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

                               ------------------

                                    FORM 10-K

[X]  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934
                 For the fiscal year ended December 31, 1996
                                      OR

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

           For the transition period from ____________ to ___________

                        Commission file number 1-5631

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

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

  3333 Hillview Avenue, Palo Alto, California            94304-1223
   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)              (ZIP CODE)
                                                                    
                                 (415) 493-4141
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

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

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

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

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

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not 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. [X]

                                                          AS OF FEBRUARY 7, 1997
                                                          ----------------------
     Aggregate market value of the voting stock held 
      by non-affiliates of the registrant: ................. $181,172,000
     Number of shares outstanding: Common stock,        
      no par value .........................................    8,329,000 shares

                       DOCUMENTS INCORPORATED BY REFERENCE

     Portions  of the  Watkins-Johnson  Company  Notice  of  Annual  Meeting  of
Shareowners--April  5,  1997 and  Proxy  Statement  filed  with  the  commission
pursuant  to  Regulation  14A are  incorporated  by  reference  into  Part  III.

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<PAGE>
                                     PART I

ITEM 1. BUSINESS

(a) General Development of Business

    The company's structure during 1996 was unchanged from the previous year. In
    1995,   Watkins-Johnson divided its Electronics  Group,  recognizing the two
    major markets that it served,  into the Wireless  Communication  segment and
    the Government Electronics segment for reporting purposes. Since the company
    realigned its business  between 1991 and 1993,  operations had been reported
    as three business segments:  semiconductor  equipment,  electronics products
    and environmental  services. At the end of 1994, the environmental  services
    unit was divested.  In 1993, the former Commercial and Defense segments were
    renamed as the Semiconductor Equipment and Electronics segments.

    No material  reclassifications,  mergers or consolidations of the company or
    its subsidiaries  occurred during 1996. Other than in the ordinary course of
    business,  there were no acquisitions or dispositions of material amounts of
    assets during the year.

(b) Financial Information about Industry Segments

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

(c) Narrative Description of Business

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

    Semiconductor Equipment

    The  company's   Semiconductor   Equipment   Group  designs,   develops  and
    manufactures  equipment to deposit thin  dielectric  films by chemical vapor
    deposition (CVD), using two fundamental CVD processes.  The earlier process,
    atmospheric-pressure CVD (APCVD), accounted for all of the equipment sold in
    1996.  This  equipment  functions  by  injecting  the gases  needed  for the
    reaction over the substrate  material.  The substrates are transported under
    the injectors on a  continuously  moving  conveyor belt through a resistance
    heated muffle.  This approach  allows high  deposition  rates with a simpler
    reactor  design  yielding  higher  reliability   operation  and  high  wafer
    throughput.

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

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

                                        1


<PAGE>

    conductors.  These  smaller  (0.25 micron and below)  features are needed to
    fabricate  devices such as the 256 megabit dynamic random access memory (256
    Meg  DRAM)  and  the  seventh  generation  of  microprocessors.   Using  the
    philosophy  developed  with  its  APCVD  equipment,  WJ's HDP  equipment  is
    designed for high productivity. Following the 1995 introduction, the company
    concentrated on a series of tests in its Scotts Valley  laboratory to verify
    the production  capabilities of the equipment with wafers provided by WJ and
    customers.  The company has  successfully  completed sample runs for various
    customers and successive  marathon runs for our first  beta-test  partner in
    the HDP product  line.  Additional  beta tests for the equipment at selected
    customer facilities are continuing into 1997 prior to accepting orders.

    The company  markets the APCVD  systems as the WJ-999 and the  WJ-1000.  The
    WJ-999 and WJ-TEOS999 systems are for production lines using 150 mm (6-inch)
    semiconductor  wafers;  they are capable of  simultaneous  processing of two
    wafers in parallel.  The WJ-1000 is also offered with either hydride or TEOS
    reactant  processes  and is  specifically  designed  for  high  productivity
    processing on 200 mm (8-inch) semiconductor  processing lines. The company's
    APCVD   process  is  mostly   used  in   depositing   doped   oxide   films,
    boro-phosphoro-silicate glass (BPSG) and phosphoro-silicate-glass (PSG), for
    the initial dielectric layers deposited on the wafers. These initial layers,
    sometimes termed the premetal  dielectric  (PMD), are deposited prior to the
    metal  layers  which are used to connect  the  transistors  and  provide the
    circuit action.  BPSG is a useful dielectric layer since it self-planarizes,
    offering a smoother  surface for the following metal and dielectric  layers.
    The WJ APCVD equipment is well suited for these applications and the company
    believes  it is the PMD  equipment  market  leader.  This  market  grew more
    rapidly than the semiconductor  equipment market in general in the period of
    1992  through  1996,   since  the  increased  chip   complexity  is  leading
    semiconductor manufacturers to use more dielectric layers.

    The smaller and smaller feature size used in the  construction of integrated
    circuits  is opening a new  application  for the WJ APCVD  equipment.  Small
    feature  sizes allow  smaller  transistors  to be defined and for them to be
    located  closer  together in the circuits.  The desired  packing  density is
    making the  naturally  grown LOCOS (local oxide  separation)  step to become
    difficult.  The  LOCOS  step  can be  replaced  with a STI  (shallow  trench
    isolation)  approach using CVD. WJ's APCVD approach is competitive  for this
    newer step.

    As chip  complexity  increases,  additional  metal  layers are  required  to
    provide the  circuit  connections.  Another  growing  market for  dielectric
    deposition  equipment is inter-metal  dielectric  deposition  (IMD) used for
    insulation  between the metal layers. The development of the new WJ-2000 HDP
    equipment is aimed specifically at this market.  WJ's APCVD equipment is not
    intended to compete for the IMD market since the lower temperature  required
    is technically challenging for good films. The 1996 IMD equipment market was
    estimated by  Dataquest,  a high  technology  market  research  firm,  to be
    roughly the same size as that for PMD at  approximately  $700 million  each.
    Thus,  success in the IMD market will  nearly  double the  company's  served
    available market. Additionally, the IMD equipment market is forecast to grow
    more  rapidly  than the PMD  equipment  market.  Dataquest  forecast the PMD
    market to grow to 60% of the total PMD/IMD dielectric equipment market which
    is expected to approach $2.7 billion in the year 2001.

    Sales in the Semiconductor  Equipment segment were 62% of consolidated sales
    in 1996, 57% in 1995 and 43% in 1994. The company  recently changed its mode
    of selling semiconductor  equipment. In place of a network of manufacturers'
    representatives and distributors, the company established a direct sales and
    service  force  world-wide  to better serve its  customers.  Currently,  the
    company has direct offices in the United States,  Korea, Taiwan,  Singapore,
    Japan and Europe.  During 1996, the Semiconductor  Equipment Group completed
    construction of a new headquarters and technology center in Japan.

    The  company   sells   capital   equipment  to  a  majority  of  the  global
    semiconductor   manufacturers.   Most  of  the   sales   are  to  makers  of
    semiconductor integrated circuits. Although there are many such customers, a
    majority of the integrated circuits world-wide are produced by approximately
    20 companies,  with roughly  two-thirds  of the business  outside the United
    States. NEC (through

                                        2


<PAGE>

    Marubeni Hytech, the company's Japanese  distributor),  Hyundai  Electronics
    Ind.  Co. Ltd.  and  Samsung  Pacific  International  Inc.  are  significant
    customers  of the  segment.  There are several  domestic  and  international
    competitors  (some of whom are larger than the company) and  competition  is
    intense.  In meeting the competition,  emphasis is placed on selling quality
    products with good technical  performance and reliability with a competitive
    cost of ownership.  The company's growing global customer-support network is
    a possible competitive advantage.

    The  Semiconductor  Equipment  Group's business depends upon the planned and
    actual capital expenditures of the semiconductor manufacturers, who react to
    the current and  anticipated  market demand for  integrated  circuits.  This
    demand has been growing over the years from 1992  through  1995,  however in
    1996 its history of cyclical  variations  returned  with a market  downturn.
    Although the cyclical growth trend of the semiconductor  integrated circuits
    business is  expected to return,  it is  recognized  that the  semiconductor
    equipment  business  can  vary  rapidly  in  response  to  customer  demand.
    Following  placement of orders,  customers  frequently seek either faster or
    delayed  delivery,  based on their  changing  needs.  Uncertainty  increases
    significantly  when  projecting  product  demand  more  than 6 months in the
    future.

    Wireless Communications

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

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

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

    Sales by the Wireless  Communications segment were 11% of consolidated sales
    in 1996, 8% in 1995 and 7% in 1994.  Although the business is  international
    in scope,  present  selling  efforts are  concentrated in the United States.
    Marketing  and sales are  performed by company  direct sales  personnel  and
    distributors.  Major  accounts  are  handled  by  direct  company  sales and
    service. Components, subassemblies, receivers and transceivers are primarily
    sold to  companies  which  manufacture  base station  equipment  for various
    wireless communication carriers.  Although the customer community represents
    a large business opportunity, the number of individual customer companies is
    not large.

    The  telecommunications  bill  enacted  in  1995  reorganizes  the  business
    opportunities  for the  telecommunications  industry.  Although  the company
    believes  the  results  of  this  reorganization  will be  positive  for its
    wireless  communication  business,  its full  effects  are still not  clear.
    Various regulatory agencies of federal, state and local governments can also
    affect the wireless  communication  market dynamics,  causing unforeseen ebb
    and flow of orders and delivery requirements.

                                        3


<PAGE>

    Domestic and international  competition from a number of companies,  some of
    which are much larger than Watkins-Johnson, is intense. The company seeks to
    win competitions by excellent service and superior technical performance. It
    seeks to protect its intellectual property by an aggressive patent and trade
    secret program as indicated below.

    Government Electronics

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

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

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

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

    Sales by the Government  Electronics  segment were 27% of consolidated sales
    in 1996,  35% in 1995 and 50% in 1994.  A majority  of segment  sales are to
    government  agencies  and  government  prime  contractors,  such  as  Hughes
    Aircraft Company and Raytheon Company,  engaged in defense contracting.  The
    principal end user for such sales is the U.S.  Department of Defense.  Sales
    contracts  with  the  government  are  customarily   subject  to  terms  and
    conditions which provide for renegotiation of profits and termination of the
    contract  at the  election of the  government.  The right to  terminate  for
    convenience  has not had any significant  effect on the company's  financial
    position or results of operations.

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

    Other Business Items

    Raw  materials  for the  production  of  semiconductor  equipment,  wireless
    communications and government  electronic products are acquired from a broad
    range of suppliers. Because suppliers

                                        4


<PAGE>

    are  numerous,  dependence  on any one  supplier  is kept to a  minimum.  On
    occasion,  however,  the  failure  of a supplier  to  deliver  key parts can
    jeopardize the on-time shipment of WJ products.  Business operations are not
    believed to be seasonal.  Except for negotiated advance or progress payments
    from customers on long-term contracts in the  defense-electronics  business,
    there are no special working capital practices.

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

    Total  company  backlog at December  31, 1996 was  $228,397,000  compared to
    $250,276,000 at December 31, 1995. The percentage of backlog attributable to
    the  Semiconductor   Equipment,   Wireless   Communications  and  Government
    Electronics segments were 40%, 17% and 43%, respectively,  in 1996, compared
    to 49%,  11% and 40% in 1995.  Approximately  92% of all backlog at year-end
    1996 is shippable within 12 months, compared to 97% at year-end 1995.

    Company-sponsored  research and development expense was $56,675,000 in 1996,
    $47,629,000 in 1995, and  $34,436,000 in 1994.  Customer-sponsored  research
    and  development  was  estimated to be  approximately  $17,000,000  in 1996,
    $20,000,000  in 1995, and  $24,000,000 in 1994, and was performed  mostly by
    the Government Electronics segment.

    The  company's  employment  at  December  31,  1996 was  2,080.  None of the
    company's  employees is covered by a  collective-bargaining  agreement.  The
    company's relationship with its employees is generally good.

    Environmental  issues are discussed in Note 6 to the consolidated  financial
    statements  contained in Part II, Item 8 of this annual report on Form 10-K.
    
(d) Financial  Information  about  Foreign and  Domestic  Operations  and Export
    Sales.

    Combined export sales and sales from foreign operations accounted for 50% of
    the company's sales in 1996, 47% in 1995, and 45% in 1994. Assets of foreign
    operations accounted for 14% of consolidated totals at December 31, 1996 and
    were  less  than 10% for all  years  prior to 1996.  The  inherent  risks of
    foreign business are similar to domestic business, with the additional risks
    of foreign government  instability and export license cancellation.  A major
    portion of foreign  product  orders in the  Government  Electronics  segment
    requires export licensing by the Department of State prior to shipment.  For
    international  shipments  for all  company  business  segments,  the company
    purchases  forward  exchange  contracts  and/or obtains  customer letters of
    credit to reduce foreign currency  fluctuation and credit risks. For further
    information  on  foreign  sales,  see Note 8 to the  consolidated  financial
    statements contained in Part II, Item 8 of this annual report on Form 10-K.

ITEM 2. PROPERTIES

    Watkins-Johnson  Company and  subsidiaries  conduct their main operations at
    plants  in  Palo  Alto,  San  Jose,   and  Scotts  Valley,   California  and
    Gaithersburg,  Maryland.  During 1996,  the  Semiconductor  Equipment  Group
    completed   construction  of  a  new  technology  center  in  Japan.   Space
    limitations at the Semiconductor  Equipment  Group's  headquarters in Scotts
    Valley  prompted  the company to reopen the San Jose  facility at the end of
    1995 in order to accommodate  the Group's  expansion.  Adjacent  undeveloped
    land at the San Jose site has been offered for sale.

    At December 31, 1996, there were approximately  725,000 square feet of plant
    space in  California,  and  175,000  square feet in  Maryland,  and a 36,000
    square foot facility in Kawasaki, Japan.  Approximately 77% of the company's
    plant  space is  occupied  for the  company's  operations.  The  company  is
    pursuing  opportunities  to realize the market value of its properties while
    ensuring efficient use of available space.

                                        5

<PAGE>

    The Government  Electronics  and Wireless  Communications  segments  utilize
    substantially all of the Palo Alto and Gaithersburg  facilities.  The Scotts
    Valley, San Jose and Kawasaki  facilities house the Semiconductor  Equipment
    Group.

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

ITEM 3. LEGAL PROCEEDINGS

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

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

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

<TABLE>
                     EXECUTIVE OFFICERS OF THE REGISTRANT

<CAPTION>
                                                                     OFFICER            BUSINESS EXPERIENCE
            NAME                 AGE          OFFICE HELD            SINCE               LAST FIVE YEARS
--------------------------      -----  --------------------------  ---------   -----------------------------------
<S>                             <C>    <C>                         <C>         <C>
Dr. Dean A. Watkins .........   74     Chairman of the Board        1957       Chairman of the Board
Dr. H. Richard Johnson  .....   70     Vice Chairman of the Board   1957       Vice Chairman of the Board
Dr. W. Keith Kennedy, Jr. ...   53     President and Chief          1977       President and Chief Executive
                                         Executive Officer                       Officer
Keith D. Gilbert ............   55     Executive Vice President     1984*      Executive Vice President; Prior to
                                                                                 1995, President, Electronics Group
                                                                                 (formerly Defense Group); Prior to
                                                                                 1993, Vice President, Defense Group
Scott G. Buchanan ...........   45     Vice President and Chief     1989       Vice President and Chief Financial
                                         Financial Officer                       Officer; Prior to 1993, Chief
                                                                                 Financial Officer and Treasurer
Richard G. Bell .............   49     Vice President and General   1990       Vice President and General Counsel
                                         Counsel                               
Dr. Patrick J. Brady  .......   51     Vice President               1996       President, Semiconductor Equipment
                                                                                 Group; Prior to 1996, Vice
                                                                                 President of Engineering,
                                                                                 Semiconductor Equipment Group
Malcolm J. Caraballo  .......   41     Vice President               1996       President, Microwave Products
                                                                                 Group; Prior to 1996, Vice
                                                                                 President, Microwave Products
                                                                                 Division
Marc C. Elgaway .............   42     Vice President               1995       President, Telecommunications
                                                                                 Group; Prior to 1995, Executive
                                                                                 Vice President, C-TEC Corporation
Darryl T. Quan ..............   42     Controller                   1991       Controller
Claudia D. Kelly ............   56     Secretary                    1996       Secretary; Prior to 1996, Manager,
                                                                                 Palo Alto Customer and Export
                                                                                 Services
Joan M. Varrone .............   45     Treasurer                    1994       Treasurer; Prior to 1994, Assistant
                                                                                 Treasurer, Raychem Corporation
</TABLE>

    Dr.  Watkins and Dr.  Johnson have been  directors of the company  since its
    incorporation in 1957. Dr. Kennedy has been a Director since August 1987.

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

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

                                        6

<PAGE>

                                     PART II

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

    The company's common stock is principally traded on the New York and Pacific
    stock  exchanges.  At  December  31,  1996  there were  approximately  5,400
    shareowners,  which included  holders of record and beneficial  owners.  The
    company expects that comparable cash dividends will continue in the future.

<TABLE>
                          DIVIDENDS AND STOCK PRICES

<CAPTION>
              1996 QUARTERS                            1ST         2ND         3RD          4TH
              -------------                            -----       -----       -----        -----
<S>                                          <C>       <C>         <C>         <C>          <C>
Dividends declared per share (in cents)                12          12          12           12
Stock price (NYSE-in dollars) ...........    High      44-5/8      36-1/4      28-3/4       28-1/4
                                             Low       34-1/4      27-1/8      17           17-3/4
                                                                                      
              1995 QUARTERS                            1ST         2ND         3RD          4TH
              -------------                            -----       -----       -----        -----
Dividends declared per share (in cents)                12          12          12           12
Stock price (NYSE-in dollars) ...........   High       40-1/4      48-3/8      57           54-7/8
                                            Low        29-3/4      38-5/8      43-1/2       40-1/2
                                                                                            
                                                                                  


</TABLE>
<TABLE>

ITEM 6. SELECTED FINANCIAL DATA

<CAPTION>
                                                                  (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                               ------------------------------------------------------------------------------------
                                                   1996             1995              1994              1993               1992
                                               -----------      -----------       -----------       -----------        ------------
<S>                                            <C>               <C>               <C>               <C>               <C>       
OPERATING RESULTS
  Sales ...............................        $  438,319        $  387,031        $  332,606        $  282,134        $  255,485
  Net Income ..........................             3,034            31,428            20,961            11,596            10,401(a)
  Net Income Per Share ................               .36              3.54              2.56              1.45              1.38(a)
  Dividends Per Share .................               .48               .48               .48               .48               .48
  Average Shares Outstanding ..........         8,541,000         8,875,000         8,200,000         7,999,000         7,551,000

FINANCIAL POSITION
  Working Capital .....................        $  122,982        $  142,213        $  116,651        $  108,497        $  100,852
  Total Assets ........................           314,373           287,674           235,030           220,628           206,090
  Long-Term Obligations ...............            38,801            21,669            22,583            26,463            28,644
  Shareowners' Equity .................           194,711           191,253           149,626           133,888           125,055
  Firm Backlog ........................        $  228,397        $  250,276        $  235,942        $  221,437        $  203,717

<FN>
---------------
(a) Includes a tax  benefit  of  $5,438,000,  or 72 cents per share,  due to the
    cumulative effect of a change in accounting for income taxes.
</FN>
</TABLE>

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

   FINANCIAL CONDITION

   During 1996, the company required  additional cash to finance its foreign and
   domestic infrastructure  expansion.  Although net cash provided by operations
   was $14.2 million,  cash and  equivalents  decreased $18.9 million from $34.6
   million to $15.7 million. Despite the slowdown in business in the second half
   of 1996, the company  invested $50 million in new capital plant and equipment
   in  order  to  support  long-term  growth,  primarily  for the  semiconductor
   equipment and wireless communications operations. The slowdown in business in
   the second half of 1996 caused working capital needs to decline from the peak
   levels of the first half.  As a result,  the company paid off the $10 million
   in short-term borrowings incurred during the first half of the year under the
   company's $100 million line-of-credit. During 1996, $4.7 million was provided
   by stock issuances from stock option  exercises  offsetting the $4 million in
   dividends paid.

                                        7


<PAGE>

   During  the  year,   approximately  $25  million  was  invested  in  a  newly
   constructed  facility and related capital  equipment in Kawasaki,  Japan, for
   the Semiconductor Equipment Group. Over $20 million in external financing was
   funded for the land and  completion  of the  building.  The amount  funded is
   denominated in Yen, of which  approximately  $8.6 million is amortizable over
   15 years, bearing interest at 2.5%. The additional funding requires a balloon
   payment in 10 years, bearing interest at 3.1%.

   CURRENT OPERATIONS AND BUSINESS OUTLOOK

   Semiconductor Equipment Group

   The  Semiconductor  Equipment  Group  began  the year  with an  all-time-high
   backlog,  but shared the fate of the entire  semiconductor  capital-equipment
   segment with the worldwide  overcapacity  of DRAMs,  leading our customers to
   stretch out or cancel  orders for new  equipment.  Revenues  declined to $100
   million in the second half of 1996 compared to the $172 million  record level
   in the first  half of the  year.  Starting  in the  second  quarter  of 1996,
   management   moved  to  realign  costs  more  closely  with  revised  revenue
   projections,  allowing the group to remain profitable for the year.  Business
   processes were streamlined, inventories scaled back, noncritical research and
   development  curtailed  and  headcount  reduced by about 20%  through  normal
   attrition  and  reductions  in force.  The company is poised to reduce  costs
   further if the market slump  deepens,  but will  maintain  the core  strength
   needed to respond  quickly to  increased  demand when the market turns upward
   again.  Despite the downturn in the second half of 1996,  the group ended the
   year with  revenues  up 23% over 1995,  accounting  for 62% of total  company
   revenue  compared  to 57% in 1995.  Orders  for the  fourth  quarter  of 1996
   amounted to approximately  $78 million  including  significant  placements by
   Hyundai  Electronics  and Anam Industrial Co. totaling more than $38 million.
   Orders for the second  half of 1996  totaled  $104  million  compared to $137
   million  in  the  first  half.  The  group  enters  1997  with a  backlog  of
   approximately $91 million.

   In   November   1996,   the   group   completed   construction   of   a   new
   36,000-square-foot  Asian  headquarters  and technology  center in Japan. The
   facility  will  serve  primarily  as an  applications  laboratory  capable of
   supporting  up to six WJ  dielectric-deposition  systems for the  cooperative
   development of new deposition processes with all Asia-Pacific customers. From
   this  convenient  new location,  the group will provide its  important  Asian
   market  with  system  demonstrations,  a spares  depot,  service  support and
   training. Looking forward, the company is reviewing the planned personnel and
   equipment growth rate in light of the chip slowdown. We will keep expenses on
   the facility to a minimum,  yet consistent with the mission of establishing a
   direct quality impact in Japan.

   The recently introduced WJ-2000P  high-density-plasma (HDP) process module is
   the first of a series to be developed on a cluster  platform for the company.
   Our forward looking road map plans for additional process modules,  adding to
   the cluster tool  platform  capabilities.  The WJ- 2000P  high-density-plasma
   reactor,  first  introduced in July 1995, is aimed at devices such as the 256
   Megabit DRAM and 7th generation  microprocessors expected to enter production
   in the  1998-1999  timeframe.  We are  positioning  this tool to  expand  our
   overall  semiconductor  equipment  market.  The HDP tools are not intended to
   replace current lines. The group believes their current continuous deposition
   platform  tools will have good sales  performance  into the  quarter-  micron
   process era and beyond. WJ-999 and WJ-1000  atmospheric-pressure systems lead
   the market for premetal  dielectric  films while the HDP systems are designed
   to compete in the market for intermetal  dielectric  layer films,  especially
   for the smaller  feature  sizes  expected  for future chip  designs.  We have
   successfully  completed  sample runs for  various  customers  and  successive
   marathon  runs for our  first  beta-site  partner  in the HDP  product  line.
   Looking  forward,  we expect  customers to be placing  small orders for their
   engineering efforts for late 1997 delivery.

   Although  the long range  forecast  for the  semiconductor  industry  remains
   bright, looking forward, management sees a continuing soft orders picture for
   semiconductor   equipment   through  the  first  half  of  1997  with  slight
   improvement towards the end of the year. With the current DRAM

                                        8


<PAGE>

   oversupply and sharp price declines,  customers  continue to carefully review
   their capacity and capital expansion plans. Even for fabs where customers are
   definitely  moving  forward,  they  appear to be delaying  capital  equipment
   orders until they must be placed.  It is  recognized  that the  semiconductor
   equipment business is cyclical, and uncertainty increases  significantly when
   projecting  demand for  semiconductor  equipment  products more than 6 months
   into the  future.  The  semiconductor  market  may slow more  than  currently
   anticipated.  In addition,  inherent risks and uncertainties  associated with
   the  development of the WJ-2000P could cause delays in its  availability  for
   sale, thereby reducing expected revenues.

   Wireless Communications

   The wireless  communications  business  segment  presents the greatest growth
   opportunity  for the company today.  The company's  range of products for the
   wireless  telecommunications  industry  showed  strength in 1996,  with sales
   increasing 53% over the prior year. The company's technological leadership in
   microwave  integrated  circuits,   multifunction   assembly  integration  and
   wideband receiver design gives its products a technical edge in many wireless
   communications applications.  Orders for our cellular fraud receivers and the
   call-extender  transceivers were stronger than expected.  Early 1996 shipment
   plans for wireless  communications  subassemblies were frustrated by problems
   the PCS  carrier  companies  experienced  with cell  site and tower  permits.
   However, customers requested increasingly higher shipment rates in the second
   half of 1996.

   Current research and development  effort heavily funds the development of the
   Base2(TM),  a  demonstration  base station to exhibit  wide-band  DSP systems
   technology.  It is designed  to meet  cellular  provider  desires for an open
   systems  approach to the base station design.  The Base2(TM) has been engaged
   successfully in cellular laboratory trials with two customers and field-trial
   plans are now being implemented.

   Although  our  wireless  communications  segment  showed  strength  in  1996,
   customer  demand for  components  and  subassemblies  were  softer than first
   expected due to a slower build-out of the PCS infrastructure.  Orders for the
   second half of 1996 were  stronger  than earlier  expected.  The group enters
   1997 with a backlog of $39 million.  Looking forward, the company expects the
   wireless  segment  growth  to  continue  at the  recent  pace,  and  for  the
   operational  project  income to overcome  the  admittedly  high  research and
   development  investments for a pre-tax  break-even  performance by the end of
   1997.

   Government Electronics

   The company's government electronics business declined from the previous year
   to $119 million in revenues due in part to  divestitures  of certain  product
   lines in the second  quarter of 1995 which  accounted  for  approximately  $7
   million in sales.  Shipments and profit levels were adversely affected as the
   company  supported  a higher  than  planned  effort to  convert  to a new MRP
   (materials  requirement  planning)  computer system to improve efficiency and
   profitability.  The segment's  excellent shipping rate in the fourth quarter,
   coupled  with  profit  improvement,  shows  that  most of the  conversion  is
   complete.

   Although the government electronics segment revenues declined in 1996, orders
   for  communications-intelligence  equipment and  missile-guidance  subsystems
   showed solid orders  performance.  The government  electronics segment enters
   1997 with a $98  million  backlog.  The  success of the  company's  microwave
   subsystems   production   capabilities   as   demonstrated  on  the  Advanced
   Medium-Range  Air-to-Air Missile project (AMRAAM),  has led Raytheon Co., the
   second AMRAAM prime contractor,  to have the company take over the production
   of modules which Raytheon  previously produced  internally.  These new orders
   will assist the government electronics segment in stabilizing future sales.

   1996 COMPARED TO 1995

   Semiconductor   Equipment  Group  sales  and  wireless  communications  sales
   increased  23% and 53%,  respectively,  while  government  electronics  sales
   decreased 11%, resulting in an overall

                                        9


<PAGE>

   company increase of 13%. The $15.1 million decrease in government electronics
   sales was due in part to the  divestiture  of  certain  product  lines in the
   second  quarter of 1995 and  inefficiencies  discussed  below.  Gross margins
   decreased from 43% to 32% due mostly to slow-moving  inventory write-offs and
   termination  costs totaling nearly $20 million;  an increased fixed cost base
   associated  with early 1996 expansion  efforts in  anticipation  of increased
   business by the  Semiconductor  Equipment  Group; and  inefficiencies  in the
   government  electronics  segment  stemming  from  the  conversion  to  a  new
   materials  planning  computer  system.  Although  selling and  administrative
   expenses  decreased  as a  percentage  of sales due  mostly  to cost  cutting
   efforts and lower  foreign  sales  commissions  resulting  from direct  sales
   efforts,  1996 expenses were slightly higher due to the increased  volume and
   infrastructure development.  Research and development expenses increased from
   12% to 13% of sales due to  continuing  efforts  to  develop  next-generation
   products,   particularly  for  the   semiconductor   equipment  and  wireless
   communications  segments.  Although  research and development  costs are at a
   historical  high,  the  company is at  critical  points on key  developmental
   programs on which  management  believes  the  earnings  growth  opportunities
   outweigh  the near term  benefits of slowing  development  efforts.  Interest
   expense  increased  over  1995  due to  long-term  borrowings.  Other  income
   decreased as 1995 results  included  $1.3 million from a favorable  insurance
   settlement for certain environmental expenditures. The effective tax rate for
   federal and foreign  income taxes  increased from 29% to 30% compared to last
   year.  The tax rate  increase  resulted  mostly  from the  effect of  foreign
   operations  taxed at various tax rates  offsetting  the  benefits  related to
   export sales and research credits.  Due to the above factors,  net income for
   1996 decreased 90% compared to 1995.

   1995 COMPARED TO 1994

   Semiconductor   Equipment  Group  sales  and  wireless  communications  sales
   increased 55% and 31%, respectively,  while government electronics sales were
   down 19%,  resulting in an overall company increase of 16%. The $31.5 million
   decrease in government  electronics  sales was due in part to the divestiture
   of certain  product lines in the second  quarter of 1995 which  accounted for
   approximately  $28 million of sales in 1994. Gross margins increased from 41%
   to 43% due  mostly  to the  revenue  mix  shifting  towards  more  profitable
   semiconductor  equipment  products  and  improved  margins in the  government
   electronics  segment.  Although  selling  and  administrative  expenses  as a
   percentage  of  sales  decreased  slightly,  expenses  were  up 5% due to the
   increased volume. Research and development expenses increased from 10% to 12%
   of  sales  due  to the  company's  substantial  efforts  in  developing  next
   generation products,  particularly for the Semiconductor  Equipment Group and
   the   development  and   commercialization   of  products  for  the  wireless
   communications segment. The effective tax rate for federal and foreign income
   taxes  decreased  from 30% to 29% compared to the same period last year.  The
   tax rate decrease  resulted mostly from tax benefits related to higher export
   sales. Due to the combined effect of the above factors,  net income increased
   50% over 1994.

   RISKS AND UNCERTAINTIES THAT MAY AFFECT FUTURE RESULTS

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

                                       10

<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>
                                              WATKINS-JOHNSON COMPANY AND SUBSIDIARIES

                                                CONSOLIDATED STATEMENTS OF OPERATIONS
                                          (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<CAPTION>
                                                                                               YEAR ENDED DECEMBER 31
                                                                              ------------------------------------------------------
                                                                                  1996                 1995                  1994
                                                                              -----------          -----------           -----------
<S>                                                                           <C>                  <C>                  <C>        
Sales ...............................................................         $   438,319          $   387,031          $   332,606
                                                                              -----------          -----------          -----------
Costs and expenses:
 Cost of goods sold .................................................             298,656              221,792              195,558
 Selling and administrative .........................................              78,075               75,738               72,033
 Research and development ...........................................              56,675               47,629               34,436
                                                                              -----------          -----------          -----------
                                                                                  433,406              345,159              302,027
                                                                              -----------          -----------          -----------
Income from operations ..............................................               4,913               41,872               30,579
Other income (expense):
 Interest income ....................................................                 789                2,400                1,562
 Interest expense ...................................................              (1,574)                (873)              (1,141)
 Other income (expense)--net ........................................                 191                  618                 (149)
                                                                              -----------          -----------          -----------
Income from continuing operations before Federal ....................               4,319               44,017               30,851
 and foreign income taxes
Federal and foreign income taxes ....................................              (1,285)             (12,589)              (9,200)
                                                                              -----------          -----------          -----------
Income from continuing operations ...................................               3,034               31,428               21,651
Discontinued operations (Note 8):
 Loss from discontinued operations, net of taxes ....................                --                   --                   (490)
 Loss on disposition, net of taxes ..................................                --                   --                   (200)
                                                                              -----------          -----------          -----------
Net income ..........................................................         $     3,034          $    31,428          $    20,961
                                                                              ===========          ===========          ===========
Fully diluted per share amounts (difference between fully 
  diluted and primary  earnings per share is not material):
Income from continuing operations ...................................         $       .36          $      3.54          $      2.64
Discontinued operations .............................................                --                   --                   (.08)
                                                                              -----------          -----------          -----------
Net income ..........................................................         $       .36          $      3.54          $      2.56
                                                                              ===========          ===========          ===========
Average common and equivalent shares ................................           8,541,000            8,875,000            8,200,000

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


                                       11

<PAGE>

<TABLE>
                                              WATKINS-JOHNSON COMPANY AND SUBSIDIARIES

                                                     CONSOLIDATED BALANCE SHEETS
                                          (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<CAPTION>
                                                                                                             DECEMBER 31
                                                                                                  ----------------------------------
                                                                                                      1996                   1995
                                                                                                  -----------            -----------
<S>                                                                                                <C>                    <C>      
                                                ASSETS
CURRENT ASSETS:
 Cash and equivalents ................................................................             $  15,702              $  34,556
 Receivables .........................................................................                95,717                 86,311
 Inventories:
   Finished goods ....................................................................                 4,005                  3,623
   Work in process ...................................................................                35,000                 45,092
   Raw materials and parts ...........................................................                30,153                 31,120
 Deferred income taxes ...............................................................                17,795                 11,725
 Other ...............................................................................                 5,471                  4,538
                                                                                                   ---------              ---------
   Total current assets ..............................................................               203,843                216,965
                                                                                                   ---------              ---------
PROPERTY, PLANT AND EQUIPMENT:
 Land ................................................................................                13,075                  4,130
 Buildings and improvements ..........................................................                54,035                 37,046
 Plant facilities, leased ............................................................                13,060                 13,060
 Machinery and equipment .............................................................               151,148                131,143
                                                                                                   ---------              ---------
                                                                                                     231,318                185,379
 Accumulated depreciation and amortization ...........................................              (127,748)              (120,243)
                                                                                                   ---------              ---------
 Property, plant and equipment--net ..................................................               103,570                 65,136
                                                                                                   ---------              ---------
OTHER ASSETS:
 Deferred income taxes ...............................................................                 2,290                  4,880
 Other ...............................................................................                 4,670                    693
                                                                                                   ---------              ---------
   Total other assets ................................................................                 6,960                  5,573
                                                                                                   ---------              ---------
                                                                                                   $ 314,373              $ 287,674
                                                                                                   =========              =========
                                    LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES:
 Accounts payable ....................................................................             $  18,960              $  23,162
 Accrued expenses ....................................................................                12,791                 11,899
 Advances on contracts ...............................................................                 8,932                  4,446
 Provision for warranties and losses on contracts ....................................                17,378                 10,490
 Payroll and profit sharing ..........................................................                14,494                 14,602
 Income taxes ........................................................................                 8,306                 10,153
                                                                                                   ---------              ---------
   Total current liabilities .........................................................                80,861                 74,752
                                                                                                   ---------              ---------
LONG-TERM OBLIGATIONS ................................................................                38,801                 21,669
                                                                                                   ---------              ---------
COMMITMENTS AND CONTINGENCIES (Notes 3 and 6)

SHAREOWNERS' EQUITY:
 Preferred stock, $1.00 par value--authorized and unissued,
  500,000 shares
 Common stock, no par value--authorized, 45,000,000 shares; 
  outstanding: 1996, 8,329,248 shares; 1995, 8,124,055 shares ........................                38,998                 34,307
 Retained earnings ...................................................................               155,713                156,946
                                                                                                   ---------              ---------
   Total shareowners' equity .........................................................               194,711                191,253
                                                                                                   ---------              ---------
                                                                                                   $ 314,373              $ 287,674
                                                                                                   =========              =========
<FN>
                 See notes to consolidated financial statements.
</FN>
</TABLE>

                                       12

<PAGE>

<TABLE>
                                              WATKINS-JOHNSON COMPANY AND SUBSIDIARIES

                                           CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
                                          (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<CAPTION>
                                                                     COMMON STOCK                                          TOTAL
                                                              ---------------------------             RETAINED          SHAREOWNERS'
                                                               SHARES             DOLLARS             EARNINGS             EQUITY
                                                              --------            -------             --------           -----------
<S>                                                           <C>                <C>                 <C>                 <C>       
Balance, January 1, 1994 ...........................          7,598,290          $    9,106          $  124,782          $  133,888
 Net income for 1994 ...............................               --                  --                20,961              20,961
 Repurchase of common stock ........................           (564,200)               (972)            (12,833)            (13,805)
 Dividends declared--$.48 per share ................               --                  --                (3,563)             (3,563)
 Stock option transactions .........................            542,381              12,145                --                12,145
                                                             ----------          ----------          ----------          ----------
Balance, December 31, 1994 .........................          7,576,471              20,279             129,347             149,626
 Net income for 1995 ...............................               --                  --                31,428              31,428
 Dividends declared--$.48 per share ................               --                  --                (3,829)             (3,829)
 Stock option transactions .........................            547,584              14,028                --                14,028
                                                             ----------          ----------          ----------          ----------
Balance, December 31, 1995 .........................          8,124,055              34,307             156,946             191,253
 Net income for 1996 ...............................               --                  --                 3,034               3,034
 Dividends declared--$.48 per share ................               --                  --                (3,973)             (3,973)
 Stock option transactions .........................            205,193               4,691                --                 4,691
 Cumulative translation adjustments ................               --                  --                  (294)               (294)
                                                             ----------          ----------          ----------          ----------
Balance, December 31, 1996 .........................          8,329,248          $   38,998          $  155,713          $  194,711
                                                             ==========          ==========          ==========          ==========

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

                                       13

<PAGE>

<TABLE>
                                              WATKINS-JOHNSON COMPANY AND SUBSIDIARIES

                                                CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                       (DOLLARS IN THOUSANDS)

<CAPTION>
                                                                                                     YEAR ENDED DECEMBER 31
                                                                                      ----------------------------------------------
                                                                                         1996              1995              1994
                                                                                      ----------       -----------        ----------
<S>                                                                                    <C>               <C>               <C>     
OPERATING ACTIVITIES:
 Net income ..................................................................         $  3,034          $ 31,428          $ 20,961
 Adjustments to reconcile net income to net cash provided by
  operating activities:
  Depreciation and amortization ..............................................           11,296             9,941             8,711
  Deferred tax provisions ....................................................           (3,480)             (985)             (695)
  Net changes in:
   Receivables ...............................................................           (9,406)           (5,884)           (6,456)
   Inventories ...............................................................           10,677           (28,180)          (14,509)
   Other assets ..............................................................           (1,172)           (2,625)               27
   Accruals and payables .....................................................           (7,837)           11,148             9,550
   Advances on contracts .....................................................            4,486            (3,126)           (4,248)
   Provision for warranties and losses on contracts ..........................            6,888             3,298             1,208
   Environmental remediation .................................................             (327)             (817)           (2,727)
                                                                                       --------          --------          --------
 Net cash provided by operating activities ...................................           14,159            14,198            11,822
                                                                                       --------          --------          --------
INVESTING ACTIVITIES:
 Additions of property, plant and equipment ..................................          (50,003)          (25,566)          (12,526)
 Restricted plant construction funds .........................................           (3,738)             --                --
 Other .......................................................................              294               741               476
                                                                                       --------          --------          --------
 Net cash used in investing activities .......................................          (53,447)          (24,825)          (12,050)
                                                                                       --------          --------          --------
FINANCING ACTIVITIES:
 Long-term and line-of-credit borrowings .....................................           30,241              --                --
 Payments on long-term and line-of-credit borrowings .........................          (10,135)             (112)           (4,916)
 Proceeds from issuance of common stock ......................................            4,691            14,028            12,145
 Repurchase of common stock ..................................................             --                --             (13,805)
 Dividends paid ..............................................................           (3,973)           (3,829)           (3,563)
 Other .......................................................................             (390)              627              (204)
                                                                                       --------          --------          --------
 Net cash provided (used) by financing activities ............................           20,434            10,714           (10,343)
                                                                                       --------          --------          --------
Net increase (decrease) in cash and equivalents ..............................          (18,854)               87           (10,571)
Cash and equivalents at beginning of year ....................................           34,556            34,469            45,040
                                                                                       --------          --------          --------
Cash and equivalents at end of year ..........................................         $ 15,702          $ 34,556          $ 34,469
                                                                                       ========          ========          ========
Other cash flow information:
 Income taxes paid-net of refunds ............................................         $  5,700          $  5,828          $  9,003
 Interest expense paid .......................................................            1,574               872             1,143
Noncash investing and financing activities:
 Noncash effect on "Property, Plant and Equipment" and
  "Other Assets" due to a plant held for sale in 1994 and
  returned to service in 1995. Plant transferred at book
  value which is below market. ...............................................                           $ (5,107)         $  5,107


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

                                       14


<PAGE>

                    WATKINS-JOHNSON COMPANY AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SIGNIFICANT ACCOUNTING POLICIES

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

Cash   Equivalents--Cash   equivalents  consist  of  municipal  bond  funds  and
commercial paper acquired with remaining maturity periods of 90 days or less and
are  stated at cost plus  accrued  interest  which  approximates  market  value.
Year-end  cash  equivalents  totaled $13.4 million and $33.4 million in 1996 and
1995,  respectively.  The  company's  investment  guidelines  limit  holdings in
commercial paper to $1,000,000 per issuer.

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

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

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

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

Forward Exchange  Contracts--The  company enters into forward exchange contracts
to  hedge  sales  transactions  and  firm  commitments  denominated  in  foreign
currencies.  Gains and losses on the forward  contracts are recognized  based on
changes in exchange rates, as are offsetting  foreign  exchange gains and losses
on the underlying transactions.  The company does not engage in foreign currency
speculation.

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

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

Use of  Estimates--The  preparation of financial  statements in conformity  with
generally accepted  accounting  principles requires management to make estimates
and assumptions  that affect the reported  amounts of assets and liabilities and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.

                                       15


<PAGE>
                    WATKINS-JOHNSON COMPANY AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Stock-Based  Compensation--The  company  continues  to account  for  stock-based
compensation   under  the  intrinsic  value  method  as  defined  in  Accounting
Principles  Board Opinion No. 25,  "Accounting  for Stock Issued to  Employees,"
(APB 25).

Reclassification--Certain  amounts for 1995 and 1994 have been  reclassified  to
conform to the 1996 presentation.

2. RECEIVABLES AND FINANCIAL INSTRUMENTS

Receivables consist of the following at December 31:

                                                           (IN THOUSANDS)
                                                        -------------------
                                                         1996         1995
                                                        -------     -------
   Trade receivables .................................  $90,196     $84,304
                                                        -------     -------
   Long-term contracts:
    Billed ...........................................    1,448         875
    Unbilled .........................................    4,073       1,132
                                                        -------     -------
   Total long-term contract receivables ..............    5,521       2,007
                                                        -------     -------
   Total receivables, less allowance of $1,247 in
    1996 and $1,034 in 1995 ..........................  $95,717     $86,311
                                                        =======     =======

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

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

Financial  instruments that potentially subject the company to concentrations of
credit risk consist  principally of cash  equivalents,  trade  receivables,  and
financial instruments used in hedging transactions. Concentration of credit risk
with  respect to trade  receivables  are limited due to the variety of customers
and markets  segments  into which the  company's  products are sold,  as well as
their dispersion  across  geographic  areas. The carrying value of cash and cash
equivalents,  receivables,  accounts  payable and short-term notes payable are a
reasonable  approximation  of their  fair  market  value  due to the  short-term
maturities of those instruments.  The carrying value of the company's  long-term
debt approximates fair value based on the interest rates currently  available to
the company for  long-term  debt with similar  terms as those  borrowings of the
company.  Considerable  judgment  is  required  in  interpreting  market data to
develop estimates of fair value, so the estimates are not necessarily indicative
of the  amounts  that  could be  realized  or would be paid in a current  market
exchange.

The company is a party to financial instruments with  off-balance-sheet  risk in
the normal course of business to reduce its exposure to  fluctuations in foreign
exchange rates. At December 31, 1996, the company had forward exchange contracts
to sell  Japanese Yen with a market value of  approximately  $16.7 million for a
contract amount of $16.3 million.  These  contracts  mature within one year. The
market value of forward exchange  contracts were obtained from published foreign
exchange  market  rates.  The company's  risk in these  contracts is the cost of
replacing, at current market rates, these contracts in the event

                                       16


<PAGE>
                    WATKINS-JOHNSON COMPANY AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

of default by the other party.  Management  believes the risk of incurring  such
losses  is  remote as the  contracts  are  entered  into  with  major  financial
institutions.  Prior to 1996 forward exchange contracts held by the company were
not material.

3. LONG-TERM OBLIGATIONS AND LINES OF CREDIT

Long-term  obligations,  excluding  amounts due within one year,  consist of the
following at December 31:

                                                         (IN THOUSANDS)
                                                     ----------------------
                                                       1996           1995
                                                     -------        -------
     Long-term borrowings ...................        $20,241        $     0
     Deferred compensation ..................          3,360          6,356
     Environmental remediation ..............          7,635          7,613
     Long-term leases .......................          7,565          7,700
                                                     -------        -------
     Total ..................................        $38,801        $21,669
                                                     =======        =======

The current portion of long-term obligations is included in current liabilities.
The  expected  maturity  amounts  are  as  follows:  1997,   $1,997,000;   1998,
$1,950,000; 1999, $1,965,000;  2000, $1,981,000;  2001, $1,999,000;  thereafter,
$28,909,000.

Long-term  Borrowings--Consists  of two  unsecured  loans used for the company's
land,  building  and  equipment  located  in  Kawasaki,  Japan.  The  loans  are
denominated  in Yen,  of which  approximately  $8.6  million is  amortizable  in
monthly  installments  over 15 years,  bears interest at 2.5%, and approximately
$11.6 million  requires a balloon  payment due in 10 years and bears interest at
3.1%, payable semiannually.

Deferred  Compensation--The  company has deferred  compensation  plans  covering
selected  members of management and key technical  employees.  The purpose is to
reward and encourage talented employees to remain with the company. Such amounts
are payable in accordance with various fixed payment schedules.

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

                                       17


<PAGE>
                    WATKINS-JOHNSON COMPANY AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Leases--Certain  long-term  leases for plant  facilities  are treated as capital
leases for financial statement purposes. The leases expire during the years 2014
to 2029, and renewal options do not provide for lease extensions beyond the year
2029. The company also has noncancellable  operating leases for plant facilities
and  equipment  expiring  through  the year 2001.  The leases may be renewed for
various periods after the initial term. Payment  obligations under these capital
and operating leases as of December 31, 1996 are as follows:

                                                         (IN THOUSANDS)
                                                  ---------------------------
                                                  CAPITAL          OPERATING
                                                   LEASES            LEASES
                                                  ---------         --------
     Lease payments:
     1997 ...............................          $   848          $ 1,420
     1998 ...............................              848              636
     1999 ...............................              848              417
     2000 ...............................              848              344
     2001 ...............................              848               50
     Remaining years ....................           14,024             --
                                                   -------          -------
     Total ..............................           18,264          $ 2,867
                                                                    =======
     Imputed interest ...................          (10,564)
                                                   -------
     Present value of lease payments 
      (current portion, $135) ...........          $ 7,700
                                                   =======

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

                                                     (IN THOUSANDS)
                                         ----------------------------------
                                          1996          1995           1994
                                         ------        ------        -------
     Real property ..............        $2,388        $1,202        $  774
     Equipment ..................         1,029           665           626
                                         ------        ------        ------
     Total ......................        $3,417        $1,867        $1,400
                                         ======        ======        ======

Lines of  Credit--The  company  has  arranged  with  several  banks to provide a
$100,000,000  unsecured  credit  facility.  This facility expires on December 8,
1998. No material compensating  balances are required or maintained.  Borrowings
under this facility generally bear interest at the lower of prime rate or London
Interbank  Offered Rates (LIBOR) plus .75%.  During 1996,  the company  borrowed
approximately  $10  million  under this  facility,  of which the full amount was
repaid. The amount of outstanding letters of credit and other guarantees was not
material at December 31, 1996. In addition to the $100,000,000  unsecured credit
facility,  the company's foreign subsidiaries  maintain separate lines of credit
totaling approximately $500,000.

4. SHAREOWNERS' EQUITY

Stock Repurchase  Program--The  Board of Directors has authorized the company to
repurchase a maximum of 2,500,000 shares of company stock.  Through December 31,
1996, 1,500,000 shares have been repurchased. No shares were repurchased in 1995
and 1996. The program  enables the company to acquire its common stock from time
to time when appropriate.

Common Share  Purchase  Rights--On  September 20, 1996,  the company  declared a
dividend of one Common Share Purchase Right on each outstanding  share of common
stock.  The Rights were distributed on October 20, 1996 to shareowners of record
on October 10, 1996. The Rights extend and replace the

                                       18


<PAGE>

                    WATKINS-JOHNSON COMPANY AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Common Share  Purchase  Rights  distributed  in October of 1986 which expired on
October 20, 1996. The new Rights expire October 20, 2006, and may be redeemed by
the  company  for $.01 per Right at any time  prior to 10 days after a person or
group  acquires 15% or more of the  company's  common  stock.  The Rights become
exercisable  and trade  separately  from the common stock if any person or group
acquires 15% or more of the company's  outstanding common stock, or announces an
offer which would  result in such person or group  acquiring  15% or more of the
company's common stock. When the Rights first become  exercisable as a result of
the  announcement  of a tender or  exchange  offer,  a holder of a Right will be
entitled to buy one share of the company's common stock for $160. If, instead or
thereafter,  a person or group not previously  approved by the company  acquires
15% or more of the company's shares, a holder of a Right (other than that person
or group) will be entitled  to buy that  number of  additional  shares of common
stock  from the  company  which have a market  value of twice the $160  exercise
price of each Right.  If the  company is acquired in a merger or other  business
combination  after any  person or group  acquires  15% or more of the  company's
common  stock,  each Right will  entitle its holder to buy a number of shares of
common stock of the  surviving  company  having a market value of twice the $160
exercise  price.  After the acquisition by any person or group of 15% or more of
the company's common stock and up to the time that such person or group acquires
a 50%  interest,  the company will also have the ability to exchange some or all
of the Rights  (other than Rights held by the  acquiror) for one share of common
stock per Right at no  expense  to the  holder.  The  Rights  also  provide  for
protection against self-dealing  transactions by a controlling  shareowner.  The
company  reserves and keeps  available out of its authorized and unissued shares
of common stock, the number of shares of common stock that will be sufficient to
permit the exercise in full of all outstanding Rights.

Stock  Option  Plans--The  Employee  Stock  Option Plan  provides  for grants of
nonqualifying and incentive stock options to certain key employees and officers.
The company  may grant  options to  purchase  up to  3,900,000  shares of common
stock.  The options are granted at the market  price on date of grant and expire
at the tenth anniversary date.  One-third of the options granted are exercisable
in each of the third,  fourth and fifth succeeding  years. The Plan allows those
employees who are subject to the insider  trading  restrictions  certain limited
rights to receive  cash in the event of a change in control.  Shares  issued are
net of retirement of shares used in payment for options exercised.  In addition,
the Plan permits the award of restricted stock rights subject to a fixed vesting
schedule.  The holder of vested restricted stock has certain  dividend,  voting,
and other shareowner  rights.  No restricted stock awards have been made through
December 31, 1996.

The  Nonemployee  Directors  Stock Option Plan provides for a fixed  schedule of
options  to be  granted  through  the year 2005.  Nonemployee  directors  of the
company are  automatically  granted  3,000 shares of common stock each year that
such person  remains a director of the  company.  The options are granted at the
market  price on date of grant and  expire at the tenth  anniversary  date.  The
options  granted  become  exercisable  after six months  from the date of grant.
Prior to 1996, options granted were exercisable  similarly to the Employee Stock
Option  Plan.  The total  number of shares to be issued  under this plan may not
exceed 350,000 shares.  Included in the tables below,  21,000 option shares were
granted at $34.63 in 1996; 12,600 and 5,440 option shares were granted at $39.75
and $39.88,  respectively,  in 1995;  and 16,320  option  shares were granted at
$29.00 in 1994.

Included in the Consolidated  Statements of Shareowners' Equity are tax benefits
related  to sales  under  stock  option  plans  of  $1,161,000,  $4,735,000  and
$2,327,000 for 1996, 1995 and 1994, respectively.

                                       19


<PAGE>
                    WATKINS-JOHNSON COMPANY AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Activity related to all stock option plans is as follows:

                                                    WEIGHTED          AVERAGE
                                                     SHARES       EXERCISE PRICE
                                                  -----------     --------------
     1996 
     Granted ...............................         205,000         $25.54
     Exercised .............................         209,393         $17.57
     Terminated ............................         328,443         $29.39
     At December 31:                                                
      Outstanding ..........................       1,529,237         $27.32
      Exercisable ..........................         463,119         $19.11
      Reserved for future grants ...........         797,973            --
                                                                    
     1995                                                           
     Granted ...............................         680,290         $40.13
     Exercised .............................         566,198         $17.81
     Terminated ............................          87,346         $24.35
     At December 31:                                                
      Outstanding ..........................       1,862,073         $26.79
      Exercisable ..........................         249,704         $21.25
                                                                    
     1994                                                           
     Granted ...............................         577,320         $24.25
     Exercised .............................         573,842         $17.84
     Terminated ............................          28,641         $17.86
     At December 31:                                                
      Outstanding ..........................       1,835,327         $18.96
      Exercisable ..........................         458,022         $23.96
                                                                       

<TABLE>                               

The following table summarizes  information concerning currently outstanding and
exercisable options at December 31, 1996:
                                      
<CAPTION>                                
                                   OPTIONS OUTSTANDING                    OPTIONS EXERCISABLE
                     ----------------------------------------------   ----------------------------
                                       WEIGHTED
                                       AVERAGE           WEIGHTED                       WEIGHTED
     RANGE OF          NUMBER         REMAINING          AVERAGE         NUMBER          AVERAGE
 EXERCISE PRICES     OUTSTANDING  CONTRACTUAL LIFE   EXERCISE PRICE   EXERCISABLE    EXERCISE PRICE
-----------------   ------------  ----------------   --------------   -------------   --------------
<S>                  <C>                <C>              <C>            <C>           <C>   
$10.00 to $21.63       477,066            6.7              $14.64         247,121       $11.85
$22.75 to $26.13       390,505            7.1              $23.03         123,483       $23.13
$26.50 to $35.88       100,126            6.3              $31.97          65,515       $31.66
$36.75 to $55.00       561,540            8.0              $40.26          27,000       $36.75
----------------     ---------         ------            --------       ---------      -------   
$10.00 to $55.00     1,529,237            7.2              $27.32         463,119       $19.11
================     =========         ======            ========       ==========     =======   

</TABLE>                              
                                      
As discussed in Note 1, the company applies Accounting  Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," and related  interpretations
in  accounting  for its plans.  Accordingly,  no  compensation  expense has been
recognized for its stock-based compensation plans. Had compensation cost for the
company's  stock option plans been  determined  based upon the fair value at the
grant date for awards  under these  plans,  and  amortized  to expense  over the
vesting period of the awards  consistent with the methodology  prescribed  under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation,"  the  company's pro forma net income for 1996 and 1995 would have
been  $1,256,000  and  $29,849,000,  respectively,  or $.15 and $3.42 per share,
respectively.  However,  the  impact of  outstanding  non-vested  stock  options
granted  prior  to 1995  has  been  excluded  from  the pro  forma  calculation;
accordingly,  the 1996 and 1995 pro  forma  adjustments  are not  indicative  of
future period pro

                                       20


<PAGE>
                    WATKINS-JOHNSON COMPANY AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

forma  adjustments,  when the  calculation  will apply to all  applicable  stock
options. The weighted average fair value of options granted during 1996 and 1995
is calculated as $7.96 per share and $13.96 per share, respectively, on the date
of grant  using  the  Black-Scholes  option-pricing  model  with  the  following
weighted  average  assumptions:  dividend yield of 1.5% for 1996 grants and 1.7%
for 1995 grants,  volatility  of 37.5%,  risk-free  interest rate at the time of
grant of 6.2% for 1996 and 7.1% for 1995,  and an  expected  term to exercise of
approximately  3.5 months from the vest date.  The  company's  calculations  are
based on a multiple option valuation  approach and forfeitures are recognized as
they occur.

The Black-Scholes  model used by the company to calculate option values, as well
as other currently accepted option valuation models,  were developed to estimate
the fair values of freely tradable,  fully transferable  options without vesting
restrictions, which significantly differ from the company's stock option awards.
These models also require highly subjective assumptions,  including future stock
price  volatility,  and expected time until  exercise,  which greatly affect the
calculated values.  Assuming expected future volatility  decreases to 25% over a
shorter  expected  term which  assumes  immediate  exercise  upon  vesting,  the
weighted  average fair value of options  granted during 1996 and 1995 would have
been $5.79 per share and $10.49 per share,  respectively,  on the date of grant.
Pro forma net income  for 1996 and 1995  would  have been lower than  actual net
income by $1,305,000 and $1,178,000,  respectively,  or $.15 and $.08 per share,
respectively. Assuming expected future volatility increases to 50% over a longer
expected  term to exercise of  approximately  12 months from the vest date,  the
weighted  average  fair  value  of  options  granted  during  1996  and  1995 is
calculated as $10.98 per share and $18.65 per share,  respectively,  on the date
of grant.  Pro forma net  income  for 1996 and 1995  would  have been lower than
actual net income by $2,439,000 and $2,132,000,  respectively,  or $.29 and $.16
per share, respectively.

5. INCOME TAXES

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

                                                 (IN THOUSANDS)
                                  ----------------------------------------
                                     1996           1995            1994
                                  ---------      ---------        --------
     U.S .................        $  1,590        $ 43,133        $ 31,010
     Foreign .............           2,729             884            (159)
                                  --------        --------        --------
     Total ...............        $  4,319        $ 44,017        $ 30,851
                                  ========        ========        ========

                                       21


<PAGE>

                    WATKINS-JOHNSON COMPANY AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The  provision  for Federal and foreign  income taxes on income from  continuing
operations consists of the following:

                                                 (IN THOUSANDS)
                                   ---------------------------------------
                                      1996           1995          1994
                                   ---------      ---------      ---------
     Current:
      U.S ....................      $  3,333       $ 13,057       $  9,855
      Foreign ................         1,432            517             40
                                    --------       --------       --------
      Total current ..........         4,765         13,574          9,895
                                    --------       --------       --------
     Deferred ................        (3,480)          (985)          (695)
                                    --------       --------       --------
     Total ...................      $  1,285       $ 12,589       $  9,200
                                    ========       ========       ========

Deferred foreign taxes were not significant for all years presented.

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

                                                        (IN THOUSANDS)
                                           -------------------------------------
                                             1996           1995          1994
                                           --------      --------      ---------
    Deferred compensation ................ $  2,115      $  3,259      $  3,251
    Loss accruals ........................   13,195         6,753         6,295
    Environmental remediation ............    3,147         3,298         3,490
    Uniform capitalization ...............    1,207         1,456         1,273
    Vacation accrual .....................    1,780         1,794         1,724
    Other ................................    2,396         2,426         1,307
                                           --------      --------      --------
      Gross deferred tax assets ..........   23,840        18,986        17,340
                                           --------      --------      --------
    Depreciation .........................   (3,697)       (2,297)       (1,562)
    Other ................................      (58)          (84)         (158)
                                           --------      --------      --------
      Gross deferred tax liabilities .....   (3,755)       (2,381)       (1,720)
                                           --------      --------      --------
    Net deferred tax asset ............... $ 20,085      $ 16,605      $ 15,620
                                           ========      ========      ========

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

                                                     1996     1995     1994
                                                     ----     ----     ----
     Statutory Federal tax rate ................     34.0%    35.0%    35.0%
     Export sales benefit ......................     (7.8)    (6.0)    (5.5)
     Research credit ...........................    (13.8)    (1.4)    (2.3)
     Effect of foreign operations taxed at
      various rates ............................     11.6       .5       .3
     Other .....................................      5.8       .5      2.3
                                                     ----     ----     ----
     Effective rate ............................     29.8%    28.6%    29.8%
                                                     ====     ====     ====

Domestic  state and local  income taxes  included in selling and  administrative
expenses totaled $248,000 in 1996, $1,670,000 in 1995, and $1,813,000 in 1994.

                                       22

<PAGE>
                    WATKINS-JOHNSON COMPANY AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

6. ENVIRONMENTAL REMEDIATION AND OTHER CONTINGENCIES

The company remains in compliance with the remedial action plans being monitored
by various regulatory agencies at its Scotts Valley and Palo Alto sites. In 1991
the company recorded a $15 million charge for estimated  remediation actions and
cleanup   costs.   No  additional   provision  has  been  recorded  since  1991.
Expenditures  charged  against the  provision  totaled  $327,000,  $778,000  and
$2,727,000 for the years 1996, 1995 and 1994, respectively. While the timing and
ultimate  amount of expenditures of restoring the sites cannot be predicted with
certainty,  management  believes that the provision  taken is adequate  based on
facts known at this time. In 1994 the company  reached  agreement with the other
potentially  responsible parties regarding  allocations of the remediation costs
at the Palo Alto site.  Included in other  income for 1995 are  recoveries  from
insurers totaling $1,331,000. The company will continue to vigorously pursue any
potential  recoveries  from insurers or other  responsible  parties.  Changes in
environmental  regulations,  improvements in cleanup technology and discovery of
additional  information  concerning these sites and other sites could affect the
estimated costs in the future.

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

7. EMPLOYEE BENEFIT PLANS

Employees'  Investment  Plan--The  Watkins-Johnson  Employees'  Investment  Plan
conforms to the requirements of the Employee  Retirement  Income Security Act of
1974 (ERISA) and the Internal Revenue Code as a qualified  defined  contribution
plan. The Plan covers substantially all employees and for 1996 and 1995 provided
that the company match  employees'  401(k) salary deferrals up to 3% of eligible
employee   compensation.   Prior  to  1995,   the  plan   provided  for  company
contributions  equal to 9% of the net pretax  earnings.  The  amount  charged to
income was $2,724,000 in 1996, $2,577,000 in 1995, and $3,190,000 in 1994.

Employee Stock  Ownership  Plan  (ESOP)--The  ESOP was  established to encourage
employee  participation  and  long-term  ownership of company  stock.  The Board
determines each year's  contribution  depending on the performance and financial
condition  of the  company.  The Board  approved a  contribution  equal to 1% of
eligible  employee  compensation  for 1996,  1995,  and 1994,  which resulted in
charges to income of $883,000,  $839,000, and $894,000,  respectively.  The ESOP
held  220,941 and 197,000  shares of common stock at December 31, 1996 and 1995,
respectively.  The ESOP is a qualified defined contribution plan under ERISA and
the Internal Revenue Code.

8. BUSINESS SEGMENT REPORTING

The company operates in three industry segments. Operations in the Semiconductor
Equipment  segment  involve the  development,  production,  sales and service of
chemical-vapor-deposition  equipment used in the  manufacture  of  semiconductor
products.  Operations in the Wireless Communications segment involve the design,
development,   manufacture  and  sale  of  advanced  wireless  telecommunication
products for cellular service providers,  personal  communication  systems,  and
other wireless product  manufacturers.  Operations in the Government Electronics
segment  include  the  design,  development,  manufacture  and sale of  advanced
electronic  systems  and  devices for  guided-missile  programs,  communications
intelligence,  and  other  government  agency  applications.  The  Environmental
Services  business  was  divested  at the  end of  1994  and  is  reported  as a
discontinued business in the financial statements.

                                       23

<PAGE>

                    WATKINS-JOHNSON COMPANY AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

<TABLE>

Continuing operations by business segment are as follows:

<CAPTION>
           (IN THOUSANDS)                                                        YEAR ENDED DECEMBER 31, 1996
           --------------                            -------------------------------------------------------------------------------
                                                                                           YEAR-
                                                                         PRE-TAX            END            CAPITAL
                                                       SALES             INCOME            ASSETS         ADDITIONS    DEPRECIATION
                                                     ---------         ---------         ---------        ---------   --------------
<S>                                                  <C>               <C>               <C>              <C>           <C>      
Semiconductor Equipment .....................        $ 272,436         $   7,089         $ 174,549        $  46,122     $   7,231
Wireless Communications .....................           46,571            (5,793)           28,307            1,536           793
Government Electronics ......................          119,312             3,617            72,893            2,105         2,759
Corporate ...................................                                               38,624              240           513
                                                     ---------         ---------         ---------        ---------     ---------
Income from continuing operations ...........                              4,913
Other income (expense)--net .................                               (594)
                                                     ---------         ---------         ---------        ---------     ---------
Total .......................................        $ 438,319         $   4,319         $ 314,373        $  50,003     $  11,296
                                                     =========         =========         =========        =========     =========

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

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

Sales  to  individual  customers   representing  greater  than  10%  of  company
consolidated sales are as follows:

                                                      (IN THOUSANDS)
                                              ------------------------------
                                               1996       1995        1994
                                              -------    -------    -------
     Semiconductor Equipment:
       Marubeni Hytech (a Japanese
        distributor) .....................    $47,000    $61,000    $39,000
     Government Electronics:
       United States Government ..........     32,000     42,000     57,000
       Hughes Aircraft Company ...........     30,000     40,000     35,000

In January 1997, Raytheon Co. announced plans to acquire the defense holdings of
Hughes  Aircraft  Company in a merger.  Raytheon has also been a customer of the
company for many years.  It is unknown  what effect,  if any,  such a merger may
have on the company at this time.

                                       24


<PAGE>

                    WATKINS-JOHNSON COMPANY AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Sales from continuing  operations to  unaffiliated  customers by geographic area
are as follows:

                                                       (IN THOUSANDS)
                                             -------------------------------
                                                1996      1995       1994
                                             --------   --------   --------
     United States .......................   $219,060   $203,460   $183,963
     Export sales from United States:
      Europe .............................     35,141     19,958     26,534
      Japan ..............................     69,181     60,674     43,544
      Korea ..............................     52,755     53,470     32,292
      Other Asia-Pacific countries .......     36,990     30,388     23,088
      Other ..............................      7,361      9,975     12,385
     Europe ..............................      9,759      6,734     10,800
     Japan ...............................      3,312
     Other Asia-Pacific countries ........      4,760      2,372
                                             --------   --------   --------
     Total ...............................   $438,319   $387,031   $332,606
                                             ========   ========   ========

Intercompany  transfers of products and services between geographic regions were
$37,533,000,  $12,130,000  and  $2,809,000 in fiscal years 1996,  1995 and 1994,
respectively,  and are accounted for at prices the company  believes to be arm's
length.

Operating profit and year-end assets by geographic area for 1996 are as follows:

                                                         (IN THOUSANDS)
                                                   -------------------------
                                                   OPERATING       YEAR-END
                                                     PROFIT         ASSETS
                                                    --------       --------
     United States ..........................       $  1,981       $269,609
     Europe .................................            700          6,476
     Japan ..................................            952         32,074
     Other Asia-Pacific countries ...........          1,280          6,214
                                                    --------       --------
     Total ..................................       $  4,913       $314,373
                                                    ========       ========

For  all  years  prior  to  1996,  foreign  operations'  sales,   profits,   and
identifiable assets are less than ten percent of consolidated totals.

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


                                                               (IN THOUSANDS)
                                                                 YEAR ENDED
                                                             DECEMBER 31, 1994
                                                             -----------------
     Sales ...................................................     $ 4,911
     Intersegment sales ......................................      (1,294)
                                                                   -------
     Net sales ...............................................     $ 3,617
                                                                   =======
     Loss before income taxes ................................     $  (690)
     Income tax benefit ......................................         200
     Loss on disposition net of $100 income tax benefit ......        (200)
                                                                   -------
     Net loss ................................................     $  (690)
                                                                   =======
     Year-end assets .........................................     $ 2,281
                                                                   =======

                                       25


<PAGE>

                    WATKINS-JOHNSON COMPANY AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

9. QUARTERLY FINANCIAL DATA--UNAUDITED

Unaudited quarterly financial data are as follows:

                                  (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                 -----------------------------------------
         1996 QUARTERS              1ST        2ND       3RD         4TH
     ---------------------       --------   --------   --------   --------
     Sales ...................   $122,742   $126,447   $ 94,962   $ 94,168
     Gross profit ............     45,910     41,488     34,041     18,224
     Net income ..............      6,434        358      2,832     (6,590)
     Net income per share ....   $    .75   $    .04   $    .33   $   (.77)

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

The  fourth  quarter  of 1996  includes  a charge  of $11  million  relating  to
slow-moving inventories and severance costs.

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

                                       26


<PAGE>

                              REPORT OF MANAGEMENT

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

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

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

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

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

                                       27


<PAGE>


                          INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying  consolidated balance sheets of Watkins-Johnson
Company  and  subsidiaries  as of December  31,  1996 and 1995,  and the related
consolidated  statements of operations,  shareowners' equity, and cash flows for
each of the three years in the period ended December 31, 1996.  These  financial
statements   are  the   responsibility   of  the   company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion,  such consolidated  financial  statements present fairly, in all
material  respects,  the  financial  position  of  Watkins-Johnson  Company  and
subsidiaries at December 31, 1996 and 1995, and the results of their  operations
and their cash flows for each of the three  years in the period  ended  December
31, 1996 in conformity with generally accepted accounting principles. 



Deloitte & Touche LLP 
San Francisco, California 
February 7, 1997

                                       28


<PAGE>

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

    Not applicable.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

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

ITEM 11. EXECUTIVE COMPENSATION

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

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

                                       29


<PAGE>


                                     PART IV

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


                                                                 PAGE
                                                                 ----

(a) 1. Consolidated Financial Statements 

       Consolidated Statements of Operations                   
         For the Years Ended December 31, 1996, 1995 and 1994      11
  
       Consolidated Balance Sheets                             
         December 31, 1996 and 1995                                12

       Consolidated Statements of Shareowners' Equity          
         For the Years Ended December 31, 1996, 1995 and 1994      13

       Consolidated Statements of Cash Flows                   
         For the Years Ended December 31, 1996, 1995 and 1994      14

       Notes to Consolidated Financial Statements               15-26

       Report of Management                                        27

       Independent Auditors' Report                                28


                                                                 PAGE
                                                                 ----
    2. Financial Statement Schedules

       Independent Auditors' Report                                32

       II  Valuation and Qualifying Accounts and Reserves        
           For the Years Ended December 31, 1996, 1995 and
           1994                                                    33

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

    3. Exhibits

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

-------------
(b) No reports on Form 8-K were  required to be filed during the last quarter of
    the period covered by this report.

(c) The exhibits required to be filed by Item 601 of Regulation S-K are the same
    as Item 14(a)3 above.

(d) Financial  statement schedules not included herein have been omitted because
    of the absence of  conditions  under which they are  required or because the
    required information is included in the financial statements or in the notes
    thereto.

                                       30


<PAGE>


                                   SIGNATURES

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

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



                                                 /s/ DEAN A. WATKINS
Date: February 24, 1997                    By ---------------------------
                                                    DEAN A. WATKINS
                                                 CHAIRMAN OF THE BOARD

<TABLE>

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

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

                              
    /s/  W. Keith Kennedy, Jr.       President and Chief Executive Officer     February 24, 1997
 --------------------------------
      W. KEITH KENNEDY, JR.

Principal Financial and
  Accounting Officer:
                              
     /s/  Scott G. Buchanan          Vice President and                        February 24, 1997   
 --------------------------------      Chief Financial Officer
       SCOTT G. BUCHANAN

                              
    /s/  H. Richard Johnson          Director                                  February 24, 1997
 --------------------------------
       H. RICHARD JOHNSON
                            
     /s/  John J. Hartmann           Director                                  February 24, 1997
 --------------------------------
        JOHN J. HARTMANN
                          
     /s/  Raymond F. O'Brien         Director                                  February 24, 1997
 --------------------------------
       RAYMOND F. O'BRIEN
                        
     /s/  William R. Graham          Director                                  February 24, 1997
 --------------------------------
        WILLIAM R. GRAHAM
                           
      /s/  Robert L. Prestel         Director                                  February 24, 1997
 --------------------------------
        ROBERT L. PRESTEL
                          

      /s/  Gary M. Cusumano          Director                                  February 24, 1997
 --------------------------------
         GARY M. CUSUMANO
</TABLE>

                                                    31


<PAGE>

                          INDEPENDENT AUDITORS' REPORT

Watkins-Johnson Company: 

We have audited the consolidated financial statements of Watkins-Johnson Company
and  subsidiaries  as of December  31, 1996 and 1995,  and for each of the three
years in the period ended  December 31, 1996, and have issued our report thereon
dated February 7, 1997; such  consolidated  financial  statements and report are
included in Item 8 of this annual report on Form 10-K.  Our audits also included
the consolidated  financial  statement schedule of  Watkins-Johnson  Company and
subsidiaries,  listed in Item 14. This consolidated financial statement schedule
is the  responsibility  of the company's  management.  Our  responsibility is to
express  an opinion  based on our  audits.  In our  opinion,  such  consolidated
financial  statement schedule taken as a whole,  presents fairly in all material
respects the information set forth therein.

Deloitte & Touche LLP
San Francisco, California
February 7, 1997

                                       32

<PAGE>

<TABLE>

                                                                                                                         SCHEDULE II
                                              WATKINS-JOHNSON COMPANY AND SUBSIDIARIES

                                           VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                                        FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

<CAPTION>
                                                               BALANCE AT         CHARGED TO                              BALANCE AT
                                                               BEGINNING          COSTS AND                                 END OF 
                     DESCRIPTION                               OF PERIOD           EXPENSES         DEDUCTIONS(1)          PERIOD(2)
          --------------------------------                    ----------          ----------        -------------         ----------
<S>                                                           <C>                 <C>                 <C>                 <C>       
1996 
Allowance for doubtful accounts ....................          $1,033,798          $  219,649          $    6,727          $1,246,720
                                                              ==========          ==========          ==========          ==========

1995 
Allowance for doubtful accounts ....................          $1,014,898          $   18,900          $        0          $1,033,798
                                                              ==========          ==========          ==========          ==========

1994 
Allowance for doubtful accounts ....................          $  998,998          $   16,900          $    1,000          $1,014,898
                                                              ==========          ==========          ==========          ==========
<FN>
--------------
(1) Write-off of uncollectible accounts. 
(2) Reduction of accounts receivable. 

</FN>
</TABLE>

                                                                 33

<PAGE>

<TABLE>
                                EXHIBIT INDEX 

<CAPTION>

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

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

10           Material Contracts 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                                       35

<PAGE>

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

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

10-q         *Watkins-Johnson Company Credit Agreement covering the period of November 30, 1995 through 
             December 8, 1998, ABN-AMRO BANK N.V. as Agent (Exhibit 10-a to the 1996 Third Quarter Form 10-Q, 
             Commission File No. 1-5631). 

10-r         *Loan Agreement dated as of February 9, 1996 (English Translation) between Watkins-Johnson 
             International Japan K.K. and The Bank of Yokohama, LTD, including Loan Guaranty Agreement with 
             Watkins-Johnson Company dated January 31, 1996 (Exhibit 10-b to the 1996 Third Quarter Form 
             10-Q, Commission File No. 1-5631). 

10-s         *Loan Agreement dated as of June 12, 96 (English Translation) between Watkins-Johnson 
             International Japan K.K. and The Japan Development Bank, including Loan Guaranty Agreement with 
             Watkins-Johnson Company dated June 12, 1996 (Exhibit 10-c to the 1996 Third Quarter Form 10-Q, 
             Commission File No. 1-5631). 

10-t         *Shareowners' Rights Agreement dated as of September 30, 1996 Between Watkins-Johnson Company 
             and ChaseMellon Shareholder Services, L.L.C., as Rights Agent (Report on Form 8-K, filed on 
             October 1, 1996, Commission File No.1-5631). 

11           Statement re Computation of Per Share Earnings. 

21           Subsidiaries of Watkins-Johnson Company. 

23           Consent of Independent Auditors. 

27           Financial Data Schedule. 

</TABLE>

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