reduced by payments totaling approximately $5.3 million on April 1, 1997.
The remaining balance of this note, $21.2 million, is payable upon the
resolution of a former Cordant minority shareholder's lawsuit. Both promissory
notes are supported by irrevocable standby letters of credit which are fully
collateralized by cash escrow deposits. Approximately $5 million of the
restricted cash and promissory notes is classified as current and presented with
other current assets and current portion of long-term debt, respectively, in the
balance sheet. The remainder of the restricted cash and promissory notes is
classified as long-term.

The acquisition has been accounted for using the purchase method, and,
accordingly, the purchase price including transaction expenses ($66 million) and
the liabilities assumed ($39 million) have been allocated to the assets acquired
($44.9 million) based on their respective fair values at the date of
acquisition. The resulting excess of the purchase price over the fair value of
the net assets acquired ($60.1 million) is being amortized over 25 years.

Tracor recorded estimated liabilities of $2.9 million relating to the planned
elimination of certain duplicative corporate functions and the consolidation of
operating facilities. As of December 31, 1997, approximately $1.8 million of
costs has been incurred for employee severance and excess facility costs. The
remainder of these costs are expected to be incurred before December 31, 1998.

AEL Acquisition - On February 22, 1996, Tracor purchased all of the outstanding
common shares of AEL Industries, Inc. (AEL). AEL, now known as Tracor Aerospace
Electronic Systems, Inc., is a leading supplier of electronic defense systems
and subsystems. The company designs and manufactures sophisticated
countermeasures, simulation, and radar warning receiver systems, and provides
state-of-the-art antenna, microwave, and integrated circuit components.

The acquisition has been accounted for using the purchase method, and,
accordingly, the purchase price ($103.1 million) and the liabilities assumed
($64 million) have been allocated to the assets acquired ($98.1 million) based
on their respective fair values at the date of acquisition. The resulting excess
of the purchase price over the fair value of the net assets acquired ($69
million) is being amortized over 30 years.

In conjunction with the acquisition, Tracor developed and executed a plan to
exit certain non-strategic activities and product lines of AEL, dispose of
certain AEL properties which are excess to the combined company, and to relocate
certain AEL operations to other Tracor facilities. During 1996, Tracor completed
the sale of two excess properties and two product lines obtained in the
acquisition resulting in net proceeds of approximately $14.4 million. At
December 31, 1997, another facility was under contract to be sold with closing
expected to occur in the second quarter of 1998.

As of December 31, 1997, the Company had completed the relocation and
consolidation of certain operations previously performed at AEL facilities into
other Tracor facilities and the elimination of certain corporate functions at
AEL's headquarters. Estimated liabilities of approximately $6 million for
employee severance, relocation costs, facility closing-related costs, and other
miscellaneous liabilities were established at the date of acquisition.
Substantially all of these costs were incurred as of December 31, 1997.

Westmark Acquisition - On June 13, 1996, Tracor concluded the acquisition of
substantially all the assets of Westmark Systems, Inc. (Westmark), which
primarily consisted of Tracor stock and warrants and certain other real estate
holdings. Westmark held all of Tracor's Class A stock (978,458 shares), a Series
B warrant to purchase 5,249,428 shares of Tracor common stock with an exercise
price of $4.42 per share, and a Series C warrant to purchase 5,455,000 shares of
Tracor common stock with an exercise price of $7.36 per share. Under the
agreement, Tracor exchanged 8,267,435 shares of common stock for the Westmark
assets. Westmark liquidated concurrently with the closing by distributing the
Tracor shares to its shareholders. The agreement provided for a distribution of
the Tracor shares through underwritten secondary offerings of a maximum of 
one-half of the shares during the first two years after the closing.
Accordingly, 3,567,272 shares were sold in a public offering concluded on July
11, 1996. (See Note J.)

Other Acquisitions - During 1997, 1996, and 1995, Tracor completed several
business acquisitions, none of which were individually or collectively material
to the financial condition or results of operations of the Company. These
acquisitions included, in 1997, the Visual Information Technology (VITec)
division of Connectware, Inc. and the Military Products Group of Calspan SRL
Corporation; in 1996, the AEGIS shipbuilding program support business from
Litton Industries, Inc., the Systems Integration Division of Codar Technology,
Inc., and Aerial Data Reduction Associates, Inc.; and, in 1995, the chaff
manufacturing business of Lundy Technical Center (a division of TransTechnology
Corporation), the Convair Twin Engine Program from General Dynamics' Convair
Division, and the shape-charged munitions business unit of The Titan
Corporation. The aggregate cash purchase price of these acquisitions, including
expenses, was approximately $38.3 million. The acquisitions have been accounted
for using the purchase method, and, accordingly, the purchase price and
liabilities assumed ($9 million) have been allocated to the assets acquired
($18.8 million) based on their respective fair values at the date of
acquisition. The resulting excess of the purchase price over the fair value of
the net assets acquired ($28.5 million) is being amortized over 10 to 30 years.

Note C - Summary of Significant Accounting Policies

Consolidation - The consolidated financial statements include the accounts of
Tracor, Inc. and its subsidiaries, all of which are wholly owned. All
significant intercompany accounts have been eliminated.

Cash Equivalents - All highly liquid investments, with a maturity of three
months or less when purchased, are considered to be cash equivalents.
 Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles (GAAP) requires management to make
estimates and assumptions. In particular, management estimates anticipated
contract costs and revenues used in the earnings recognition process, which
affect the amounts reported in the Company's financial statements and
accompanying notes. Actual results could differ from those estimates.

Long-term Contracts - Long-term contracts are accounted for under the
percentage of completion method, wherein revenue is recognized based on
cumulative costs incurred and the estimated cost to complete as such relates to
total contract price. All costs are expensed as incurred, and losses on
contracts are estimated and recognized when it becomes apparent a loss is to be
incurred. The revenue impact of pension costs is recognized as the pension costs
are recognized for GAAP purposes. This results in the deferral of revenue where
allowable pension costs under government accounting regulations exceed pension
costs as prescribed by GAAP. The entire amount of deferred revenue in the
accompanying consolidated balance sheets results from this accounting
methodology.

The progress payment provisions of certain contracts permit Tracor to bill
for a percentage of costs incurred. The remainder of costs incurred and profit
are included in unbilled costs and fees and are billed at the completion of the
contract or upon delivery of the product. (See Note D.)

Inventories - Inventories, consisting primarily of raw materials and
purchased components, are stated at the lower of cost (generally first-in,
first-out method) or market.

Property, Plant, and Equipment - Property, plant, and equipment are recorded
at cost, and depreciation is calculated on both the straight-line and
accelerated methods over the useful lives of the related assets.

Goodwill, Other Intangibles, and Deferred Charges and Other Assets - Goodwill,
the excess cost over the fair value of net assets acquired, is
amortized using the straight-line method over 10 to 30 years. Other intangibles
are recorded at cost and amortized using the straight-line method over their
economic lives. Deferred debt issuance costs, included in deferred charges and
other assets, are capitalized and amortized to interest expense using the
interest method.

It is Tracor's policy to value goodwill and other intangible assets at the
lower of unamortized cost or fair value. Management reviews the valuation and
amortization of intangible assets on a periodic basis, taking into consideration
any events or circumstances which might result in diminished fair value. If this
review indicates goodwill will not be recoverable, the carrying value of the
goodwill will be reduced accordingly.

Research and Development Costs - Company-funded research and development
costs are expensed as incurred. Such costs were $10.1 million in 1997, 
$11.1 million in 1996, and $5.4 million in 1995.

Income Taxes - In accordance with FASB Statement No. 109, Accounting for
Income Taxes, deferred income taxes are provided for the temporary differences
between the basis of assets and liabilities for financial reporting purposes and
for income tax return purposes.

Reclassifications - For comparative purposes, certain reclassifications have
been made to amounts previously reported.

Note D - Accounts Receivable

The following table shows the components of accounts receivable (in
thousands), which include unbilled costs and fees under both fixed-price and
cost-reimbursement type contracts. Billed accounts receivable are shown net of
allowances for doubtful accounts.

                                       1997         1996
----------------------------------------------------------
Billed:
  U.S. government, including 
    Foreign Military Sales (FMS)     $105,371     $105,288
  Foreign                              21,609       27,909
  Domestic commercial                  24,356       22,236
----------------------------------------------------------
                                      151,336      155,433

Unbilled costs and fees:
  U.S. government, including FMS       73,697       49,892
  Foreign                              17,164        6,345
  Domestic commercial                  25,155       11,229
----------------------------------------------------------
                                      116,016       67,466
----------------------------------------------------------
                                     $267,352     $222,899
==========================================================

Amounts included in unbilled costs and fees comprise contract amounts for
which billings have not been presented. The requirements for billing are those
commonly found in contracting situations, such as meeting contractual milestones
and fulfilling retainage provisions. Substantially all amounts not billed at
December 31, 1997, will be billed during 1998. It is also anticipated that
substantially all billed accounts receivable and unbilled costs and fees will be
collected within one year.

The following table summarizes the changes in the allowance for doubtful
accounts for 1995, 1996, and 1997 (in thousands):

Balance at January 1, 1995                 $   868
  Additions charged to costs and expenses      285
  Write-off of uncollectible accounts         (195)
  Reduction in allowance                      (492)
--------------------------------------------------
Balance at December 31, 1995                   466
  Additions charged to costs and expenses      223
  Additions due to acquisitions              1,508
  Write-off of uncollectible accounts         (251)
--------------------------------------------------
Balance at December 31, 1996                 1,946
  Additions charged to costs and expenses      266
  Additions due to acquisitions                 25
  Write-off of uncollectible accounts         (343)
  Reduction in allowance                    (1,406)
--------------------------------------------------
Balance at December 31, 1997               $   488
==================================================

Although it has a concentration of credit risk with the U.S. government,
Tracor has not historically experienced substantial collection losses on U.S.
government contracts. Also, Tracor's foreign receivables are not concentrated
within any one geographic region, nor are they subject to economic conditions
that would subject Tracor to unusual risk.

Note E - Inventories 

The components of inventories are as follows (in thousands):
 
                                             1997        1996
--------------------------------------------------------------
Raw materials and purchased components     $10,550     $ 8,996
Work in process                              3,915       2,859
Finished goods                                 762         601
--------------------------------------------------------------
                                           $15,227     $12,456
==============================================================

Note F - Property, Plant, and Equipment 

The components of property, plant, and equipment are as follows (in thousands):

                            1997         1996
----------------------------------------------
Land                     $ 13,644     $ 13,644
Buildings                  54,010       50,635
Equipment                 102,454       94,658
Leasehold improvements      6,583        6,368
----------------------------------------------
                         $176,691     $165,305
==============================================

Note G - Accrued Liabilities 

The components of accrued liabilities are as follows (in thousands):

                                    1997         1996
-------------------------------------------------------
Payroll and related items         $ 52,527     $ 47,553
Advance payments from customers      8,563        9,519
Interest                             9,147        5,617
Other                               33,696       44,487
-------------------------------------------------------
                                  $103,933     $107,176
=======================================================

Note H - Long-term Debt

The components of long-term debt are as follows (in thousands):

                                   1997          1996
------------------------------------------------------
Revolving loan                   $  --        $   --
Term loans                          --         163,205
Senior subordinated notes         249,055      115,947
Promissory notes payable to 
  former Cordant shareholders 
  (see Note B)                     26,250       31,500
Other                               5,662        6,232
------------------------------------------------------
                                  280,967      316,884
Less current maturities            10,624       24,712
------------------------------------------------------
                                 $270,343     $292,172
======================================================

Interest paid totaled $21.1 million in 1997, $25.9 million in 1996, and $20.6
million in 1995. 

Senior Subordinated Notes - On February 14, 1997, Tracor commenced a tender
offer to purchase for cash up to the entire $115,947,000 outstanding principal
amount of its 10 7/8% Senior Subordinated Notes due 2001 (Old Notes) and a
related solicitation of consents to modify certain other terms of the indentures
under which the Old Notes were issued. On February 17, 1997, the Company also
commenced a private placement offering (Offering) of $250 million aggregate
principal amount of 8 1/2% Senior Subordinated Notes due 2007 (New Notes). The
Offering was conditioned upon receipt of consents and tenders representing at
least a majority in aggregate principal amount of Old Notes outstanding. On
March 14, 1997, Tracor consummated the tender offer and purchased for cash
$112,891,000 of Old Notes. On July 14, 1997, Tracor issued a notice of
redemption for the remaining $3,056,000 of Old Notes and redeemed such notes on
August 15, 1997. The purchase of the Old Notes in the first quarter and
redemption of the remaining Old Notes in the third quarter resulted in an
extraordinary loss for the year of approximately $10.1 million, net of an income
tax benefit of $7.1 million, consisting of a $7.6 million premium to retire the
Old Notes and a $9.6 million write-off of unamortized debt issuance costs. The
New Notes were issued subject to a registration rights agreement, pursuant to
which Tracor filed a registration statement on April 1, 1997, and exchanged the
New Notes for identical registered 8 1/2% Senior Subordinated Notes due 2007
(Notes) of the Company.

Interest on the Notes is payable semiannually on September 1 and March 1. The
Notes are redeemable in whole or in part at the option of the Company on or
after March 1, 2002, at the redemption prices of 104.250% in 2002, 102.833% in
2003, 101.417% in 2004, and 100% thereafter. In addition, prior to March 1,
2000, the Company, at its option, may redeem up to 35% of the aggregate
principal amount of the Notes with the net cash proceeds of one or more public
equity offerings at the redemption price of 108.5%. In the event of a change of
control, as defined in the indenture, each holder may require Tracor to
repurchase such holder's Notes at 101% plus accrued and unpaid interest. Tracor
is also required to offer to repurchase a specified portion of the Notes in the
event of certain asset sales.

The Notes are general unsecured obligations of the Company and are
subordinated in right of payment to all existing and future senior indebtedness
of the Company. Substantially all of Tracor's wholly owned subsidiaries have
guaranteed the Notes on a senior subordinated basis.

Bank Credit Facility - Upon completion of the Offering, the Company also
refinanced its outstanding indebtedness under its existing bank agreement and
entered into a new bank credit facility (New Bank Credit Facility) providing for
a five-year revolving credit facility in the initial principal amount of 
$200 million.

The New Bank Credit Facility is subject to commitment reductions of
$25 million on February 28, 2000, and $50 million on February 28, 2001.
Revolving borrowings may remain outstanding until the final maturity date of the
facility except for the possibility of repayments being required by certain
mandatory prepayment events. All of Tracor's stock in certain of its domestic,
wholly owned subsidiaries is pledged under the New Bank Credit Facility, and all
borrowings are guaranteed by such subsidiaries. 

The New Bank Credit Facility bears interest at Tracor's option either at the
lender's base rate plus up to .75% or the eurodollar rate plus .625% to 1.75% in
each case based on certain financial ratios, as defined. Interest on base rate
loans is payable quarterly, and interest on eurodollar loans is payable at the
end of the applicable interest period or every three months in the case of
interest periods in excess of three months. A commitment fee ranging from .25%
to .375% per annum is charged on unused revolving loans and is payable quarterly
in arrears. The commitment fee at December 31, 1997, was .25%. Each letter of
credit bears an issuance fee of .125% per annum plus a fee equal to .25% less
the interest margin in effect for revolving loans maintained as eurodollar
loans. The total letters of credit fee at December 31, 1997, was .875%. The
Company had outstanding letters of credit at December 31, 1997, totaling $38.4
million relating to commitments for performance on certain contracts with
foreign customers and as collateral on certain insurance policies. There were no
revolving borrowings outstanding at December 31, 1997.

Long-term Debt Covenants - The New Bank Credit Facility and Notes contain
covenants which, among other things, impose limitations and restrictions on the
incurrence of additional indebtedness, capital expenditures, future mergers and
acquisitions, sales of assets, and payment of dividends. In addition, Tracor is
required to satisfy certain financial covenants relating to, among other
matters, interest coverage, working capital, leverage, and net worth.
Long-term Debt Maturities - Aggregate annual long-term debt maturities for
each of the next five years are as follows (in thousands):

      1998                   $ 10,624
      1999                         36
      2000                          2
      2001                       --
      2002                       --
      2003 and thereafter     270,305
                             --------
      Total                  $280,967
                             ========

Fair Value - Based on the market prices for the Notes, the fair value of
Tracor's Notes is $258.8 million at December 31, 1997.

Note I - Retirement Benefit Plans 

Tracor provides employee retirement benefits through contributory and
noncontributory defined benefit and defined contribution plans.

Defined Benefit Pension Plan - Tracor's defined benefit pension plan (Pension
Plan) covers most of its employees. Retirement benefits are generally based on
years of service and final average compensation. Tracor's contributions are made
in amounts sufficient to satisfy funding requirements under the Employee
Retirement Income Security Act of 1974 (ERISA). 

Assumptions used in accounting for the Pension Plan were:

                                1997      1996      1995
---------------------------------------------------------
Weighted average discount rate:
    January 1                   7.75%     7.25%     8.75%
    December 31                 7.25%     7.75%     7.25%
Rate of increase in 
  compensation levels:
    January 1                   4.00%     4.00%     5.00%
    December 31                 4.00%     4.00%     4.00%
Expected long-term rate 
  of return on assets           9.50%     9.50%     9.50%

Substantially all Pension Plan assets are invested in publicly traded stocks and
bonds. The funded status and the amount recognized in the consolidated balance
sheets are as follows (in thousands):

                                          1997        1996
------------------------------------------------------------
Actuarial present value of 
  benefit obligations:
    Vested benefit obligation           $335,558    $296,648
============================================================
    Accumulated benefit obligation      $346,793    $306,739
============================================================
Projected benefit obligation            $399,271    $353,421
Pension Plan assets at fair value        410,418     370,422
------------------------------------------------------------
Pension Plan assets in excess of 
  the projected benefit obligation        11,147      17,001
Unrecognized prior service cost            5,941       6,668
Unrecognized net gain                     (9,851)     (8,689)
------------------------------------------------------------
Net prepaid pension costs recognized    $  7,237    $ 14,980
============================================================

The components of pension expense are as follows (in thousands):
                                  1997        1996        1995
---------------------------------------------------------------
Service cost, benefits earned 
  during the year               $13,810     $14,487     $12,458
Interest cost on projected 
  benefit obligation             27,192      25,149      25,891
Actual return on Pension 
  Plan assets                   (67,664)    (42,961)    (73,856)
Net amortization and deferral    34,405      11,452      47,193
---------------------------------------------------------------
                                $ 7,743     $ 8,127     $11,686
===============================================================

Defined Contribution Retirement Plans - Tracor's contributions under its
defined contribution plans, which together cover substantially all employees,
are generally based upon a percentage of an eligible employee's covered
compensation or employee contributions. Expenses recorded under defined
contribution plans were $12.5 million in 1997, $10 million in 1996, and $9.2
million in 1995.

Effective December 1, 1996, the Company established the Tracor Deferred
Compensation Plan for eligible employees. The plan is a nonqualified deferred
compensation plan pursuant to which certain eligible employees of the Company
may elect to defer compensation. The Company will match contributions up to the
extent of the allowable scheduled company contributions under the defined
contribution retirement plans. Expenses under the Tracor Deferred Compensation
Plan were approximately $225,000 in 1997 and $88,000 in 1996.

Postretirement Health Care Plans - The Company provides postretirement health
care and life insurance benefits to certain retired employees who meet minimum
age and service requirements. The health care and life insurance plans are
contributory and contain other cost-sharing features such as deductibles and
coinsurance. Tracor's policy is to fund the cost of medical benefits in amounts
determined at the discretion of management. 

The postretirement health care plans for certain employees within the Systems
Technologies and Aerospace segments were discontinued in 1993, leaving only the
obligation that existed at that date for eligible employees and retirees.
Accordingly, the cost of providing these benefits is not material to the
consolidated financial statements, and information regarding actuarial methods
and assumptions, health care cost assumptions, and components of the obligation
and annual expense is not provided. Other long-term liabilities include
$4 million at December 31, 1997, and $5 million at December 31, 1996, for such
benefits.

Postretirement health care and life insurance benefits are currently provided
for certain employees of the Information Systems segment; however, the salaried
retiree medical plans will terminate effective July 1, 2008. The current retiree
plans will continue until that time with the premium capped at the rate in
effect July 1, 1993, plus an escalation of 5% per year through 1997. 

The following table (in thousands) presents the Information Systems plans'
funded status:
 
                                                 1997       1996
-----------------------------------------------------------------
Accumulated postretirement benefit obligation:
    Retirees                                    $5,698     $7,000
    Fully eligible active plan participants        831        840
    Other active plan participants                 345        466
-----------------------------------------------------------------
                                                 6,874      8,306
Plan assets at fair value                         --         --
-----------------------------------------------------------------
Net accumulated postretirement obligation       $6,874     $8,306
=================================================================

The accrued postretirement obligation, including an unrecognized net gain,
recorded in other long-term liabilities was approximately $10.3 million at
December 31, 1997 and 1996. Net periodic postretirement benefit cost for the
Information Systems plans was approximately $332,000 in 1997, $610,000 in 1996,
and $961,000 in 1995.

For measurement of the plans, 7% to 9% annual rates of increase, depending on
participant criteria, in the per capita cost of covered benefits (i.e., health
care cost trend rate), were assumed for 1997 and 1996. The rates were assumed to
decrease gradually to 6% for most participants by the year 2001 and remain at
that level thereafter. The health care cost trend rate assumption has a
substantial effect on the amounts reported. For example, increasing the assumed
health care trend rate by one percentage point would increase the accumulated
postretirement benefit obligation at December 31, 1997 and 1996, by $100,000 and
$130,000, respectively. The net periodic postretirement benefit cost for 1997
and 1996 would increase by $221,000 and $67,000, respectively.

The weighted average discount rate used in determining the accumulated
postretirement benefit obligation for the Information Systems plans was 7.25% at
December 31, 1997, and 7.75% at December 31, 1996.

Note J - Shareholders' Equity

Common Stock - The acquisition of Westmark (see Note B), completed on June 13,
1996, resulted in the issuance of 8,267,435 shares of Tracor common stock, as
well as the retirement of the Company's Class A common stock (978,458 shares)
and two series of warrants to purchase a total of 10,704,428 shares of the
Company's common stock. Subsequent to the Westmark acquisition, Tracor concluded
a public offering on July 11, 1996, of 6,567,272 shares of common stock at a
price of $17.50 per share. Of the shares sold, the Company sold 3,000,000 shares
and certain former shareholders of Westmark sold 3,567,272 shares. The net
proceeds to the Company from the primary shares sold in the offering totaled
approximately $48 million.

On May 2, 1995, Tracor concluded a public offering of 4,600,000 shares of
common stock at a price of $11.50 per share. Of the 4,600,000 shares, Tracor
sold 1,600,000 shares and a selling stockholder sold 3,000,000 shares. Included
in shares sold by the stockholder were 616,875 shares obtained upon the exercise
of Series A Warrants. The net proceeds to Tracor from the exercise of Series A
Warrants and the primary shares sold in the offering totaled approximately $18
million.

Common Stock Purchase Warrants - At December 31, 1997, there were outstanding
979,295 Series A Warrants, which entitle the holders to purchase shares of
common stock at an exercise price of $2.54. The warrants are exercisable at the
option of the holder at any time prior to December 27, 2001, and are not
callable by Tracor. Under certain conditions, as defined in the warrant
agreement, the number of shares purchasable and the exercise price may be
adjusted. Theholders may also request Tracor to register the underlying
securities with the SEC and such registration rights are generally transferable
to subsequent warrant holders. Series A Warrants exercised totaled 248,493
shares in 1997, 122,900 shares in 1996, and 829,175 shares in 1995. 

Preferred Share Purchase Rights - On February 17, 1997, the board of
directors declared a dividend of one Preferred Share Purchase Right (Right) on
each outstanding share of the Company's common stock. Under certain conditions,
the holder of Rights may purchase one one-hundredth of a share of a new series
of junior participating preferred stock at an exercise price of $100. The Rights
expire February 17, 2007.

The Rights become exercisable only if a person or group acquires 20% or more
of Tracor's common stock or upon the announcement of an intention to make a
tender offer or exchange offer, the consummation of which would result in
ownership by a person or group of 20% or more of the common stock. Following the
acquisition by a person or group of beneficial ownership of 20% or more of the
Company's common stock and prior to an acquisition of 50% or more of the common
stock, the board of directors may exchange the Rights (other than Rights owned
by such person or group), in whole or in part, at an exchange ratio of one share
of common stock (or one one-hundredth of a share of the new series of junior
participating preferred stock) per Right. These Rights may cause substantial
ownership dilution to a person or group who attempts to acquire Tracor without
the approval of the Company's board of directors.

In the event Tracor is acquired in a merger or other business combination
transaction after a person or group has acquired 20% or more of the Company's
outstanding stock, each Right will entitle its holder to purchase, at the
Right's then-current exercise price, a number of the acquiring company's shares
having a market value of twice such price. In addition, if a person or group
acquires 20% or more of Tracor's outstanding common stock, each Right will
entitle its holder (other than such person or members of such group) to
purchase, at the Right's then-current exercise price, a number of Tracor's
common shares having a market value of twice such price.

The Rights may be redeemed by the Company at a price of $.01 per Right at any
time prior to the acquisition by person or group of beneficial ownership of 20%
or more of Tracor's common stock at the option of the board of directors. The
board is also authorized to reduce the 20% threshold referred to above to not
less than 10%.

Common Stock Option Plan - Tracor's stock option plans provide for the grant
of restricted stock, stock appreciation rights, and both incentive and 
non-qualified options to employees. The exercise price of each currently
outstanding option is the fair value of a share of Tracor's common stock on the
date of grant. Up to 30% of each option is exercisable one year after the grant,
up to an additional 30% is exercisable two years after the grant, and the
remainder is exercisable three years after the grant. The term of each option is
10 years from the date of grant.

The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25), and related interpretations
in accounting for its employee stock options, because the alternative fair value
accounting provided for under FASB Statement No. 123, Accounting for Stock-Based
Compensation (FAS 123), requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized. 

Pro forma information regarding net income and earnings per share is required
by FAS 123, which also requires the information be determined as if the Company
has accounted for its employee stock options granted subsequent to December 31,
1994, under the fair value method prescribed by FAS 123. The fair value of these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted average assumptions:
 
                              1997        1996        1995
------------------------------------------------------------
Risk-free interest rate         6.1%        5.8%        6.3%
Dividend yield                    0%          0%          0%
Volatility factor of the 
  expected market price of 
  Tracor's common stock         .542        .576        .576
Weighted average expected 
  life of the options        5 years     5 years     5 years

The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, this option valuation model requires the input
of highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics substantially
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the Black-Scholes model does not necessarily provide a reliable single
measure of the fair value of its employee stock options.

For purposes of pro forma disclosures, the estimated fair value of the
options is expensed over the options' vesting periods. The Company's pro forma
information follows (in thousands, except per share amounts):

                                        1997        1996        1995
---------------------------------------------------------------------
Pro forma stock-based 
  compensation expense                $ 3,375     $ 2,021     $   773
Pro forma net income                   30,870      34,593      27,090
Pro forma earnings per 
  common share - basic:
    Income before extraordinary item    $1.65       $1.75       $2.05
    Extraordinary loss                   (.41)        --          --
---------------------------------------------------------------------
    Net income per common share - 
      basic                             $1.24       $1.75       $2.05
=====================================================================
Pro forma earnings per 
  common share - assuming dilution:
    Income before extraordinary item    $1.54       $1.40       $1.27
    Extraordinary loss                   (.38)        --          --
---------------------------------------------------------------------
    Net income per common share - 
      assuming dilution                 $1.16       $1.40       $1.27
=====================================================================

Because FAS 123 is applicable only to options granted after December 31,
1994, the year ended December 31, 1997, is the only period presented which
reflects the full pro forma effect of the standard. The effects of applying FAS
123 for pro forma disclosures are not likely to be representative of the effects
on reported net income for future years.

A summary of changes in common stock options during 1995, 1996, and 1997 is
as follows:

                                                         Weighted
                                          Range of        Average
                                          Exercise       Exercise
                          Shares           Prices          Price
-----------------------------------------------------------------
Options outstanding, 
  January 1, 1995         933,200      $ 1.75 - $12.25     $ 3.60
    Granted               487,500       13.00 -  15.25      13.02
    Exercised             (69,703)       1.75 -   8.13       2.22
    Surrendered              --              --               --
-----------------------------------------------------------------
Options outstanding, 
  December 31, 1995     1,350,997        1.75 -  15.25       7.07
    Granted               374,600       16.13 -  21.88      16.96
    Exercised            (188,625)       2.00 -  13.00       2.90
    Surrendered            (5,399)       8.13 -  13.00      10.84
-----------------------------------------------------------------
Options outstanding, 
  December 31, 1996     1,531,573        1.75 -  21.88      10.00
    Granted               478,150       21.25 -  22.38      22.35
    Exercised            (154,911)       2.00 -  22.38      10.71
    Surrendered           (31,110)      13.00 -  22.38      19.25
-----------------------------------------------------------------
Options outstanding,
  December 31, 1997     1,823,702      $ 1.75 - $22.38     $13.01
=================================================================

Options outstanding at December 31, 1997, are comprised of the following:

                                             Weighted
                                              Average
                                 Average     Remaining
                 Range of        Exercise   Contractual
  Options     Exercise Prices     Price        Life
------------------------------------------------------
  504,322     $ 1.75 - $ 3.50     $ 2.66     4.7 years
   60,000       7.88 -   8.13       8.12     5.9 years
  753,700      12.25 -  16.13      14.14     7.6 years
  505,680      19.13 -  22.38      22.23     9.1 years
------------------------------------------------------
1,823,702     $ 1.75 - $22.38     $13.01     7.2 years
======================================================

Options exercisable, December 31, 
     1997   959,109   $1.75 - $21.88
     1996   797,143    1.75 -  15.25
     1995   653,400    1.75 -  12.25

                                         1997        1996         1995
-----------------------------------------------------------------------
Weighted average fair value of
  options granted during the year        $11.97       $9.39       $7.28
Weighted average remaining 
  contractual life of options at 
  December 31                         7.2 years   7.5 years   7.8 years

Common stock reserved at December 31, 1997, consists of the following:

For exercise of outstanding warrants     979,295
For exercise of stock options          2,507,961
------------------------------------------------
                                       3,487,256

Note K - Income Taxes

Income before income taxes and extraordinary item consists of the following
(in thousands):

                             1997        1996        1995
----------------------------------------------------------
Domestic                   $73,495     $64,990     $48,212
Foreign                      3,174       1,130         482
----------------------------------------------------------
                           $76,669     $66,120     $48,694
==========================================================

The provision for income taxes from continuing operations consists of the
following (in thousands):
                             1997        1996        1995
----------------------------------------------------------
Current:
   Federal                 $22,229     $17,442     $14,887
   State                     4,516       4,269       3,308
   Foreign                     885          17        (160)
----------------------------------------------------------
                            27,630      21,728      18,035
Deferred:
   Federal                   4,227       6,995       2,309
   State                       631         528         487
   Foreign                    (210)        255         --
----------------------------------------------------------
                             4,648       7,778       2,796
----------------------------------------------------------
                           $32,278     $29,506     $20,831
==========================================================

A reconciliation between income taxes computed on income before income taxes
and extraordinary item at the statutory federal rate, 35%, and the provision for
income taxes is as follows (in thousands):

                             1997        1996        1995
----------------------------------------------------------
Income taxes at the 
  statutory federal rate   $26,834     $23,142     $17,043
Goodwill                     2,888       2,115       1,240
State income taxes, 
  net of federal tax 
  benefits                   3,346       3,118       2,467
Other                         (790)      1,131          81
----------------------------------------------------------
                           $32,278     $29,506     $20,831
==========================================================

A summary of the tax effects of temporary differences comprising deferred
income tax assets and liabilities is as follows (in thousands):

                                            1997        1996
-------------------------------------------------------------
Deferred income tax assets:
  Contracts                               $ 2,930     $13,383
  Postretirement medical obligation         3,447       1,942
  Accrued vacation/employee benefits        9,032       8,834
  Expense accruals not yet deductible       2,740       4,612
  Deferred compensation                    11,058       6,894
  Pension                                   3,163       6,891
  Other                                     2,562       2,242
-------------------------------------------------------------
    Total deferred tax assets              34,932      44,798
Deferred income tax liabilities:
  Depreciation/amortization                 6,700      11,055
  Pension                                   3,160       6,257
  Other                                    11,266       9,941
-------------------------------------------------------------
    Total deferred tax liabilities         21,126      27,253
-------------------------------------------------------------
Net deferred income taxes                 $13,806     $17,545
=============================================================

Net deferred income taxes are reflected on the consolidated balance sheet as
follows (in thousands):
 
                                 1997       1996
--------------------------------------------------
Current deferred income taxes  $15,594     $26,829
Other long-term liabilities     (1,788)     (9,284)
--------------------------------------------------
Net deferred income taxes      $13,806     $17,545
==================================================

Based on Tracor's taxable income in prior carryback years and forecast of
future income, management believes, it is more likely than not, all net deferred
tax assets will be realized. The Company settled the Internal Revenue Service
(IRS) examination of  the federal income tax returns of GDE Systems, Inc. (GDE)
for its tax periods beginning November 20, 1992, and ending November 17, 1994
(the date the Company acquired GDE). The final adjustments resulted in a
reduction of GDE's goodwill by $1.7 million. Also in 1997, the IRS completed its
examination of the Company's federal income tax returns for 1994 and 1995. The
final adjustments resulted in a reduction in goodwill of $5.4 million. A benefit
will be realized in earnings through reduced future goodwill amortization
expense as a result of these adjustments.

Income taxes paid, net of refunds, totaled $13.1 million in 1997, $17.4
million in 1996, and $20 million in 1995.

Note L - Lease Commitments

Tracor leases office space under various operating leases, which generally
contain renewal options and are subject to increases based on formulas such as
changes in the Consumer Price Index. Future minimum payments at December 31,
1997, for all noncancelable operating leases with initial terms of one year or
more are as follows (in thousands):

     1998                 $17,795
     1999                  14,733
     2000                  12,274
     2001                   8,247
     2002                   5,671
     2003 and thereafter   16,441
     ----------------------------
                          $75,161
     ============================

Rental expense for all operating leases was $19.9 million in 1997, 
$16.6 million in 1996, and $17.4 million in 1995.

Note M - Contingencies

Tracor is involved in various lawsuits and is subject to certain
contingencies incidental to its business. While the ultimate results of these
matters cannot be predicted with certainty, management does not expect them to
have a material adverse effect on the consolidated financial position of Tracor.

Note N - Earnings Per Share

In February 1997, the FASB issued Statement No. 128, Earnings Per Share (FAS
128), changing the method used to compute earnings per share. The Company has
adopted the provisions of FAS 128 as of December 31, 1997, and has restated
earnings per share for all prior periods presented. Under the new requirements,
the Company has presented basic earnings per share, the calculation of which
excludes the dilutive effect of warrants, options, and convertible securities,
and diluted earnings per share, which is similar to the previously reported
fully diluted earnings per share.

The following table (in thousands) reconciles the weighted average common
shares used to calculate basic earnings per share and the adjusted weighted
average common shares and assumed conversions of warrants and stock options used
to calculate diluted earnings per share.
 
                                    1997       1996       1995
---------------------------------------------------------------
Weighted average common shares     24,907     19,720     13,188
Effect of dilutive securities: 
  Series A Warrants                   950        835        713
  Stock options                     1,033      4,414      7,636
---------------------------------------------------------------
Weighted average common shares
  and assumed conversions          26,890     24,969     21,537
===============================================================

<PAGE>

<TABLE>

<CAPTION>

Common Stock Data

                    1993           1994             1995             1996               1997
               -------------  ---------------  --------------- ----------------   --------------
                High    Low    High    Low      High    Low      High     Low       High     Low
-------------------------------------------------------------------------------------------------
<S>            <C>    <C>    <C>     <C>      <C>     <C>      <C>      <C>      <C>      <C>
First Quarter  $4 1/8 $2 3/4 $10 1/8 $7 7/8   $14     $10      $17 7/16 $14      $24      $21 1/8
Second Quarter  6 1/8  2 7/8   8 1/2  6 15/16  14 1/4  11 3/8   21 1/8   17 1/8   26 3/4   20
Third Quarter   6 7/8  5 3/4   8 3/4  7 1/8    18 1/8  13 5/8   20 5/8   16 5/8   31       23 7/8
Fourth Quarter  9 1/4  6 7/8  12 5/8  7 1/2    16 7/8  14 1/2   24 3/8   19 3/4   31 3/8   25
13/16

<FN>
Listed on The Nasdaq Stock Market(SM) - TTRR

</TABLE>

<TABLE>

<CAPTION>

Summary of Quarterly Results

Unaudited (in thousands, except per share amounts)

                                         1st Qtr     2nd Qtr    3rd Qtr    4th Qtr      Year
-------------------------------------------------------------------------------------------------
<S>                                    <C>         <C>        <C>        <C>        <C>
1997

Net sales                               $297,464   $312,667   $320,791   $334,764   $1,265,686
Income before extraordinary item         $10,264    $10,511    $11,350    $12,266      $44,391
Extraordinary loss from early 
  extinguishment of debt, net of
  income tax benefit                       9,985       --          161       --         10,146
-------------------------------------------------------------------------------------------------
Net income                              $    279    $10,511    $11,189    $12,266      $34,245
=================================================================================================
Earnings per common share - 
  basic (1):
    Income before extraordinary item        $.41       $.42       $.46       $.49        $1.78
    Extraordinary loss                      (.40)       --        (.01)       --          (.41)
-------------------------------------------------------------------------------------------------
    Net income per common share - 
      basic                                 $.01       $.42       $.45       $.49        $1.37
=================================================================================================
Earnings per common share - 
  assuming dilution (1):
    Income before extraordinary item        $.38       $.39       $.42       $.46        $1.65
    Extraordinary loss                      (.37)       --        (.01)       --          (.38)
-------------------------------------------------------------------------------------------------
    Net income per common share -
      assuming dilution                     $.01       $.39       $.41       $.46        $1.27
=================================================================================================
1996(2)
Net sales                               $229,047   $267,372   $255,994   $330,092   $1,082,505
Net income                                $7,661     $7,997    $11,306     $9,650      $36,614
Net income per common share - 
  basic (1)                                 $.54       $.51      $.46(3)     $.39        $1.86(3)
Net income per common share -
  assuming dilution (1)                     $.34       $.34      $.43(3)     $.36        $1.47(3)

<FN>
(1)  Amounts have been restated in accordance with Statement of Financial
     Accounting Standards No. 128, Earnings Per Share. See notes to the
     Consolidated Financial Statements.
(2)  Reflects the acquisitions of AEL Industries, Inc. on February 22, 1996,
     and Cordant Holdings, Inc. on September 26, 1996.
(3)  Includes a $2.1 million gain, net of tax, ($.08 per share) due to a
     negotiated increase in the price of a U.S. government contract for work
     performed prior to 1996.

</TABLE>

<PAGE>   42

Tracor Principal Locations

[A MAP OF THE UNITED STATES IS SHOWN]

TRACOR, INC.
6500 Tracor Lane
Austin, TX 78725-2000
512 926-2800
512 929-2262 Fax
800 519-TTRR (8877)
www.tracor.com

Washington Office
1215 Jefferson Davis Highway, Suite 1109
Arlington, VA 22202-4302
703 418-3530
703 415-1459 Fax

TRACOR INFORMATION SYSTEMS
P.O. Box 509009
San Diego, CA 92150-9009

GDE Systems, Inc.
San Diego, CA 
619 675-2600
619 675-1999 Fax
www.gdesystems.com

Imagery and Information Systems Division
P.O. Box 509008
San Diego, CA 92150-9008
619 592-5553
619 592-1019 Fax

Mission Management Systems Division
P.O. Box 509008
San Diego, CA 92150-9008
619 592-1689
619 592-1628 Fax

Products Division
P.O. Box 509008
San Diego, CA 92150-9008
619 592-5200
619 592-5309 Fax

ADR, Inc.
9285 Commerce Highway
Pennsauken, NJ 08110
609 663-7200
800 257-7960
609 486-7778 Fax
www.adrinc.com

Test and Space Systems Division
San Diego, CA
619 675-5806
619 675-5885 Fax

Quality Systems, Inc.
8201 Greensboro Drive, Suite 1200
McLean, VA 22102
703 847-5820
703 847-5887 Fax
www.qsi.com

Tracor Integrated Solutions
1601 Research Boulevard
Rockville, MD 20850-3173
301 838-6800
301 838-6805 Fax

Tracor Enterprise Solutions, Inc.
11400 Commerce Park Drive
Reston, VA 20191
703 758-7000
703 758-7047 Fax
www.tracor-es.com

TRACOR AEROSPACE
6500 Tracor Lane
Austin, TX 78725-2070

Tracor Aerospace, Inc.
Austin, TX
512 926-2800
512 929-2380 Fax

Analysis and Applied Research Division
Austin, TX 
512 929-2053
512 929-4089 Fax
www.aard.tracor.com

Countermeasures and Combat Systems Division
Austin, TX 
512 929-2200
512 929-2891 Fax

Defense Systems Division
Austin, TX 
512 929-2779
512 929-2320 Fax

Tracor Aerospace Electronic Systems, Inc.
305 Richardson Road
Lansdale, PA 19446-1485
215 996-2000
215 996-2088 Fax
www.aes.tracor.com

Tracor Flight Systems, Inc.
1434 Flight Line, Bldg. 58B
Mojave, CA 93501-1665
805 824-4601
805 824-2257 Fax

TRACOR SYSTEMS TECHNOLOGIES
1601 Research Boulevard
Rockville, MD 20850-3173

Tracor Systems Technologies, Inc.
Rockville, MD
301 738-4000
301 738-4643 Fax
www.tst.tracor.com

Army Systems Division
Monmouth Park Corporate Center 
185 Route 36, Building B
West Long Branch, NJ 07764-1304
732 726-2600
732 726-2610 Fax

Electronic Systems Division
23481 Cottonwood Parkway
California, MD 20619-9517
301 862-9300
301 862-9330 Fax
www.eaglenet.com/tracor

FAA Division
Rockville, MD
301 838-6400
301 838-6465 Fax

Surface Warfare Division
5001 N. State Road 37 (Bus.)
Bloomington, IN 47404-1626
812 333-6291
812 333-1415 Fax

Surface Weapons Systems Division
16541 Commerce Drive
King George, VA 22485
540 663-9800
540 663-6382 Fax

Systems Design Division
Rockville, MD
301 231-3370
301 231-2562 Fax

Systems Engineering Division
Heitman Office Building, Suite 1012
2351 S. Jefferson Davis Highway
Arlington, VA 22202
703 418-8003
703 418-8275 Fax

Systems Integration Division
Rockville, MD 
301 231-1900
301 231-3150 Fax

Technical Services Division
10300 Silverdale Way, NW
Silverdale, WA 98383-1072
360 692-7800
360 692-2108 Fax

Tracor Services Corporation
Industrial Parkway
557 Mary Esther Cut-off
Fort Walton Beach, FL 32548-4090
850 244-7711
850 244-7760 Fax
www.tracorservices.com

<PAGE>

Board of Directors

James B. Skaggs, 60
Chairman of the Board, Tracor, Inc.
Austin, TX
Director since 1990

William E. Conway, Jr., 48
Managing Director, The Carlyle Group
Washington, D.C.
Director since 1995 (1)

Dr. Julian Davidson, 70
President and Chief Executive Officer, Davidson Enterprises, LLC
Huntsville, AL
Director since 1991 (2)

Anthony Grillo, 42
Senior Managing Director, The Blackstone Group, L.P.
New York, NY 
Director since 1991 (1)

Bob Marbut, 62
Chairman and Co-Chief Executive Officer, Hearst-Argyle Television, Inc.
New York, NY/San Antonio, TX
Director since 1991 (2)

Elvis L. Mason, 64
Managing Partner, Mason Best Company, L.P.
Dallas, TX
Director since 1991 (2)

Retired U.S. Air Force Lt. Gen. Thomas P. Stafford, 67
Former Astronaut
Co-Founder, Stafford, Burke and Hecker, Inc.
Alexandria, VA
Director since 1994 (1)

(1)   Audit/Ethics Committee
(2)   Compensation/Stock Option Committee

Management Team

James B. Skaggs, 60
President 
Chief Executive Officer
8 years of service

Robert K. Floyd, 62
Vice President, Finance
Chief Financial Officer
8 years of service

Barry G. Campbell, 56
Vice President
Chief Executive Officer, Tracor Systems Technologies
28 years of service

Woody Endsley, 45
Vice President
Treasurer
21 years of service

Robert J. Fitch, 49
Vice President, Government Relations
5 years of service

K. Bruce Hamilton, 56
Vice President
President, Tracor Systems Technologies
32 years of service

George R. Melton, 51
Vice President
President and Chief Executive Officer, Tracor Aerospace
8 years of service

Russell E. Painton, 57
Vice President
General Counsel
Corporate Secretary
32 years of service

John M. Rock, 58
Vice President,Technology and Information Systems
7 years of service

Roger W. Sadler, 61
Vice President, Business Development
7 years of service

Dr. Terry A. Straeter, 55
Vice President
President and Chief Executive Officer, Tracor Information Systems
19 years of service

Kathleen Thompson, 50
Vice President, Human Resources
26 years of service

<PAGE>

Mission

At Tracor, we believe mutual dedication to excellence in performing every task
we undertake, large or small, is the key to our future. We accomplish excellence
and enhance shareholder value by carrying out our responsibilities to:
     achieve profitable growth consistent with the best in our industry; 
     provide high-quality, innovative technological products, systems, and
     services which give the best value to our customers;
     ensure the highest standards of integrity in all activities;
     create a safe, pleasant, and motivating work environment providing both job
     fulfillment and career growth opportunities for employees; and 
     support the communities in which we have operations to develop a better
     environment for all citizens to enjoy.

Growth at Tracor is through excellence.

Acknowledgments

Design and printing:  Tracor Publications, Austin, Texas
Principal photography:  Jim Lincoln Photography, Austin, Texas
Other photography credits: Iridium LLC, Frank Morgan Photography, Motorola,
Inc., NASA, 
Shin Watanabe/PHOTONICA, and Kent Schnoeker Photography

Thanks to the following individuals who were photographed to illustrate our
business areas:
Cynthia L. Alaniz, Staff Accountant, Tracor Aerospace - page 12
Gilbert Atencio, Structural Mechanic, Tracor Flight Systems - page 15
Allan Blades, Photogrammetric Technician, ADR - page 13
Eric Bonner, Photogrammetric Technician, ADR - page 13
David K. Braig, Photogrammetric Technician, ADR - page 13
Julie Brophy, Data Analyst, Tracor Flight Systems - page 15
James F. Brown, Photogrammetric Technician, ADR - page 13
La Verne Deyne, Production Operator, Tracor Aerospace Electronic Systems - page
15
Lisa Dorn, Data Manager, GDE Systems - page 10
Deb Finney, Production Operator, Tracor Aerospace Electronic Systems - page 15
Rusty Greer, Systems Analyst, Tracor Systems Technologies - page 18
John Gullatt, Principal Scientist, Tracor Aerospace - page 12
Shelley Helyer, Human Resources Representative, Tracor Aerospace - page 12
Peggy Hess, Production Operator, Tracor Aerospace Electronic Systems - page 15
Marsha Holland, Department Head, Simulation and Signature Department, Tracor
Services - page 20
Rick Jorgenson, Painter, Tracor Flight Systems - page 16
Mike Krueger, Structural Mechanic, Tracor Flight Systems - page 15
Michael Lauth, Photogrammetric Technician, ADR - page 13
David Lown, Production Supervisor, Tracor Flight Systems - page 15
Carroll L. Marcus, Jr., Director, Accounting, Tracor Aerospace - page 12
Larry Martin, Structural Mechanic, Tracor Flight Systems - page 15
Tanya L. Mayes, Staff Sergeant, Texas Army National Guard, Camp Mabry - page 14
Celsa Medellin, Electronic Assembler Specialist, GDE Systems - page 11
Samuel A. Mirsky, Electrical Engineer, Tracor Services - page 20
Eric Mueller, Electronics Development Technician, GDE Systems - page 11
Tim L. Murphy, Painter, Tracor Flight Systems - page 16
Ivette Nelson, Structural Mechanic, Tracor Flight Systems - page 15
Barb Nice, Production Operator, Tracor Aerospace Electronic Systems - page 15
Connie Polakoff, Structural Mechanic, Tracor Flight Systems - page 15
Javier Ramirez, Staff Sergeant, Texas Army National Guard, Camp Mabry - page 14
Gabe Sulyok, Supervisor, Electronic Assembly, Tracor Aerospace Electronic
Systems - page 15
Paul Theriault, Structural Mechanic, Tracor Flight Systems - page 15
Dennis Werner, Technician, Tracor Aerospace Electronic Systems - page 15

Tracor is an equal opportunity employer and seeks to attract and retain the best
qualified people without regard to race, color, religion, sex, age, national
origin, disability, or veteran status.

<PAGE>   45

Shareholder Information

Stock Listing

Tracor, Inc. common stock typically is bought or sold through a brokerage
institution. At year end, 23 firms were making a market for the stock, which is
listed in the Nasdaq National Market under the trading symbol TTRR. Tracor
Series A Warrants trade in the Nasdaq National Market under the symbol TTRRW.

Company Information
To keep you informed of your company's progress, shareholders periodically are
provided with updated information through quarterly news releases, as well as
semiannual and annual reports. 

For additional information, contact: 
Marian Kelley,
Corporate Director, 
Public Relations
512 929-2271
800 519-TTRR (8877)
512 929-2262 Fax
mkelley@tracor.com
Corporate address: 
Tracor, Inc.
6500 Tracor Lane
Austin, TX 78725-2006
www.tracor.com

Transfer Agent
For stock transfers, name changes, address changes, or other inquiries, contact
our transfer agent:
Harris Trust and Savings Bank
700 Louisiana Street, Suite 3350
Houston, TX 77002-2729
800 926-1269
713 223-0674 Fax

Form 10-K
Copies of Tracor's Form 10-K filed each year with the Securities and Exchange
Commission are available online at www.tracor.com or, without charge, upon
request from:
W. Michael Murray
Assistant Corporate Secretary
Tracor, Inc.
6500 Tracor Lane
Austin, TX 78725-2000
512 929-2288
mmurray@tracor.com

Exhibits to this report are also available online, or printed copies may be
obtained at a reasonable cost.

Annual Meeting

The annual meeting of shareholders will be held at 10 a.m., Tuesday, April 21,
1998, at Tracor corporate headquarters in Austin, Texas. A notice of the
meeting, along with a form of proxy and a proxy statement, will be mailed to
shareholders on or about March 26, 1998.

Any statements contained in this report which are forward-looking statements
rather than historical facts are subject to risks and uncertainties that could
cause actual results to differ materially from those stated or implied. These
risks and uncertainties include the competitive nature of the government
contracting environment, dependence on continued funding of government
contracts, government contract procurement and termination risks, restrictions
imposed by terms of the company's indebtedness, the effect of changing political
or economic conditions, and other risks described in the company's various
Securities and Exchange Commission filings, including the company's Form 8-K,
dated July 21, 1997.

<PAGE>

  Tracor, Inc.
  6500 Tracor Lane
  Austin, TX 78725-2000

  512 926-2800
  www.tracor.com