<PAGE>
 
================================================================================
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549
                               -----------------
                                   FORM 10-K

               ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                      THE SECURITIES EXCHANGE ACT OF 1934
                               -----------------

FOR FISCAL YEAR ENDED OCTOBER 31, 1998            COMMISSION FILE NUMBER 0-20609

                             WHITTAKER CORPORATION

            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

          DELAWARE                                              95-4033076
(STATE OR OTHER JURISDICTION OF                             (I.R.S.  EMPLOYER
INCORPORATION OR ORGANIZATION)                             IDENTIFICATION NO. )

       1955 N. SURVEYOR AVENUE                                    93063
       SIMI VALLEY, CALIFORNIA                                  (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

      REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (805) 526-5700

          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:


                                                          NAME OF EACH EXCHANGE
        TITLE OF EACH CLASS                                ON WHICH REGISTERED
        -------------------                                -------------------
Common Stock, par value $.01 per share                   New York Stock Exchange
                                                          Pacific Exchange, Inc.

  Series E Participating Cumulative                      New York Stock Exchange
   Preferred Stock Purchase Rights                        Pacific Exchange, Inc.

          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:


                                     NONE
                               (TITLE OF CLASS)


  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 (or for such shorter period that the
Registrant was required to file such reports), 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 ((S)229.405 of the Securities Exchange Act of 1934) is not
contained 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. [_]

  State the aggregate market value of the voting stock held by nonaffiliates of
the Registrant: $179,980,043 as of December 31, 1998.

  Indicate the number of shares outstanding of each of the Registrant's classes
of common stock, as of the latest practicable date: 11,423,199 shares of Common
Stock as of December 31, 1998.


DOCUMENTS INCORPORATED BY REFERENCE


                                                                        WHERE
                           Document                                 INCORPORATED
                           --------                                 ------------

Definitive Proxy Statement for the Annual Meeting of Stockholders     Part III
  to be held March 26, 1999 to be filed pursuant to Section 14(a) 
  of the Securities Exchange Act of 1934 (the ''Proxy Statement'')

================================================================================
<PAGE>
 
                                    PART I

ITEM 1.  BUSINESS.

GENERAL

   Whittaker Corporation ("Whittaker" or the "Company") was incorporated in
California in 1947 and became a Delaware corporation in 1986.  Whittaker
maintains its principal executive and administrative offices at 1955 N.
Surveyor Avenue, Simi Valley, California 93063 (telephone number 805-526-5700).

   In its continuing operations the Company has been active during fiscal 1998
in the Aerospace business.  During the third quarter of 1998, the Company
decided to discontinue its Integration Services business and, on August 20,
1998, the Company sold the assets and business of its Integration Services unit,
Aviant Information, Inc., to Enterprise Consulting Group, Inc.  During the first
quarter of 1998, the Company sold all of the common stock of its previously
discontinued Communications business unit, Whittaker Xyplex, Inc. to MRV
Communications, Inc.  These actions implemented the Company's previously
announced strategy of focusing on its strengths in the aerospace industry and
concluded its involvement in the computer networking and integration services
businesses.  The Company's financial statements report the operating results and
balance sheet items of these discontinued operations separately from its
continuing operations.  See Note 2 to Consolidated Financial Statements in Part
II, Item 8 of this Form 10-K for financial information about discontinued
operations.  The Company, in its Aerospace business develops, manufactures and
markets proprietary fluid (pneumatic, hydraulic and fuel) control valves and
control systems and fire and overheat detection products and systems for
aircraft, land-based gas turbines, and other industrial applications; radio
frequency and high temperature cable and cable systems and hydrogen and oxygen
analyzers. For the fiscal year ended October 31, 1998, the Company's total sales
from continuing operations were $131.5 million.  Set forth below is a
description of the Company's continuing Aerospace business and the operations of
the discontinued businesses.

CONTINUING OPERATIONS

AEROSPACE GROUP
---------------

PRODUCTS

   Principal applications and representative products of the Company's
continuing operations include:

   Fluid and Pneumatic Controls. The Company designs and manufactures a broad
range of fluid control devices for both commercial and military aircraft.  The
products are designed to control pneumatic, hydraulic and fuel flows in aircraft
systems.  In commercial applications, they are used on virtually all Boeing and
AirBus commercial aircraft, and virtually all other aircraft and jet engines
manufactured in the world, with the exception of those manufactured in the
former Communist countries.  In addition, commercial and industrial applications
include ground fueling devices for airports and valving systems, heat
exchangers, and fuel skids for land-based gas turbines, off-shore oil platforms,
and petrochemical complexes.  In military applications, the products are used on
military transports, bombers, helicopters, fighters and landing craft.  Both
commercial and military applications include aircraft turbine engines built by
General Electric, Rolls Royce and Pratt & Whitney.  Sales of fluid control
products were $89.2 million in fiscal 1998, $63.5 million in fiscal 1997 and
$73.9 million in fiscal 1996.

   Fire and Overheat Detectors. The Company designs and manufactures continuous
length pneumatic fire and overheat detectors, optical flame detectors, smoke
detectors and bleed-air leak detection systems.  These systems are used on
commercial and military aircraft, gas turbine engines, small naval vessels,
helicopters, and railcars.  This equipment is widely used on a broad spectrum of
aircraft manufactured by Boeing, AirBus, McDonnell Douglas, Northrop Grumman and
many small manufacturers.  The aircraft range from large commercial transports
to small commuter aircraft, private twin engine airplanes, helicopters, military
fighters and transport aircraft.  The fire and overheat detectors are used on
aircraft engines manufactured by General Electric, Pratt & Whitney and Rolls
Royce.  Industrial applications of such products include complete fire
protection systems for vehicles, gas turbine powered pumping and electric power
generation applications, as well as large scale systems to protect oil platforms
and refineries.  Sales of fire and overheat detectors and systems were $33.7 in
fiscal 1998, $19.5 million in fiscal 1997 and $21.8 million in fiscal 1996.

                                       1
<PAGE>
 
   Radio Frequency and High Temperature Cables. The Company designs and
manufactures high reliability silicon dioxide insulated coaxial and multiple
conductor cable systems which permit broad-band data transmission and control
function operation in extreme environments.  Applications for these technologies
include signal transmission and control functions inside nuclear power plants
and reactors, power and control monitoring and electronic valve control at oil
refineries, extreme environmental condition cable applications near jet engines,
and critical connections in airborne electronic countermeasure systems.

   Hydrogen and Oxygen Analyzers. The Company's hydrogen and oxygen analyzers
have been developed for use in the extreme environment surrounding a nuclear
reactor.  The analyzers monitor and protect against the dangerous build up of
these gases, which, left unchecked, could result in a catastrophic fire or
explosion.  The key features of the hydrogen and oxygen analyzers include the
rugged and stable electrochemical based sensors in combination with accurate and
dependable control and display units.

PRODUCT DEVELOPMENT

   During 1998 the Company, with its liquid fuel metering systems and gas
metering technology was able to capture a significant share of the design
low emission ("DLE") market and the industrial gas turbine market. In addition,
the Company's quick disconnect product line for the sophisticated cryogenic and
missile fuel systems was expanded to missile pressurization systems
allowing the Company to enter the drone and target drone field.

   During 1998, a major contract awarded to the Company in 1997 to supply air
conditioning and pressurization control valves for Boeing 757 and 767 aircraft
was expanded to include Boeing 777 aircraft.  Moreover, this product line
will be used in jumbo jet electronic entertainment systems and in specialized
smoking section. The Joint Strike Fighter design contract awarded to
the Company in 1997 was completed in 1998 and the manufacturing phase was turned
over to its partner, Rolls-Royce Aero Engines.

   The Company also developed, during 1998, a new valving technology
specifically targeted to its core aerospace turbine engine, wing and anti-icing
applications.  This new valving technology provides lower weight and cost
features and offers a significant advantage over the Company's competition.

   In its fire and overheat detector product line the Company, in 1998,
developed two new overheat sensors based on the intrinsic ruggedness of its
silicone dioxide cable technology. The first of these new products is a
continuous length sensor cable for pneumatic de-icing and environmental control
systems on aircraft is capable of identifying the location of an alarm along the
length of the cable. The second development in the overheat sensor product line
is a new family of resistance temperature detector ("RTD") based sensor probes
which, unlike fixed-alarm overheat sensors, permit continuous monitoring over a
wide temperature range.

   During 1998, the Company developed, qualified and shipped the first fire
cable which is capable of meeting the latest Nuclear Regulatory Commission
standards mandated for U.S. nuclear power plants.  In addition, the silicone
dioxide cable product line saw further developments for nuclear applications
during 1998 including the first installation of triax instrumentation cable in
U.S. Navy submarines and aircraft carriers.

   A new solid-electrolyte based sensor was developed during 1998 which
complements the Company's existing line of hydrogen and oxygen analyzers.  The
new sensor uses water instead of acid which greatly simplifies the sensor
construction. This new sensor is targeted for application in nuclear waste
storage facilities where continuous monitoring is critical.

   The Company, in its continuing operations, spent $0.8 million, $0.9 million
and $1.4 million on research and development activities in fiscal 1998, 1997 and
1996, respectively.

MARKETS AND CUSTOMERS

   Sales to commercial customers, including foreign customers, were the major
contributor to the Company's continuing operations' sales and profit in 1998.
Export sales to customers outside the United States represented 23% of the
Company's sales in 1998, compared to 21% in 1997 and 24% in 1996. In certain
geographic areas and for certain products, sales are often made indirectly
through independent representatives or distributors.

   Sales directly or indirectly to the United States Government, primarily under
military procurement contracts, were 20% of sales in 1998 compared to 19% of
sales in 1997 and 27% in 1996.  Companies engaged in supplying military
equipment to the United States Government are subject to competition, changes in
the continuing 

                                       2
<PAGE>
 
availability of Congressional appropriations, changes in contract timing and
scheduling, complexity of designs and the potential for obsolescence, and other
changes which may result from world events. Contracts with the United States
Government are subject to termination for the convenience of the Government if
deemed in its best interests. Contracts which are terminated for convenience
generally provide for payments to a contractor for its costs and for fees or
profits related to work accomplished through the date of termination.

BACKLOG

   At October 31, 1998, the Company's continuing operations backlog totaled
$66.5 million, of which $8.0 million is not expected to be filled within fiscal
1999.  This backlog consisted of control valves and systems ($26.9 million),
fire and overheat detectors ($18.0 million), spare parts ($8.9 million), cable
and analyzer products ($2.6 million) and other products ($10.1 million).  At
October 31, 1997 the Company's continuing operations backlog totaled $70.5
million and consisted of control valves and systems ($30.3 million), fire and
overheat detectors ($18.3 million), spare parts ($9.3 million), cable and
analyzer products ($3.9 million) and other products ($8.7 million).  The
Company's backlog does not include any unfunded amounts relating to government
contracts.

COMPETITION

   The military and commercial industries in which the Company operates are
generally highly competitive, with competition centering on price, technical
innovation, product performance and product support.  Competitors of the Company
in such markets may have substantially greater financial resources, research and
design capabilities, and manufacturing capacity.

DISCONTINUED OPERATIONS

ASSETS HELD FOR SALE
--------------------

   The Company owned a 996-acre parcel of land formerly used, until 1987, by the
Company's former Bermite division, a discontinued technology unit.  The land is
located in the City of Santa Clarita, California, approximately 35 miles from
downtown Los Angeles.  In September 1995, the city granted the entitlements
necessary to develop this property as a mixed-use, residential, commercial, and
light industrial development.  In February 1996 the city approved a Development
Agreement which, among other things, extended the ten-year life of the
entitlements to over 20 years.  In connection with its ongoing discussions with
potential developers, the Company, in the fourth quarter of 1997, wrote down the
carrying value of this land by $15.7 million to reflect this asset at its
estimated fair value.  See Note 4 to Consolidated Financial Statements in Part
II, Item 8 of the Form 10-K for information about this land parcel and a
discussion of the factors considered by management in determining the fair value
of the land and the amount written down for impairment.  In November of 1998,
the Company entered into a definitive agreement to sell this asset for $10.0
million in cash, a $5.0 million promissory note and a contingent interest in the
future development of this land and this sale was concluded in January, 1999.

DIVESTED OPERATIONS
-------------------

   On January 30, 1998, the Company sold Whittaker Xyplex, Inc. to MRV
Communications, Inc. This unit designed, developed and marketed a comprehensive
line of networking products. On August 20, 1998, the Company sold the assets and
business of its Integration Services unit, Aviant Information, Inc., to
Enterprise Consulting Group, Inc. This unit provided knowledge management and
information communication systems optimization for health care providers.

ENVIRONMENTAL

   Compliance with Federal, state and local provisions that have been enacted or
adopted regulating the discharge of materials into the environment or otherwise
relating to the protection of the environment has had no material effect upon
the capital expenditures, earnings or competitive position of the Company, nor
is the Company estimating any material capital expenditures for environmental
control facilities in fiscal 1999 or 2000.

                                       3
<PAGE>
 
EMPLOYEE RELATIONS

   As of October 31, 1998, the Company employed approximately 450 persons in its
continuing businesses, about 8% of whom were represented by labor organizations.
The Company believes that it has generally good relations with its employees.

ITEM 2.  PROPERTIES.

   The Company's corporate headquarters are located in a portion of its
facilities in Simi Valley, California, which consist of approximately 276,000
square feet in three buildings leased by the Company through February, 2012 with
options to renew these leases for up to 12 years.  The leases call for rent
escalations of 6% every three years beginning in March 2000. The Company, in its
continuing operations, also leases one facility in North Hollywood, California
which consists of approximately 93,000 square feet under a lease that expires in
2003. The Company has an option to renew this lease for an additional five
years. The Company also owns a 30,000 square foot production facility in
Colorado which was formerly used in its discontinued defense electronics
business.

   Approximately 47% of the square footage is used for manufacturing,
engineering, and product development, while approximately 17% is used for sales,
marketing, and other general and administrative support.  Of the remainder,
approximately 76,000 square feet is subleased by the Company to an unaffiliated
business.

   The Company also leases and occupies several sales and technical support
offices in the United States and in the United Kingdom.

   The Company believes that in general its plants and equipment are adequately
maintained, in good operating condition and adequate for the Company's present
needs.  The Company regularly upgrades and modernizes its facilities and
equipment and expands it facilities as necessary to meet customer requirements.

ITEM 3.  LEGAL PROCEEDINGS.

ENVIRONMENTAL MATTERS

   As a result primarily of the activities of its discontinued operations, the
Company is a potentially responsible party in a number of actions filed under
the Comprehensive Environmental Response Compensation and Liability Act of 1980
("CERCLA").  CERCLA, also known as "Superfund," is the main Federal law
enacted to address public health and environmental concerns arising with respect
to past treatment and disposal of hazardous substances.  The Company also is a
potentially responsible party in a number of actions brought under state laws
patterned after CERCLA.

   CERCLA and such other state laws provide for the imposition of clean-up
liability on anyone who arranges for the disposal or treatment of hazardous
substances at designated sites.  Accordingly, anyone who generates hazardous
substances may be a potentially responsible party if the treatment, storage, or
disposal facility that handles the substances becomes the subject of an
environmental clean-up under such laws.  This is true even if the treatment,
storage, or disposal facility has the proper licenses and permits issued by
appropriate governmental authorities and treats, stores, or disposes of the
hazardous substances in accordance with the terms of such licenses and permits.
The various state environmental agencies and the U.S. Environmental Protection
Agency take the position under these environmental laws that all responsible
parties are jointly and severally liable for the costs of cleaning up sites
subject to their jurisdiction and for any environmental damages caused by the
treatment or disposal of hazardous substances at such sites.

   In nearly all of the environmental matters in which the Company is involved
as a potentially responsible party, the Company contributed a very small amount
(generally much less than 1%) of the total wastes treated or disposed of at
these various treatment or disposal facilities and participates as a so-called
"de minimis" party.  De minimis parties are generally allowed to settle their
potential liability for clean-up activities by agreeing with the state or
Federal environmental authorities and the other, larger responsible parties to
bear a share of the past and estimated future clean-up costs based on the volume
of the waste each de minimis party contributed, plus a "premium" or
"multiplier." These premiums or multipliers are designed to allow for the
uncertainty of estimates of future costs and the desirability of settling
liability early to avoid so-called transaction costs, i.e., the legal,
consulting, and other expenses, which tend to consume a significant amount of
the funds actually spent on the resolution of environmental matters.

                                       4
<PAGE>
 
   Where the Company does not qualify for such treatment, or the Company's
potential liability on a particular environmental matter could be significant,
or the Company believes that the premium or multiplier for a de minimis
settlement is unreasonable, the Company may elect to participate in the
settlement or remediation activities as, or on the same basis as, a major party,
generally paying its allocated share of remediation expenses and transaction
costs as they are incurred, often over several years.

   In addition to the CERCLA and similar actions described above, the Company
also, from time to time, conducts or participates in remedial investigations and
clean-up activities at facilities formerly occupied by its operating units. In
the most significant of these sites, the Company has ''clean closed'' 13 of 14
facilities regulated under the Resource Conservation and Recovery Act at its
former Bermite division in Santa Clarita, California. Until the sale of its
former Bermite facility in January, 1999, the Company was working to close the
14th of such facilities and to complete an investigation of the entire 996-acre
property in anticipation of the development of the property for a planned mixed-
use residential and commercial development.

   In 1998, the Company made cash expenditures of approximately $1.9 million on
environmental matters, excluding expenditures for clean-up activities at its
former Bermite division.  This amount was charged to reserves for environmental
contingencies related to the Company's discontinued operations.  In 1998, 1997
and 1996, the Company made cash expenditures for clean-up activities at its
former Bermite division of $1.4 million, $2.6 million and $4.0 million,
respectively.

OTHER LEGAL MATTERS

   There are also various other claims and suits pending against the Company.
Based on an evaluation, which included consultation with counsel concerning the
legal and factual issues involved, the Company is of the opinion that such
claims and suits pending against the Company, including the environmental
matters discussed above, will not have a material adverse effect, singly or in
the aggregate, on the financial position of the Company.  See Note 11 of Notes
to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.

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

Not applicable.

                                       5
<PAGE>
 
ITEM 4A.  EXECUTIVE OFFICERS OF THE REGISTRANT.

   The following table sets forth the names, ages and positions of the current
executive officers of the Registrant.

<TABLE>
<CAPTION>
                  NAME                         Age                           Positions
                  ----                         ---                           ---------            
<S>                                            <C>              <C>
Joseph F. Alibrandi.....................       70               President and Chief Executive Officer
Lynne M. O. Brickner....................       46               Vice President, Secretary and General Counsel
John K. Otto............................       44               Vice President, Chief Financial Officer and Treasurer
Roland G. Patitz........................       62               President, Whittaker Controls, Inc.
John J. Stobie..........................       44               President, Safety Systems Division
</TABLE>

   Mr. Alibrandi  joined Whittaker in July 1970 as President and Director and
served as Chief Executive Officer from November 1974 through January 1995.  He
became Chairman of the Board in December 1985 and has continuously served in
such capacity since then.  He was re-appointed President and Chief Executive
Officer on September 30, 1996.

   Ms. Brickner joined Whittaker in September 1995 as Assistant General Counsel
and Assistant Vice President.  She was named Secretary and General Counsel in
September 1996 and Vice President in October 1996. Prior to joining Whittaker,
Ms. Brickner was a practicing attorney with Kaye, Scholer, Fierman, Hays &
Handler since 1990.

   Mr. Otto joined Whittaker in 1983 as Whittaker's Manager of Banking and Cash.
He was named Assistant Treasurer in 1986 and Treasurer in 1988.  He was
appointed Vice President of the Company in December 1996 and Chief Financial
Officer in October 1997.

   Mr. Patitz joined Whittaker in 1976 as Vice President of Operations of
Whittaker Controls, Inc.  He was named President of Whittaker Controls, Inc. on
December 1, 1997.

   Mr. Stobie joined Whittaker Controls in 1977 where he served as Materials
Manager, Manufacturing Manager and Manufacturing Engineering Manager prior to
his appointment in 1995 as Director of Operations of the Company's Safety
Systems Division.  In 1996 he was appointed Executive Vice President of
Operations of the Company's Safety Systems Division, and on December 1, 1997, he
was named President of the Safety Systems Division.

   The term of office of each executive officer (except for Mr. Patitz and Mr.
Stobie, who serve at the discretion of the Board of Directors) will expire at
the next annual meeting of the Board of Directors, which is scheduled to be held
on March 26, 1999.

                                       6
<PAGE>
 
                                    PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
        MATTERS.

PRINCIPAL MARKETS

   The Common Stock is listed on the New York Stock Exchange and the Pacific
Exchange, Inc. (Symbol: WKR).  Until their expiration on November 29, 1998, the
Series A Participating Cumulative Preferred Stock Purchase Rights were listed on
the New York Stock Exchange and the Pacific Exchange, Inc., and traded with the
Common Stock and were not separately transferable.  Since November 30, 1998, The
Series E Participating Cumulative Preferred Stock Purchase Rights have been
listed on the New York Stock Exchange and the Pacific Exchange, Inc., and, at
the present time, trade with the Common Stock and are not separately
transferable. The Series D Participating Convertible Preferred Stock (the
''Series D Preferred Stock'') is not listed or traded on any exchange. See Note
7 of Notes to Consolidated Financial Statements in Part II, Item 8 of this Form
10-K.

COMMON STOCKHOLDERS

   As of December 31, 1998 there were 4,664 registered holders of the Common
Stock.

COMMON STOCK PRICES

   The following table sets forth the high and low sales prices of the Common
Stock during Whittaker's two most recent fiscal years.

<TABLE>
<CAPTION>
                                                                     Quarter Ended
                    ----------------------------------------------------------------------------------------------------------------
                          January 31                    APRIL 30                       JULY 31                     OCTOBER 31
                    -----------------------    ---------------------------    --------------------------    ------------------------
                      High          LOW           HIGH            LOW            HIGH           LOW            HIGH          LOW
                    ---------   -----------    -----------   -------------    -----------   ------------    -----------   ----------
<S>                 <C>         <C>            <C>           <C>              <C>           <C>             <C>           <C>
1997..............     14 1/4     11 5/8         11 7/8         9 1/8         11 3/4          10 1/2         15 3/16       10 7/16
1998..............     12 3/4      7 1/8       15 13/16        12 1/2         15 7/8        12 15/16        14 15/16      12 15/16
</TABLE>

DIVIDENDS

   Dividends of $0.25 were last declared on each share of Series D Preferred
Stock for the first two quarters of fiscal 1996 and no dividends have been
declared or paid since that time.  At October 31, 1998 these accrued and unpaid
dividends amounted to $1,442.94.  No dividends have been declared on the Common
Stock during the two most recent fiscal years.

   Since April 30, 1996, the Company has been prohibited from declaring or
paying dividends on any of its outstanding shares by restrictions in its 7%
convertible subordinated notes. Thus, the Company has neither paid nor declared
dividends (including any quarterly dividend for the Series D Preferred Stock)
and has not redeemed shares since that date. However, dividends on the Series D
Preferred Stock have been accrued since that date. In the foreseeable future, in
light of the Company's strategy of using cash flow from operations to fund
internal growth and acquisitions, the Company's present intention is to refrain
from paying cash dividends on the Common Stock, even if the Company is otherwise
able to do so under its convertible subordinated notes. See Note 6 and Note 7 of
Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K
for further description of the Company's convertible subordinated notes.

SALES OF UNREGISTERED SECURITIES

   During the three most recent fiscal years, the Company has issued a total of
2,082,174 unregistered shares of Common Stock. The Company issued 1,974,333
unregistered shares of Common Stock to Raytheon Company ("Raytheon") on April
10, 1996. Such shares were issued as partial consideration for the Company's
acquisition of Xyplex, Inc. These shares were issued in reliance upon Section
3(b) and 4(a) of the 1934 Act and Regulation D promulgated thereunder. A
registration statement on Form S-3 covering these shares was declared effective
by the Securities and Exchange Commission on April 9, 1998. On May 4, 1998, the
Company issued 107,841 unregistered shares of Common Stock to Hughes Electronics
Corporation ("Hughes"). Such shares were issued in satisfaction of certain
unpaid contingent payments and accrued interest thereon that were payable
pursuant to the terms of the Company's 1995 purchase of Hughes LAN Systems, Inc.
from Hughes Aircraft Company, a subsidiary of Hughes.


                                       7
<PAGE>
 
A registration statement on Form S-3 covering these shares was declared
effective by the Securities and Exchange Commission on June 18, 1998.

TRANSFER AGENT AND REGISTRAR FOR COMMON STOCK

  CHASE MELLON SHAREHOLDER SERVICES
  85 Challenger Road
  Overpeck Centre
  Ridgefield Park, New Jersey  07660

RIGHTS AGENT FOR SERIES E PARTICIPATING CUMULATIVE PREFERRED STOCK PURCHASE
RIGHTS

  MELLON BANK N.A.
  Four Station Square
  Pittsburgh, Pennsylvania 15219

ITEM 6.  SELECTED FINANCIAL DATA.

                             WHITTAKER CORPORATION
               (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                    1998               1997               1996             1995             1994
                                               ------------       ------------       -----------       -----------      -----------
<S>                                            <C>                <C>                <C>               <C>              <C>
Summary of Operations*
Sales......................................    $    131,477       $     89,782       $    98,647       $    81,298      $    71,276
Income (loss) from continuing operations,                                                                                           

 before extraordinary item.................    $     40,090       $    (28,287)      $     9,817       $     6,627      $     6,046 

Income (loss) from discontinued operations.    $       (773)      $   (127,095)      $   (26,944)      $     1,238      $     4,015
Gain (loss) on disposal of discontinued                                                                                             

 operations................................    $      9,221       $     (4,791)               --                --               -- 

Extraordinary item.........................              --       $     (3,409)               --                --               --
Net income (loss)..........................    $     48,538       $   (163,582)      $   (17,127)      $     7,865      $    10,061
Basic earnings (loss) per share
   Continuing operations, before                                                                                                    

    extraordinary item.....................    $       3.56       $      (2.54)      $       .98       $       .78      $       .71 

   Discontinued operations.................    $        .75       $     (11.83)      $     (2.68)      $       .14      $       .48
   Extraordinary item......................              --       $       (.31)               --                --               --
   Net income (loss).......................    $       4.31       $     (14.68)      $     (1.70)      $       .92      $      1.19
Average common shares outstanding (in                                                                                               

 thousands)................................          11,264             11,144            10,065             8,531            8,481 

 
OTHER DATA*
Working capital............................    $     48.509       $    (76,366)      $   (65,731)      $    72,272      $    79,983
Total assets...............................    $    136,578       $    162,933       $   340,448       $   227,137      $   200,981
Long-term debt.............................    $     60,368       $        222       $       453       $    70,694      $    54,742
Stockholders' equity (deficit).............    $     23,478       $    (30,723)      $   131,136       $   102,424      $    93,950
Current ratio..............................          2.29:1             0.54:1            0.65:1            3.40:1           3.81:1
Capital additions..........................    $      2,600       $      2,200       $     1,700       $     2,000      $     1,300
Stockholders of record.....................           4,700              4,900             5,200             5,500            5,700
</TABLE> 

*  Operating results and balance sheet items reflect the segregation of
   continuing operations from discontinued operations. The 1997 loss from
   continuing operations included a $15.7 million write-down of an asset held
   for sale. See Notes 2 and 4 of Notes to Consolidated Financial Statements in
   Part II, Item 8 of this Form 10-K.

                                       8
<PAGE>
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.

RESULTS OF OPERATIONS

   During the third quarter of 1998, the Company decided to discontinue its
Integration Services segment and on August 20, 1998 sold the assets and business
of Aviant Information, Inc., its Integration Services business unit.  The
Company had previously discontinued its Communications segment and sold
Whittaker Xyplex, Inc. earlier in 1998 and discontinued and sold its defense
electronics business at the end of 1997.  These units are reflected in the
results of operations as discontinued operations.  These actions implemented the
Company's previously announced strategy of focusing on its strengths in the
aerospace industry and concluded its involvement in the computer networking and
integration services businesses.  The Company's continuing operations are now
involved in the design and manufacturing of a broad range of fluid control
devices, continuous length pneumatic fire and overheat detectors, optical flame
detectors, smoke detectors and silicon dioxide insulated coaxial and multiple
conductor cable systems.

   The discontinued operations include the following: the Company's defense
electronics business which designed and manufactured a wide range of command,
control and communication systems, radar countermeasure systems and electronic
combat systems; the Integration Services business unit, Aviant Information,
Inc., which provided turnkey data networking solutions for hospitals and other
enterprises and Xyplex Networks, including the operations of Whittaker
Communications, Inc.  ("WCI").  Xyplex Networks designed, developed and marketed
a comprehensive line of networking products.

 COMPARISON OF 1998 TO 1997

   Sales.  The Company's 1998 sales from continuing operations were $131.5
million, an increase of $41.7 million (46.4%) from the sales in the prior fiscal
year. This increase reflects increased sales of fluid and pneumatic control
devices in both the commercial and military markets, increased sales of fire and
overheat detectors in the aircraft market, higher levels of repair and overhaul
business in both the commercial and military markets, increased sales of spare
parts in the commercial market and increased sales of cable products and
systems. The increase in sales of fire and overheat detectors and cable products
in 1998 reflects the successful resolution in 1998 of the production
inefficiencies associated with the 1997 move of the Company's fire and overheat
detector operations from Concord, California to Simi Valley, California.

   Gross Margin.  The Company's gross margin from continuing operations for 1998
as a percentage of sales was 49.9% compared with 32.6% for 1997. For 1998 the
gross margin was $65.6 million compared to a gross margin of $29.2 million in
1997. The improvement in gross margin as a percentage of sales in 1998 as
compared to 1997 was attributable to the successful resolution in 1998 of the
production inefficiencies associated with the 1997 move of the fire and overheat
detector operations from Concord, California to Simi Valley, California,
provisions for contract losses recorded in 1997, efficiencies associated with
higher sales volume and increased sales of higher margin spare parts and repair
and overhaul business in 1998.

   Engineering and Development.  Engineering and development expenses of the
Company's continuing operations decreased by $0.1 million in 1998, from $0.9
million in 1997 to $0.8 million in 1998.

   Selling, General and Administrative.  Selling, general and administrative
expenses (SG&A) for continuing operations in 1998 increased by $1.9 million from
1997. In 1998 SG&A expenses were $25.4 million compared to $23.5 million in
1997. This increase was attributable to higher management incentive costs in
1998 partially offset by a reduction in salaries in 1998 (because of lower
headcount) and lower legal fees in 1998.

   Interest Expense.  Interest expense for the Company's continuing operations
in 1998 decreased by $6.2 million from 1997, from $18.3 million in 1997 to $12.1
million in 1998. This reduction was primarily due to reduced levels of debt
outstanding during 1998 as compared to 1997. The average amount of debt
outstanding during 1998 was approximately $79.0 million, while in 1997, the
average amount of debt outstanding was approximately $130.9 million. Also
contributing, to a lesser extent, to the reduction in interest expense was a
reduction in the interest rates on debt outstanding during 1998 as compared to
1997.

                                       9
<PAGE>
 
   Interest Income.  Interest income for the Company's continuing operations in
1998 was $1.9 million compared to $0.4 million in 1997. During 1998 the Company
received $1.5 million of interest payments on federal and state tax refunds for
1987 through 1994 tax years.

   Other Expense.  Other expense for the Company's continuing operations for
1998 was $6.7 million compared to $3.5 million for 1997. Included in the 1998
other expenses are $2.2 million of costs associated with the Company's 996-acre
land parcel located in Santa Clarita, California, a $2.2 million write-down in
the value of the warrants received in connection with the sale of Whittaker
Xyplex, Inc. to reflect the reduction in the market value of the common stock
underlying the warrants and a $2.1 million addition to reserves related to the
Company's environmental remediation efforts at various sites other than the
Santa Clarita property. Also contributing to the increase from 1997 was a gain
on the sale of an investment in 1997 of $3.7 million.

   Income Taxes.  The continuing operations benefit for taxes for 1998 was $17.6
million and consisted of a $10.2 million tax provision on the continuing
operations 1998 income and a $27.8 million tax benefit. During the third quarter
of 1998, the Company determined that, because of improved 1998 operating results
and the favorable outlook for future operating results, previously recorded
valuation allowances against its future tax benefits were no longer appropriate.
Consequently, the Company reversed all such valuation allowances against its
federal tax benefits.

   Discontinued Operations.  The loss from discontinued operations of $0.8
million for 1998 includes the after-tax losses of the Company's Integration
Services segment and the benefits from prior year tax losses of $1.1 million.
The 1997 loss from discontinued operations of $127.1 million includes the after-
tax losses of the Integration Services segment as well as the after-tax losses
of the Company's discontinued Communications segment and defense electronics
business.

     The 1998 gain on disposal of discontinued operations of $9.2 million
includes tax benefits of $1.6 million and reflects a $12.5 million gain on the
sale of Whittaker Xyplex, Inc. during the first quarter of 1998 and a $1.7
million gain on the sale of the assets and business of Aviant Information, Inc.
during the fourth quarter of 1998. Also included in the 1998 gain on disposal of
discontinued operations is a $2.7 million write-off of certain assets related to
the discontinued Communications segment; a $2.0 million loss on certain
contracts related to the discontinued defense electronics business and $1.9
million of other losses arising from the disposition of its various discontinued
operations. The Company received cash during 1998 on the sale of Whittaker
Xyplex, Inc. and the assets and business of Aviant Information, Inc. of $35.0
million and $2.9 million, respectively.

     The 1997 loss on disposal of discontinued operations of $4.8 million is net
of tax benefits of $0.3 million and reflects proceeds realized from the
disposition of discontinued operations of $18.9 million. Of these proceeds,
$18.4 million was used to reduce the Company's bank debt. The 1997 loss on
disposal reflects provisions for accrued liabilities for retained obligations
arising directly as a result of the decision to dispose of these operations and
the estimated future results of operations of such businesses through the date
of disposition.


 COMPARISON OF 1997 AND 1996

   Sales.  The Company's sales from continuing operations for 1997 of $89.8
million decreased by $8.9 million (9.0%) from 1996 sales from continuing
operations. This decrease was due to reduced sales from contracts qualifying,
under the Company's policy, for revenue recognition using the percentage of
completion method. The Company's policy allows for revenue recognition using the
percentage of completion method in accordance with generally accepted accounting
principles ("GAAP") when the contract value is greater than $1.0 million and the
contract term is longer than one year. With fewer multi-year contracts being
awarded to original equipment manufacturers, including the Company, and more
customers going to "just in time" ordering, the majority of the Company's
revenue in 1997 related to short-term contracts where revenue is recorded, in
accordance with GAAP, on the completed contract basis. Also negatively impacting
1997 sales were inefficiencies in the production of fire and overheat detectors
for the industrial and aircraft markets resulting from the move of the fire and
overheat detector operations from Concord, California to Simi Valley,
California.

   Gross Margin.  The Company's gross margin from continuing operations for 1997
was $29.2 million (32.6% of sales) compared to $48.3 million (49.0% of sales)
for 1996. This decrease reflected primarily the production inefficiencies
associated with the move of the Concord, California operations to Simi Valley,
California, lower sales volume of fluid control devices and increases in
valuation allowances related to inventories that the Company had determined to
be excess or obsolete. Also in 1997, based on estimates of the costs to complete
certain long-term contracts and the related revenue to be derived from those
contracts, the Company determined that the completion of those contracts would
result in losses. In compliance with AICPA Statement of Position 81-1, the
Company provided for the entire amount of the estimated losses at that time.

   Engineering and Development.  Engineering and development expenses for the
Company's continuing operations decreased by $0.5 million, from $1.4 million in
1996 to $0.9 million in 1997.

   Selling, General and Administrative.  Selling, general and administrative
expenses (SG&A) for the Company's continuing operations for 1997 decreased by
$3.1 million from 1996. 1997 SG&A expenses were $23.5 million (26.2% of sales)
compared to $26.6 million (27.0% of sales) in 1996. This decrease was primarily
the result of lower management incentive costs in 1997 compared to 1996.

                                       10
<PAGE>
 
   Assets Held for Sale.  In connection with discussions with potential
developers the Company, in 1997, wrote down the value of a 996 acre land parcel
held for sale by $15.7 million to its estimated fair value.

   Interest.  Interest expense increased to $18.3 million in 1997 from $10.9
million in 1996 primarily as a result of higher interest rates. Interest income
decreased in 1997 by $5.9 million from 1996 as a result of interest income
received in 1996 associated with federal income tax refunds for prior years.

   Other Expense.  Other expense for 1997 increased by $2.8 million over 1996.
This increase reflects increased environmental remediation costs in 1997, costs
associated with an asset held for sale which were being capitalized in 1996, and
the loss on disposal of certain non-productive assets in 1997. Partially
offsetting these costs was a $3.7 million gain on the sale of an investment in
1997.

   Discontinued Operations.  In addition to the losses from operations of the
Company's discontinued Integration Services business, Communications segment and
defense electronics unit, the loss from discontinued operations of $127.1
million  for 1997 includes a $55.7 million write-down of the assets of the
Communications segment to their estimated net realizable value, a $30.2 million
goodwill and other intangibles impairment charge and a restructuring charge of
$5.3 million. Tax benefits of $2.6 million representing loss carry-back benefits
and the reversal of prior year overaccruals of tax liabilities are also included
in the 1997 loss from discontinued operations. The 1996 loss from discontinued
operations includes the operational results of the Communications segment and
defense electronics unit, the $11.7 million write-off of acquired in-process
research and development and restructuring costs of $2.4 million.

   The 1997 loss on disposal of discontinued operations is net of income tax
benefits of $0.3 million and includes the estimated operating losses of the
Communications segment until the date of sale.

 GENERAL

   In fiscal 1998, 1997 and 1996, approximately 20%, 19% and 27%, respectively,
of the Company's continuing operations sales were directly or indirectly
attributable to the United States Government.  Companies engaged in supplying
military equipment to the United States Government are subject to competition,
changes in the continuing availability of Congressional appropriations, changes
in contract timing and scheduling, complexity of designs and the potential for
obsolescence, and other changes which may result from world events.  A loss of
Government business, although not anticipated by the Company, could have a
material adverse effect on the Company's operations.  In addition, any
significant impact on the business of the Company's major customers resulting
from global economic or other conditions could have a material adverse effect on
the Company's future results.

FINANCIAL CONDITION AND LIQUIDITY

   On May 28, 1998, the Company and a group of lenders entered into a new credit
agreement that consists of a $45 million revolving credit facility that expires
in May 2001 and a $40 million term loan that is repayable in quarterly
installments over five years.  Interest on loans outstanding under the credit
agreement is based, at the Company's option, on a "base rate" or on a
"eurodollar rate." The annual interest rate based on the base rate may range
between the agent bank's prime rate plus 0.5% and the agent bank's prime rate
plus 1.75%.  The annual interest rate based on the eurodollar rate may range
between LIBOR plus 1.75% and LIBOR plus 3.0%. The Company is obligated to pay
letter of credit fees which may range between 2.0% per annum and 3.0% per annum
on the aggregate amount of outstanding letters of credit. The Company is also
obligated to pay commitment fees which may range between 0.375% per annum and
0.50% per annum on the unused portion of the revolving credit facility.  The
applicable margin over LIBOR or the prime rate, the applicable letter of credit
fee, and the applicable commitment fee are determined by reference to the
Company's leverage ratio as defined in the credit agreement.  As of October 31,
1998, the weighted average interest rate on loans outstanding under the credit
agreement was 8.03%.  At October 31, 1998, the Company's debt totaled $61.4
million, which consisted of $8.7 million of loans outstanding under its
revolving credit facility, $37.6 million outstanding under the term loan, $15.0
million of convertible subordinated debt and $0.1 million of other debt. In
addition there were $1.8 million of letters of credit outstanding under the
revolving credit facility.  The new agreement includes financial covenants with
respect to financial leverage, earnings and fixed charge coverage.  Proceeds
from the new agreement were used to repay all of the $70 million of indebtedness
previously outstanding under the Company's prior credit agreement.  The new
facility provides additional availability to fund working capital requirements
and acquisitions.

                                       11
<PAGE>
 
   In order to reduce the risk of higher interest expense that could result from
an increase in the level of market interest rates, the Company in June 1996
purchased an interest rate cap with an initial notional amount of $42.5 million.
Under the terms of the interest rate cap, the Company will receive a payment at
the end of each quarterly period, as defined in the interest rate cap agreement,
if three-month LIBOR at the beginning of the period exceeds 7.5%.  The amount of
such payment will be the interest for such period on the notional amount of the
interest rate cap at the beginning of such period calculated using an interest
rate equal to the positive difference, if any, between LIBOR at the beginning of
such period and 7.5%.  The interest rate cap expires in July 1999.  The cost of
this interest rate cap is being amortized over its 37-month term.  At October
31, 1998, the unamortized cost was $60,500.

   On January 30, 1998, the Company sold Whittaker Xyplex, Inc.  On February 2,
1998, the net cash proceeds of $34.5 million from the sale were used to prepay
debt under the Company's prior credit facility.

   The Company believes that cash from operations and available credit under its
new credit facility will be adequate to meet future operating, debt service, and
capital expenditure cash needs.

   Debt as a percent of total capitalization (stockholders' equity plus debt)
was 72.3% at October 31, 1998, compared with 131.1% at October 31, 1997.  The
current ratio at October 31, 1998 was 2.29:1, compared with 0.54:1 at October
31, 1997, while working capital was $48.5 million at October 31, 1998, compared
with ($76.4) million at October 31, 1997.  As a result of the Company's non-
compliance with the financial ratio covenants contained in its prior credit
agreement, debt in the amount of $120.3 million as of October 31, 1997, which
otherwise would have been classified as noncurrent, was classified as current.
Excluding those debt reclassifications, the current ratio would have been 1.97:1
at October 31, 1997 and working capital would have been $43.9 million at October
31, 1997.

   Cash flow provided by continuing operations for 1998 was $18.3 million,
compared to $5.0 million in 1997.  The $13.3 million increase from 1997 to 1998
was due primarily to a net income of $40.1 million in 1998 compared to a net
loss after extraordinary item (excluding a $15.7 million writedown of an asset
held for sale), of $16.0 million in 1997.  Partially offsetting this increase
was an increase in deferred taxes in 1998 of $24.4 million compared to a
decrease in deferred taxes of $2.9 million in 1997 and an increase in accounts
payable and other liabilities of $0.1 million in 1998 compared to an increase of
$11.8 million in 1997.

   On May 4, 1998, the Company and Hughes Electronics Corporation ("Hughes")
entered into an agreement (the "Amendment"), to modify certain terms of the
Company's 1995 purchase of Hughes LAN Systems, Inc. (now known as Whittaker
Communications, Inc.) from Hughes.  Under the Stock Purchase Agreement between
the Company and Hughes, dated April 24, 1995 (the "Prior Agreement"), the
Company issued to Hughes a 7% convertible subordinated note in the principal
amount of $15 million, due May 1, 2005 (the "Note").

   The Amendment provides that Whittaker may elect to make certain payments due
to Hughes under the terms of the Prior Agreement in cash or in shares of
Whittaker common stock.  In accordance with the terms of the Amendment, the
Company elected to make these payments to Hughes by issuing to Hughes 107,841
newly issued shares of Whittaker common stock.  The Amendment also provides that
no such further payments shall be payable by the Company.  The Company and
Hughes also agreed in the Amendment to release any and all existing claims
against each other.

   The Amendment modifies the Note by (a) changing the conversion price from
$24.25 per share to $16.97 per share; and (b) if the Company redeems all or a
portion of the Note prior to May 4, 2002, obligating the Company to issue to the
holder of the Note a warrant to purchase the number of shares of Whittaker
common stock which the holder of the Note could have received upon conversion of
the principal amount so redeemed by the Company ("Warrant").  The form of
Warrant states that the exercise price of the Warrant will be based on the
conversion price of $16.97 and adjusted in accordance with customary anti-
dilutive protections similar to those affecting the conversion of the Note.  The
form of Warrant also provides that the number of shares subject to the Warrant
will be adjusted based upon similar anti-dilutive principles.  If the entire
principal amount of the Note, as amended, was converted as of October 31, 1998
into Whittaker common stock, the Company would be required to issue, and has
thus reserved for issuance, 883,912 shares of Whittaker common stock.

   On June 12, 1998, the Company issued to Hughes fifteen 7% convertible
subordinated notes, each in the principal amount of $1 million (the "Notes"), in
exchange for the $15 million Note which was cancelled.  The terms of each of the
$1 million Notes are identical, except for the principal amount, to the terms of
the $15 million Note, as amended by the Amendment.  Hughes subsequently sold the
Notes to other investors.

                                       12
<PAGE>
 
   Under the Notes, the Company may not pay or declare cash dividends or redeem
shares of the Company if the Company's tangible net worth is less than $15
million. Since April 30, 1996, the Company's tangible net worth has been less
than $15 million and the Company has not paid or declared dividends (including
the quarterly dividend for the Series D Preferred Stock) or redeemed shares
since that date. However, dividends on the Series D Preferred Stock have been
accrued since that date. At October 31, 1998, the amount of accrued and unpaid
dividends on the Series D Preferred Stock was $1,442.94.

   Capital expenditures of continuing operations during 1998 were $2.6 million,
compared to $2.2 million for 1997.  At October 31, 1998, there were
approximately $0.5 million of approved capital expenditures outstanding for the
replacement and upgrade of existing plant and equipment at the Company's various
facilities. Funds for these and other capital expenditures are expected to be
provided from operations and advances under the Company's new credit agreement.
Under the terms of the Company's new credit agreement, capital expenditures may
not exceed specified annual amounts.

   Cash expenditures related to the environmental remediation of a 996-acre
parcel of land located in Santa Clarita, California were $1.4 million during
1998.

   As a result primarily of the activities of its discontinued operations , the
Company is a potentially responsible party in a number of actions filed under
the Comprehensive Environmental  Response Compensation and Liability Act of 1980
(CERCLA).  See further discussion in Item 3 of this Form 10-K.

   See Note 11 of Notes to Consolidated Financial Statements in Part II, Item 8
of this form 10-K for information regarding commitments and contingencies.

 IMPACT OF YEAR 2000

   The Year 2000 ("Y2K") issue is the result of computer programs being written
using two digits rather than four to define the applicable year.  Any of the
Company's computer programs or hardware that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than the
year 2000.  This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in normal business activities.

   Since 1997, the Company has undertaken a number of initiatives to address the
anticipated impact of the Y2K on its business, including information and non-
information systems, customers and suppliers and third party service providers.
These initiatives include assessments of it systems and products, discussions
with its suppliers and customers, and the implementation of remedial action
plans where necessary. Based on these assessments, the Company determined that a
computer system (both hardware and software) used in its fire and overheat
detector business was not Y2K compliant and needed to be replaced with a system
that was fully Y2K compliant.  The Company is currently in the process of
replacing this system and estimates that this will be completed by March, 1999.
The estimated cost of replacing this system is $2.0 million and as of October
31, 1998, the Company has spent approximately $1.5 million of this cost.

   Customers and suppliers of the Company are in various stages of addressing
any potential Y2K problems.  In view of the large number of alternative
suppliers, the Company believes that the failure of a supplier to become Y2K
compliant would not have a material adverse effect on the Company.  The Company
has contacted or is in the process of contacting its third party service
providers to determine their ability to become Y2K compliant.  To date, all of
the service providers who have been contacted have indicated that they are or
will be fully Y2K compliant.

   While the Company believes that it has identified all potential Y2K issues
and has implemented a program to resolve any potential Y2K problems, all
necessary phases of this program have not yet been completed.  The failure by
the Company to complete the remaining phases of this program prior to December
31, 1999 or the failure by the Company to have identified all potential Y2K
issues could materially adversely effect the Company.  The amount of any
potential liability or lost revenue cannot be reasonably estimated at this time.
The Company currently has no contingency plans in place in the event it does not
complete the remaining phases of its Y2K program in a timely manner or has
failed to identify a potential issue. The Company does intend to develop a
contingency plan prior to December 31, 1999.

                                       13
<PAGE>
 
 SUBSEQUENT EVENT

   On November 12, 1998, the Company adopted a new Stockholders Rights Plan (the
"New Plan") which is substantially similar to the prior Rights Plan which
expired by its terms on November 29, 1998.  Under the New Plan, Rights were
distributed as a dividend at the rate of one Right for each share of Common
Stock held by stockholders of record at the close of business on November 30,
1998.  Each Right entitles stockholders to buy, upon the occurrence of certain
events, 1/100th of a share of a new series of the Company's preferred stock
(Series E Participating Cumulative Preferred Stock) for $125.  The Rights become
exercisable only if a person or group acquires beneficial ownership of 25% or
more of the Company's Common Stock, or commences a tender offer or exchange that
would result in such person or group owning 25% or more of the Company's Common
Stock.  Until a person or group acquires 25% or more of the Company's Common
Stock, the Rights may be redeemed by the Board of Directors for $.01 per Right.
After a person or group acquires 25% or more of the Company's  Common Stock but
before such person or group acquires 50% or more of the Company's Common Stock,
the Board of Directors may exchange all or part of the Rights (other than the
Rights owned by the person or group holding the 25% or more of the Company's
Common Stock) for shares of the Company's Common Stock at an exchange ratio of
one Right for one share of Common Stock.  The Rights will expire on November 30,
2008.

   On January 11, 1999, the Company sold its 996-acre land parcel located in the
City of Santa Clarita, California and certain other additional rights and assets
related to this land for $10.0 million in cash, a $5.0 million promissory note
and a contingent interest in any final profit from the development of this land.
The net cash proceeds from the sale were used to repay debt outstanding under
the Company's credit facility.

   Statements made herein that are not based on historical fact are "forward
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. The risk factors that could cause actual results to differ
from the forward looking statements include delay in developing new programs
and products, inability to qualify for new programs or to develop new products,
loss of existing business and inability to attract new business and customers,
reduced spending by commercial and defense customers, development of competing
products and the cyclical nature of the aerospace industry.

ITEM 7A.  QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.

     The interest on the Company's bank debt is based on prevailing market
interest rates and interest on the Company's subordinated debt is based on a
fixed interest rate. For market rate based debt, interest rate changes generally
do not affect the market value of the debt but do impact future earnings and
cash flows, assuming other factors are held constant. Conversely for fixed rate
debt, interest rate changes affect the fair market value of the debt but do not
impact earnings or cash flows. A theoretical one percentage point change in
market rates in effect on October 31, 1998 would impact the after-tax earnings
of the Company by less than $0.5 million per year. The effect of this change on
the market value of the Company's fixed rate debt would not be material.

   Statements made herein that are not based on historical fact are "forward
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995.  The risk factors that could cause actual results to differ
from the forward looking statements include delay in developing new programs and
products, inability to qualify for new programs or to develop new products, loss
of existing business and inability to attract new business and customers,
reduced spending by commercial and defense customers, development of competing
products and the cyclical nature of the aerospace industry.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.

                                       14
<PAGE>
 
                        REPORT OF INDEPENDENT AUDITORS

To the Stockholders and Board of Directors of Whittaker Corporation

   We have audited the accompanying consolidated balance sheets of Whittaker
Corporation as of October 31, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended October 31, 1998.  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, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Whittaker Corporation at October 31, 1998 and 1997, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended October 31, 1998, in conformity with generally accepted accounting
principles.

                                        ERNST & YOUNG LLP
Los Angeles, California
December 11, 1998

                                       15
<PAGE>
 
                             WHITTAKER CORPORATION

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                           FOR THE YEARS ENDED OCTOBER 31,
                                                               -----------------------------------------------------
                                                                   1998                 1997                 1996
                                                               ------------         ------------         -----------
<S>                                                            <C>                  <C>                  <C>     
                                                                                  RESTATED -NOTE 2
                                                                 (DOLLARS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)

Sales....................................................      $    131,477         $     89,782         $    98,647
Costs and expenses
   Cost of sales.........................................            65,915               60,549              50,355
   Engineering and development...........................               757                  894               1,398
   Selling, general and administrative...................            25,447               23,500              26,618
   Restructuring costs...................................                --                   --                 200
   Writedown of asset held for sale......................                --               15,677                  --
                                                               ------------         ------------         -----------
Operating income (loss)..................................            39,358              (10,838)             20,076
Interest expense.........................................            12,059               18,299              10,937
Interest income..........................................            (1,914)                (444)             (6,295)
Other expense............................................             6,725                3,495                 684
                                                               ------------         ------------         -----------
Income (loss) from continuing operations before                      
 extraordinary item and provision for taxes..............            22,488              (32,188)             14,750
Provision (benefit) for taxes (Note 8)...................           (17,602)              (3,901)              4,933
                                                               ------------         ------------         -----------
Income (loss) from continuing operations before                      
 extraordinary item......................................            40,090              (28,287)              9,817
 
Discontinued operations (Note 2)
 Loss from discontinued operations.......................              (773)            (127,095)            (26,944)
 Gain (loss) on disposal of discontinued operations......             9,221               (4,791)                 --
Extraordinary item, less income tax benefit of $224                      
 (Note 15)...............................................                --               (3,409)                 --
                                                               ------------         ------------         -----------
Net income (loss)........................................      $     48,538         $   (163,582)        $   (17,127)
                                                               ============         ============         ===========

Basic income (loss) per share
 Continuing operations...................................      $       3.56         $      (2.54)        $       .98
 Discontinued operations
  Loss from discontinued operations......................              (.07)              (11.40)              (2.68)
  Gain (loss) on disposal of discontinued operations.....               .82                 (.43)                 --
 Extraordinary item......................................                --                 (.31)                 --
                                                               ------------         ------------         -----------
 Net income (loss).......................................      $       4.31         $     (14.68)        $     (1.70)
                                                               ============         ============         ===========

Diluted income (loss) per share
 Continuing operations...................................      $       3.30         $      (2.54)        $       .94
 Discontinued operations
  Loss from discontinued operations......................              (.06)              (11.40)              (2.41)
  Gain (loss) on disposal of discontinued operations.....               .74                 (.43)                 --
 Extraordinary item......................................                --                 (.31)                 --
                                                               ------------         ------------         -----------
 Net income (loss).......................................      $       3.98         $     (14.68)        $     (1.47)
                                                               ============         ============         ===========
</TABLE>
                                                                                
       The accompanying notes are an integral part of these statements.

                                       16
<PAGE>
 
                             WHITTAKER CORPORATION

                          CONSOLIDATED BALANCE SHEETS

                                    ASSETS

<TABLE>
<CAPTION>
                                                                         AT OCTOBER 31,
                                                               -------------------------------
                                                                   1998                1997
                                                               -----------         -----------
<S>                                                            <C>                 <C>     
                                                                                     RESTATED
                                                                                     - NOTE 2
                                                                    (DOLLARS IN THOUSANDS)
CURRENT ASSETS                                          
Cash....................................................       $        --         $     6,366
Receivables.............................................            19,415              23,702
Inventories.............................................            42,060              37,009
Prepaids and other current assets.......................             2,578                 772
Income taxes recoverable................................               195               3,238
Deferred income taxes...................................            21,800              11,244
Net current assets of discontinued units................                --               7,057
                                                               -----------         -----------
   Total Current Assets.................................            86,048              89,388
                                                               -----------         -----------
                                                        
PROPERTY, PLANT AND EQUIPMENT                           
Land and land improvements..............................                72                 299
Buildings and improvements..............................             7,324               8,355
Equipment...............................................            21,421              20,858
Construction in progress................................             1,645                 384
                                                               -----------         -----------
                                                                    30,462              29,896
Less accumulated depreciation and amortization..........           (20,623)            (20,433)
                                                               -----------         -----------
                                                                     9,839               9,463
                                                               -----------         -----------
                                                        
OTHER ASSETS                                            
Goodwill, net of amortization...........................            13,677              14,032
Other intangible assets, net of amortization............               922               1,106
Notes and other noncurrent receivables..................             3,152               3,443
Other noncurrent assets.................................             7,726               7,637
Net assets held for sale................................            15,214              15,214
Net noncurrent assets of discontinued units.............                --              22,650
                                                               -----------         -----------
                                                                    40,691              64,082
                                                               -----------         -----------
                                                               $   136,578         $   162,933
                                                               ===========         ===========
</TABLE>

       The accompanying notes are an integral part of these statements.

                                       17
<PAGE>
 
                             WHITTAKER CORPORATION

                          CONSOLIDATED BALANCE SHEETS

                      LIABILITIES & STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                                  AT OCTOBER 31,
                                                                                       ----------------------------------
                                                                                             1998                 1997
                                                                                       -------------        -------------
                                                                                                              RESTATED -
                                                                                                                NOTE 2
                                                                                              (Dollars in thousands)
<S>                                                                                    <C>                  <C> 
CURRENT LIABILITIES
Current maturities of long-term debt...........................................        $       1,043        $     129,353
Accounts payable...............................................................                6,457                9,086
Accrued liabilities............................................................               30,039               27,315
                                                                                       -------------        -------------
   Total Current Liabilities...................................................               37,539              165,754
                                                                                       -------------        -------------
OTHER LIABILITIES
Long-term debt.................................................................               60,368                  222
Other noncurrent liabilities...................................................               13,933               12,603
Deferred income taxes..........................................................                1,260               15,077
                                                                                       -------------        ------------- 
   Total Other Liabilities.....................................................               75,561               27,902
                                                                                       -------------        -------------
Commitments and contingencies (Notes 4, 10, and 11)
 
STOCKHOLDERS' EQUITY
Capital Stock:
   Preferred Stock, par value $1 per share, authorized 5,000,000 shares--
     Series D Participating Convertible Preferred Stock, outstanding 577.18                        1                    1
      shares at October 31, 1998 and October 31, 1997..........................
   Common Stock, authorized 40,000,000 shares--
   Par value, $.01 per share, outstanding 11,345,199 shares at October 31,                       113                  112
    1998 and 11,204,658 shares at October 31, 1997.............................
Additional paid-in capital.....................................................               77,703               72,041
Retained deficit...............................................................              (54,339)            (102,877)
                                                                                       -------------        -------------  
    Total Stockholders' Equity (deficit)........................................              23,478              (30,723)
                                                                                       -------------        ------------- 
                                                                                       $     136,578        $     162,933
                                                                                       =============        =============
</TABLE>
                                                                                
       The accompanying notes are an integral part of these statements.

                                       18
<PAGE>
 
                             WHITTAKER CORPORATION
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                                 FOR THE YEARS ENDED OCTOBER 31,
                                                                                             -------------------------------------
                                                                                                 1998          1997          1996
                                                                                             ----------    ----------    ---------
Operating Activities                                                                                    RESTATED - NOTE 2
Continuing Operations                                                                                 (DOLLARS IN THOUSANDS)
<S>                                                                                          <C>           <C>           <C>  
 Net income (loss), including extraordinary item..........................................   $   40,090    $  (31,696)   $   9,817
 Adjustments to reconcile net income (loss) to net cash provided (used) by operations:
  Depreciation and amortization...........................................................        2,516         2,602        2,629
  Net periodic pension (income) expense...................................................          196           208          (63)
  Income taxes recoverable................................................................        3,043         2,205       (3,991)
  Deferred taxes..........................................................................      (24,373)        2,930        1,108
  Impairment charge.......................................................................           --        15,677           --
  Extraordinary loss......................................................................           --         3,633           --
  Changes in operating assets and liabilities:
   Receivables............................................................................        3,607         3,676       (2,677)
   Inventories and prepaid expenses.......................................................       (6,857)       (6,036)      (6,881)
   Accounts payable and other liabilities.................................................           95        11,831        2,973
                                                                                             ----------    ----------    ---------
 Total from continuing operations.........................................................       18,317         5,030        2,915
                                                                                             ----------    ----------    ---------
Discontinued Operations
 Net income (loss)........................................................................         (773)     (131,886)     (26,944)
 Adjustments to reconcile net income (loss) to net cash provided (used) by operations:
  Depreciation and amortization...........................................................        2,774        21,108       16,010
  Intangible asset impairment charges and other write-offs................................           --        90,376           --
  Net periodic pension (income) expense...................................................           --           381         (142)
  Acquired in-process research and development............................................           --            --       11,700
  Deferred taxes..........................................................................        1,023        (4,736)      (8,291)
  Changes in operating assets and liabilities.............................................         (261)       23,898        5,181
                                                                                             ----------    ----------    ---------
 Total from discontinued operations.......................................................        2,763          (859)      (2,486)
                                                                                             ----------    ----------    ---------
Net cash provided by operating activities.................................................       21,080         4,171          429
                                                                                             ----------    ----------    ---------
INVESTING ACTIVITIES
Continuing Operations
 Proceeds on sale of businesses...........................................................       37,931            --           --
 Sale of property, plant and equipment....................................................           --        15,029           --
 Purchase of property, plant and equipment................................................       (2,555)       (2,182)      (1,661)
 Collections of notes receivable..........................................................          971          (415)       1,724
 (Increase) decrease in assets held for sale..............................................           --           238       (4,014)
 Contingent payments on purchased business................................................           --            --       (1,839)
 Other items, net.........................................................................        1,771         1,315        1,886
                                                                                             ----------    ----------    --------- 
 Total from continuing operations.........................................................       38,118        13,985       (3,904)
                                                                                             ----------    ----------    ---------
Discontinued Operations
 Net proceeds (expenditures) relating to discontinued operations..........................       (2,549)       17,280      (72,474)
                                                                                             ----------    ----------    ---------
Net cash provided (used) by investing activities..........................................       35,569        31,265      (76,378)
                                                                                             ----------    ----------    ---------
FINANCING ACTIVITIES
Issuance of debt..........................................................................       75,000            --       84,800
Net reduction of debt.....................................................................     (143,164)      (32,360)          --
Reduction (increase) in deferred debt costs...............................................         (514)            4       (3,281)
Issuance of common stock..................................................................        1,432            --           --
Tax benefit on stock option exercises.....................................................        3,995           482           89
Dividends paid............................................................................           --            --           (1)
Purchases of common stock.................................................................           --            --       (6,472)
Proceeds from shares issued under stock option plans......................................          236         1,238        2,219
                                                                                             ----------    ----------    ---------
Net cash provided (used) by financing activities..........................................      (63,015)      (30,636)      77,354
                                                                                             ----------    ----------    ---------
Net increase (decrease) in cash...........................................................       (6,366)        4,800        1,405
Cash at beginning of year.................................................................        6,366         1,566          161
                                                                                             ----------    ----------    ---------
Cash at end of year.......................................................................   $       --    $    6,366    $   1,566
                                                                                             ==========    ==========    =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
 Interest.................................................................................   $   10,779    $   18,080    $   9,792
                                                                                             ==========    ==========    =========
 Income taxes.............................................................................   $      443    $      433    $     280
                                                                                             ==========    ==========    =========
</TABLE>

       The accompanying notes are an integral part of these statements.

                                       19
<PAGE>
 
                             WHITTAKER CORPORATION

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                  FOR THE THREE YEARS ENDED OCTOBER 31, 1998
                                (IN THOUSANDS)

                                        
<TABLE>
<CAPTION>
                                           SERIES D                                   ADDITIONAL                
                                          PREFERRED          COMMON STOCK              PAID-IN         RETAINED
                                                        -----------------------
                                            STOCK          SHARES        AMOUNT        CAPITAL         EARNINGS            TOTAL
                                        ------------    ----------    ---------    -------------    --------------    --------------
<S>                                     <C>             <C>           <C>          <C>              <C>               <C>
BALANCE AT NOVEMBER 1, 1995.............        $1         8,589       $   86        $  19,261         $  83,076        $102,424   
Net loss................................        --            --           --               --           (17,127)         (17,127)  
Cash dividends--preferred stock.........        --            --           --               --                (1)              (1)  
Conversion of preferred stock...........        --           104            1               --                (1)              --  
Shares issued under stock option plans..        --           660            6            2,213                --            2,219  
Shares reacquired.......................        --          (298)          (3)          (1,226)           (5,243)          (6,472)  
Shares issued on acquisition of                                                                                                     
 business...............................        --         1,974           20           49,984                --           50,004   
Income tax benefits from stock options         
 exercised..............................        --            --           --               89                --               --  
                                        ------------    ----------    ---------    -------------    --------------    --------------

BALANCE AT OCTOBER 31, 1996.............         1        11,029          110           70,321            60,704          131,136  
Net loss................................        --            --           --               --          (163,582)        (163,582)  
Shares issued under stock option plans..        --           176            2            1,238                --            1,240  
Income tax benefits from stock options          
 exercised..............................        --            --           --              482                --              482 
Translation adjustment..................        --            --           --               --                 1                1   
                                        ------------    ----------    ---------    -------------    --------------    --------------

BALANCE AT OCTOBER 31, 1997.............         1        11,205          112           72,041          (102,877)         (30,723)  
Net income..............................        --            --           --               --            48,538           48,538  
Shares issued under stock option plans..        --            32           --              236                --              236  
Shares issued as payment under terms of         
 amended stock purchase agreement.......        --           108            1            1,431                --            1,432
Income tax benefits from stock options          
 exercised..............................        --            --           --            3,995                --            3,995
                                        ------------    ----------    ---------    -------------    --------------    --------------
BALANCE AT OCTOBER 31, 1998.............        $1        11,345       $  113        $  77,703         $ (54,339)       $  23,478   
                                        ============    ==========    =========    =============    ==============    ==============
</TABLE>
                                                                                
       The accompanying notes are an integral part of these statements.

                                      20
<PAGE>
 
                             WHITTAKER CORPORATION

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   (A) Principles of Consolidation: The consolidated financial statements
include the accounts of the Company and its subsidiaries.  All significant
intercompany accounts and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally accepted
accounting principles may require management to make certain estimates and
assumptions that could affect the amounts reported in the financial statements
and accompanying notes.  These estimates and assumptions include, among other
things, future costs to complete long-term contracts, valuation of slow moving
or obsolete inventories, and amounts of estimated liabilities for contingent
losses and future costs of litigation.  Actual costs could differ from these
estimates.

   (B) Inventories: Inventories are stated at the lower of cost or market.  Cost
has been determined principally on the first-in, first-out (FIFO) method.
Certain of the Company's inventories relate to long-term programs and may
require more than one year to be realized.  Inventories, net of valuation
reserves of $7.8 million and $7.3 million at October 31, 1998 and 1997,
respectively, consisted of the following:

<TABLE>
<CAPTION>
                                                                        OCTOBER 31,               
                                                              --------------------------------   
                                                                  1998                1997       
                                                              -------------        -----------   
                                                                       (IN THOUSANDS)            
          <S>                                                 <C>                  <C>           
          Parts and materials...............................        $20,999            $19,597   
          Work in process...................................         18,565             15,595   
          Finished goods....................................          2,496              1,817   
                                                                  ---------           --------    
                                                                    $42,060            $37,009   
                                                                  =========           ========    
</TABLE>
                                                                                
   (C) Intangibles: Goodwill is amortized using the straight-line method over 40
years.  Other intangible assets principally relate to acquired intangibles and
include patents, technology, and software.  Amortization is recorded on a
straight-line basis, generally over periods ranging from 5 to 15 years.

   Accumulated amortization of goodwill and of other intangible assets at
October 31, 1998 amounted to $1.8 million and $3.1 million, respectively, and at
October 31, 1997 amounted to $1.5 million and $2.8 million, respectively.
During 1998, 1997 and 1996 amortization of $0.6 million, $0.6 million and $0.8
million, respectively, was charged to expense in the Company's continuing
operations.

   (D) Property and Depreciation: Property, plant and equipment is recorded at
cost.  Depreciation is computed principally by use of the straight-line method
based upon the estimated useful lives of such assets, ranging from four to
thirty years.  Depreciation of leasehold improvements is computed on a straight-
line basis over the shorter of the estimated useful lives of the improvements or
the terms of the leases.  During 1998, 1997 and 1996 depreciation of $1.9
million, $2.0 million and $1.8 million, respectively, was charged to expense by
the Company in its continuing operations.  Capital expenditures by the Company's
continuing operations were $2.6 million, $2.2 million and $1.7 million in 1998,
1997 and 1996, respectively.

   (E) Revenue Recognition: The Company recognizes revenues upon shipment of its
product or upon completion of the services it renders. The Company accrues
estimated warranty and installation costs at the time of shipment. On
significant long-term contracts that involve significant engineering and
development efforts, the Company would use the percentage-of-completion method
for recognition of revenues and profits.

   (F) Engineering and Development Costs: Company-sponsored engineering and
development costs are expensed as incurred.  Costs related to engineering and
development contracts are included in inventory and charged to cost of goods
sold upon recognition of related revenue.

                                       21
<PAGE>
 
                             WHITTAKER CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

   (G) Earnings (Loss) Per Share: Basic earnings (loss) per share have been
computed based on the weighted average number of common shares outstanding
during the periods.  Diluted earnings per share for 1998 and 1996 include the
potential dilutive effect of employee stock options calculated using the
treasury stock method and the Series D Participating Convertible Preferred Stock
and the convertible subordinated notes on an if converted method.  These
potentially dilutive securities have been excluded from the 1997 calculations as
antidilutive.  The statements of income for prior periods have been restated to
segregate continuing and discontinued operations.

   (H) Impairment of Long-Lived Assets: When indicators of impairment of long-
lived assets used in operations or long-lived assets to be disposed of, other
than long-lived assets of discontinued operations, are present and, the
undiscounted future cash flows estimated to be generated by those assets is less
than the carrying value of such assets, an impairment loss would be recorded by
the Company.

   (I) New Accounting Standards: In June of 1997 the FASB issued FAS No. 130,
"Reporting Comprehensive Income," effective for the 1999 fiscal year.  FAS No.
130 establishes standards for reporting and displaying comprehensive income and
its components in the financial statements.  Comprehensive income is defined as
the change in the equity of a business enterprise during a period from
transactions and other events from nonowner sources.  The Company does not
expect the adoption of this standard to have a material effect on its
consolidated financial statements.

   In June of 1997 the FASB issued FAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," effective for the 1999 fiscal year.  FAS
No. 131 requires the reporting of certain information about operating segments
of a business enterprise and replaces FAS No. 14.  The Company has not completed
its review of this standard and the effect of this standard upon its 
consolidated financial statements.

   In February 1998, the Financial Accounting Standards Board issued FAS No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits,"
effective for the Company's 1999 fiscal year.  FAS No. 132 supersedes the
disclosure requirements in FAS No. 87, FAS No. 88 and FAS No. 106 and attempts
to improve and standardize disclosures about pensions and other postretirement
benefits and to make the required information easier to prepare and more
understandable.  The Company does not expect the adoption of this standard to
have a material effect on its consolidated financial statements.

   In June 1998, the Financial Accounting Standards Board issued FAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," effective for
the Company's 2000 fiscal year. Because of the Company's minimal use of
derivatives, it does not anticipate that the adoption of this standard will have
a material impact on its consolidated financial statements.

NOTE 2.  DISCONTINUED OPERATIONS

   During the third quarter of 1998, the Company decided to sell its Integration
Services business, Aviant Information, Inc.  On August 20, 1998, the Company
sold the assets and business of Aviant Information, Inc. to Enterprise
Consulting Group, Inc.  During the first quarter of 1998 the Company completed
the sale of its previously discontinued Communications business, Whittaker
Xyplex, Inc. ("Xyplex") to MRV Communications, Inc. ("MRV"), for $35 million in
cash plus warrants to purchase 421,402 shares of common stock of MRV.  The
warrants were valued at $2,200,000 based on their estimated market value at
January 31, 1998.  Because of a decline in the estimated market value of the
common stock underlying these warrants the Company, in the fourth quarter of
1998, wrote down the value of this asset to zero.  This $2,200,000 charge is
reflected in the Company's continuing operations other expense.  The net
proceeds from the sales were used to reduce the Company's bank debt.  During the
fourth quarter of 1997, the Company sold its defense electronics unit.  The
Company's financial statements report the operating results and balance sheet
items of these discontinued operations separately from its continuing
operations.  Previously reported financial statements have been restated to
reflect the discontinuance of these businesses.

                                       22
<PAGE>
 
                             WHITTAKER CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


NOTE 2.  DISCONTINUED OPERATIONS--(CONTINUED)

   Operating results of the discontinued operations were as follows:

<TABLE>
<CAPTION>
                                                      FOR THE YEARS ENDED OCTOBER 31,
                                                ----------------------------------------------
                                                     1998              1997            1996
                                                ------------      ------------     -----------
          <S>                                   <C>               <C>              <C>   
          Sales                                 $     19,592      $    105,169     $   123,230
          Costs and expenses                          22,410           235,226         164,196
                                                ------------      ------------     -----------
          Loss before taxes                           (2,818)         (130,057)        (40,966)
          Tax benefit                                 (2,045)           (2,962)        (14,022)
                                                ------------      ------------     -----------
          Loss from discontinued operations     $       (773)     $   (127,095)    $   (26,944)
                                                ============      ============     ===========
</TABLE>

   Net assets of the discontinued businesses at October 31, 1998 and October 31,
1997 were as follows:

<TABLE>
<CAPTION>
                                                                      October 31,           
                                                          --------------------------------- 
                                                               1998                 1997    
                                                          -------------       ------------- 
               <S>                                        <C>                 <C>         
               Current assets                             $          --       $      27,834 
               Current liabilities                                   --              20,777 
                                                          -------------       ------------- 
                  Net current assets                                 --               7,057 
                                                          -------------       ------------- 
               Property, plant and equipment                         --               5,505 
               Other noncurrent assets                               --              22,448 
               Deferred taxes                                        --              (5,303)
                                                          -------------       ------------- 
                Net noncurrent assets                                --              22,650 
                                                          -------------       ------------- 
                Net assets                                $          --       $      29,707 
                                                          =============       =============  
</TABLE>

   The 1998 net loss from discontinued operations includes benefits from prior
year tax losses of $1.1 million.  The 1997 discontinued operations loss before
taxes includes a fourth quarter charge of $55.7 million for the write-down of
the net assets of Xyplex, Inc. to their estimated net realizable value. Also
included in the 1997 loss is a goodwill and other intangibles impairment charge
of $30.2 million and restructuring costs of $5.3 million. The 1996 discontinued
operations loss before taxes includes the write-off of acquired in-process
research and development of $11.7 million.

     The 1998 gain on disposal of discontinued operations of $9.2 million
includes tax benefits of $1.6 million and reflects a $12.5 million gain on the
sale of Whittaker Xyplex, Inc. during the first quarter of 1998 and a $1.7
million gain on the sale of the assets and business of Aviant Information, Inc.
during the fourth quarter of 1998. Also included in the 1998 gain on disposal of
discontinued operations is a $2.7 million write-off of certain assets related to
the discontinued Communications segment; a $2.0 million loss on certain
contracts related to the discontinued defense electronics business and $1.9
million of other losses arising from the disposition of its various discontinued
operations. The Company received cash during 1998 on the sale of Whittaker
Xyplex, Inc. and the assets and business of Aviant Information, Inc. of $35.0
million and $2.9 million, respectively.

     The 1997 loss on disposal of discontinued operations of $4.8 million is net
of tax benefits of $0.3 million and reflects proceeds realized from the
disposition of discontinued operations of $18.9 million. Of these  proceeds,
$18.4 million was used to reduce the Company's bank debt. The 1997 loss on
disposal reflects provisions for accrued liabilities for retained obligations
arising directly as a result of the decision to dispose of these operations and
the estimated future results of operations of such businesses through the date
of disposition.

                                       23
<PAGE>
 
                             WHITTAKER CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


NOTE 3.  EARNINGS PER SHARE

   The following table sets forth for continuing operations the computation of
basic and diluted earnings (loss) per share in thousands except per share
amounts:

<TABLE>
<CAPTION>
                                                                              FOR THE YEARS ENDED OCTOBER 31,
                                                                      ---------------------------------------------
                                                                           1998            1997             1996
                                                                      ------------    ------------     ------------
<S>                                                                   <C>             <C>              <C>     
Basic Earnings (Loss) Per Share
-------------------------------
  Income (loss) from continuing operations                            $     40,090    $    (28,287)    $      9,817
  Less preferred dividends                                                      --              --                1
                                                                      ------------    ------------     ------------
  Net income (loss) from continuing operations available to common                                                  
   stockholders                                                       $     40,090    $    (28,287)    $      9,816 
                                                                      ============    ============     ============
  Weighted average common shares outstanding                                11,264          11,144           10,065
                                                                      ============    ============     ============
  Basic income (loss) per share from continuing operations            $       3.56    $      (2.54)    $       0.98
                                                                      ============    ============     ============
Diluted Earnings (Loss) Per Share
---------------------------------
  Net income (loss) from basic earnings per share calculation, above  $     40,090    $    (28,287)    $      9,816
  Add after-tax interest on convertible debt                                   693              --              693
                                                                      ------------    ------------     ------------
  Net income (loss) from continuing operations for diluted earnings                                                 
   per share calculation                                              $     40,783    $    (28,287)    $     10,509 
                                                                      ------------    ------------     ------------
  Weighted average common shares outstanding for basic earnings per                                                 
   share calculation, above                                                 11,264          11,144           10,065 
  Effect of dilutive securities:                                                                                    
    Series D Convertible Preferred Stock                                       188              --              213 
    Employee stock options                                                     167              --              294 
    Convertible debt                                                           751              --              619 
                                                                      ------------    ------------     ------------
  Denominator for diluted earnings per share calculation                    12,370          11,144           11,191
                                                                      ============    ============     ============
  Diluted earnings (loss) per share from continuing operations        $       3.30    $      (2.54)    $       0.94
                                                                      ============    ============     ============
</TABLE>

   Options to purchase 349,334 shares of common stock at prices ranging from
$14.94 to $26.25 per share were not included in the computation of diluted
earnings per share for 1998 because their inclusion would be anti-dilutive.
Options to purchase 630,427 shares of common stock at prices ranging from $14.87
to $26.25 per share were not included in the computation of diluted earnings per
share for 1996 because their inclusion would be anti-dilutive.  Loss per share
calculations for 1997 do not include the effect of the Series D Convertible
Preferred Stock, employee stock options or the convertible debt as such amounts
would be anti-dilutive.

                                       24
<PAGE>
 
                             WHITTAKER CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


NOTE 4.  NET ASSETS HELD FOR SALE

   Net assets held for sale at October 31, 1998 and October 31, 1997, include
$15.0 million of land formerly used by a discontinued technology unit.  The land
is located in the City of Santa Clarita, California.

   During the fourth quarter of 1997, in connection with its strategy to reduce
debt, the Company decided to sell this land and thus recorded a  non-cash
write-down of  $15.7 million dollars to reflect this asset at $15 million which
is the amount the Company estimates it would receive upon the sale of this asset
after deducting estimated selling costs. Under Financial Accounting Standards
Board Statement No. 121 ("FAS 121"), when an impairment write-down is required,
the related assets are adjusted to their estimated fair value, net of estimated
selling costs. For purposes of FAS 121, fair value has been determined to be the
amount a willing buyer would pay a willing seller for such assets in a current
transaction that is other than a forced or liquidation sale.

   The cost to perform the environmental remediation of this property necessary
to prepare the property for development is estimated to be approximately $14.0
million.  However, the Company does not plan to develop the property.  In
addition, no claim has been asserted or is probable, and no assessment has been
made or is probable, against the Company by a governmental agency to remediate
this property.  Consequently, the Company has not recorded a liability for these
costs.  These costs are not considered selling costs because they are not costs
that must be incurred before legal title can be transferred nor is there a
contractual agreement for the sale of the land that obligates the Company to
incur these costs in the future.

   The estimation process involved in determining if assets have been impaired
and in the determination of fair value is inherently uncertain since it requires
estimates of current market yields as well as future events and conditions.

NOTE 5.  RECEIVABLES

     Receivables consisted of the following:

<TABLE> 
<CAPTION> 
                                                                                   OCTOBER 31,
                                                                        -------------------------------
                                                                             1998               1997
                                                                        ------------       ------------
     <S>                                                                <C>                <C>
                                                                                 (IN THOUSANDS)
     Trade accounts receivable--billed............................          $19,832            $21,392   
     Other receivables............................................            1,942              2,942   
     Allowance for doubtful accounts..............................           (2,359)              (632)  
                                                                            -------            -------   
     Total receivables............................................          $19,415            $23,702   
                                                                            =======            =======   
</TABLE>  
                           

                                       25
<PAGE>
 
                             WHITTAKER CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Note 6.  Long-Term Debt

   Long-term debt consisted of the following:

<TABLE>
<CAPTION>
                                                                                         OCTOBER 31,
                                                                   -------------------------------------------------------
                                                                            1998                             1997
                                                                   ------------------------       ------------------------
                                                                                       (In thousands)
                                                                                  INTEREST                       INTEREST
                                                                     AMOUNT         RATE          AMOUNT           RATE
                                                                   ----------    ----------     -----------    -----------
<S>                                                                <C>           <C>            <C>            <C> 
Borrowings under revolving credit facility.....................       $ 8,750        7.625%        $ 79,936        12.5%
Borrowings under term loan.....................................        37,552        8.125%          34,016        12.5%
Other note, payable semiannually to 1999, with interest at the                                                           
 lesser of 10% or 65% of prime.................................            59          5.2%             259         5.5% 
                                                                                                                  
7% convertible subordinated notes due May 1, 2005..............        15,000          7.0%          15,000         7.0%
                                                                                                                  
Capitalized lease obligations payable in varying monthly or                                                              
 quarterly installments through 1999, with interest rates                                                         
 ranging to 9.67%  (Note 10)...................................            50          7.3%             364         8.7% 
                                                                      -------                      --------
                                                                      $61,411                      $129,575
Less current maturities........................................         1,043                       129,353
                                                                      -------                      --------
                                                                      $60,368                      $    222
                                                                      =======                      ========
</TABLE>
                                                                                
   Maturities of long-term debt are as follows for the periods stated:

<TABLE>
<CAPTION>
                    YEAR ENDING                                   (IN    
                    OCTOBER 31                                THOUSANDS) 
                    -----------                              -----------
                    <S>                                      <C>         
                      1999..........................              $ 1,043
                      2000..........................                  955
                      2001..........................               12,293
                      2002..........................               13,226
                      2003..........................               18,894 
</TABLE>

   On May 28, 1998, the Company and a group of lenders entered into a new credit
agreement that consists of a $45 million revolving credit facility that expires
in May 2001 and a $40 million term loan that is repayable in quarterly
installments over five years.  Interest on loans outstanding under the credit
agreement is based, at the Company's option, on a "base rate" or on a
"eurodollar rate." The annual interest rate based on the base rate may range
between the agent bank's prime rate plus 0.5% and the agent bank's prime rate
plus 1.75%.  The annual interest rate based on the eurodollar rate may range
between LIBOR plus 1.75% and LIBOR plus 3.0%. The Company is obligated to pay
letter of credit fees which may range between 2.0% per annum and 3.0% per annum
on the aggregate amount of outstanding letters of credit. The Company is also
obligated to pay commitment fees which may range between 0.375% per annum and
0.50% per annum on the unused portion of the revolving credit facility.  The
applicable margin over LIBOR or the prime rate, the applicable letter of credit
fee, and the applicable commitment fee are determined by reference to the
Company's leverage ratio as defined in the credit agreement.  As of October 31,
1998, the weighted average interest rate on loans outstanding under the credit
agreement was 8.03%.  At October 31, 1998, the Company's debt totaled $61.4
million, which consisted of $8.7 million of loans outstanding under its
revolving credit facility, $37.6 million outstanding under the term loan, $15.0
million of convertible subordinated debt and $0.1 million of other debt. In
addition there were $1.8 million of letters of credit outstanding under the
revolving credit facility.  The Company's obligations under the credit agreement
are secured by a pledge of shares of stock of the subsidiaries of the Company,
accounts receivable, inventory, equipment, intellectual property and other
assets of the Company and its subsidiaries.  The new agreement includes
financial covenants with respect to financial leverage, earnings and fixed
charge coverage.  Proceeds from the new agreement were used to repay all of the
$70 million of indebtedness previously outstanding under the Company's prior
credit agreement.  The new facility provides additional availability to fund
working capital requirements and acquisitions.

                                       26
<PAGE>
 
                             WHITTAKER CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 6.  LONG-TERM DEBT--(CONTINUED)

   Under the Company's 7% convertible subordinated notes, the Company may not
pay or declare cash dividends or redeem shares of the Company if the Company's
tangible net worth is less than $15 million.  Since April 30, 1996, the
Company's tangible net worth has been less than $15 million and the Company has
not paid or declared dividends (including the quarterly dividend for the Series
D Preferred Stock) or redeemed shares since that date.  However, dividends on
the Series D Preferred Stock have been accrued since that date.  At October 31,
1998, the amount of  accrued and unpaid dividends on the Series D Preferred
Stock was $1,442.94.

   In order to reduce the risk of higher interest expense that could result from
an increase in the level of market interest rates, the Company in June 1996
purchased an interest rate cap with an initial notional amount of $42.5 million.
Under the terms of the interest rate cap, the Company will receive a payment at
the end of each quarterly period, as defined in the interest rate cap agreement,
if three-month LIBOR at the beginning of the period exceeds 7.5%.  The amount of
such payment will be the interest for such period on the notional amount of the
interest rate cap at the beginning of such period calculated using an interest
rate equal to the positive difference, if any, between LIBOR at the beginning of
such period and 7.5%.  The interest rate cap expires in July 1999.  The cost of
this interest rate cap is being amortized over its 37-month term.  At October
31, 1998, the unamortized cost was $60,500.

   On January 30, 1998, the Company sold Whittaker Xyplex, Inc.  On February 2,
1998 the net cash proceeds of $34.5 million from the sale were used to prepay
debt under the Company's prior credit facility.

   On May 4, 1998, the Company and Hughes Electronics Corporation ("Hughes")
entered into an agreement (the "Amendment"), to modify certain terms of the
Company's 1995 purchase of Hughes LAN Systems, Inc. (now known as Whittaker
Communications, Inc.) from Hughes.  Under the Stock Purchase Agreement between
the Company and Hughes, dated April 24, 1995 (the "Prior Agreement"), the
Company issued to Hughes a 7% convertible subordinated note in the principal
amount of $15 million, due May 1, 2005 (the "Note").

   The Amendment provides that Whittaker may elect to make certain payments due
to Hughes under the terms of the Prior Agreement in cash or in shares of
Whittaker common stock.  In accordance with the terms of the Amendment, the
Company elected to make these payments to Hughes by issuing to Hughes 107,841
newly issued shares of Whittaker common stock.  The Amendment also provides that
no such further payments shall be payable by the Company.  The Company and
Hughes also agreed in the Amendment to release any and all existing claims
against each other.

   The Amendment modifies the Note by (a) changing the conversion price from
$24.25 per share to $16.97 per share; and (b) if the Company redeems all or a
portion of the Note prior to May 4, 2002, obligating the Company to issue to the
holder of the Note a warrant to purchase the number of shares of Whittaker
common stock which the holder of the Note could have received upon conversion of
the principal amount so redeemed by the Company ("Warrant").  The form of
Warrant states that the exercise price of the Warrant will be based on the
conversion price of $16.97 and adjusted in accordance with customary anti-
dilutive protections similar to those affecting the conversion of the Note.  The
form of Warrant also provides that the number of shares subject to the Warrant
will be adjusted based upon similar anti-dilutive principles.  If the entire
principal amount of the Note, as amended, was converted as of October 31, 1998
into Whittaker common stock, the Company would be required to issue, and has
thus reserved for issuance, 883,912 shares of Whittaker common stock.

   On June 12, 1998, the Company issued to Hughes fifteen 7% convertible
subordinated notes, each in the principal amount of $1 million (the "Notes"), in
exchange for the $15 million Note which was cancelled.  The terms of each of the
$1 million Notes are identical, except for the principal amount, to the terms of
the $15 million Note, as amended by the Amendment.  Hughes subsequently sold the
Notes to other investors.

                                       27
<PAGE>
 
                             WHITTAKER CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 7.  CAPITAL STOCK

   Each share of Series D Participating Convertible Preferred Stock is
nonvoting, cumulative and, in connection with a qualifying transfer, convertible
into 326.531 shares of Common Stock.  Holders of the Series D Participating
Convertible Preferred Stock, of which there is presently only one, are entitled
to a $1.00 per share liquidation preference and to the greater of $.25 per share
per quarter or any dividends paid in respect of the number of shares of Common
Stock underlying each share of Series D Participating Convertible Preferred
Stock.  The Board of Directors is authorized to issue preferred stock in series,
to fix dividend rates, conversion rights, voting rights, rights and terms of
redemption and liquidation preferences, and to increase or decrease the number
of shares of any series.

   Common Stock reserved for issuance at October 31, 1998 was as follows:

<TABLE>
<CAPTION>
                                                                                             SHARES IN
                                                                                             THOUSANDS
                                                                                            ------------
          <S>                                                                               <C>
          For conversion of Series D Participating Convertible Preferred Stock........            188
          For stock options...........................................................          1,688
          For conversion of 7% convertible subordinated note..........................            884
                                                                                                -----  
                                                                                                2,760
                                                                                                -----   
</TABLE>

   The Company had reserved 1,688,480 shares of Common Stock at October 31, 1998
for future issuances under the Whittaker Corporation Long-Term Stock Incentive
Plan (1989) and The Whittaker Corporation 1992 Stock Option Plan for Non-
Employee Directors.  The Company also had reserved 883,912 shares of Common
Stock at October 31, 1998 for possible conversion of the 7% convertible
subordinated notes at the option of the holders.  Options to purchase Common
Stock generally are conditioned upon continued employment, expire from five to
ten years after the grant date, and become exercisable in whole or in part
either commencing with the seventh month or upon the attainment of certain
predetermined goals, or both.  The exercise price for options granted is equal
to the average market price on the date of grant.  The following information for
the three years ended October 31, 1998 relates to options granted from 1991
through 1998 under the plans.

<TABLE>
<CAPTION>
                                                               OPTIONS                          WEIGHTED AVERAGE
                                                             OUTSTANDING        PRICE RANGE      EXERCISE PRICE 
                                                            -------------    ----------------   ----------------
                                                            (IN THOUSANDS)                                         
   <S>                                                      <C>              <C>                <C>             
   Balance, October 31, 1995..............................         1,722         2.41 to 22.50          11.56
      Options granted.....................................         1,201        13.44 to 26.25          20.20
      Options canceled or expired.........................        (1,150)       13.44 to 26.25          20.16
      Options exercised...................................          (660)        2.41 to 22.50           3.63
                                                                  ------                                     
                                                                                                        
   Balance, October 31, 1996..............................         1,113         4.10 to 26.25          16.65
      Options granted.....................................           361         9.44 to 14.12          12.10
      Options canceled or expired.........................          (640)       10.31 to 26.25          17.97
      Options exercised...................................          (176)        4.10 to 12.44           7.07
                                                                  ------                                     
                                                                                                             
   Balance, October 31, 1997..............................           658         5.24 to 26.25          15.42
      Options granted.....................................           399         7.22 to 14.94           7.66
      Options canceled or expired.........................          (314)        7.22 to 26.25          16.83
      Options exercised...................................           (33)                 7.22           7.22
                                                                  ------                                     
                                                                                                             
   Balance, October 31, 1998..............................           710         5.24 to 26.25          10.80 
</TABLE>

                                       28
<PAGE>
 
                             WHITTAKER CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 7.  CAPITAL STOCK--(CONTINUED)

   At October 31, 1998, options outstanding and options exercisable were as
follows:

<TABLE>
<CAPTION>
    NUMBER OF                                                 WEIGHTED AVERAGE
     OPTIONS          RANGE OF          WEIGHTED AVERAGE         REMAINING
   OUTSTANDING     EXERCISE PRICES      EXERCISE PRICE       CONTRACTUAL LIFE
   -----------     ---------------      --------------       ----------------   
   <S>             <C>                   <C>                 <C> 
       9,247       $     5.24                $ 5.24            1.81 Years
     584,476        7.22 to 13.25              9.21            8.68 Years
      98,587        14.94 to 21.75            17.17            6.64 Years
      17,250            26.25                 26.25            7.31 Years
     -------                
     709,560    
     =======    
 
    NUMBER OF                                               WEIGHTED AVERAGE
     OPTIONS           RANGE OF        WEIGHTED AVERAGE        REMAINING
   EXERCISABLE     EXERCISE PRICES      EXERCISE PRICE      CONTRACTUAL LIFE
   -----------     ---------------      --------------      ----------------
   <S>             <C>                  <C>                 <C> 
       9,247           $  5.24               $ 5.24            1.81 Years
     457,010        7.22 to 13.25              8.33            8.76 Years
      75,466        14.94 to 21.75            17.45            6.02 Years
       3,584            26.25                 26.25            7.31 Years
     -------            
     545,307      
     -------            
</TABLE>

   At October 31, 1997 and October 31, 1996 options for 187,045 and 380,040
shares, respectively, were exercisable.

   In the discontinued Integration Services segment, The 1997 Stock Option Plan
of Aviant Information, Inc. (the "Aviant Plan") was adopted as of October 14,
1997. The plan provided for the granting of options to purchase the common stock
of Aviant Information, Inc. ("Aviant"), a wholly owned subsidiary of the
Company. The term of each option was five or ten years and became exercisable,
with respect to an individual, in annual installments of at least 25 percent of
the total number of options granted to that individual commencing one year from
the grant date and in full upon the consummation of an initial public offering
of the common shares of Aviant or the transfer of more than fifty percent of the
common stock of Aviant to a non-affiliate of Aviant, the Company or the
shareholders of the Company.  Following the sale of the assets of Aviant
Information, Inc. and the termination of its employees, the Aviant Plan was
terminated in the fourth quarter of 1998.

   In the discontinued Communications segment, the 1997 Stock Option Plan of
Whittaker Xyplex, Inc. (the "WXI Plan") was adopted on January 24, 1997.  The
WXI Plan provided for the granting of options to purchase the common stock of
Whittaker Xyplex, Inc. ("WXI"), a wholly owned subsidiary of the Company. The
term of each option was five or ten years and the option became exercisable,
with respect to an individual,  in annual installments of at least 20 percent of
the total number of options granted to that individual  commencing one year from
the grant date and upon the consummation of an initial public offering of the
common shares of WXI or the transfer of more than fifty percent of the common
stock of WXI to a non-affiliate of WXI, the Company or the shareholders of the
Company.  In the first quarter of 1998, the Company sold all of the issued and
outstanding shares of Whittaker Xyplex, Inc.

                                       29
<PAGE>
 
                             WHITTAKER CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


NOTE 7.  CAPITAL STOCK--(CONTINUED)

   Pro forma information regarding net income and earnings per share is required
by SFAS No. 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of SFAS No 123.  The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1998,
1997 and 1996, respectively: risk-free interest rates of 4.36% for all years;
dividend yields of 0.0% in all years, volatility factors of the expected market
price of the Company's common stock of .33 in all years and weighted-average
expected life of the options of 3.33 years, 4.44 years and 4.05 years,
respectively.  The weighted average fair value of options granted during 1998,
1997 and 1996 is estimated to be $2.25, $4.21 and $6.67, respectively.

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

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

<TABLE>
<CAPTION>
                                              1998          1997        1996
                                           ---------    -----------  ----------
<S>                                        <C>          <C>          <C>
Pro forma income (loss)                      $47,937     $(164,753)   $(17,871)
Pro forma basic income (loss) per share      $  4.26     $  (14.78)   $  (1.78)
</TABLE>

     The Company's Stockholder Rights Plan as of October 31, 1998 gave each
holder of the Company's Common Stock one right for each share of Common Stock
held. Each right entitled the holder to purchase from the Company 1/100 of a
share of a new series of the Company's preferred stock (Series A Participating
Cumulative Preferred Stock) at an exercise price of $125 per 1/100 of a share.
The rights would have become exercisable and would have detached from the Common
Stock 10 days after any person or group acquired 25% or more of the Company's
Common Stock, or 10 business days after any person or group commenced a tender
or exchange offer which, if consummated, would have resulted in that person or
group owning at least 25% of the Company's Common Stock. 

     If any person had acquired 25% or more of the Company's Common Stock, each
right would have entitled the holder, other than the acquiring person, to
purchase for the exercise price Common Stock of the Company with a value of
twice the exercise price. In addition, if following an acquisition by any person
or group of 25% or more of the Company's Common Stock, the Company had been
involved in a merger or other business combination transaction, or had sold more
than 50% of its assets or earning power to any person, each right would have
entitled the holder, other than the acquiring person, to purchase for the
exercise price Common Stock of the acquiring person with a value of twice the
exercise price. 

     The Company could have redeemed the rights at $.01 per right at any time
until the tenth day after any person or group had acquired 25% or more of its
Common Stock. The Stockholder Rights Plan could have been supplemented or
amended at the direction of the Company without the approval of the holders of
rights, except as otherwise set forth in the Stockholder Rights Plan. At October
31, 1998, 150,000 preferred shares were reserved for these rights.


                                       30
<PAGE>
 
                             WHITTAKER CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 

NOTE 8.  INCOME TAXES

   Income tax expense (benefit) consists of the following:

<TABLE>
<CAPTION>
                                                                             YEARS ENDED OCTOBER 31,
                                                                 1998                  1997                 1996
                                                          ---------------       ---------------       --------------
                                                                                 (In thousands)
<S>                                                       <C>                   <C>                   <C>
Total provision -
   Continuing operations............................      $       (17,602)      $        (3,901)      $        4,933
   Discontinued operations and other................               (3,624)               (3,501)             (14,022)
                                                          ---------------       ---------------       -------------- 
                                                          $       (21,226)      $        (7,402)      $       (9,089)
                                                          ===============       ===============       ==============
Components of the provision -
   Federal..........................................      $       (20,526)      $        (4,902)      $       (8,149)
   State............................................                 (700)               (2,500)                (940)
                                                          ---------------       ---------------       --------------
                                                          $       (21,226)      $        (7,402)      $       (9,089)
                                                          ===============       ===============       ==============
Classification of the provision -
   Current..........................................      $        (2,427)      $        (5,398)      $       (5,048)
   Deferred.........................................              (18,799)               (2,004)              (4,041)
                                                          ---------------       ---------------       --------------  
                                                          $       (21,226)      $        (7,402)      $       (9,089)
                                                          ===============       ===============       ==============
</TABLE>

   Foreign income taxes were not material.

   The tax expense (benefit) is different than the amount computed by applying
the U.S. federal income tax rate to income (loss) before income taxes.  The
reasons for the differences are as follows:

<TABLE>
<CAPTION>
                                                                       YEARS ENDED OCTOBER 31,
                                                           1998                  1997                  1996
                                                      --------------        --------------        --------------
<S>                                                   <C>                   <C>                   <C>
U.S. federal statutory rate.........................          34.0%                (34.0%)               (34.0%)
State taxes, net of U.S. federal income tax benefit.           3.4%                 (0.2%)                (2.4%)
Goodwill amortization...............................           0.0%                 15.4%                  3.5%
Valuation allowance.................................         (99.1%)                16.0%                  0.0%
Capital gain........................................         (16.0%)                 0.0%                  0.0%
Other items.........................................           0.0%                 (1.5%)                (1.8%)
                                                       --------------        --------------        --------------
Effective tax rate..................................         (77.7%)                (4.3%)               (34.7%)
                                                       ==============        ==============        ==============
</TABLE>

                                       31
<PAGE>
 
                             WHITTAKER CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


NOTE 8.  INCOME TAXES--(CONTINUED)

   Deferred income taxes reflect the net tax effects of temporary differences
between the reported amounts of assets and liabilities in the financial
statements and the amounts used for income tax purposes.  Significant components
of the Company's deferred tax assets and liabilities at October 31 are as
follows:

<TABLE>
<CAPTION>
                                                                   1998              1997              1996
                                                              ------------     -------------     --------------
                                                                                 (In thousands)
<S>                                                           <C>              <C>               <C> 
Deferred tax assets:
   Receivables valuation.................................     $        538     $       1,280     $          858
   Inventory valuation...................................            4,932             6,770              8,397
   Self-insurance reserves...............................            1,271             1,367              1,384
   Reserves for discontinued operations..................            2,902             2,380              1,163
   Benefits from net operating loss carryforward.........           11,677            13,293                 --
   Benefits from net capital loss carryforward...........           21,825                --                 --
   Other.................................................            9,167            14,905             12,553
                                                              ------------     -------------     --------------
Total before valuation allowance.........................           52,312            39,995             24,355
Valuation allowance......................................          (23,367)          (29,372)              (390)
                                                              ------------     -------------     --------------   
Net deferred tax assets..................................     $     28,945     $      10,623     $       23,965
                                                              ============     =============     ==============
 
Deferred tax liabilities:
   Excess of tax over book depreciation..................     $        768     $        (884)    $        1,487
   Assets held for sale or development...................            2,415             2,088              7,919
   Intangible assets.....................................            1,066             7,890             15,667
   Pension costs.........................................            1,593             1,671              1,904
   Other.................................................            2,533             2,556              2,745
                                                              ------------     -------------     --------------
                                                              $      8,375     $      13,321     $       29,722
                                                              ============     =============     ==============
</TABLE>
                                                                                
   In March 1996 the Company received a net tax refund of $5.2 million under an
agreement reached with the Internal Revenue Service closing the audit of the
1987 and 1988 income tax returns.

   The Company in 1997, in compliance with FASB 109, established a full
allowance against its net operating loss carryforward and net deferred tax
assets. During the third quarter of 1998, the Company determined that, because
of improved 1998 operating results and the favorable outlook for future
operating results, previously recorded valuation allowances against benefits
from prior year operating tax losses were no longer appropriate. Consequently,
the Company reversed all federal valuation allowances at the end of the third
quarter. At October 31, 1998 the Company had a $32.8 million total net operating
loss carryforward that will expire in 2012.

   The valuation allowance at October 31, 1998 represents substantially the
allowance against the benefit from the net capital loss carryforward.

NOTE 9.  EMPLOYEE BENEFIT PLANS

   Prior to October 31, 1994, most of the Company's domestic employees were
covered by the Whittaker Corporation Employees' Pension Plan (the ''Pension
Plan''), its noncontributory defined benefit pension plan.  The benefits are
based on years of service and the employee's highest compensation for five
consecutive years during the last ten years of credited service.

                                       32
<PAGE>
 
                             WHITTAKER CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


NOTE 9.  EMPLOYEE BENEFIT PLANS--(CONTINUED)

   Effective October 31, 1994, the Company amended the Pension Plan to
"freeze" benefits for all participants.  Adjustments for changes in credited
years of service ceased on October 31, 1994 and adjustments for changes in
remuneration ceased on December 31, 1994. Vesting service continues to accrue in
accordance with applicable Pension Plan provisions, and Pension Plan funding
will continue until such time that the Pension Plan is terminated and all
benefit obligations are satisfied. The Company funds the Pension Plan in
accordance with the Employee Retirement Income Security Act of 1974, as amended
(ERISA).

   The following table sets forth the Pension Plan's funded status and amounts
recognized in the Company's consolidated balance sheet:

<TABLE>
<CAPTION>
                                                                                                  OCTOBER 31
                                                                                     ---------------------------------
                                                                                           1998               1997
                                                                                     --------------     --------------
                                                                                               (In thousands)
<S>                                                                                  <C>                <C>
Actuarial present value of benefit obligations:
   Accumulated benefit obligation, including vested benefits of $125,341 in 1998 and
    $112,811 in 1997.................................................................     $(125,656)         $(122,373)
                                                                                      ==============     ==============
   Projected benefit obligation for service rendered through October 31, 1994........      (125,656)          (122,373)
Plan assets at fair value, primarily government, government agency and fixed                
income securities....................................................................       127,086            122,635
                                                                                      --------------     --------------
Plan assets in excess of projected benefit obligation................................         1,430                262
Items not yet recognized in earnings:
   Prior service cost................................................................            92                192
   Unrecognized net loss.............................................................         2,507              3,770
                                                                                      --------------     --------------
Net prepaid pension cost recorded in the consolidated balance sheet..................     $   4,029          $   4,224
                                                                                      ==============     ==============
</TABLE>
                                                                                
   The weighted average discount rates used in determining the actuarial present
value of the projected benefit obligation was 7.15% at October 31, 1998 and
1997.  The expected long-term rate of return on plan assets was 7.5% for the
years ended October 31, 1998, 1997 and 1996.  As a result of the amendment
described above, there are no projected increases in future compensation levels.

   The Company also sponsors unfunded supplemental nonqualified executive and
director plans.  At October 31, 1998, the projected benefit obligation for those
plans totaled $6.3 million, of which $1.3 million is subject to later
amortization.  The remaining $5.0 million is accrued as a liability in the
consolidated balance sheet.

   Effective November 1, 1994, the Company amended its defined contribution
401(k) plan and renamed it the Whittaker Corporation Partnership Plan
("Partnership Plan").  The amendment provided for new investment alternatives,
added a profit sharing component to Company contributions to the Partnership
Plan, and allowed certain rollover contributions from other qualified plans.
The Partnership Plan covers substantially all of the Company's employees and
contains a matched savings provision that permits pretax employee contributions.
Participants can contribute from 1% to 12% of compensation and receive a maximum
matching employer contribution of 50% on up to 6% of their annual compensation.

   In addition to matching of employee contributions, beginning with fiscal
1995, the Company has recorded as expense profit-sharing contributions to the
Partnership Plan which may range from 0% to 7.5% of eligible employee
compensation, based on the attainment of specified financial goals by
participating divisions of the Company.

                                       33
<PAGE>
 
                             WHITTAKER CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


NOTE 9.  EMPLOYEE BENEFIT PLANS--(CONTINUED)

   Total pension and retirement expense was as follows:

<TABLE>
<CAPTION>
                                                                            YEARS ENDED OCTOBER 31,
                                                              -------------------------------------------------
                                                                   1998              1997               1996
                                                              ------------      ------------      -------------
                                                                                (IN THOUSANDS)
<S>                                                           <C>               <C>               <C> 
Cost components of funded defined benefit plan:
   Service cost--benefits earned during the period.......     $        525      $        516      $         540
   Interest cost on projected benefit obligation.........            8,393             8,603              8,500
   Actual return on plan assets..........................          (15,593)          (12,724)           (15,892)
   Net amortization and deferral.........................            6,871             4,194              6,647
                                                              ------------      ------------      -------------
Net periodic pension expense (income) for funded defined               196               589               (205)
 benefit plan............................................
Cost for unfunded defined benefit plans..................              474               658                703
Cost for special termination benefit.....................               --               440                 --
Cost for defined contribution plans......................            2,845             2,293              1,589
                                                              ------------      ------------      -------------
Total pension and retirement plan expense................     $      3,515      $      3,980      $       2,087
                                                              ============      ============      =============
</TABLE>

NOTE 10.  LEASED ASSETS AND LEASE COMMITMENTS

   Whittaker has various leases covering real property and equipment.

   Property, Plant and Equipment includes $38,000 at October 31, 1998 and
$360,000 at October 31, 1997 for leases that have been capitalized.  The
amortization of these assets is included in depreciation expense.

   Future minimum payments under capital leases and under noncancellable
operating leases, net of rentals to be received from existing noncancellable
operating subleases, as of October 31, 1998, were as follows:

<TABLE>
<CAPTION>
                                                                   CAPITAL          OPERATING
                  YEARS ENDED OCTOBER 31,                          LEASES             LEASES
                  -----------------------                         --------          ----------
                                                                          (IN THOUSANDS)
<S>                                                              <C>             <C>    
   1999....................................................      $       41      $        1,818
   2000....................................................              11               1,978
   2001....................................................              --               1,855
   2002....................................................              --               1,855
   2003....................................................              --               1,929
   2004 and subsequent.....................................              --              17,469
                                                                 ----------      --------------
Total commitments..........................................              52      $       26,904
                                                                                 ==============
Amounts representing interest..............................               2
                                                                 ----------
Present value of net minimum lease payments................      $       50
                                                                 ==========
</TABLE>

   Rental expense for operating leases of the Company's continuing operations,
net of rental income from subleases, was as follows:

<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,                           (IN THOUSANDS)
-----------------------                           --------------
<S>                                               <C>
1998............................................         $2,157
1997............................................          1,371
1996............................................            250
</TABLE>

                                       34
<PAGE>
 
                             WHITTAKER CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


NOTE 11.  COMMITMENTS AND CONTINGENCIES

   In certain years, after evaluating the availability and cost of insurance,
the Company did not purchase insurance for certain risks, including workers'
compensation and product liability. The Company currently purchases workers'
compensation insurance and product liability insurance. The Company's insurance
carriers have taken the position that in certain cases the Company is uninsured
for environmental matters, a position that the Company disputes in certain
instances.

   As a result primarily of the activities of its discontinued operations, the
Company is a potentially responsible party in a number of actions filed under
the Comprehensive Environmental Response Compensation and Liability Act of 1980
("CERCLA"). CERCLA, also known as "Superfund", is the main Federal law enacted
to address public health and environmental concerns arising with respect to the
past treatment and disposal of hazardous substances. The Company is also a
potentially responsible party in a number of other actions brought under state
laws patterned after CERCLA. In nearly all of these matters, the Company
contributed a small amount (generally less than 1%) of the total treated or
disposed of waste. In addition to the CERCLA and similar actions described
above, the Company also, from time to time, conducts or participates in remedial
investigations and cleanup activities at facilities currently or formerly
occupied by its operating units. There are also various other claims and suits
pending against the Company.

   At October 31, 1998, the Company had provided for its aggregate liability
related to various claims, including uninsured risks and potential claims in
connection with the environmental matters noted above, excluding the
environmental remediation activities related to the property located in the City
of Santa Clarita, California. The amounts provided on the Company's books for
contingencies, including environmental matters, are recorded at gross amounts.
Because of the uncertainty with respect to the amount of probable insurance
recoveries, these potential insurance recoveries are not taken into account as a
reduction of those amounts provided unless an insurance carrier has agreed to
such coverage. The Company does not anticipate that these matters will have a
material adverse effect on the Company's financial position or on its ability to
meet its working capital and capital expenditure needs. Although the Company has
recorded estimated liabilities for contingent losses, including uninsured risks
and claims in connection with environmental matters, in accordance with
generally accepted accounting principles, the absence of or denial of various
insurance coverages and the filing of future environmental claims which are
unknown to the Company at this time represent a potential exposure for the
Company, and the net income of the Company in future periods could be adversely
affected if uninsured losses in excess of amounts recorded were to be incurred.

   As prescribed by SOP 96-1, the Company has accrued for its estimated costs,
including certain employee compensation costs, for environmental remediation
where the Company is a potentially responsible party under CERCLA and similar
state laws. These accruals are adjusted periodically as further assessment and
remediation efforts progress or as technical and legal information becomes
available. As of October 31, 1998, the Company estimates that the total
remaining unpaid remediation costs for the sites associated with these federal
and state actions is $4.9 million. As of October 31, 1998, all of these
estimated costs have been accrued and are reflected in accrued liabilities and,
in the case of those costs to be incurred beyond one year, "Other Noncurrent
Liabilities" in the consolidated balance sheet of the Company. Although the
Company, at this time, does not anticipate that any additional significant costs
(beyond those already recognized) wi11 be incurred in the remediation efforts
for these sites, there can be no assurance that significant additional costs for
the remediation of these, or new sites, will not be incurred in the future.
Costs of future expenditures for environmental remediation efforts are not
discounted to their present value.

   In connection with the discontinuance of various businesses, the Company
remains liable for certain retained obligations and for certain future claims,
principally environmental and product liability. The noncurrent portion of such
items is included in "Other Noncurrent Liabilities" in the consolidated balance
sheet.

                                       35
<PAGE>
 
                             WHITTAKER CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


NOTE 12.  QUARTERLY FINANCIAL DATA (UNAUDITED)

   Summarized quarterly financial data for 1998 and 1997 follow (in millions of
dollars except for per share amounts):

<TABLE>
<CAPTION>
                                                 FIRST        SECOND      THIRD       FOURTH
                                                QUARTER      QUARTER     QUARTER     QUARTER       YEAR
                                              -----------  ----------  ----------  ----------  -----------
<S>                                           <C>          <C>         <C>         <C>         <C>
1998
Sales.......................................      $ 29.0      $ 33.0      $ 34.0      $ 35.5      $ 131.5
Cost of sales...............................        16.9        17.1        16.1        15.8         65.9
Income before taxes-continuing operations...          .9         6.9         8.3         6.4         22.5
Income-continuing operations................          .9         6.8        28.6         3.8         40.1
Income (loss)-discontinued operations.......         9.5         (.9)         .9        (1.1)         8.4
Net income..................................        10.4         5.9        29.5         2.7         48.5
Basic income (loss) per share*
 Continuing operations**....................      $  .08      $  .61      $ 2.53      $  .34      $  3.56
 Discontinued operations....................         .85        (.09)        .08        (.10)         .75
 Net income.................................         .93         .52        2.61         .24         4.31
Diluted income (loss) per share
 Continuing operations......................      $  .08      $  .57      $ 2.29      $  .32      $  3.30
 Discontinued operations....................         .83        (.08)        .07        (.09)         .68
 Net income.................................         .91         .49        2.36         .23         3.98
 
1997
Sales.......................................      $ 19.7      $ 21.2      $ 22.6      $ 26.3      $  89.8
Cost of sales...............................        12.3        12.8        15.9        19.5         60.5
Income before taxes-continuing operations...        (2.5)       (3.6)       (4.3)      (21.8)       (32.2)
Loss-continuing operations..................        (2.5)       (3.6)       (4.3)      (17.9)       (28.3)
Loss-discontinued operations................       (15.6)      (30.9)      (22.8)      (62.7)      (131.9)
Extraordinary item..........................          --          --          --        (3.4)        (3.4)
Net loss....................................       (18.1)      (34.4)      (27.1)      (84.0)      (163.6)
Basic loss per share*
 Continuing operations**....................      $ (.23)     $ (.32)     $ (.38)     $(1.60)     $ (2.54)
 Discontinued operations....................       (1.40)      (2.77)      (2.05)      (5.61)      (11.83)
 Extraordinary item.........................          --          --          --        (.31)        (.31)
 Net loss...................................       (1.63)      (3.09)      (2.43)      (7.52)      (14.68)
Diluted loss per share
 Continuing operations......................      $ (.23)     $ (.32)     $ (.38)     $(1.60)     $ (2.54)
 Discontinued operations....................       (1.40)      (2.77)      (2.05)      (5.61)      (11.83)
 Extraordinary item.........................          --          --          --        (.31)        (.31)
 Net loss...................................       (1.63)      (3.09)      (2.43)      (7.52)      (14.68)
</TABLE>
                                                                                
*    The sums of quarterly per share amounts do not equal the annual amounts
     reported since per share calculations are made independently for each
     quarter and the full year based upon respective average shares outstanding.

**   The financial statements for prior periods have been restated to reflect
     the segregation of continuing and discontinued operations.

                                       36
<PAGE>
 
                             WHITTAKER CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

NOTE 13.  DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

   The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:

   Long-term debt: The carrying amounts of the Company's borrowings approximate
their fair value. The Company's bank credit facility is a variable rate facility
that reprices frequently.

   Notes receivable: The carrying amounts of the Company's notes receivable
approximate their fair value.

   As part of the consideration for the sale of Whittaker Xyplex, Inc. to MRV
Communications, Inc. in the first quarter of 1998, the Company received warrants
to purchase 421,402 shares of common stock of MRV Communications, Inc. The
warrants were valued at $2.2 million based on their estimated market value at
January 31, 1998. Because of a decline in the market value of the common stock
underlying these warrants, the Company, in the fourth quarter of 1998, wrote
down the value of this asset to zero. This $2.2 million charge is reflected in
other expense.

NOTE 14.  BUSINESS SEGMENTS

   The Company's continuing operations are classified as a single business
segment which provides specialized products and customer solutions for aircraft,
defense and industrial markets.

   Operating profit is total revenue less operating expenses. General corporate
expenses which are included in consolidated operating profit or loss were $6.9
million, $26.5 million and $10.4 million in 1998, 1997 and 1996, respectively.
Identifiable assets are those assets used in the Company's operations and for
1998, 1997 and 1996 were $85.6 million, $81.2 million and $79.7 million,
respectively. Corporate assets are principally cash, notes receivable, deferred
income taxes, assets held for sale and assets of discontinued operations, and
were $51.0 million, $81.7 million and $260.7 million for 1998, 1997 and 1996,
respectively.

   In fiscal 1998, 1997 and 1996 approximately 20.2%, 18.8% and 27.0%,
respectively, of Whittaker's sales from continuing operations were directly or
indirectly to the United States Government. In fiscal 1998, 1997 and 1996
approximately 22.7%, 20.8% and 24.0% respectively, of Whittaker's sales from
continuing operations arose from exports to customers outside the United States,
primarily in Europe. Approximately 9% of the Company's accounts receivable at
October 31, 1998 were from the U.S. Government, and the balance was primarily
from commercial customers, prime defense contractors with the U.S. Government,
and foreign customers.

NOTE 15. EXTRAORDINARY ITEM

   In consideration of its lending group issuing to the Company in 1997 waivers
of default for non-compliance with the financial ratio covenants under the terms
of its prior bank credit agreement, the Company agreed to a significant increase
in the interest rate at which the Company could borrow under the terms of that
agreement. That increase represented a substantial modification of that credit
agreement. Accordingly, the Company during the fourth quarter of 1997 recorded a
charge of $3.4 million (net of $0.2 million of tax benefit) representing the
write off of the unamortized portion of debt issuance costs incurred in
connection with obtaining that credit agreement. The charge was reflected in the
Company's 1997 consolidated statements of income as an extraordinary item.

                                       37
<PAGE>
 
                             WHITTAKER CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

NOTE 16.  EVENT SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT AUDITORS (UNAUDITED)

   On November 12, 1998, the Company adopted a new Stockholders Rights Plan (the
"New Plan") which is substantially similar to the prior Rights Plan which
expired by its terms on November 29, 1998. Under the New Plan, Rights were
distributed as a dividend at the rate of one Right for each share of Common
Stock held by stockholders of record at the close of business on November 30,
1998. Each Right entitles stockholders to buy, upon the occurrence of certain
events, 1/100th of a share of a new series of the Company's preferred stock
(Series E Participating Cumulative Preferred Stock) for $125. The Rights become
exercisable only if a person or group acquires beneficial ownership of 25% or
more of the Company's Common Stock, or commences a tender offer or exchange that
would result in such person or group owning 25% or more of the Company's Common
Stock. Until a person or group acquires 25% or more of the Company's Common
Stock, the Rights may be redeemed by the Board of Directors for $.01 per Right.
After a person or group acquires 25% or more of the Company's Common Stock but
before such person or group acquires 50% or more of the Company's Common Stock,
the Board of Directors may exchange all or part of the Rights (other than the
Rights owned by the person or group holding the 25% or more of the Company's
Common Stock) for shares of the Company's Common Stock at an exchange ratio of
one Right for one share of Common Stock. The Rights will expire on November 30,
2008.

   On January 11, 1999, the Company sold its 996-acre land parcel located in the
City of Santa Clarita, California and certain other additional rights and assets
related to this land for $10.0 million in cash, a $5.0 million promissory note
and a contingent interest in any final profit from the development of this land.

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

   Not applicable.

                                       38
<PAGE>
 
                                   PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

   The information called for by Item 10 is incorporated by reference to the
information under the following captions in the Proxy Statement:

      CAPTION

      Election of Directors--Directors
      Compliance with Section 16(a) of the Securities Exchange Act

   Certain of the information called for by Item 10 with respect to executive
officers of the Registrant appears as Item 4A in Part I of this Report.

ITEM 11.  EXECUTIVE COMPENSATION.

   The information called for by Item 11 is incorporated by reference to the
information under the following caption in the Proxy Statement:

      CAPTION

      Election of Directors--Executive Compensation

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

   The information called for by Item 12 is incorporated by reference to the
information under the following caption in the Proxy Statement:

      CAPTION

      Equity Securities and Principal Holders Thereof

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

   The information called for by Item 13 is incorporated by reference to the
information under the following caption in the Proxy Statement:

      CAPTION

      Election of Directors--Directors

                                       39
<PAGE>
 
                                    PART IV

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

   The following documents are filed as part of this report:

<TABLE>
<CAPTION>
                                                                                                  Page
                                                                                                  ----    
                                                                                                REFERENCE
                                                                                                ---------
                                                                                                Form 10-K
<S>                                                                                             <C>
(a-1) Financial Statements:
Report of Independent Auditors................................................................     15
Consolidated Statements of Operations for the three years ended October 31, 1998..............     16
Consolidated Balance Sheets as of October 31, 1998 and 1997...................................     17
Consolidated Statements of Cash Flows for the three years ended October 31, 1998..............     19
Consolidated Statements of Stockholders' Equity for the three years ended October 31, 1998....     20
Notes to Consolidated Financial Statements....................................................     21
</TABLE>

(A-2) FINANCIAL STATEMENT SCHEDULES:

   All supplemental schedules are omitted as inapplicable or because the
required information is included in the Consolidated Financial Statements or the
Notes to Consolidated Financial Statements.

(A-3) EXHIBITS:*

     3.1  Restated Certificate of Incorporation (Exhibit 3.1 to Form 10-K for
            fiscal year ended October 31, 1989), as amended on March 16, 1990
            (Exhibit 3.1 to Form 10-K for fiscal year ended October 31, 1995).

     3.2  Restated Bylaws (Exhibit 3.2 to Form 10-K for fiscal year ended
            October 31, 1989), as amended on September 30, 1994 (Exhibit 3.2 to
            Form 10-K for fiscal year ended October 31, 1994), on December 16,
            1996 (Exhibit 3.2 to Form 10-K for fiscal year ended October 31,
            1996) and on October 2, 1998.

     4.1  Reference is made to Exhibit 3.1.

     4.2  Reference is made to Exhibit 3.2.

     4.3  Rights Agreement dated as of November 12, 1998 between Registrant and
            Mellon Bank N.A. concerning Series E Participating Cumulative
            Preferred Stock Purchase Rights (Exhibit 1 to Form 8-A filed on
            November 30, 1998).

     4.4  Certificate of Designation of Series D Participating Convertible
            Preferred Stock (Exhibit to Form S-4, Registration No. 33-29028), as
            amended on March 16, 1990 (Exhibit 4.4 to Form 10-K for fiscal year
            ended October 31, 1995).

     4.5  Certificate of Designation of Series E Participating Cumulative
            Preferred Stock (Exhibit A to Exhibit 1 to Form 8-A filed on
            November 30, 1998).

     4.6  Form of 7% Convertible Subordinated Note dated April 24, 1995 by the
            Registrant, in the principal amount of $1,000,000 issued to various
            holders (Exhibit 4.1 to Form 10-Q dated July 31, 1998).

     4.7  Registration Rights Agreement dated April 24, 1995 between Registrant
            and Hughes Electronics Corporation (Exhibit 10.1 to Form 8-K dated
            May 8, 1995).

     4.8  Term Note dated May 28, 1998 by the Registrant in favor of CIBC Inc.
            (Exhibit 4.1 to Form 8-K dated June 1, 1998).

                                       40
<PAGE>
 
     4.9    Term Note dated May 28, 1998 by the Registrant in favor of The First
              National Bank of Chicago (Exhibit 4.2 to Form 8-K dated June 1,
              1998).

     4.10   Term Note dated May 28, 1998 by the Registrant in favor of Van
              Kampen American Capital Prime Rate Income Trust (Exhibit 4.3 to
              Form 8-K dated June 1, 1998).

     4.11   Term Note dated May 28, 1998 by the Registrant in favor of Banque
              Paribas (Exhibit 4.4 to Form 8-K dated June 1, 1998).

     4.12   Revolving Note dated May 28, 1998 by the Registrant in favor of CIBC
              Inc. (Exhibit 4.5 to Form 8-K dated June 1, 1998).
           
     4.13   Revolving Note dated May 28, 1998 by the Registrant in favor of The
              First National Bank of Chicago (Exhibit 4.6 to Form 8-K dated June
              1, 1998).
     
     4.14   Revolving Note dated May 28, 1998 by the Registrant in favor of Van
              Kampen American Capital Prime Rate Income Trust (Exhibit 4.7 to
              Form 8-K dated June 1, 1998).

     4.15   Revolving Note dated May 28, 1998 by the Registrant in favor of
              Banque Paribas (Exhibit 4.8 to Form 8-K dated June 1, 1998).

     4.16   Swingline Note dated May 28, 1998 by the Registrant in favor of CIBC
              Inc. (Exhibit 4.9 to Form 8-K dated June 1, 1998).

            (Other instruments defining the rights of holders of long-term debt
              are not filed because the total amount of securities authorized
              under any such instrument does not exceed 10% of the consolidated
              total assets of Registrant. Registrant hereby agrees to furnish a
              copy of any such instrument to the Commission upon request.)

     10.1   Amended and Restated Whittaker Corporation 1992 Stock Option Plan
              for Non-Employee Directors (Exhibit 10.3 to Form 10-K for fiscal
              year ended October 31, 1996).**

     10.2   Restated Directors' Retirement Plan effective as of August 2, 1985,
              as amended on January 24, 1991 (Exhibit 10.10 to Form 10-K for
              fiscal year ended October 31, 1990), and on December 16, 1996
              (Exhibit 10.6 to Form 10-K for fiscal year ended October 31,
              1996).**

     10.3   Amended and Restated Whittaker Corporation Long-Term Stock Incentive
              Plan (1989) (Exhibit 10.7 to Form 10-K for fiscal year ended
              October 31, 1996).**

     10.4   Whittaker Corporation Supplemental Benefit Plan dated November 23,
              1988, as amended on June 12, 1990 and on July 12, 1991 (Exhibit
              10.8 to Form 10-K for fiscal year ended October 31, 1996).**

     10.5   Whittaker Corporation Excess Benefit Plan dated November 23, 1988,
              as amended June 21, 1990 (Exhibit 10.9 to Form 10-K for fiscal
              year ended October 31, 1996).**

     10.6   Whittaker Corporation Supplemental Disability Benefit Plan dated
              November 23, 1988 (Exhibit 10.10 to Form 10-K for fiscal year
              ended October 31, 1996).**

     10.7   Whittaker Corporation Supplemental Retirement and Disability Trust
              Agreement dated November 23, 1988 (Exhibit 10.13 to Form 10-K for
              fiscal year ended October 31, 1988).**

     10.8   Whittaker Corporation Supplemental Executive Retirement Plan dated
              as of January 1, 1996**

     10.9   Amended and Restated Whittaker Corporation Supplemental Executive
              Retirement Plan dated as of January 1, 1996, as amended January
              24, 1997 (Exhibit 10.12 to Form 10-K for fiscal year ended October
              31, 1996).**

     10.10  Amendment and Restatement of Whittaker Corporation Employees'
              Pension Plan dated December 22, 1994, as amended on December 15,
              1995 (Exhibit 10.10 to Form 10-K for fiscal year ended October 31,
              1995), and on October 1, 1996 (Exhibit 10.13 to Form 10-K for
              fiscal year ended October 31, 1996).**

                                       41
<PAGE>
 
     10.11  Whittaker Corporation Partnership Plan (formerly the Whittaker
              Corporation Savings and Stock Investment Plan), as amended and
              restated effective November 1, 1994 (Exhibit 10.11 to Form 10-K
              for fiscal year ended October 31, 1995), as amended on June 21,
              1996 (Exhibit 10.2 to Form 10-Q dated September 13, 1996), on July
              1, 1997 and on December 12, 1997 (Exhibit 10.10 to Form 10-K dated
              January 28, 1998).**

     10.12  Credit Agreement dated as of May 28, 1998 among Registrant, Canadian
              Imperial Bank of Commerce, as Administrative Agent, The First
              National Bank of Chicago, as Documentation Agent, and certain
              commercial lending institutions, as the Lenders (Exhibit 10.1 to
              Form 8-K dated June 1, 1998).

     10.13  Stock Purchase Agreement dated as of March 23, 1995 between
              Registrant and Hughes Aircraft Company, as amended on April 24,
              1995 (Exhibit 10.1 to Form 8-K dated May 8, 1995) and on May 4,
              1998 (Exhibit 10.1 to Form 8-K dated May 7, 1998).

     10.14  Stock Purchase Agreement dated as of March 2, 1996, between
              Registrant and Raytheon Company (Exhibit 10.1 to Form 8-K dated
              April 24, 1996).

     10.15  Asset Purchase Agreement dated as of September 4, 1997 among
              Registrant, Whittaker Communications Limited, Whittaker Services
              Corporation and Condor Systems, Inc.

     10.16  Stock Purchase Agreement dated as of January 19, 1998, between
              Registrant and MRV Communications, Inc. (Exhibit 10.23 to Form 10-
              K dated January 28, 1998).

     10.17  Asset Purchase Agreement dated August 20, 1998 among Registrant,
              Aviant Information, Inc., Superior Consultant Holdings Corporation
              and Enterprise Consulting Group, Inc. (Exhibit 10.1 to Form 8-K
              dated August 25, 1998).

     10.18  Restated and Amended Purchase Agreement dated as of November 5, 1998
              between Registrant and Santa Clarita, L.L.C. (Exhibit 10.1 to Form
              8-K dated January 12, 1999). 

     10.19  Whittaker Corporation Cafeteria Plan dated as of January 1, 1999.**

     11.    Calculation of earnings per share for the three years ended October
              31, 1998.

     21.    Subsidiaries of the Registrant.

     23.    Consent of Independent Auditors.

     27.    Financial Data Schedule.

*    Exhibits followed by a parenthetical reference are incorporated by
     reference to the document described therein. Upon written request to the
     Secretary of the Company, a copy of any exhibit referred to above will be
     furnished without charge.

**   Management contract or compensatory plan or arrangement required to be
     filed as an exhibit to this Form 10-K.

(B) REPORTS ON FORM 8-K:

     During the quarter ended October 31, 1998, the Registrant filed the
following reports on Form 8-K:

     1.   A report on Form 8-K was filed on August 25, 1998. The form reports,
          in Item 2 thereof, that the Registrant completed the sale of assets
          relating to the business of its subsidiary, Aviant Information, Inc.,
          to Enterprise Consulting Group, Inc.

     2.   A report on Form 8-K was filed on August 31, 1998. The form reports,
          in Item 5 thereof, the Registrant's earnings for its third quarter of
          1998.

                                       42
<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 Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                   WHITTAKER CORPORATION

Date :  January 27, 1999              By: /s/ John K. Otto
                                      _____________________________________
                                      John K. Otto
                                      Vice President, Chief Financial Officer
                                      and Treasurer

   Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of Registrant
and in the capacities and on the dates indicated.
<TABLE> 
<CAPTION> 
          SIGNATURE                          TITLE                      DATE
          ---------                          -----                      ----   
<S>                                 <C>                              <C> 
                                                               -
/s/ Joseph F. Alibrandi              Director and Principal     |
__________________________________                              |
      (Joseph F. Alibrandi)            Executive Officer        |
                                                                | 
/s/ John K. Otto                           Principal            |
__________________________________                              |
          (John K. Otto)               Financial Officer        |
                                                                | 
 /s/ Don Delmatoff                         Principal            |
__________________________________                              |
          (Don Delmatoff)              Accounting Officer       |
                                                                | 
/s/ George H. Benter, Jr.                    Director           |
__________________________________                              |
      (George H. Benter, Jr.)                                   |
                                                                | 
/s/ George Deukmejian                        Director           |
__________________________________                              |
        (George Deukmejian)                                     |
                                                                >     January 27, 1999
/s/ Jack L. Hancock                          Director           |
__________________________________                              |
         (Jack L. Hancock)                                      | 
                                                                |
/s/ Edward R. Muller                         Director           |
__________________________________                              |
         (Edward R. Muller)                                     | 
                                                                |
/s/ Gregory T. Parkos                        Director           |
__________________________________                              |
        (Gregory T. Parkos)                                     | 
                                                                |
/s/ Malcolm T. Stamper                       Director           |
__________________________________                              |
        (Malcolm T. Stamper)                                    | 
                                                                |
/s/ Ronald B. Woodard                        Director           |
__________________________________                              |
         (Ronald B. Woodard)                                    | 
                                                               -
</TABLE> 
                                      S-1
<PAGE>
 
                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
                                                                                                  Sequentially
Exhibit No.                                                                                       Numbered Page
-----------                                                                                       -------------
<S>                                                                                               <C>
  3.2           Restated Bylaws, as amended on October 2, 1998.
 10.8           Whittaker Corporation Supplemental Executive Retirement Plan dated as of
                January 1, 1996.
10.11           Whittaker Corporation Partnership Plan (formerly the Whittaker Corporation
                Savings and Stock Investment Plan), as amended on July 1, 1997.
10.15           Asset Purchase Agreement dated as of September 4, 1997 among Registrant,
                Whittaker Communications Limited, Whittaker Services Corporation and Condor
                Systems, Inc.
10.19           Whittaker Corporation Cafeteria Plan dated as of January 1, 1999.
11              Calculation of earnings per share for the three years ended October 31, 1998.
21              Subsidiaries of the Registrant.
23              Consent of Independent Auditors.
27              Financial Data Schedule.
</TABLE>