================================================================================

               UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                  ----------

                                  FORM 10-K

[ X ]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
       ACT OF 1934

                 For the fiscal year ended December 31, 1995

                                      OR

[   ]  TRANSITION  REPORT  PURSUANT  TO SECTION  13 OR 15(d) OF THE  SECURITIES
       EXCHANGE ACT OF 1934

           For the transition period from ---------- to ----------

                        Commission file number 1-5631

                           WATKINS-JOHNSON COMPANY
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

           California                                    94-1402710
 (STATE OR OTHER JURISDICTION               (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)           

3333 Hillview Avenue, Palo Alto, California              94304-1223
 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                (ZIP CODE)

                                (415) 493-4141
             (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

                                  ----------

         Securities registered pursuant to Section 12(b) of the Act:

                                              NAME OF EACH EXCHANGE ON
          TITLE OF EACH CLASS                      WHICH REGISTERED
          -------------------                 -------------------------
     Common stock, no par value                New York Stock Exchange
                                               Pacific Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

   Indicate  by check mark  whether  the  registrant  (1) has filed all  reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934 during the  preceding  12 months,  and (2) has been  subject to such filing
requirements for the past 90 days. Yes   X       No 
                                       ----         ----

   Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not con- tained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.    [ X ]

                                                 AS OF FEBRUARY 2, 1996
                                                ----------------------
Aggregate market value of the voting stock held
 by non-affiliates of the registrant: ..........   $317,338,000
Number of shares outstanding: Common stock,
 no par value ..................................      8,124,000 shares

                     DOCUMENTS INCORPORATED BY REFERENCE

   Portions  of  the  Watkins-Johnson   Company  Notice  of  Annual  Meeting  of
Shareowners--April  13,  1996 and  Proxy  Statement  filed  with the  commission
pursuant to Regulation 14A are incorporated by reference into Part III.

================================================================================

<PAGE>

                                    PART I

ITEM 1. BUSINESS
  (A)  General Development of Business

       In  1995  Watkins-Johnson   decided  to  divide  its  Electronics  Group,
       recognizing  the two major  markets  that it  served,  into the  Wireless
       Communication   segment  and  the  Government   Electronics  segment  for
       reporting  purposes.  Other than this split into two reporting  segments,
       the company's structure during 1995 was unchanged from the previous year.
       Since  the  company   realigned  its  business  between  1991  and  1993,
       operations  had been reported as three business  segments:  semiconductor
       equipment, electronics products and environmental services. At the end of
       1994, the environmental services unit was divested.

       No material  reclassifications,  mergers or consolidations of the company
       or its  subsidiaries  occurred  during  1995.  Other than in the ordinary
       course  of  business,  there  were no  acquisitions  or  dispositions  of
       material amounts of assets during the year.

  (b)  Financial Information about Industry Segments

       The company operates in three industry segments--semiconductor equipment,
       wireless  communications,  and  government  electronics.  The  previously
       reported  environmental services segment was divested at the end of 1994.
       Financial  information  covering these  industry  segments is included in
       Note 8 to the  consolidated  financial  statements  contained in Part II,
       Item 8 of this annual report on form 10-K.

  (c)  Narrative Description of Business

       Watkins-Johnson Company is a high-technology  corporation specializing in
       semiconductor-manufacturing equipment, subassemblies and transceivers for
       wireless communications,  and radio-frequency  electronics for government
       applications.

       Semiconductor Equipment

       The  company's  Semiconductor  Equipment  Group  designs,   develops  and
       manufactures equipment to deposit thin dielectric films by chemical vapor
       deposition  (CVD),  using two  fundamental  CVD  processes.  The  earlier
       process,  atmospheric-pressure  CVD  (APCVD),  accounted  for  all of the
       equipment sold in 1995.  This equipment  functions by injecting the gases
       needed for the reaction over the substrate  material.  The substrates are
       transported  under the injectors on a continuously  moving  conveyor belt
       through a resistance heated muffle.  This approach allows high deposition
       rates with a simpler reactor design yielding higher reliability operation
       and high wafer throughput.

       The major market for the APCVD  equipment is the  semiconductor  industry
       where the  equipment  is used to deposit  thin films of doped and undoped
       silicon dioxide used in the making of integrated circuits.  The company's
       APCVD  process  is highly  productive  and offers an  attractive  cost of
       ownership.  The  equipment  is  sold  world-wide  to  most  of the  major
       semiconductor  manufacturers,  especially to those engaged in high volume
       integrated  circuit  manufacture.   Customers  include  both  firms  that
       manufacture and sell their own products and  semiconductor  foundry firms
       that contract manufacturing services to "fabless" companies.  As such the
       company's equipment is used in the manufacture of all types of integrated
       circuits from logic circuits to semiconductor memory chips.

       The newer process, high density plasma CVD (HDP), was first introduced to
       the  customers in July 1995 at the important  SEMICON West  exposition as
       the WJ-2000.  High  density  plasma is a variant of  plasma-enhanced  CVD
       which uses an  RF-induced  glow  discharge  to  transfer  energy into the
       reactant  gases.   This  allows  the  substrate  to  remain  at  a  lower
       temperature than in the APCVD process.  Improved  generators allow higher
       density of plasmas which the  semiconductor  industry  expects to use for
       future  integrated  circuits with smaller  feature size  transistors  and
       conductors.  These smaller (0.25 micron and below) features are needed to
       fabricate devices such

                                        1


<PAGE>

       as the 256 megabit  dynamic  random  access memory (256 Meg DRAM) and the
       seventh  generation of  microprocessors.  Using the philosophy  developed
       with  its  APCVD  equipment,  WJ's HDP  equipment  is  designed  for high
       productivity.   Following   the  July   introduction,   the  company  has
       concentrated  on a series of tests in its  Scotts  Valley  laboratory  to
       verify the production  capabilities of the equipment with wafers provided
       by WJ and  customers.  Additional  tests for the  equipment  at  selected
       customer  facilities (beta test sites) will be performed in 1996 prior to
       accepting orders.

       The company markets the APCVD systems as the WJ-999 and the WJ-1000.  The
       WJ-999 and  WJ-TEOS999  systems  are for  production  lines  using 150 mm
       (6-inch)   semiconductor   wafers;   they  are  capable  of  simultaneous
       processing  of two wafers in  parallel.  The WJ-1000 is also offered with
       either hydride or TEOS reactant  processes and is  specifically  designed
       for  high  productivity  processing  on  200  mm  (8-inch)  semiconductor
       processing   lines.  The  company's  APCVD  process  is  mostly  used  in
       depositing  doped oxide films,  boro-phosphoro-silicate  glass (BPSG) and
       phosphoro-silicate-glass   (PSG),  for  the  initial   dielectric  layers
       deposited  on the wafers.  These  initial  layers,  sometimes  termed the
       interlevel  dielectric  (ILD),  are  deposited  prior to the metal layers
       which are used to connect the transistors and provide the circuit action.
       BPSG is a useful  dielectric layer since it  self-planarizes,  offering a
       smoother  surface for the  following  metal and  dielectric  layers.  The
       equipment market for the pre-metal dielectric  depositions (PMD) for 1995
       was estimated by Dataquest, a high technology market research firm, to be
       $475  million.   The  WJ  APCVD   equipment  is  well  suited  for  these
       applications  and the  company  believes it is the PMD  equipment  market
       leader.  This  market  has  grown  more  rapidly  than the  semiconductor
       equipment  market in  general  since the  increased  chip  complexity  is
       leading semiconductor manufacturers to use more dielectric layers.

       As chip  complexity  increases,  more than one metal layer is required to
       provide the circuit  connections.  Another  growing market for dielectric
       deposition  equipment is inter-metal  dielectric  deposition  (IMD).  The
       development  of the new WJ-2000 HDP  equipment is aimed  specifically  at
       this market.  Dataquest estimated the 1995 IMD equipment market to exceed
       $600 million.  The IMD equipment  market is forecast to grow more rapidly
       than the PMD equipment  market;  Dataquest  forecast the total dielectric
       equipment market to approach $3 billion in the year 2000.

       The APCVD process equipment is easily scaleable. It has thus been adapted
       for the manufacture of the active matrix liquid crystal  displays used in
       personal communication, computing and entertainment products.

       Sales in the  Semiconductor  Equipment  segment were 57% of  consolidated
       sales in 1995,  43% in 1994 and 29% in 1993.  The company is changing its
       mode of  selling  semiconductor  equipment.  In  place  of a  network  of
       manufacturers'   representatives   and   distributors,   the  company  is
       establishing a direct sales and service force  world-wide to better serve
       its customers and reduce international expenses.  Currently,  the company
       has direct offices in the United  States,  Korea,  Taiwan,  Singapore and
       Europe (added in 1995). The business plans for the direct office in Japan
       have been  initiated with a phase-over  agreement  with the  distributor,
       Marubeni  Hytech,  and  the  purchase  of  a  site  for  the  office  and
       applications laboratory. Office and lab construction will be initiated in
       1996.

       The  company  sells  capital  equipment  to  a  majority  of  the  global
       semiconductor  manufacturers.   Most  of  the  sales  are  to  makers  of
       semiconductor   integrated   circuits.   Although  there  are  many  such
       customers,  a majority of the integrated circuits world-wide are produced
       by  approximately 20 companies,  with roughly  two-thirds of the business
       outside the United States.  NEC (through  Marubeni Hytech,  the company's
       Japanese  distributor),  Hyundai  Electronics  Ind.  Co. Ltd. and Samsung
       Pacific  International  Inc.  are  significant  customers of the segment.
       There are several domestic and  international  competitors  (some of whom
       are larger than the company) and  competition is intense.  In meeting the
       competition,  emphasis is placed on selling  quality  products  with good
       technical   performance  and  reliability  with  a  competitive  cost  of
       ownership.  The company's  growing global  customer-support  network is a
       possible competitive advantage.

                                        2


<PAGE>

       The Semiconductor Equipment Group's business depends upon the planned and
       actual capital expenditures of the semiconductor manufacturers, who react
       to the current and  anticipated  market demand for  integrated  circuits.
       Although  this demand has been growing over the past few years,  it has a
       history of cyclical  variations.  It is recognized that the semiconductor
       equipment  business  can vary  rapidly in response  to  customer  demand.
       Following placement of orders, customers frequently seek either faster or
       delayed delivery,  based on their changing needs.  Uncertainty  increases
       significantly  when  projecting  product demand more than 6 months in the
       future.

       Wireless Communications

       This newly recognized segment serves original equipment  manufacturers in
       the rapidly  growing  market for wireless  communication  equipment.  The
       company's long time  leadership as a  microwave-electronics  manufacturer
       and its historic  strength in space  communication  components  provide a
       competitive  advantage in offering unique  solutions to requirements  for
       wireless network communications and satellite systems.

       The  company  has  entered  two  wireless  communication  business  areas
       paralleling  the  skills  it  had  developed  as  a   defense-electronics
       supplier.  In the Palo Alto facility the company is producing  components
       and subassemblies for cellular, personal communication services (PCS) and
       space  applications.   At  the  Gaithersburg   facility  the  company  is
       successfully   adapting   its    communications-intelligence    equipment
       technology to the design and production of low-cost,  sensitive receivers
       for cellular telephone fraud detection and wideband transceivers for base
       station applications.

       Both of these  operations  take advantage of the  processes,  devices and
       monolithic   microwave   integrated   circuits   (MMIC)   developed   and
       manufactured  in the company's  gallium-arsenide  (GaAs)  foundry.  These
       proprietary    devices   and    circuits    perform    highly    reliable
       signal-processing functions in the various equipment and have enabled the
       company to capture  programs over its  competition.  Other  strengths the
       company  brings to this  marketplace  are  derived  from the  skills  and
       technology  developed over many years of providing  microwave  components
       and communications  receivers for defense-electronics  applications.  The
       company is mining this  technology to take  advantage of expected  market
       growth in the wireless  communications  sector.  Substantial research and
       development efforts are being expended in an attempt to take advantage of
       projected growth opportunities.

       Sales by the  Wireless  Communications  segment  were 8% of  consolidated
       sales  in  1995,  7% in 1994 and 7% in 1993.  Although  the  business  is
       international  in scope,  present selling efforts are concentrated in the
       United States.  Marketing and sales are performed by company direct sales
       personnel and distributors.  Major accounts are handled by direct company
       sales and service. Components, subassemblies,  receivers and transceivers
       are primarily sold to companies which  manufacture base station equipment
       for  various  wireless  communication  carriers.  Although  the  customer
       community  represents  a  large  business  opportunity,   the  number  of
       individual customer companies is not large.

       The  telecommunications  bill recently  enacted  reorganizes the business
       opportunities for the telecommunications  industry.  Although the company
       believes  the results of this  reorganization  will be  positive  for its
       wireless communication  business, its full effects are not clear. Various
       regulatory  agencies of  federal,  state and local  governments  can also
       affect the wireless communication market dynamics, causing unforeseen ebb
       and flow of orders and delivery requirements.  Domestic and international
       competition  from a number of  companies,  some of which are much  larger
       than  Watkins-Johnson,  is intense. The company seeks to win competitions
       by excellent  service and  superior  technical  performance.  It seeks to
       protect  its  intellectual  property  by an  aggressive  patent and trade
       secret program as indicated below.

                                        3


<PAGE>

       Government Electronics

       The Government  Electronics  segment  designs,  develops and manufactures
       microwave  components,  subsystems,  and  receivers  for a broad range of
       applications.  The segment supplies sophisticated electronic products for
       defense-intelligence,     missile-guidance,     electronic-warfare    and
       space-communications missions.

       Watkins-Johnson  receivers  and  signal-analysis  equipment  are  used by
       military  and other  governmental  agencies to perform  range-monitoring,
       frequency-measurement,   signal  localization  and  interference-analysis
       functions,  often  in  complex,   high-signal-density  environments.  The
       company continues to sustain its  technological and marketing  leadership
       in  communications  intelligence  equipment.  Company  funded  design and
       development   efforts  are  producing   advanced  receivers  and  related
       equipment   featuring  the   small-size,   light-weight   and  low-power-
       consumption  characteristics  demanded by its  customers  at  competitive
       prices.  This  design  effort is also  serving  the demand by  government
       customers for "commercial-off-the-shelf" (COTS) equipment.

       The company is the largest  merchant  supplier  of  integrated  microwave
       subsystems to guided missile prime contractors.  The company's integrated
       capability provides a technological advantage, while its microwave hybrid
       assembly  and  test  capabilities  give  it  a  manufacturing  edge  over
       competing  suppliers  (including  the internal  capabilities  of customer
       companies).  The  company is a  subcontractor  for  certain  key  missile
       programs, such as the Advanced  Medium-Range Air-to-Air Missile (AMRAAM),
       the High-speed  Anti-Radiation  Missile  (HARM) and the Standard  Missile
       Block IV  which  continue  to  represent  a  substantial  portion  of the
       segment's core defense-electronics business.

       Government  Electronics  products are  marketed  through  direct  selling
       efforts and  distributor  networks  domestically  and  overseas.  A small
       portion of the  sector's  business is exported  to  customers  similar to
       those in the U.S.  Such sales are  generally  subject to U.S.  Government
       export control procedures.

       Sales by the  Government  Electronics  segment  were 35% of  consolidated
       sales in 1995,  50% in 1994 and 64% in 1993. A majority of segment  sales
       are to government  agencies and  government  prime  contractors,  such as
       Hughes Aircraft Company,  engaged in defense  contracting.  The principal
       end  user  for  such  sales is the  U.S.  Department  of  Defense.  Sales
       contracts  with the  government  are  customarily  subject  to terms  and
       conditions which provide for  renegotiation of profits and termination of
       the  contract at the election of the  government.  The right to terminate
       for  convenience  has not had any  significant  effect  on the  company's
       financial position or results of operations.

       The Government Electronics segment has numerous competitors which include
       large,  diversified corporations and smaller specialty firms. In addition
       to pressures from competing companies,  the company's defense electronics
       business  is  influenced  by U.S.  and  foreign  political  activity  and
       national  budgetary  policies.  In recent  years,  Department  of Defense
       budget cutbacks have had direct and indirect  impact on the company.  The
       indirect impacts had come about as large diversified  customers  retained
       within  their  companies  work  which WJ had  previously  performed.  The
       company has reduced its work force and  restructured  its organization to
       better address the changing business opportunities.  Continued reductions
       in defense spending could limit the demand for the company's products.

       Other Business Items

       Raw materials for the  production of  semiconductor  equipment,  wireless
       communications  and  government  electronic  products are acquired from a
       broad range of suppliers.  Because suppliers are numerous,  dependence on
       any one supplier is kept to a minimum. On occasion,  however, the failure
       of a supplier to deliver key parts can jeopardize the on-time shipment of
       WJ products.

                                        4


<PAGE>

       Business  operations  are  not  believed  to  be  seasonal.   Except  for
       negotiated  advance or progress  payments  from  customers  on  long-term
       contracts  in the  defense-electronics  business,  there  are no  special
       working capital practices.

       The company has been active in securing patents and licensing  agreements
       to protect certain  proprietary  technologies and know-how resulting from
       its  ongoing  research  and  development.  The  financial  impact  of the
       company's  efforts to protect  its  intellectual  property  are  unknown.
       Management  believes  that the  company's  competitive  strength  derives
       primarily  from its core  competence in  engineering,  manufacturing  and
       understanding its customers and markets;  therefore,  aggressive steps to
       protect that knowledge are considered justifiable.

       Total company backlog at December 31, 1995 was  $250,276,000  compared to
       $235,942,000 at December 31, 1994. The percentage of backlog attributable
       to the Semiconductor  Equipment,  Wireless  Communications and Government
       Electronics  segments  were  49%,  11% and  40%,  respectively,  in 1995,
       compared to 39%, 6% and 55% in 1994.  Approximately 97% of all backlog at
       year-end 1995 is shippable within 12 months,  compared to 92% at year-end
       1994.

       Company-sponsored  research and  development  expense was  $47,629,000 in
       1995,  $34,436,000 in 1994, and  $27,163,000 in 1993.  Customer-sponsored
       research and development was estimated to be approximately $20,000,000 in
       1995,  $24,000,000  in 1994,  and  $18,000,000 in 1993, and was performed
       mostly by the Government Electronics segment.

       The  company's  employment  at December  31, 1995 was 2,180.  None of the
       company's employees is covered by a collective-bargaining  agreement. The
       company's relationship with its employees is generally good.

       Environmental  issues  are  discussed  in  Note  6  to  the  consolidated
       financial  statements  contained in Part II, Item 8 of this annual report
       on Form 10-K.

  (d)  Financial Information  about  Foreign and  Domestic Operations and Export
       Sales.

       Combined export sales and sales from foreign operations accounted for 47%
       of the company's sales in 1995, 45% in 1994, and 33% in 1993.  Assets and
       sales from foreign  operations are less than ten percent of  consolidated
       totals.  The inherent  risks of foreign  business are similar to domestic
       business, with the additional risks of foreign government instability and
       export license cancellation. A major portion of foreign product orders in
       the  Government  Electronics  segment  requires  export  licensing by the
       Department of State prior to shipment.  For  international  shipments for
       all company business  segments,  the company  purchases  forward exchange
       contracts  and/or  obtains  customer  letters of credit to reduce foreign
       currency fluctuation and credit risks. For further information on foreign
       sales, see Note 8 to the consolidated  financial  statements contained in
       Part II, Item 8 of this annual report on Form 10-K.

ITEM 2.  PROPERTIES

       Watkins-Johnson Company and subsidiaries conduct their main operations at
       plants in Palo  Alto and  Scotts  Valley,  California  and  Gaithersburg,
       Maryland.  During 1995, the company divested its  switch-matrix  business
       operations conducted in Windsor, England, and the facility is offered for
       sale. The plant in San Jose, California, which had been closed at the end
       of 1994 and  offered  for  sale,  has been  taken off the  market.  Space
       limitations at the Semiconductor Equipment Group's headquarters in Scotts
       Valley  prompted the company to reopen the San Jose  facility in order to
       accommodate the Group's rapid expansion. Adjacent undeveloped land at the
       San Jose site is still  offered for sale.  The company  closed its 50,000
       square foot facility in Columbia (Savage), Maryland, in the first quarter
       of 1995 and returned it to the lessor.

       At December 31, 1995,  there were  approximately  725,000  square feet of
       plant  space  in  California,   and  175,000  square  feet  in  Maryland.
       Approximately  75% of the  company's  plant  space  is  occupied  for the
       company's  operations.  The company is pursuing  opportunities to realize
       the  market  value of its  properties  while  ensuring  efficient  use of
       available space.

                                        5


<PAGE>

       The Government Electronics and Wireless  Communications  segments utilize
       substantially  all of the Palo  Alto  and  Gaithersburg  facilities.  The
       Scotts Valley plant houses the  Semiconductor  Equipment Group,  with the
       Group expanding into the San Jose facility.

       The Palo Alto facility and sales office locations are leased. Information
       on  long-term  obligations  is in  Note 3 to the  consolidated  financial
       statements  contained  in Part II, Item 8 of this  annual  report on Form
       10-K.

ITEM 3. LEGAL PROCEEDINGS

       Information  required  under  this  item  is  contained  in Note 6 to the
       consolidated  financial  statements  contained in Part II, Item 8 of this
       annual report on Form 10-K.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

       The company submitted no matters to a vote of the shareowners  during the
       last quarter of the period covered by this report.

<TABLE>
                      EXECUTIVE OFFICERS OF THE REGISTRANT

<CAPTION>
                                                           OFFICER        BUSINESS EXPERIENCE
           NAME             AGE        OFFICE HELD          SINCE           LAST FIVE YEARS
------------------------- ----- ------------------------ --------- -------------------------------
<S>                       <C>   <C>                       <C>      <C>                         
Dr. Dean A. Watkins  .....73    Chairman of the Board     1957     Chairman of the Board
Dr. H. Richard Johnson....69    Vice Chairman of the      1957     Vice Chairman of the Board
                                  Board
Dr. W. Keith Kennedy, Jr. 52    President and Chief       1989     President and Chief Executive
                                  Executive Officer                  Officer
Scott G. Buchanan........ 44    Vice President and Chief  1989     Vice President and Chief
                                  Financial Officer                  Financial Officer; Prior to
                                                                     1993, Chief Financial Officer
                                                                     and Treasurer
Keith D. Gilbert......... 54    Executive Vice President  1984*    Executive Vice President; Prior
                                                                     to 1995, President, Electronics
                                                                     Group (formerly Defense
                                                                     Group); Prior to 1993, Vice
                                                                     President, Defense Group
Richard G. Bell.......... 48    Vice President and        1990     Vice President and General
                                  General Counsel                    General Counsel
Marc C. Elgaway.......... 41    Vice President            1995     President, Telecommunications
                                                                     Group
Darryl T. Quan........... 41    Controller                1991     Controller
Carol H. Roosen.......... 64    Secretary                 1988     Secretary
Joan M. Varrone.......... 44    Treasurer                 1994     Treasurer; Prior to 1994,
                                                                     Assistant Treasurer, Raychem
                                                                     Corporation
<FN>
       Dr.  Watkins and Dr. Johnson have been directors of the company since its
       incorporation in 1957. Dr. Kennedy has been a Director since August 1987.

       None  of  the  above   officers  is  related  to  any  other  officer  at
       Watkins-Johnson Company.

       *From  January 1995 until  November  1995,  Keith D. Gilbert  served as a
       consultant  for  the  company,  reporting  to  the  President  and  Chief
       Executive Officer.  He was reappointed as Executive Vice President by the
       Board of Directors in November 1995.
</FN>
</TABLE>

                                        6


<PAGE>

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

       The  company's  common  stock is  principally  traded on the New York and
       Pacific stock  exchanges.  At December 31, 1995 there were  approximately
       4,900  shareowners,  which  included  holders  of record  and  beneficial
       owners.  The company expects that comparable cash dividends will continue
       in the future.

                          DIVIDENDS AND STOCK PRICES

              1995 QUARTERS                    1ST      2ND     3RD       4TH
---------------------------------------       ------   -----   -----     ----- 
Dividends Declared Per Share (in cents)        12       12       12       12
Stock Price (NYSE-in dollars) ..........High   40-1/4   48-3/8   57       54-7/8
                                        Low    29-3/4   38-5/8   43-1/2   40-1/2

              1994 QUARTERS                    1ST      2ND     3RD       4TH
-------------------------------------------   -----    -----   -----     -----
Dividends Declared Per Share (in cents)        12       12       12       12
Stock Price (NYSE-in dollars) ...........High  28-3/4   35-5/8   36-5/8   36
                                         Low   19-5/8   24-7/8   26-1/8   28-1/2

<TABLE>

ITEM 6. SELECTED FINANCIAL DATA

<CAPTION>
                                    (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                              ---------------------------------------------------------------
                                  1995        1994        1993         1992          1991
                              ----------- ----------- ----------- ------------ --------------
<S>                             <C>        <C>         <C>        <C>           <C>
OPERATING RESULTS
  Sales ......................  $ 387,031  $ 332,606   $ 282,134  $  255,485    $ 268,010
  Net Income .................     31,428     20,961      11,596      10,401(a)   (22,399)(b)
  Net Income Per Share .......       3.54       2.56        1.45        1.38(a)     (2.98)(b)
  Dividends Per Share ........        .48        .48         .48         .48          .48
  Average Shares Outstanding    8,875,000  8,200,000   7,999,000   7,551,000    7,527,000

FINANCIAL POSITION
  Working Capital ............  $ 142,213  $ 116,651   $ 108,497   $ 100,852    $  90,363
  Total Assets ...............    287,674    235,030     220,628     206,090      212,579
  Long-Term Obligations  .....     21,669     22,583      26,463      28,644       31,630
  Shareowners' Equity ........    191,253    149,626     133,888     125,055      118,126
  Firm Backlog ...............  $ 250,276  $ 235,942   $ 221,437   $ 203,717    $ 218,434

----------
<FN>
(a) Includes a tax  benefit  of  $5,438,000,  or 72 cents per share,  due to the
    cumulative effect of a change in accounting for income taxes.
(b) Includes pre-tax charges for  restructuring,  environmental  remediation and
    pending claims on government  contracts  totaling  $29,751,000 or $3.08 loss
    per share.
</FN>
</TABLE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

       Financial Condition

       The  company's  financial  condition  remains  healthy.  Net  income  has
       increased  from $21 million in 1994 to $31.4 million in 1995.  During the
       same periods, cash provided by operations increased from $11.8 million in
       1994 to $14.2 million in 1995,  reflecting  the need to fund increases in
       working capital items to support the company's growth. In 1995, purchases
       of capital equipment grew to $25.5 million from $12.5 million in 1994, in
       order to  support  the  company's  growing  semiconductor  equipment  and
       wireless communications operations. Cash provided by operations and stock
       option  exercises were  sufficient to fund these capital  expenditures as
       well as the 1995 dividend payments.  Cash and equivalents at December 31,
       1995 were virtually unchanged from

                                        7


<PAGE>

       the prior year. For 1996, growth  expectations are anticipated to require
       the use of external financing. The company has established a $100 million
       unsecured credit facility with several banks. The company has not had any
       borrowings under its credit facility during 1995.

       Current Operations and Business Outlook

       Semiconductor  Equipment  Group orders for 1995 were 34% above last year,
       reaching a total of $252  million.  Semiconductor  Equipment  Group sales
       accounted for 57% of total company  revenue.  The mainstay of the group's
       product    line   in   1995   was   the   WJ-1000    atmospheric-pressure
       chemical-vapor-deposition  (APCVD) system which was produced specifically
       to process 200-mm  (8-inch)  wafers.  The group is continuing to increase
       its international presence. A sales and service office was established in
       Europe and progress is  currently  underway  for the  construction  of an
       applications  laboratory  in  Japan.  Space  limitations  at the  group's
       headquarters in Scotts Valley, California, prompted the company to reopen
       its San  Jose,  California,  facility  to  accommodate  rapid  expansion.
       Training,  marketing,  sales,  and spares  functions will relocate to San
       Jose  in the  first  half  of  1996,  followed  in  1997  by the  group's
       engineering  organization.  The outlook for 1996 appears  positive as the
       group enters the year with record  backlog and strong  orders  prospects.
       The group expects 1996 profit margins to be at about the 1995 level.

       Although Wireless Communications is Watkins-Johnson's newest and smallest
       business segment today,  representing  nearly 10 percent of 1995 revenue,
       its growth rate is  expected to be higher than the rest of the  company's
       businesses.  The segment  enters 1996 with a strong  backlog for wireless
       subassemblies  which  coupled with good orders  prospects  from a few key
       customers  should  allow  wireless  revenues to nearly  double.  Industry
       analysts  forecast healthy  expansion for the wireless  industry at about
       25% to 30% revenue  growth per year through the end of the  century.  The
       company's longtime leadership as a microwave-electronics manufacturer and
       historic strength in space communication  provide a competitive advantage
       in providing  unique solutions to the increasing  requirements  placed on
       network  communications and satellite systems.  Although revenues for the
       wireless  market is expected to grow  strongly,  such growth will require
       continued high research and development  spending by the group in 1996 to
       capitalize on the  opportunities.  It is expected  this business  segment
       will continue to operate at a slight loss in 1996.

       While revenue from the Government  Electronics  segment declined in 1995,
       due in part to the  divestiture of certain  product lines,  profitability
       increased 35% as a result of aggressive  management  action.  The company
       maintained   tight  control  of  costs,   consolidated   its  Savage  and
       Gaithersburg,  Maryland, operations into its Gaithersburg plant, divested
       its  California-based  microwave  surveillance systems operation and sold
       its Windsor,  England,  switch-matrix business.  These actions enable the
       segment to concentrate on its long-term  technical strengths and focus on
       those  opportunities in which it can be most  competitive.  For 1996, the
       segment expects flat sales with improved profitability.

       Results of Operations

       1995 Compared to 1994:  Semiconductor  Equipment Group sales and Wireless
       Communications   sales  increased  55%  and  31%,   respectively,   while
       Government  Electronics  sales  were down 19%,  resulting  in an  overall
       company  increase  of 16%.  The  $31.5  million  decrease  in  Government
       Electronics  sales was due in part to the  divestiture of certain product
       lines in the second quarter of 1995 which accounted for approximately $28
       million of sales in 1994.  Gross  margins  increased  from 41% to 43% due
       mostly to the revenue mix shifting towards more profitable  semiconductor
       equipment  products and improved  margins in the  Government  Electronics
       segment.  Although selling and administrative expenses as a percentage of
       sales  decreased  slightly,  expenses  were  up 5% due  to the  increased
       volume.  Research and development  expenses  increased from 10% to 12% of
       sales  due  to the  company's  substantial  efforts  in  developing  next
       generation products,  particularly for the Semiconductor  Equipment Group
       and the  development and  commercialization  of products for the Wireless
       Communications  segment.  The  effective tax rate for federal and foreign
       income taxes  decreased  from 30% to 29% compared to the same period last
       year. The tax

                                        8


<PAGE>

       rate decrease  resulted mostly from tax benefits related to higher export
       sales.  Due to the  combined  effect of the  above  factors,  net  income
       increased 50% over 1994.

       1994 Compared to 1993:  Sales by the  Semiconductor  Equipment  Group and
       Wireless Communications segment increased 78% and 16%, respectively, more
       than offsetting the 9% decline in Government Electronics, resulting in an
       overall  company  increase  of 18%.  The  favorable  shift  towards  more
       profitable   semiconductor-equipment   products  helped  to  improve  the
       company's gross margin to above 40% despite  consolidation costs incurred
       in  the  Government  Electronics  segment.   Selling  and  administrative
       expenses  grew  faster than  revenues  because of  commissions  on higher
       international  semiconductor-equipment sales. To improve customer service
       and better control international expenses, the company moved to establish
       certain foreign operations and phase out its international  distributors.
       The offices will operate in parallel with the current distributors during
       a  transition   period.   Research  and  development   expenditures  were
       expectedly  higher  than  last  year  due to  the  company's  efforts  in
       advancing  high-density  plasma  technology  and the  development of next
       generation  products for all business  segments.  The  effective tax rate
       declined from 31% to 30% primarily due to higher R&D credit.  As a result
       of the above factors, net income from continuing operations rose 78%.

       Factors That May Affect Future Results

       Statements included in "Management's Discussion and Analysis of Financial
       Condition and Results of Operations"  which are not historical  facts are
       forward looking  statements that involve risks and uncertainties that may
       affect future  results,  including but not limited to: product demand and
       market acceptance risks, the effect of economical conditions,  the impact
       of    competitive    products   and   pricing,    product    development,
       commercialization  and  technological  difficulties,  capacity and supply
       constraints or difficulties,  business  cycles,  the results of financing
       efforts,  actual purchases under agreements,  the effect of the company's
       accounting  policies,  U.S.  Government  export  policies and other risks
       detailed in the company's Security and Exchange Commission filings.

                                        9

<PAGE>

<TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                   WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF OPERATIONS
               (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<CAPTION>
                                                       YEAR ENDED DECEMBER 31
                                                 ----------------------------------
                                                   1995        1994        1993
                                                 ---------   ---------   --------
<S>                                              <C>         <C>         <C>
Sales ...........................................$387,031    $332,606    $282,134
                                                 --------    --------    --------
Costs and expenses:
  Cost of goods sold ............................ 221,792     195,558     181,557
  Selling and administrative ....................  75,738      72,033      55,627
  Research and development ......................  47,629      34,436      27,163
                                                 --------    --------    --------
                                                  345,159     302,027     264,347
                                                 --------    --------    --------
Income from operations ..........................  41,872      30,579      17,787
Other income (expense):
  Interest income ...............................   2,400       1,562       1,497
  Interest expense ..............................    (873)     (1,141)     (1,291)
  Other income (expense)--net ...................     618        (149)       (278)
                                                 --------    --------    --------
Income from continuing operations before
  Federal and foreign income taxes ..............  44,017      30,851      17,715
Federal and foreign income taxes ................ (12,589)     (9,200)     (5,550)
                                                 --------    --------    --------
Income from continuing operations ...............  31,428      21,651      12,165
Discontinued operations (Note 8):
  Loss from discontinued operations, net of taxes                (490)       (569)
  Loss on disposition, net of taxes .............                (200)
                                                 --------    --------    --------
Net income ......................................$ 31,428    $ 20,961    $ 11,596
                                                 ========    ========    ========
Fully diluted per share amounts (difference
  between fully diluted and primary earnings
  per share is not material):
  Income from continuing operations .............   $3.54       $2.64       $1.52
  Discontinued operations .......................                (.08)       (.07)
                                                 --------    --------    --------
Net income ......................................   $3.54       $2.56       $1.45
                                                    =====       =====       =====
Average common and equivalent shares ...........8,875,000   8,200,000   7,999,000
<FN>

               See notes to consolidated financial statements.
</FN>
</TABLE>

                               10


<PAGE>

                   WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
                         CONSOLIDATED BALANCE SHEETS
               (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>  
                                                                      DECEMBER 31
                                                               -----------------------
                                                                   1995       1994
                                                               ----------- -----------
<S>                                                              <C>         <C>
                                       ASSETS
CURRENT ASSETS:
  Cash and equivalents ......................................... $ 34,556    $ 34,469
  Receivables ..................................................   86,311      80,427
  Inventories:
    Finished goods .............................................    3,623       1,680
    Work in process ............................................   45,092      37,682
    Raw materials and parts ....................................   31,120      12,293
  Deferred income taxes ........................................   11,725      11,060
  Other ........................................................    4,538       1,861
                                                                ---------   ---------
      Total current assets ...................................    216,965     179,472
                                                                ---------   ---------
PROPERTY, PLANT AND EQUIPMENT:
  Land .........................................................    4,130       3,198
  Buildings and improvements ...................................   37,046      24,617
  Plant facilities, leased .....................................   13,060      13,060
  Machinery and equipment ......................................  131,143     119,808
                                                                ---------   ---------
                                                                  185,379     160,683
  Accumulated depreciation and amortization ..................   (120,243)   (115,537)
                                                                ---------   ---------
  Property, plant and equipment--net .........................     65,136      45,146
                                                                ---------   ---------
OTHER ASSETS:
  Deferred income taxes ........................................    4,880       4,560
  Other ........................................................      693       5,852
                                                                ---------   ---------
    Total other assets .........................................    5,573      10,412
                                                                ---------   ---------
                                                                $ 287,674   $ 235,030
                                                                =========   =========
                         LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES:
  Accounts payable .............................................$  23,162   $  15,045
  Accrued expenses .............................................   11,899      11,466
  Advances on contracts ........................................    4,446       7,572
  Provision for warranties and losses on contracts  ............   10,490       7,192
  Payroll and profit sharing ...................................   14,602      16,074
  Income taxes .................................................   10,153       5,472
                                                                ---------   ---------
    Total current liabilities ..................................   74,752      62,821
                                                                ---------   ---------
LONG-TERM OBLIGATIONS ........................................     21,669      22,583
                                                                ---------   ---------
COMMITMENTS AND CONTINGENCIES (Note 3 and 6)
SHAREOWNERS' EQUITY:
  Preferred stock, $1.00 par value--authorized and unissued,
    500,000 shares 
  Common stock, no par value--authorized, 45,000,000 shares;
    outstanding: 1995, 8,124,055 shares; 1994, 7,576,471 shares    34,307      20,279
  Retained earnings ............................................  156,946     129,347
                                                                ---------   ---------
    Total shareowners' equity ..................................  191,253     149,626
                                                                ---------   ---------
                                                                $ 287,674   $ 235,030
                                                                =========   =========
<FN>
               See notes to consolidated financial statements.
</FN>
</TABLE>

                                       11

<PAGE>
                    WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
                 (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                         COMMON STOCK                    TOTAL
                                    ---------------------   RETAINED   SHAREOWNERS
                                       SHARES     DOLLARS   EARNINGS     EQUITY
                                    ----------- --------- ----------- --------------
<S>                                   <C>         <C>        <C>        <C>
Balance, January 1, 1993 ..........   7,554,865   $ 7,839    $117,216   $125,055
  Net income for 1993 ...............                          11,596     11,596
  Repurchase of common stock ........   (32,000)      (27)       (399)      (426)
  Dividends declared--$.48 per share                           (3,631)    (3,631)
  Stock option transactions .........    75,425     1,294                  1,294
                                      ---------   -------   ---------   --------
Balance, December 31, 1993 ........   7,598,290     9,106     124,782    133,888
  Net income for 1994 ...............                          20,961     20,961
  Repurchase of common stock ........  (564,200)     (972)    (12,833)   (13,805)
  Dividends declared--$.48 per share                           (3,563)    (3,563)
  Stock option transactions .........   542,381    12,145                 12,145
                                      ---------   -------   ---------   --------
Balance, December 31, 1994 ........   7,576,471    20,279     129,347    149,626
  Net income for 1995 ...............                          31,428     31,428
  Dividends declared--$.48 per share                           (3,829)    (3,829)
  Stock option transactions .........   547,584    14,028                 14,028
                                      ---------   -------   ---------   --------
Balance, December 31, 1995 ........   8,124,055   $34,307    $156,946   $191,253
                                      =========   =======   =========   ========

<FN>

               See notes to consolidated financial statements.
</FN>
</TABLE>
                                       12


<PAGE>
                    WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31
                                                                --------------------------------
                                                                      1995       1994       1993
                                                                ----------- ---------- ----------
<S>                                                             <C>         <C>         <C>
OPERATING ACTIVITIES:
  Net income ................................................    $ 31,428   $  20,961   $ 11,596
  Adjustments to reconcile net income to net cash provided by
   operating activities:
    Depreciation and amortization .............................     9,941       8,711      9,961
    Deferred tax provisions ...................................      (985)       (695)    (1,075)
    Net changes in:
      Receivables .............................................    (5,884)     (6,456)   (18,409)
      Inventories .............................................   (28,180)    (14,509)       345
      Other assets ............................................    (2,625)         27       (556)
      Accruals and payables ...................................    11,148       9,550      8,878
      Advances on contracts ...................................    (3,126)     (4,248)     1,261
      Provision for warranties and losses on contracts  .......     3,298       1,208       (980)
      Environmental remediation ...............................      (817)     (2,727)    (1,676)
                                                                 ---------   --------   --------
        Net cash provided by operating activities .............    14,198      11,822      9,345
                                                                 ---------   --------   --------
INVESTING ACTIVITIES:
  Additions of property, plant and equipment ..................   (25,566)    (12,526)    (9,714)
  Other .......................................................       741         476        869
                                                                 ---------   --------   --------
        Net cash used in investing activities .................   (24,825)    (12,050)    (8,845)
                                                                 ---------   --------   --------
FINANCING ACTIVITIES:
  Payments on long-term obligations ...........................      (112)     (4,916)    (1,982)
  Proceeds from issuance of common stock ......................    14,028      12,145      1,294
  Repurchase of common stock ..................................               (13,805)      (426)
  Dividends paid ..............................................    (3,829)     (3,563)    (3,631)
  Other .......................................................       627        (204)       204
                                                                 ---------   --------   --------
       Net cash provided (used) by financing activities  ......    10,714     (10,343)    (4,541)
                                                                 ---------   --------   --------
Net increase (decrease) in cash and equivalents  ..............        87     (10,571)    (4,041)
Cash and equivalents at beginning of year .....................    34,469      45,040     49,081
                                                                 ---------   --------   --------
Cash and equivalents at end of year ...........................  $ 34,556   $  34,469   $ 45,040
                                                                 =========   =========  ========
Other cash flow information:
       Income taxes paid-net of refunds ........................ $  5,828   $   9,003   $  3,808
       Interest expense paid ...................................      872       1,143      1,324
Noncash investing and financing activities:  
       Noncash effect on "Property,  Plant and  Equipment"
         and "Other Assets" due to a plant held for sale
         in 1994 and returned to service in 1995. Plant
         transferred at book value which is below market ....... $ (5,107)  $   5,107

<FN>

                 See notes to consolidated financial statements.
</FN>
</TABLE>

                               13

<PAGE>
                   WATKINS-JOHNSON COMPANY AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation--The consolidated financial statements include those
of the company and its subsidiaries  after elimination of intercompany  balances
and transactions.

Cash  Equivalents--Cash  equivalents consist principally of municipal bond funds
and commercial paper acquired with remaining maturity periods of 90 days or less
and are stated at cost plus accrued  interest which  approximates  market value.
The  company's  investment  guidelines  limit  holdings in  commercial  paper to
$1,000,000 per issuer.

Inventories--Inventories  are  stated  at the  lower  of cost,  using  first-in,
first-out and average-cost basis, or market. Cost of inventory items is based on
purchase  and  production  cost.   Long-term  contract  costs  and  selling  and
administrative  expenses are excluded from inventory.  Progress payments are not
netted against inventory.

Property, Plant and Equipment--Property, plant and equipment are stated at cost.
Leases  which at  inception  assure the lessor full  recovery of the fair market
value  of the  property  over the  lease  term are  capitalized.  Provision  for
depreciation and amortization is primarily based on the sum-of-the-years'-digits
and straight-line methods.

Revenue  Recognition--Revenue  on  fixed-price  contracts  other than  long-term
contracts is recorded  upon  shipment or completion of tasks as specified in the
contract.  Estimated product warranty costs are accrued at the time of shipment.
Sales and  allowable  fees under  cost-reimbursement  contracts  are recorded as
costs  are  incurred.  Long-term  contract  sales  and  cost of  goods  sold are
recognized  using  the  percentage-  of-completion  method  based on the  actual
physical  completion of work  performed and the ratio of costs incurred to total
estimated costs to complete the contract.  Any  anticipated  losses on contracts
are charged to earnings when identified.

Foreign Currency Translation--The functional currency for all foreign operations
is the U.S.  dollar with the  exception of the company's  subsidiary  located in
Japan which uses the local functional  currency.  Gains or losses,  which result
from the  process of  remeasuring  foreign  currency  financial  statements  and
transactions into U.S. dollars, are generally included in net income. For Japan,
the cumulative  translation  adjustments  are recorded  directly in shareowners'
equity. Translation gains or losses are not material in any year presented.

Income Taxes--The  consolidated  statements of operations include provisions for
deferred  income  taxes using the  liability  method for  transactions  that are
reported in one period for financial  accounting  purposes and in another period
for income tax  purposes.  State and local  income taxes are included in selling
and administrative expenses.

Per Share  Information--Net  income  per share is  computed  using the  weighted
average number of common and common  equivalent  shares (dilutive stock options)
outstanding  during the year. The difference  between fully diluted earnings per
share and primary earnings per share is not significant.

Use of  Estimates--The  preparation of financial  statements in conformity  with
generally accepted  accounting  principles requires management to make estimates
and assumptions  that affect the reported  amounts of assets and liabilities and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.  The December 31, 1995
consolidated  balance sheet includes  approximately  $6.5 million of inventories
for recently introduced products. Such inventory may be subject to a higher risk
of technological obsolescence than the company's other inventory.

Recently Issued Accounting Standard--Statement of Financial Accounting Standards
No. 123,  "Accounting for Stock-Based  Compensation,"  (SFAS 123) defines a fair
value method of accounting for stock- based  compensation  whereby  compensation
cost is  measured  at the grant date based on the fair value of the award and is
recognized  over the  service  period,  which is  usually  the  vesting  period.
Pursuant to SFAS

                                       14

<PAGE>

                    WATKINS-JOHNSON COMPANY AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


123,  companies are  encouraged,  but are not required,  to adopt the fair value
method no later than fiscal  years  beginning  after  December  15, 1995 for all
employee  awards  granted  after  the  beginning  of such  year.  Companies  are
permitted  to  continue  to  account  for  such  transactions  under  Accounting
Principles  Board Opinion No. 25,  "Accounting  for Stock Issued to  Employees,"
(APB 25) but would be required to disclose in a note to the financial statements
proforma  net income and  earnings  per share as if the company had applied SFAS
123.  The company  has  determined  it will not adopt the fair value  method and
therefore will continue to account for  stock-based  compensation  under APB 25,
reporting the required footnote disclosures pursuant to SFAS 123 in 1996.

Reclassification--Certain  amounts for 1994 and 1993 have been  reclassified  to
conform to the 1995 presentation.

2. RECEIVABLES

Receivables consist of the following (in thousands):

                                                        1995       1994
                                                     ---------  ---------
U.S. Government long-term contracts:
  Billed .....................................       $    617    $  2,613
  Unbilled ...................................            213       9,516
Commercial long-term contracts:
  Billed .....................................            258       9,663
  Unbilled ...................................            919         723
                                                    ---------   ---------
Total long-term contract receivables  ......            2,007      22,515
Other trade receivables ....................           84,304      57,912
                                                    ---------   ---------
    Total receivables, less allowance of $1,034
      in 1995 and $1,015 in 1994 .................   $ 86,311    $ 80,427
                                                    =========   =========

Unbilled  receivables  represent revenue recognized for long-term  contracts not
yet billable based on the terms of the contract. These amounts are billable upon
shipment  of the  product,  achievement  of  milestones,  or  completion  of the
contract.  Unbilled  receivables are expected to be billed and collected  within
one year. Receivables representing retainage not collectible within one year are
not material. There are no significant billed or unbilled receivables subject to
future negotiation.

Government contracts have provisions for audit, price  redetermination and other
profit and cost limitations. Contracts may be terminated without prior notice at
the Government's convenience. In the event of such termination,  the company may
be  compensated  for work  performed,  a reasonable  allowance  for profit,  and
commitments at the time of  termination.  The right to terminate for convenience
has not had any  significant  effect  on the  company's  financial  position  or
results of operations.

3. LONG-TERM OBLIGATIONS AND LINES OF CREDIT

Long-term  obligations,  excluding  amounts due within one year,  consist of (in
thousands):

                                       1995         1994
                                    ---------     --------
          Deferred compensation  ...  $ 6,356      $ 6,330
          Environmental remediation     7,613        8,430
          Long-term leases .........    7,700        7,823
                                    ---------     --------
              Total ................  $21,669      $22,583
                                    =========     ========

                                       15
<PAGE>

                    WATKINS-JOHNSON COMPANY AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


The current portion of long-term obligations is included in current liabilities.
The  expected  maturity  amounts  are  as  follows:  1996,   $2,786,000;   1997,
$1,798,000; 1998, $1,812,000; 1999, $1,827,000; 2000, $1,834,000.

Deferred  Compensation--The  company has deferred  compensation  plans  covering
selected  members of management and key technical  employees.  The purpose is to
reward and encourage talented employees to remain with the company.

Environmental  Remediation--As  discussed in Note 6, the company is obligated to
remediate  groundwater   contamination  at  the  Scotts  Valley  and  Palo  Alto
facilities.  The  portion  expected  to be paid  within one year is  included in
current liabilities.

Leases--Certain  long-term  leases for plant  facilities  are treated as capital
leases for financial statement purposes. The leases expire during the years 2014
to 2029, and renewal options do not provide for lease extensions beyond the year
2029. The company also has noncancellable  operating leases for plant facilities
and  equipment  expiring  through  the year 2000.  The leases may be renewed for
various periods after the initial term. Payment  obligations under these capital
and operating leases as of December 31, 1995 are as follows (in thousands):

                                    CAPITAL  OPERATING
                                     LEASES   LEASES
                                  ---------  ----------
Lease payments:
  1996 ........................ $    848      $1,716
  1997 ........................      848       1,525
  1998 ........................      848         620
  1999 ........................      848         340
  2000 ........................      848         286
  Remaining years .............   14,872
                                ----------   ---------
Total ..........................  19,112      $4,487
                                             =========
Imputed interest ............... (11,289)
                                ----------
Present value of lease payments
  (current portion, $123)...... $  7,823
                                ==========

Rent expense  included in  continuing  operations  for  property  and  equipment
relating to operating leases is as follows (in thousands):


                             1995         1994        1993
                          ---------    ---------    -------
          Real property... $ 1,202     $   774      $  822
          Equipment ......     665         626         865
                          ---------   --------     -------
              Total ...... $ 1,867     $ 1,400      $1,687
                          =========   ========     =======

Lines of  Credit--During  1995, the company  terminated its unsecured  revolving
lines of credit totaling  $23,500,000  and established a $100,000,000  unsecured
credit facility with several banks.  This facility  expires on December 8, 1998.
No material compensating  balances are required or maintained.  Borrowings under
this  facility  generally  bear  interest  at the lower of prime  rate or London
Interbank Offered Rates (LIBOR) plus .75%.  Although the lines of credit and new
credit facility were unused during the year,  interest rates applicable to these
facilities  ranged  from 5.7 to 6.9 percent in 1995.  The amount of  outstanding
letters of credit and other guarantees was not material at December 31, 1995.

                                       16
<PAGE>

                    WATKINS-JOHNSON COMPANY AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


4. SHAREOWNERS' EQUITY

Stock Repurchase  Program--The  Board of Directors has authorized the company to
repurchase a maximum of 2,500,000 shares of company stock.  Through December 31,
1994,  1,500,000 shares have been  repurchased.  No repurchases were made during
1995.  The program  enables the company to acquire its common stock from time to
time when appropriate.

Common  Share   Purchase   Rights--For   each  share  of  company  common  stock
outstanding,  one Common Share Purchase Right is attached.  If not renewed,  the
Rights  expire  October 20, 1996.  The Rights may be redeemed by the company for
$.01 per Right at any time prior to 15 days after an entity acquires 20% or more
of the  company's  common  stock.  The Rights  become  exercisable  if an entity
acquires 20% or more of the company's  outstanding common stock, or announces an
offer which would result in such entity  acquiring  30% or more of the company's
common stock.  When  exercisable,  the Rights trade  separately  from the common
stock and entitle a holder to buy one share of the  company's  common  stock for
$160.  If the company is  subsequently  involved  in a merger or other  business
combination,  each  Right will  entitle  its holder to buy a number of shares of
common stock of the  surviving  company  having a market value of twice the $160
exercise  price.  The Rights also provide for  protection  against  self-dealing
transactions by a controlling shareowner.

Stock  Option  Plans--The  Employee  Stock  Option Plan  provides  for grants of
nonqualifying and incentive stock options to certain key employees and officers.
The options  are granted at the market  price on date of grant and expire at the
tenth anniversary date. One-third of the options granted are exercisable in each
of the third, fourth and fifth succeeding years. The Plan allows those employees
who are subject to the insider  trading  restrictions  certain limited rights to
receive  cash in the  event of a change in  control.  Shares  issued  are net of
retirement  of shares used in payment for options  exercised.  In addition,  the
Plan permits the award of  restricted  stock rights  subject to a fixed  vesting
schedule.  The holder of vested restricted stock has certain  dividend,  voting,
and other shareowner  rights.  No restricted stock awards have been made through
December 31, 1995.

The  Nonemployee  Directors  Stock Option Plan provides for a fixed  schedule of
options to be granted through 1998. Options granted are exercisable similarly to
the Employee  Stock  Option Plan.  The total number of shares to be issued under
this plan may not exceed 200,000  shares.  Included in the tables below,  12,600
and 5,440 option shares were granted at $39.75 and $39.88, respectively, in 1995
and 16,320 option shares were granted at $29.00 in 1994.

                                       17

<PAGE>
                    WATKINS-JOHNSON COMPANY AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Activity related to stock option plans is as follows:


      1995                                SHARES         PRICE
     ---------------------------        ----------- ----------------
     Granted ......................       680,290   $31.88 to $55.00
     Exercised ....................       566,198   $ 9.63 to $36.75
     Terminated ...................        83,184
     At December 31:
       Outstanding ................     1,875,157   $ 9.63 to $55.00
       Exercisable ................       668,457   $ 9.63 to $36.75
       Reserved for future grants..       511,446


      1994                                SHARES         PRICE
     ------------------------------     ----------- ----------------
     Granted ......................       577,320   $22.75 to $35.88
     Exercised ....................       573,842   $ 9.63 to $28.25
     Terminated ...................        28,641
     At December 31:
       Outstanding ................     1,844,249   $ 9.63 to $36.75
       Exercisable ................       865,146   $ 9.63 to $36.75
       Reserved for future grants..     1,108,551


Included in the Consolidated  Statements of Shareowners' Equity are tax benefits
related to sales under stock option plans of $4,735,000, $2,327,000 and $123,000
for 1995, 1994 and 1993, respectively.

5. INCOME TAXES

The provision for income taxes includes  deferred  taxes  reflecting the net tax
effects of temporary  differences  that are reported in one period for financial
accounting purposes and in another period for income tax purposes.  Deferred tax
assets  are  recognized  when  management  believes  realization  of future  tax
benefits of temporary  differences is more likely than not. In estimating future
tax consequences, generally all expected future events are considered other than
enactments  of changes in the tax law or rates.  The  provision  for Federal and
foreign  income  taxes on income  from  continuing  operations  consists  of the
following (in thousands):

                          1995        1994      1993
                      ---------   ---------  --------
Current .......         $13,574     $ 9,895   $ 6,625
Deferred ......            (985)       (695)   (1,075)
                      ---------   ---------  --------
    Total .....         $12,589     $ 9,200   $ 5,550
                      =========   =========  ========

                                       18


<PAGE>
                    WATKINS-JOHNSON COMPANY AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Deferred tax assets  (liabilities) are comprised of the following at December 31
(in thousands):

                                                 1995      1994      1993
                                              --------  --------   -------- 
Deferred compensation ..............           $ 3,259   $ 3,251   $ 3,357
Loss accruals ......................             6,753     6,295     5,423
Environmental remediation  .........             3,298     3,490     4,034
Uniform capitalization .............             1,456     1,273     1,055
Vacation accrual ...................             1,794     1,724     1,744
Other ..............................             2,426     1,307     1,129
                                              --------  --------   --------
    Gross deferred tax assets.......            18,986    17,340    16,742
                                              --------  --------   --------
Depreciation .......................            (2,297)   (1,562)   (1,413)
Other ..............................               (84)     (158)     (404)
                                              --------  --------   -------
    Gross deferred tax liabilities..            (2,381)   (1,720)   (1,817)
                                              --------  --------   -------
Net deferred tax asset ...........             $16,605   $15,620   $14,925
                                              ========  ========   =======

The differences  between the effective income tax rate and the statutory Federal
income tax rate are as follows:

                                                1995     1994     1993
                                               -------  -------  -------
Statutory Federal tax rate .......               35.0%    35.0%    35.0%
  Export sales benefit ...........               (6.0)    (5.5)    (7.0)
  Research credit ................               (1.4)    (2.3)
  Foreign subsidiary earnings and
    losses .......................                (.7)      .2      1.7
  Other ..........................                1.7      2.4      1.7
                                               -------  -------  -------
Effective rate ...................               28.6%    29.8%    31.4%
                                               =======  =======  =======

Domestic  state and local  income taxes  included in selling and  administrative
expenses totaled $1,670,000 in 1995, $1,813,000 in 1994, and $1,257,000 in 1993.
Foreign operation amounts represent less than 5% of totals.

6. ENVIRONMENTAL REMEDIATION AND OTHER CONTINGENCIES

The company remains in compliance with the remedial action plans being monitored
by various regulatory agencies at its Scotts Valley and Palo Alto sites. In 1991
the company recorded a $15 million charge for estimated  remediation actions and
cleanup costs. No additional provision has been recorded since 1991. In 1994 the
company  reached  agreement  with  the  other  potentially  responsible  parties
regarding  allocations of the remediation costs at the Palo Alto site.  Included
in other  income for 1995 are  recoveries  from  insurers  totaling  $1,331,000.
Expenditures of $778,000,  $2,727,000 and $1,676,000 were incurred for the years
1995,  1994 and 1993,  respectively.  While the  timing and  ultimate  amount of
expenditures  of  restoring  the  sites  cannot  be  predicted  with  certainty,
management believes that the provision taken is adequate based on facts known at
this time.  The  company  will  continue  to  vigorously  pursue  any  potential
recoveries from insurers or other responsible parties.  Changes in environmental
regulations,  improvements  in cleanup  technology  and  discovery of additional
information  concerning  these sites and other sites could affect the  estimated
costs in the future.

In  addition  to the above  environmental  matters,  the  company is involved in
various  legal  actions  which  arose in the  ordinary  course  of its  business
activities.  Except for the  environmental  provision  noted  above,  management
believes the final resolution of these matters should not have a material impact
on its results of operations, cash flows, and financial position.

                                       19

<PAGE>

                    WATKINS-JOHNSON COMPANY AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


7. EMPLOYEE BENEFIT PLANS

Employees'  Investment  Plan--The  Watkins-Johnson  Employees'  Investment  Plan
conforms to the requirements of the Employee  Retirement  Income Security Act of
1974 (ERISA) and the Internal Revenue Code as a qualified  defined  contribution
plan. The Plan covers substantially all employees and for 1995 provided that the
company match employees'  401(k) salary deferrals up to 3% of eligible  employee
compensation.  Prior to 1995, the plan provided for company  contributions equal
to 9% of the net pretax  earnings and be funded each year. The amount charged to
income was $2,577,000 in 1995, $3,190,000 in 1994, and $1,945,000 in 1993.

Employee Stock  Ownership  Plan  (ESOP)--The  ESOP was  established to encourage
employee  participation  and  long-term  ownership of company  stock.  The Board
determines each year's  contribution  depending on the performance and financial
condition  of the  company.  The Board  approved a  contribution  equal to 1% of
eligible  employee  compensation  for 1995,  1994,  and 1993,  which resulted in
charges to income of $839,000,  $894,000, and $887,000,  respectively.  The ESOP
held  197,000 and 204,000  shares of common stock at December 31, 1995 and 1994,
respectively.  The ESOP is a qualified defined contribution plan under ERISA and
the Internal Revenue Code.

8. BUSINESS SEGMENT REPORTING

The company operates in three industry segments. Operations in the Semiconductor
Equipment  segment  involve the  development,  production,  sales and service of
chemical-vapor-deposition  equipment used in the  manufacture  of  semiconductor
products and flat-panel displays.  In 1995, the company established its wireless
communications business as a new reporting business segment,  separate and apart
from the  Electronics  Group.  The  Electronics  Group was  renamed  "Government
Electronics" for segment  reporting  purposes.  Amounts reported for prior years
have been restated to reflect the split of the former  Electronics  Group as two
reporting segments.  Operations in the Wireless  Communications  segment involve
the   design,   development,   manufacture   and  sale  of   advanced   wireless
telecommunication   products   for   cellular   service   providers,    personal
communication systems, and other wireless product  manufacturers.  Operations in
the Government Electronics segment include the design, development,  manufacture
and sale of advanced electronic systems and devices for guided-missile programs,
communications  intelligence,  and other  government  agency  applications.  The
environmental  services business was divested at the end of 1994 and is reported
as a discontinued business in the financial statements.

                                       20


<PAGE>
                    WATKINS-JOHNSON COMPANY AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

<TABLE>
Continuing operations by business segment are as follows (in thousands):

<CAPTION>
                                                    YEAR ENDED DECEMBER 31, 1995
                                     ----------------------------------------------------------
                                                             YEAR-
                                                 PRE-TAX      END       CAPITAL
                                       SALES      INCOME     ASSETS    ADDITIONS  DEPRECIATION
                                      --------  ---------  ---------  ----------  -------------
<S>                                    <C>          <C>       <C>         <C>         <C>
Semiconductor Equipment  .......       $ 222,212    $33,062   $147,051    $18,518     $4,687
Wireless Communications  .......          30,446     (1,796)    19,530      1,258        436
Government Electronics  ........         134,373     10,919     64,504      5,464      4,417
Corporate ......................                       (313)    56,589        326        401
                                     -----------  ---------  ---------  ----------  ---------
Income from continuing
 operations ....................                     41,872
Other income (expense)--net ....                      2,145
                                     -----------  ---------  ---------  ----------  ---------
    Total ......................        $387,031    $44,017   $287,674    $25,566     $9,941
                                     ===========  =========  =========  ==========  =========

                                                    YEAR ENDED DECEMBER 31, 1994
                                      ---------------------------------------------------------
Semiconductor Equipment  .......       $ 143,536    $22,185   $ 68,270    $ 7,649     $2,993
Wireless Communications  .......          23,196        307     10,365        135        273
Government Electronics  ........         165,874      8,087     98,291      4,465      4,999
Corporate ......................                                58,104        277        446
                                     -----------  ---------  ---------  ----------  ---------
Income from continuing
  operations ..................                      30,579
Other income (expense)--net ...                         272
                                     -----------  ---------  ---------  ----------  ---------
    Total .....................         $332,606    $30,851   $235,030    $12,526     $8,711
                                     ===========  =========  =========  ==========  =========

                                                   YEAR ENDED DECEMBER 31, 1993
                                       ------------------------------------------------------
Semiconductor Equipment  ......         $ 80,724    $10,591   $ 49,012    $ 4,299     $2,786
Wireless Communications  ......           19,985       (605)     9,981        147        404
Government Electronics  .......          181,425      7,801     98,049      4,686      6,257
Corporate .....................                                 63,586        582        514
                                     -----------  ---------  ---------  ----------  ---------
Income from continuing
  operations ..................                      17,787
Other income (expense)--net ...                         (72)
                                     -----------  ---------  ---------  ----------  ---------
    Total .....................         $282,134    $17,715   $220,628    $ 9,714     $9,961
                                     ===========  =========  =========  ==========  =========
</TABLE>

Corporate assets consist primarily of cash and equivalents, and included in 1994
and 1993 balances are assets of discontinued  operations  which are not material
for any year presented.

                                       21


<PAGE>
                    WATKINS-JOHNSON COMPANY AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


The U.S. Government and Hughes Aircraft Company are significant customers for
the Government Electronics segment. Marubeni Hytech (the company's Japanese
distributor), Hyundai Electronics Ind. Co. Ltd., and Samsung Pacific Int'l
Inc. are significant customers for the Semiconductor Equipment Group. Sales
to significant customers are as follows (in thousands):

                                                   1995        1994        1993
                                                 -------     -------     -------
United States Government ...................     $42,000     $57,000     $60,000
Hughes Aircraft Company ....................      40,000      35,000      41,000
Marubeni Hytech ............................      61,000      39,000      16,000
Hyundai Electronics Ind. Co. Ltd. ..........      28,000      11,000       4,000
Samsung Pacific Int'l Inc. .................      22,000      17,000      10,000


Sales  from  continuing  operations  by  geographic  area  are  as  follows  (in
thousands):

                                                  1995        1994        1993
                                                --------    --------    --------
United States .............................     $203,460    $183,963    $188,919
Export sales:
  Europe .....................................    19,958      26,534      20,830
  Japan ......................................    60,674      43,544      19,447
  Korea ......................................    53,470      32,292      14,307
  Other Asia-Pacific countries ...............    30,388      23,088      11,216
  Other ......................................     9,975      12,385      15,652
Foreign operations ...........................     9,106      10,800      11,763
                                                --------    --------    --------
    Total ...................................   $387,031    $332,606    $282,134
                                                ========    ========    ========

Foreign  operations' sales and identifiable  assets are less than ten percent of
consolidated totals.

Summarized   below  are  operating   results  and  assets  of  the  discontinued
Environmental  Services  business.  Intersegment sales were transferred based on
negotiated prices (in thousands).


                                                         YEAR ENDED DECEMBER 31
                                                       -------------------------
                                                            1994           1993
                                                         -------        -------
Sales ............................................       $ 4,911        $ 5,536
Intersegment sales ...............................        (1,294)        (1,380)
                                                         -------        -------
Net sales ........................................         3,617          4,156
                                                         -------        -------
Loss before income taxes .........................          (690)          (869)
Income tax benefit ...............................           200            300
Loss on disposition net of $100
 income tax benefit ..............................          (200)
                                                         -------        -------
Net loss .........................................       $  (690)       $  (569)
                                                         =======        =======


                                                                 DECEMBER 31
                                                            --------------------
                                                            1994           1993
                                                         -------       --------
ASSETS ..........................................        $ 2,281       $  3,923
                                                         =======       ========

                                       22

<PAGE>

                    WATKINS-JOHNSON COMPANY AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


9. QUARTERLY FINANCIAL DATA--UNAUDITED

Unaudited  quarterly  financial  data are as follows (in  thousands,  except per
share amounts):


 1995 QUARTERS                           1ST        2ND        3RD        4TH
------------------------------------   --------   --------   --------   --------
Sales ..............................    $92,983   $102,004   $ 95,550   $ 96,494
Gross profit .......................     39,877     41,649     40,572     43,141
Net income .........................      5,353      7,776      8,910      9,389
Net income per share ...............       $.63       $.88       $.98      $1.04


 1994 QUARTERS                           1ST        2ND        3RD        4TH
------------------------------------   --------   --------   --------   --------
Sales ..............................    $80,526   $ 87,365   $ 83,174   $ 81,541
Gross profit .......................     29,476     37,585     34,776     35,211
Net income .........................      3,624      5,934      5,386      6,017
Net income per share ...............       $.45       $.73       $.61       $.77


The total of  quarterly  amounts  for net income per share will not  necessarily
equal the annual amount,  since the computations are based on the average number
of common and common equivalent shares outstanding during each period.

Included  in  1994  net  income  and net  income  per  share  are  results  from
discontinued  operations  which do not have a material  impact on any individual
quarter.

                                       23

<PAGE>

                             REPORT OF MANAGEMENT

The   consolidated   financial   statements  of   Watkins-Johnson   Company  and
subsidiaries  were  prepared  by  management,  which is  responsible  for  their
integrity and  objectivity.  The  statements  were  prepared in conformity  with
generally accepted accounting  principles and, as such, include amounts that are
based on the best judgments of management.

The system of internal controls of the company is designed to provide reasonable
assurance  that assets are  safeguarded  and that  transactions  are executed in
accordance with management's  authorization and are reported properly.  The most
important  safeguard for shareowners is the company's emphasis in the selection,
training and  development of professional  accounting  managers to implement and
oversee the proper  application  of its internal  controls and the  reporting of
management's  stewardship  of corporate  assets and  maintenance  of accounts in
conformity with generally accepted accounting principles.

Deloitte  & Touche  LLP,  independent  auditors,  are  retained  to  provide  an
objective,   independent   review   as  to   management's   discharge   of   its
responsibilities  insofar as they relate to the  fairness of reported  operating
results and financial position. They obtain and maintain an understanding of the
company's accounting and financial controls,  and conduct such tests and related
procedures as they deem necessary to arrive at an opinion on the fairness of the
financial statements.

The Audit Committee of the Board of Directors, composed solely of Directors
from outside the company, meets periodically, separately and jointly, with
the independent auditors and representatives of management to review the work
of each. The functions of the Audit Committee include recommending the
engagement of the independent auditors, reviewing the scope and results of
the audit and reviewing management's evaluation of the system of internal
controls.




       W. Keith Kennedy, Jr.                 Scott G. Buchanan
       President and                         Vice President and
         Chief Executive Officer               Chief Financial Officer


                                       24

<PAGE>

                         INDEPENDENT AUDITORS' REPORT

The Shareowners and Board of Directors
 of Watkins-Johnson Company:

We have audited the accompanying  consolidated balance sheets of Watkins-Johnson
Company  and  subsidiaries  as of December  31,  1995 and 1994,  and the related
consolidated  statements of operations,  shareowners' equity, and cash flows for
each of the three years in the period ended December 31, 1995.  These  financial
statements   are  the   responsibility   of  the   company'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,  such consolidated  financial  statements present fairly, in all
material  respects,  the  financial  position  of  Watkins-Johnson  Company  and
subsidiaries at December 31, 1995 and 1994, and the results of their  operations
and their cash flows for each of the three  years in the period  ended  December
31, 1995 in conformity with generally accepted accounting principles. 



Deloitte & Touche LLP 
San Francisco, California 
February 2, 1996


                                       25


<PAGE>

ITEM 9.  CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
         FINANCIAL DISCLOSURE

         Not applicable.


                                   PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The  information   required  by  this  item  concerning  the  company's
         directors  is shown under the caption  "Election of  Directors"  in the
         company's definitive proxy statement filed with the Commission pursuant
         to Regulation 14A.

         The  information  relating  to  the  company's  executive  officers  is
         presented  in Part I of this Form 10-K  under  the  caption  "Executive
         Officers of the Registrant".

ITEM 11. EXECUTIVE COMPENSATION

         See this caption in the definitive  proxy  statement  which the company
         has filed with the Commission pursuant to Regulation 14A.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         This  information  is shown under the captions  "Security  Ownership of
         Certain  Beneficial  Owners & Management"  in the company's  definitive
         proxy statement filed with the Commission pursuant to Regulation 14A.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Information  concerning  certain business  relationships is shown under
         the caption "Executive  Compensation" in the definitive proxy statement
         which the company has filed with the Commission  pursuant to Regulation
         14A. There were no transactions  with  management for which  disclosure
         would be required by Item 404 of Regulation S-K.


                                   PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K


                                                                   PAGE
                                                                 -------

(a)1.   Consolidated Financial Statements

        Consolidated Statements of Operations
          For the Years Ended December 31, 1995, 1994 and 1993      10

        Consolidated Balance Sheets
          December 31, 1995 and 1994                                11

        Consolidated Statements of Shareowners' Equity
          For the Years Ended December 31, 1995, 1994 and 1993      12

        Consolidated Statements of Cash Flows
          For the Years Ended December 31, 1995, 1994 and 1993      13

        Notes to Consolidated Financial Statements               14-23

        Report of Management                                        24

        Independent Auditors' Report                                25

          
                                       26

<PAGE>

                                                                   PAGE
                                                                 -------

        2. Financial Statement Schedules

           Independent Auditors' Report                             29

           II  Valuation and Qualifying Accounts and Reserves
               For the Years Ended December 31, 1995, 1994 and
               1993                                                 30


        Schedules  not  listed  above are  omitted  because  of the  absence  of
        conditions  under  which  they are  required  or  because  the  required
        information  is included  in the  financial  statements  or in the notes
        thereto.

        3. Exhibits

        A list of the  exhibits  required  to be filed as part of this report is
        set  forth  in  the  Exhibit  Index,  which  immediately  precedes  such
        exhibits.  The exhibits are numbered according to Item 601 of Regulation
        S-K. Exhibits incorporated by reference to a prior filing are designated
        by an asterisk.

----------
(b) No reports on Form 8-K were  required to be filed during the last quarter of
    the period covered by this report.
(c) The exhibits required to be filed by Item 601 of Regulation S-K are the same
    as Item 14(a)3 above.
(d) Financial  statement schedules not included herein have been omitted because
    of the absence of  conditions  under which they are  required or because the
    required information is included in the financial statements or in the notes
    thereto.

                                       27


<PAGE>

                                  SIGNATURES

   Pursuant  to the  requirements  of  Section  13 or  15(d)  of the  Securities
Exchange Act of 1934,  the  registrant  has duly caused this annual report to be
signed on its behalf by the undersigned, thereunto duly authorized.

                                              WATKINS-JOHNSON COMPANY
                                  ----------------------------------------------
                                                   (Registrant)

Date: February 26, 1996           By  /s/        DEAN A. WATKINS
                                  ----------------------------------------------
                                                 DEAN A. WATKINS
                                              CHAIRMAN OF THE BOARD


   Pursuant to the  requirements  of the Securities  Exchange Act of 1934,  this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
            SIGNATURE                               TITLE                              DATE
--------------------------------          -------------------------            --------------------- 
<S>                                      <C>                                      <C>
 
Principal Executive Officer:

 /s/   W. KEITH KENNEDY, JR.             President and Chief Executive Officer     February 26, 1996
 --------------------------------
       W. KEITH KENNEDY, JR.     


Principal Financial and Accounting Officer:

 /s/     SCOTT G. BUCHANAN               Vice President and                        February 26, 1996
 --------------------------------          Chief Financial Officer
         SCOTT G. BUCHANAN               
 

/s/      H. RICHARD JOHNSON              Director                                  February 26, 1996
 --------------------------------
         H. RICHARD JOHNSON

 
/s/      JOHN J. HARTMANN                Director                                  February 26, 1996
 --------------------------------
         JOHN J. HARTMANN                                                          
 

/s/      RAYMOND F. O'BRIEN              Director                                  February 26, 1996
 --------------------------------
         RAYMOND F. O'BRIEN                                                        


 /s/     WILLIAM R. GRAHAM               Director                                  February 26, 1996
 --------------------------------
         WILLIAM R. GRAHAM      
         

 /s/     GARY M. CUSUMANO                Director                                  February 26, 1996
  --------------------------------
         GARY M. CUSUMANO        


/s/      ROBERT L. PRESTEL               Director                                  February 26, 1996
 --------------------------------
         ROBERT L. PRESTEL       

</TABLE>

                                       28

<PAGE>

                         INDEPENDENT AUDITORS' REPORT

Watkins-Johnson Company:

We have audited the consolidated financial statements of Watkins-Johnson Company
and  subsidiaries  as of December  31, 1995 and 1994,  and for each of the three
years in the period ended  December 31, 1995, and have issued our report thereon
dated February 2, 1996; such  consolidated  financial  statements and report are
included in Item 8 of this annual report on Form 10-K.  Our audits also included
the consolidated  financial  statement schedule of  Watkins-Johnson  Company and
subsidiaries,  listed in Item 14. This consolidated financial statement schedule
is the  responsibility  of the company's  management.  Our  responsibility is to
express  an opinion  based on our  audits.  In our  opinion,  such  consolidated
financial  statement schedule taken as a whole,  presents fairly in all material
respects the information set forth therein. 



Deloitte & Touche LLP 
San Francisco, California 
February 2, 1996



                                       29


<PAGE>
                                                                   SCHEDULE II

                    WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
                 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
              FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

<TABLE>
<CAPTION>
                                  BALANCE AT   CHARGED TO                 BALANCE AT
                                  BEGINNING    COSTS AND                    END OF
DESCRIPTION                       OF PERIOD     EXPENSES   DEDUCTIONS(1)   PERIOD(2)
------------------------------- ------------ ------------ ------------- -------------
<S>                               <C>            <C>           <C>         <C>
1995
Allowance for doubtful accounts   $1,014,898     $18,900       $    0      $1,033,798
                                 ===========  ==========   ==========      ==========
1994
Allowance for doubtful accounts   $  998,998     $16,900       $1,000      $1,014,898
                                 ===========  ==========   ==========      ==========
1993
Allowance for doubtful accounts   $  982,244     $21,420       $4,666      $  998,998
                                 ===========  ==========   ==========      ==========
<FN>
----------
(1) Write-off of uncollectible accounts.
(2) Reduction of accounts receivable.
</FN>
</TABLE>

                                       30
<PAGE>
EXHIBIT
NUMBER                                DESCRIPTION       
-------     --------------------------------------------------------------------
3-a         *Articles of Incorporation of  Watkins-Johnson  Company,  as amended
            May 8, 1989.

3-b         *By-Laws  of  Watkins-Johnson  Company,  as amended  April 27,  1989
            (Exhibit 3-b to Form 10-K for 1980, Commission File No. 1-5631).

10          Material Contracts

10-a        *Lease  and  Agreement   between  Lindco   Properties   Company  and
            Watkins-Johnson  Company  commencing  May 1, 1969  (Exhibit (b) I to
            Form 10-K for 1969, Commission File No. 2-22436).

10-b        *Lease  and  Agreement   between  Morrco   Properties   Company  and
            Watkins-Johnson Company dated October 31, 1975 (Exhibit 2(c) to Form
            10-K for 1976, Commission File No. 1-5631).

10-c        *Lease  and   Agreement   between   Danac  Real  Estate   Investment
            Corporation and Watkins-Johnson  Company (Exhibit 6 to Form 10-K for
            1972,  Commission  File  No.  2-22436)  and the  amendments  thereto
            (Exhibit 1(b) to Form 10-K for 1976, Commission File No. 1-5631).

10-d        *Building  and Loan  Agreement  and Deed of Trust Note between Danac
            Real  Estate  Investment  Corporation  and  Watkins-Johnson  Company
            (Exhibit 7 to Form 10-K for 1972, Commission File No. 2-22436).

10-e        *Promissory  Note and Deed of Trust  Agreement  entered into between
            the New England  Mutual Life Insurance  Company and  Watkins-Johnson
            Company dated May, 1978 (Exhibit 2 to Form 10-K for 1978, Commission
            File No. 1-5631).

10-f        *Promissory  Note and Deed of Trust  entered into by the Wake County
            Industrial Facilities and Pollution Control Financing Authority, the
            NCNB National  Bank of North  Carolina and  Watkins-Johnson  Company
            dated  December  28,  1984  (Exhibit  10-f to Form  10-K  for  1984,
            Commission File No. 1-5631).

10-g        *Deferred  Compensation  Plan  effective  November 29, 1979 (Exhibit
            10-g to Form 10-K for 1984, Commission File No. 1-5631).

10-h        *Key  Top-Management  Incentive Bonus Plan Summary  (Exhibit 10-h to
            Form 10-K for 1985, Commission File No. 1-5631).

10-i        *Employment  Agreement Form, in effect for those employees listed in
            the company's  definitive  proxy statement filed with the Commission
            pursuant  to  Regulation  14A  (Exhibit  10-i to Form 10-K for 1984,
            Commission File No. 1-5631).

10-j        *Deferred  Compensation Plan effective  November 29, 1979 as amended
            March 31, 1986 (Exhibit 10-j to Form 10-K for 1986,  Commission File
            No. 1-5631).

10-k        *Lease and Agreement between Seagate Technology and  Watkins-Johnson
            Company  dated  September  19, 1986  (Exhibit  10-k to Form 10-K for
            1986, Commission File No. 1-5631).

10-k(1)     *Termination of Lease and Agreement  between Seagate  Technology and
            Watkins-Johnson Company dated September 22, 1987 (Exhibit 10-k(1) to
            Form 10-K for 1987, Commission File No. 1-5631).

10-l        *Severance  Agreement Form, in effect for those employees  listed in
            the company's  definitive  proxy statement filed with the Commission
            pursuant  to  Regulation  14A  (Exhibit  10-l to Form 10-K for 1986,
            Commission File No. 1-5631).

10-m        *Form of Rights Agreement between  Watkins-Johnson  Company and Bank
            of America National Trust and Savings Association  (Exhibit 4 to the
            1986 Third Quarter Form 10-Q, Commission File No. 1-5631).

                                       31
<PAGE>
EXHIBIT
NUMBER                              DESCRIPTION
---------   --------------------------------------------------------------------

10-n        *Watkins-Johnson   Company  1976  Stock  Option  Plan,   as  amended
            September  28, 1987  (Appendix A to the company's  definitive  proxy
            statement dated March 1, 1988 filed with the Commission  pursuant to
            Regulation 14A).

10-o        *Watkins-Johnson  Company  1989 Stock  Option  Plan for  nonemployee
            directors  (Appendix A to the company's  definitive  proxy statement
            dated  February  28,  1990 filed  with the  Commission  pursuant  to
            Regulation 14A).

10-p        *Watkins-Johnson  Company 1976 Stock Option Plan amended and renamed
            as the 1991  Stock  Option and  Incentive  plan  (Appendix  A to the
            company's  definitive  proxy statement dated February 28, 1991 filed
            with the commission pursuant to Regulation 14A).

11          Statement re Computation of Per Share Earnings.

21          Subsidiaries of Watkins-Johnson Company.

23          Consent of Independent Auditors.

27          Financial Data Schedule.


                                       32