<PAGE>
1996
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
 
                                   FORM 10-K
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
 
(Mark One)
   [X]         ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                SECURITIES EXCHANGE ACT OF 1934 [ FEE REQUIRED ]
 
                  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 [ NO FEE REQUIRED ]
 
For the transition period from..........  to....................................
 
                          Commission file number 1-971
 
                                 HONEYWELL INC.
             (Exact name of registrant as specified in its charter)
 
                DELAWARE                               41-0415010
    (State or other jurisdiction of       (I.R.S. Employer Identification No.)
     incorporation or organization)
 
HONEYWELL PLAZA, MINNEAPOLIS, MINNESOTA                  55408
(Address of principal executive offices)               (Zip Code)
 
        Registrant's telephone number, including area code 612-951-1000
 
          Securities registered pursuant to section 12(b) of the act:
 
                                      Name of each exchange on which
       Title of each class                      registered
Common Stock, par value $1.50            New York Stock Exchange
  per share
 
Preferred Stock Purchase Rights          New York Stock Exchange
 
    Indicate  by check  mark whether  the registrant  (1) has  filed all reports
required to be filed by  Section 13 or 15(d) of  the Securities Exchange Act  of
1934  during  the preceding  12  months (or  for  such shorter  period  that the
registrant was required to file such reports), and (2) has been subject to  such
filing requirements for the past 90 days. Yes _X_ No ___.
 
    Indicate  by check mark if disclosure  of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) 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/
 
    Based on  the  closing sales  price  of $75.00  on  February 14,  1997,  the
aggregate  market  value  of  the  voting stock  held  by  nonaffiliates  of the
registrant was $9,463,942,950.
 
    As  of  February  14,  1997,  the  number  of  shares  outstanding  of   the
registrant's common stock, par value $1.50 per share, was 126,755,156 shares.
 
                  DOCUMENTS INCORPORATED IN PART BY REFERENCE
 
Incorporated Documents                                    Location in Form 10-K
--------------------------------------------------------  ---------------------
Honeywell Notice of 1997 Annual Meeting and Proxy               Part III
Statement
 
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
                                     PART I
 
ITEM 1.  BUSINESS
 
    Honeywell   Inc.,  a  Delaware  corporation   incorporated  in  1927,  is  a
Minneapolis-based international corporation that supplies automation and control
systems, components, software,  products and services  for homes and  buildings,
industry,  and space and aviation. The purpose  of the company is to develop and
supply advanced-technology control products, systems and services that  conserve
energy  and protect the  environment, improve productivity,  enhance comfort and
increase safety. Development and modification occur continuously in  Honeywell's
business  as new or  improved products and services  are introduced, new markets
are created  or entered,  distribution  methods are  revised, and  products  and
services are discontinued.
 
                          INDUSTRY SEGMENT INFORMATION
 
    Honeywell's  products and services  are classified by  management into three
primary industry  segments:  (i)  Home and  Building  Control,  (ii)  Industrial
Control, and (iii) Space and Aviation Control. Financial information relating to
these industry segments is set forth in Part II, Item 6 at page 11.
 
HOME AND BUILDING CONTROL
 
    Honeywell's Home and Building Control business provides controls and systems
for  building  automation,  energy management,  fire  and security,  as  well as
thermostats, air cleaners and other environmental controls products and services
for buildings and homes.
 
    Honeywell  manufactures,   markets  and   installs  mechanical,   pneumatic,
electrical  and electronic control products and systems for heating, ventilation
and air conditioning in homes  and commercial, industrial and public  buildings.
The systems, which may be generic or specifically designed for each application,
may  include panels and control systems  to centralize mechanical and electrical
functions.
 
    Honeywell produces building management systems for commercial buildings  and
controls  for a variety of applications,  including burner and boiler, lighting,
thermostatic radiators,  pressure  regulators for  water  systems,  thermostats,
actuators,  humidistats, relays, contactors, transformers, air-quality products,
and gas  valves  and  ignition  controls for  homes  and  commercial  buildings.
Honeywell  also  produces standalone  consumer products  such as  fans, heaters,
humidifiers and  water filtration  products. Sales  of these  products are  made
directly to original equipment manufacturers, including manufacturers of heating
and  air  conditioning  equipment; through  wholesalers,  distributors, dealers,
contractors, hardware  stores  and  home-care  centers;  and  also  through  the
company's nationwide sales and service organization.
 
    Services  provided  include  indoor  air-quality  services,  central-station
burglary and fire protection services for homes and commercial buildings,  video
surveillance,  access  control  and  entry  management  services  for commercial
buildings, contract maintenance services for commercial building mechanical  and
control  systems,  automated  management  of  building  operations  for building
complexes, energy management services, energy retrofit services and training.
 
INDUSTRIAL CONTROL
 
    The Industrial Control business serves  the automation and control needs  of
its  worldwide industrial customers as a major supplier of products, systems and
services ranging  from  sensors  to integrated  systems  designed  for  specific
applications.
 
    Honeywell's  Industrial Control segment supplies process control systems and
associated application software and  services to customers in  a broad range  of
markets,  which include process industries  such as the refining, petrochemical,
bulk and  fine chemical,  pulp-and-paper, electric  utility, food  and  consumer
goods,  pharmaceutical, metals and transportation industries. Industrial Control
has an
 
                                       1
<PAGE>
extensive customer base worldwide, including  most of the leading oil  refiners,
pulp  and paper manufacturers and chemical companies. Honeywell also designs and
manufactures process instruments,  process controllers, recorders,  programmers,
programmable  controllers, transmitters and other  field instruments that may be
sold as  stand-alone products  or integrated  into systems.  These products  are
generally  used in  indicating, recording and  automatically controlling process
variables.
 
    Under the MICRO SWITCH trademark, Honeywell manufactures solid-state sensors
(including position, pressure, airflow, temperature and current sensors), sensor
interface devices,  manual  controls,  explosion-proof  switches  and  precision
snap-acting  switches, as well as  proximity, photoelectric and mercury switches
and lighted/unlighted  pushbuttons.  These  products  are  used  in  industrial,
commercial  and  business  equipment,  and  in  consumer,  medical,  automotive,
aerospace and computer applications.
 
    Other products include solenoid valves, optoelectronic devices,  fiber-optic
systems  and  components, as  well  as microcircuits,  sensors,  transducers and
high-accuracy,  noncontact  measurement  and  detection  products  for   factory
automation, quality inspection and robotics applications.
 
    Honeywell   also  furnishes  industrial  customers  with  various  services,
including  the  following:  product  and  component  testing  services;  project
management,  engineering  and  installation  services,  instrument  maintenance,
repair and  calibration  services;  contract  services  for  industrial  control
equipment  including third-party  maintenance for  CAD/CAM and  other industrial
control equipment; advanced control,  networking and optimization services;  and
training,  customized products  for customer applications  and a  range of other
customer support services.
 
    Services are  generally  sold directly  to  users  on a  monthly  or  annual
contract  basis.  Products are  customarily sold  by  Honeywell on  a delivered,
supervised or installed basis directly to end users, to equipment  manufacturers
and  contractors,  or  through  third-party channels  such  as  distributors and
systems houses.
 
SPACE AND AVIATION CONTROL
 
    Honeywell's Space and  Aviation Control business  supplies avionics for  the
commercial,  military  and  space markets.  The  company  designs, manufactures,
services and markets a variety  of sophisticated electronic control systems  and
components   for  commercial  and  business   aircraft,  military  aircraft  and
spacecraft.
 
    Products manufactured  for aircraft  use include  the following:  integrated
avionics  systems; ring laser gyro-based  inertial reference systems; navigation
and  guidance  systems;  flight  control  systems;  flight  management  systems;
inertial   sensors;  air  data  computers;   radar  altimeters;  automatic  test
equipment;  cockpit  display  systems;   and  other  communication  and   flight
instrumentation.
 
    Honeywell products and services have been involved in every major U.S. space
mission  since  the  mid-1960s.  These products  and  services  include guidance
systems for launch and re-entry vehicles, flight and engine control systems  for
manned spacecraft, precision components for strategic missiles and on-board data
processing.  Other products include spacecraft attitude and positioning systems,
and precision pointing and isolation systems.
 
    Honeywell's avionics have been  purchased by leading aircraft  manufacturers
for  use  in  aircraft  throughout  the world,  including  the  Boeing  777, the
McDonnell Douglas MD-11 and MD 90, the GulfStream IV and V, the Cessna  Citation
X  and the Bombardier Global Expressjet. In  the military and space markets, the
Company solutions are found  on key platforms, including  the F-15 and the  F-16
military jets and Space Station Alpha.
 
    Space   and  Aviation  Control  products  are  sold  through  an  integrated
international marketing organization,  with customer  service centers  providing
international service for commercial and business aviation users.
 
                                       2
<PAGE>
OTHER PRODUCTS
 
    Products  and services not included in the foregoing segment information are
described below.
 
    The Honeywell  Technology  Center  provides  systems  analysis  and  applied
research  and  development  on  systems  and  products,  including,  application
software, sensors and advanced electronics.
 
    Solid State  Electronics  Center,  a semiconductor  facility  in  Minnesota,
designs   and  manufactures  integrated  circuits  and  sensors  for  Honeywell,
government customers and selected external customers.
 
    Honeywell, through its operations in Germany, develops, markets and sells to
European countries,  among other  things,  military avionics  and  electro-optic
devices for flight control and nautical systems, including sonar transducers and
echo sounders.
 
                              GENERAL INFORMATION
 
RAW MATERIALS
 
    Honeywell  experienced no significant or unusual problems in the purchase of
raw materials and commodities in 1996. Although it is impossible to predict what
effects shortages  or  price  increases  may have  in  the  future,  at  present
management  has no reason to believe a  shortage of raw materials will cause any
material adverse impact during 1997.
 
PATENTS, TRADEMARKS, LICENSES AND DISTRIBUTION RIGHTS
 
    Honeywell owns, or  is licensed  under, a  large number  of patents,  patent
applications  and trademarks acquired over a  period of many years, which relate
to many of its  products or improvements  thereon and are  of importance to  its
business. From time to time, new patents and trademarks are obtained, and patent
and  trademark  licenses  and  rights are  acquired  from  others.  In addition,
Honeywell has distribution rights of varying  terms in a number of products  and
services produced by other companies. In the judgment of management, such rights
are adequate for the conduct of the business being done by Honeywell. See Item 3
at  page 7  for information concerning  litigation relating to  patents in which
Honeywell is involved.
 
SEASONALITY
 
    Although Honeywell's core  businesses are  not seasonal  in the  traditional
sense,  revenues and earnings have  tended to concentrate to  some degree in the
fourth quarter of each  calendar year, reflecting the  tendency of customers  to
increase ordering and spending for capital goods late in the year.
 
MAJOR CUSTOMER
 
    Honeywell  provides products and services to the United States government as
a prime contractor or subcontractor, the  majority of which are described  under
the heading "Space and Aviation Control" on page 2. Such business is significant
because   of  its   volume  and   its  contribution   to  Honeywell's  technical
capabilities, but Honeywell's dependence  upon individual programs is  minimized
by  the  large  variety of  products  and  services it  provides.  Contracts and
subcontracts for  all of  such  sales are  subject  to the  standard  provisions
permitting the government to terminate for convenience or default.
 
BACKLOG
 
    The total dollar amount of backlog of Honeywell's orders believed to be firm
was  approximately $3,919  million at December  31, 1996, and  $3,676 million at
December 31, 1995.  All but approximately  $700 million of  the 1996 backlog  is
expected  to  be delivered  within the  current  fiscal year.  Backlog is  not a
reliable indicator of Honeywell's future revenues because a substantial  portion
of backlog represents the value of orders that can be canceled at the customer's
option.
 
                                       3
<PAGE>
COMPETITION
 
    Honeywell is subject to active competition in substantially all products and
services.  Competitors generally are  engaged in business on  a nationwide or an
international scale. Honeywell is  the largest producer  of control systems  and
products used to regulate and control heating and air conditioning in commercial
buildings,  and of systems to  control industrial processes worldwide. Honeywell
is also a leading supplier of  commercial aviation, space and avionics  systems.
Honeywell's  automation and control businesses compete worldwide, supported by a
strong distribution network  with manufacturing  and/or marketing  capabilities,
for at least a portion of these businesses, in 95 countries.
 
    Competitive  conditions  vary widely  among  the thousands  of  products and
services provided  by Honeywell,  and  vary as  well  from country  to  country.
Markets,  customers  and competitors  are becoming  more international  in their
outlook. In those areas of environmental and industrial components and  controls
where  sales  are  primarily to  equipment  manufacturers,  price/performance is
probably the  most  significant competitive  factor,  but customer  service  and
applied technology are also important. Competition is increasingly being applied
to  government procurements to improve price and product performance. In service
businesses,  quality,  reliability  and  promptness  of  service  are  the  most
important  competitive factors. Service must be  offered from many areas because
of  the  localized  nature  of  such  business.  In  engineering,  construction,
consulting  and research  activities, technological  capability and  a record of
proven reliability are generally the principal competitive factors. Although  in
a  small number of  highly specialized products and  services Honeywell may have
relatively  few  significant  competitors,  in  most  markets  there  are   many
competitors.
 
RESEARCH AND DEVELOPMENT
 
    During  1996 Honeywell  spent approximately  $694.7 million  on research and
development activities, including  $341.4 million  in customer-funded  research,
relating  to the development of new products  or services, or the improvement of
existing products or services. Honeywell spent $659.8 million in 1995 and $659.5
million in 1994 on research and development activities, including $336.6 million
and $340.5 million, respectively, in customer-funded research.
 
ENVIRONMENTAL PROTECTION
 
    Compliance with current federal, state  and local provisions regulating  the
discharge  of  materials  into the  environment,  or otherwise  relating  to the
protection of the  environment, has not  had, and in  the opinion of  management
will  not have, a material effect on Honeywell's financial position, net income,
capital expenditures or competitive position. See Item 7 at page 13 for  further
information concerning environmental matters.
 
EMPLOYEES
 
    Honeywell  employed approximately 53,000  persons in total  operations as of
December 31, 1996.
 
GEOGRAPHIC AREAS
 
    Honeywell engages  in  material operations  in  foreign countries.  A  large
majority  of Honeywell's foreign  business is in Western  Europe, Canada and the
Asian Pacific Rim.
 
    Although there are risks attendant to foreign operations, such as  potential
nationalization of facilities, currency fluctuation and restrictions on movement
of funds, Honeywell has taken action to mitigate such risks.
 
    Financial  information related to geographic areas is included in Note 17 to
the financial statements in Part II, Item 8 at page 39.
 
                                       4
<PAGE>
                      EXECUTIVE OFFICERS OF THE REGISTRANT
 
<TABLE>
<CAPTION>
                                                                                               POSITION HELD    AGE AT
            NAME                                           OFFICE                                  SINCE        3/1/97
-----------------------------  --------------------------------------------------------------  -------------  -----------
<S>                            <C>                                                             <C>            <C>
M. R. Bonsignore (1)           Chairman of the Board and Chief Executive Officer                      1993            55
D. L. Moore (2)                President and Chief Operating Officer                                  1993            60
D. E. Bogle (3)                President, Home and Building Control                                   1997            51
E. D. Grayson (4)              Vice President and General Counsel                                     1992            58
W. M. Hjerpe (5)               President, Honeywell Europe                                            1997            45
B. M. McGourty (6)             Senior Vice President                                                  1997            59
P. M. Palazzari (7)            Vice President and Controller                                          1994            49
J. T. Porter (8)               Corporate Vice President, Human Resources                              1996            45
D. K. Schwanz (9)              President, Space and Aviation Control                                  1997            52
L. W. Stranghoener (10)        Vice President and Chief Financial Officer                             1997            42
M. I. Tambakeras (11)          President, Industrial Control                                          1995            45
</TABLE>
 
    Officers  are elected  by the Board  of Directors  to terms of  one year and
until their successors are elected and qualified.
------------------------
(1) Mr. Bonsignore was  elected to this position  effective April 20, 1993.  For
    more  than five  years prior  thereto, he  was an  executive officer  of the
    company.
 
(2) Dr.  Moore was  elected to  this  position effective  April 20,  1993.  From
    November  1990  to April  1993, he  was Executive  Vice President  and Chief
    Operating Officer, Space and Aviation, and Industrial.
 
(3) Mr.  Bogle was  elected to  this position  effective January  1, 1997.  From
    January  1996 to December 1996, he was Vice President and General Manager of
    Honeywell's worldwide  Home and  Building Control  strategic business  unit.
    From  October  1994 to  November  1996, he  was  Vice President  and General
    Manager of Home and  Building Control. From May  1992 to September 1994,  he
    was Vice President and General Manager of Industrial Automation and Control.
    From November 1990 to April 1992 he was President of U.S. Process Automation
    Business for ASEA Brown Boveri.
 
(4) Mr. Grayson was elected to this position on effective April 1, 1992, when he
    joined  the company. For more  than five years prior  thereto, he was Senior
    Vice President,  General  Counsel, Corporate  Secretary  and Clerk  of  Wang
    Laboratories.
 
(5)  Mr.  Hjerpe was  elected to  this  position effective  March 1,  1997. From
    February 1992 to October 1994, he  was Vice President and Controller of  the
    company.  From October 1994 to January 1997, he was Vice President and Chief
    Financial Officer of the company.
 
(6) Mr. McGourty was elected an executive officer of the company effective April
    1, 1994. He was appointed to his current position effective January 1, 1997.
    From April  1994  to December  1996  he  was President,  Home  and  Building
    Control.  From December  1991 to  March 1994,  he was  Vice President, Field
    Operations for Home and Building Control.
 
(7) Mr. Palazzari was elected to this position effective October 16, 1994.  From
    May  1993  to October  1994, he  was  Vice President,  Finance for  Home and
    Building Control. From March 1992 to  April 1993, he was Vice President  and
    Assistant Controller of Operations for the company.
 
                                       5
<PAGE>
(8)  Mr. Porter was elected an executive  officer of the company effective April
    16, 1996. He has held his current position since May 1993. From January 1992
    to April 1993 he was Director, Human Resources, Home and Building Control.
 
(9) Mr. Schwanz  was elected to  this position effective  January 1, 1997.  From
    September 1993 to December 1996 he was Vice President and General Manager of
    Air Transport Systems. From March 1992 to August 1993, he was Vice President
    of Marketing for Air Transport Systems.
 
(10)  Mr. Stranghoener was elected to  this position effective February 1, 1997.
    From  March  1996  to  January   1997,  he  was  Vice  President,   Business
    Development.  From July  1993 to  February 1996,  he was  Vice President for
    Finance for Industrial Automation and Control. From April 1992 to June  1993
    he was Director, Corporate Financial Planning and Business Analysis.
 
(11)  Mr. Tambakeras  was elected to  this position effective  February 1, 1997.
    From February 1995 to January 1997, he was President, Industrial  Automation
    and  Control.  From  January 1992  to  February  1995, he  was  President of
    Honeywell Asia Pacific.
 
ITEM 2.  PROPERTIES
 
    Honeywell and  its  subsidiaries  operate  facilities  worldwide  comprising
approximately  18,706,200 square feet of space  for use as manufacturing, office
and warehouse space, of which approximately 10,587,200 square feet is owned  and
approximately  8,119,000 square feet  is leased. In  the judgment of management,
the facilities used by Honeywell are adequate and suitable for the purposes they
serve.
 
    Facilities allocated for corporate use in the United States, including sales
offices, comprise  approximately  1,511,500  square  feet  of  space,  of  which
approximately  1,462,000 square  feet is  owned and  approximately 49,500 square
feet is leased. These figures include Honeywell's principal executive offices in
Minneapolis, Minnesota which comprise approximately 957,400 square feet, all  of
which is owned.
 
    A  summary of  properties held  by each  segment of  Honeywell is  set forth
below, showing  major plants,  their location,  size and  type of  holding.  The
descriptions  include approximately 545,800 square feet of space owned or leased
by Honeywell's operations in the United States that has been leased or subleased
to third parties. In addition, approximately 4,064,700 square feet of previously
leased space  in  the  United  States  is  under  assignment  to  third  parties
(including  2,417,300 square  feet, 437,200 square  feet and  79,000 square feet
which is assigned to Alliant Techsystems Inc., Federal Systems Inc. and Bull  HN
Information  Systems, Inc., respectively, all  of which were formerly affiliates
of the company).
 
HOME AND BUILDING CONTROL
 
    Home and Building  Control occupies approximately  3,523,900 square feet  of
space  for operations  in the  United States,  of which  approximately 1,396,300
square feet is owned and approximately 2,127,600 square feet is leased.
 
    Outside the  United  States, Home  and  Building Control  operations  occupy
approximately  3,637,400 square  feet, of  which approximately  1,063,100 square
feet is  owned and  approximately  2,574,300 square  feet is  leased.  Principal
facilities  operated outside the  United States are  located in Canada, Germany,
The Netherlands, the United Kingdom and Australia.
 
    Facilities in the United States comprising  300,000 square feet or more  are
listed below.
 
<TABLE>
<CAPTION>
                                                                   APPROXIMATE    OWNED OR
         LOCATION                   MAJOR USE OF FACILITY          SQUARE FEET     LEASED
---------------------------  ------------------------------------  ------------  -----------
<S>                          <C>                                   <C>           <C>
Arlington Heights, Ill.      Manufacturing                             500,000       Leased
Golden Valley, Minn.         Manufacturing                           1,185,300        Owned
Memphis, Tenn.               Warehouse/Distribution Center             500,000       Leased
</TABLE>
 
                                       6
<PAGE>
INDUSTRIAL CONTROL
 
    Industrial Control occupies approximately 2,946,900 square feet of space for
operations in the United States, of which approximately 2,265,300 square feet is
owned and approximately 681,600 square feet is leased.
 
    Outside   the   United   States,   Industrial   Control   operations  occupy
approximately 2,461,700  square feet,  of which  approximately 1,080,600  square
feet  is  owned and  approximately 1,381,100  square  feet is  leased. Principal
facilities operated outside the United States are located in the United Kingdom,
Australia, Canada, Switzerland, France, Germany, Belgium and The Netherlands.
 
    Facilities in the United States comprising  300,000 square feet or more  are
listed below.
 
<TABLE>
<CAPTION>
                                MAJOR USE OF      APPROXIMATE    OWNED OR
         LOCATION                 FACILITY        SQUARE FEET     LEASED
---------------------------  -------------------  ------------  -----------
<S>                          <C>                  <C>           <C>
Freeport, Ill.               Manufacturing            316,000        Owned
Phoenix, Az.                 Manufacturing            550,000        Owned
</TABLE>
 
SPACE AND AVIATION CONTROL
 
    Space  and Aviation Control occupies  approximately 4,439,300 square feet of
space for  operations in  the United  States, of  which approximately  3,179,300
square feet is owned and approximately 1,260,000 square feet is leased.
 
    Outside  the  United States,  Space and  Aviation Control  operations occupy
approximately 185,600 square feet, of which approximately 140,600 square feet is
owned and  approximately  45,000 square  feet  is leased.  Principal  facilities
operated outside the United States are located in Canada, the United Kingdom and
Singapore.
 
    Facilities  in the United States comprising  300,000 square feet or more are
listed below.
 
<TABLE>
<CAPTION>
                                MAJOR USE OF      APPROXIMATE    OWNED OR
         LOCATION                 FACILITY        SQUARE FEET     LEASED
---------------------------  -------------------  ------------  -----------
<S>                          <C>                  <C>           <C>
Phoenix, Ariz.               Manufacturing            939,000        Owned
Albuquerque, N.M.            Manufacturing            526,600        Owned
Minneapolis, Minn.           Manufacturing            550,000        Owned
Clearwater, Fla.             Manufacturing            914,800        Owned
St. Petersburg, Fla.         Manufacturing            304,000       Leased
</TABLE>
 
ITEM 3.  LEGAL PROCEEDINGS
 
    On March 13, 1990, Litton Systems, Inc. filed suit against Honeywell in U.S.
District Court,  Central District  of California,  alleging patent  infringement
relating to a process used by Honeywell to coat mirrors incorporated in its ring
laser   gyroscopes;   intentional  interference   by  Honeywell   with  Litton's
prospective advantage with customers and with its contractual relationships with
Ojai Research,  Inc.;  and attempted  monopolization  and predatory  pricing  by
Honeywell  in  certain  alleged  markets  for  products  containing  ring  laser
gyroscopes. Honeywell denied Litton's  allegations; contested both the  validity
and infringement of the patent; and alleged that the patent had been obtained by
Litton's  inequitable  conduct before  the  United States  Patent  and Trademark
Office.
 
    U.S. District Judge Mariana Pfaelzer presided  over the trial of the  patent
and  two state tort claims and on August  31, 1993, a jury returned a verdict in
favor of Litton  and awarded  damages against Honeywell  in the  amount of  $1.2
billion for these claims. On January 9, 1995, the trial court set aside the jury
verdict and damage award, ruling, among other things, that the Litton patent was
unenforceable  and invalid. The trial court also  ruled that if its rulings were
vacated or reversed on  appeal, Honeywell would  be granted a  new trial on  the
issue of damages because the jury's award was inconsistent with the clear weight
of the evidence.
 
                                       7
<PAGE>
    Litton  appealed  to the  United  States Court  of  Appeals for  the Federal
Circuit, and on July 3,  1996, a three judge  panel overruled the trial  court's
rulings  of patent  invalidity, unenforceability and  non-infringement, and also
found Honeywell  liable under  Litton's state  tort claims.  However, the  panel
upheld  the trial court's ruling  that Honeywell is entitled  to a new trial for
damages on  all  claims,  as  well  as its  granting  to  Honeywell  of  certain
intervening  patent rights. Honeywell requested a rehearing by the full Court of
Appeals, which was denied on September 11, 1996. On November 26, 1996, Honeywell
petitioned the U.S.  Supreme Court  for review  of the  panel's decision,  which
petition  is still pending. In the interim, Litton filed a motion with the trial
court seeking injunctive relief which was denied on December 23, 1996.
 
    The patent and tort damages  retrial is scheduled to  begin May 6, 1997.  On
February  7, 1997,  Litton submitted damage  studies seeking damages  as high as
$1.9 billion. Honeywell  believes that  Litton's damage studies  are flawed  and
speculative  for a number of reasons. Although it is not possible to predict the
verdict of the jury in the upcoming  trial, and such verdict could result in  an
award  which is material, Honeywell believes that any award should be based on a
royalty which reasonably reflects the value  of the mirror coating process,  and
that  such an award would  not be material to  Honeywell's financial position or
results of operations.
 
    The jury trial for the antitrust  case began November 20, 1995, also  before
Judge  Pfaelzer.  The  trial court  dismissed,  for failure  of  proof, Litton's
contentions that  Honeywell engaged  in  below-cost predatory  pricing,  illegal
tying  and bundling, and an  illegal acquisition of Sperry  Avionics in 1986. On
February  2,  1996,  the  case  was  submitted  to  the  jury  on  two   claims,
monopolization and attempt to monopolize. These claims were based on allegations
that  Honeywell  entered into  certain long-term  exclusive dealing  and penalty
arrangements with aircraft manufacturers and airlines to exclude Litton from the
commercial aircraft market,  and that  Honeywell failed to  provide Litton  with
access  to certain proprietary software. On February 29, 1996, the jury returned
a $234 million single damages  verdict against Honeywell for the  monopolization
claim,  which would have been automatically trebled.  On March 1, 1996, the jury
indicated that it was  unable to reach  a verdict on  damages for the  attempted
monopolization  claim, and a mistrial was  declared on that claim. Following the
verdict, Honeywell filed a Motion for Judgment  as a Matter of Law and a  Motion
for a New Trial, contending that the jury's partial verdict should be overturned
because  Litton (i)  failed to  prove essential  elements of  liability and (ii)
failed to submit competent evidence to support its claim for damages by offering
only a speculative, all-or-nothing $298.5  million damage study. Litton filed  a
Motion for Injunctive Relief and a Motion for Entry of Judgment.
 
    On  July 24, 1996, the trial court denied Honeywell's Motion for Judgment as
a Matter of Law but concluded, that Litton's damage study was seriously  flawed,
and  granted Honeywell a retrial on damages only. The court also denied Litton's
Motion for Injunctive Relief and Litton's Motion for Entry of Judgment. No  date
has  been set for the retrial on damages. Honeywell believes there are questions
concerning what conduct the original  jury found anti-competitive that may  give
rise  to damages in  a retrial, and  consequently a damages  retrial should also
require a retrial of  liability issues in some  respects. Following the  damages
retrial,  Honeywell will have the right to appeal both the liability and damages
verdicts. Therefore, no provision has been made in the financial statements with
respect to this contingent liability.
 
    In the fall of 1996, Litton and Honeywell commenced court ordered  mediation
of  the  patent, tort  and antitrust  claims.  No resolution  of the  claims has
occurred and the mediation is currently in recess.
 
    On September 12, 1994, Honeywell filed a declaratory judgment action against
American Flywheel  Systems,  Inc. ("AFS")  in  the Superior  Court  of  Maricopa
County,  Arizona, seeking a declaration as to  the rights and obligations of the
parties under an  agreement regarding the  development of an  electro-mechanical
flywheel  battery. In October 1994, Honeywell ceased work under the project as a
result of AFS's failure to make payments under the agreement. On July 21,  1995,
AFS filed an answer
 
                                       8
<PAGE>
and  counterclaim alleging breach of contract and related tort claims, including
fraud. Honeywell  denied AFS's  allegations and  amended its  complaint to  seek
damages for nonpayment of monies owed under the agreement. The trial in the case
began on October 7, 1996. On November 27, 1996, the jury returned three verdicts
against  Honeywell which total $38 million and one verdict in favor of Honeywell
for relief which will be determined by the Court. On February 7, 1997, Honeywell
filed motions  to contest  the  verdicts and  resolve the  remaining  technology
issues  in the case.  Oral arguments on  the motions are  scheduled in mid-April
1997. Honeywell believes  that it will  be successful  on some or  all of  these
motions,  and that an adverse decision, if any,  is not likely to be material to
Honeywell's net income, financial position or liquidity.
 
    Honeywell is  a  party  to  other various  claims,  legal  and  governmental
proceedings,  including  claims  relating to  previously  reported environmental
matters. It is  the opinion  of management that  any losses  in connection  with
these  matters and the  resolution of the  environmental claims will  not have a
material effect on net income, financial position or liquidity.
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
    No matters were submitted  to a vote of  security holders during the  fourth
quarter of 1996.
 
                                    PART II
 
ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
    The principal U.S. market for Honeywell's common stock is the New York Stock
Exchange.  The  high and  low  sales prices  for the  stock  as reported  by the
consolidated transaction reporting system, of  the two most recent fiscal  years
is  set forth in Note 21 to the financial  statements in Part II, Item 8 at page
46.
 
    Information  regarding  the  frequency  and  amount  of  dividends  paid  by
Honeywell  on its common stock during the two  most recent years is set forth in
Note 21 to  the financial  statements in  Part II, Item  8 at  page 46.  Further
information  regarding the company's  payment of dividends is  set forth in Part
II, Item 7 at page 18.
 
    Information regarding Honeywell's  share repurchase  plans is  set forth  in
Part II, Item 7 at page 18.
 
    Stockholders  of  record  on  February 14,  1997  totaled  31,591, excluding
individual participants in security position listings.
 
                                       9
<PAGE>
ITEM 6.  SELECTED FINANCIAL DATA
 
                        HONEYWELL INC. AND SUBSIDIARIES
           (DOLLARS AND SHARES IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                             1996        1995        1994        1993        1992        1991
                                                           --------    --------    --------    --------    --------    --------
<S>                                                        <C>         <C>         <C>         <C>         <C>         <C>
Results of Operations
  Sales................................................    $7,311.6    $6,731.3    $6,057.0    $5,963.0    $6,222.6    $6,192.9
    Sales growth rate..................................         8.6%       11.1%        1.6%       (4.2)%       0.5%       (1.8)%
                                                           --------    --------    --------    --------    --------    --------
  Cost of sales........................................     4,975.4     4,584.2     4,082.1     4,019.6     4,195.3     4,185.1
  Research and development.............................       353.3       323.2       319.0       337.4       312.6       300.7
  Selling, general and administrative..................     1,313.1     1,263.1     1,173.8     1,075.7     1,196.8     1,150.9
  Litigation settlements (1)...........................                                           (32.6)     (287.9)
  Discontinuance of product lines......................
  Special charges......................................                                62.7        51.2       128.4
  Interest -- net......................................        72.9        68.9        60.2        51.0        58.5        61.4
  Gain on sale of assets...............................
  Equity income........................................       (13.3)      (13.6)      (10.5)      (17.8)      (15.8)      (14.6)
                                                           --------    --------    --------    --------    --------    --------
                                                            6,701.4     6,225.8     5,687.3     5,484.5     5,587.9     5,683.5
                                                           --------    --------    --------    --------    --------    --------
  Income from continuing operations before income
   taxes...............................................       610.2       505.5       369.7       478.5       634.7       509.4
  Provision for income taxes...........................       207.5       171.9        90.8       156.3       234.8       178.3
                                                           --------    --------    --------    --------    --------    --------
  Income from continuing operations....................       402.7       333.6       278.9       322.2       399.9       331.1
  Income from discontinued operations..................
  Extraordinary item (2)...............................                                                        (8.6)
  Cumulative effect of accounting changes (3)..........                                                      (144.5)
                                                           --------    --------    --------    --------    --------    --------
  Net income...........................................    $  402.7    $  333.6    $  278.9    $  322.2    $  246.8    $  331.1
                                                           --------    --------    --------    --------    --------    --------
                                                           --------    --------    --------    --------    --------    --------
    Net income growth rate.............................        20.7%       19.6%      (13.4)%      30.6%      (25.5)%     (13.3)%
Earnings Per Common Share
  Continuing operations................................    $   3.18    $   2.62    $   2.15    $   2.40    $   2.88    $   2.35
  Discontinued operations..............................
  Provision for loss on disposal of discontinued
   operations..........................................
  Extraordinary item (2)...............................                                                       (0.06)
  Cumulative effect of accounting changes (3)..........                                                       (1.04)
                                                           --------    --------    --------    --------    --------    --------
  Net income...........................................    $   3.18    $   2.62    $   2.15    $   2.40    $   1.78    $   2.35
                                                           --------    --------    --------    --------    --------    --------
                                                           --------    --------    --------    --------    --------    --------
    Earnings per share growth rate.....................        21.4%       21.9%      (10.4)%      34.8%      (24.3)%      (6.7)%
Cash Dividends Per Common Share........................    $   1.06    $   1.01    $   0.97    $   0.91    $   0.84    $   0.77
  Dividend growth rate.................................         5.0%        4.1%        6.6%        8.3%        9.1%       10.0%
Financial Position
  Current assets.......................................    $2,981.2    $2,766.9    $2,649.4    $2,550.2    $2,707.8    $2,698.9
  Current liabilities..................................     2,066.9     2,022.5     2,071.8     1,856.1     1,969.2     2,095.0
                                                           --------    --------    --------    --------    --------    --------
  Working capital                                          $  914.3    $  744.4    $  577.6    $  694.1    $  738.6    $  603.9
                                                           --------    --------    --------    --------    --------    --------
                                                           --------    --------    --------    --------    --------    --------
  Current ratio........................................         1.4         1.4         1.3         1.4         1.4         1.3
  Short-term debt......................................    $  252.4    $  312.4    $  360.6    $  187.9    $  188.4    $  168.4
  Long-term debt.......................................       715.3       481.0       501.5       504.0       512.1       639.8
                                                           --------    --------    --------    --------    --------    --------
  Total debt...........................................       967.7       793.4       862.1       691.9       700.5       808.2
  Stockholders' equity.................................     2,204.9     2,040.1     1,854.7     1,773.0     1,790.4     1,850.8
                                                           --------    --------    --------    --------    --------    --------
  Capitalization.......................................    $3,172.6    $2,833.5    $2,716.8    $2,464.9    $2,490.9    $2,659.0
                                                           --------    --------    --------    --------    --------    --------
                                                           --------    --------    --------    --------    --------    --------
</TABLE>
 
--------------------------
(1) In 1993, the settlement of the lawsuits against Unisys Corporation and other
    parties in connection with Honeywell's 1986 purchase of the Sperry Aerospace
    Group  resulted in a gain of $22.4.  Litigation settlements in 1993 and 1992
    in the amounts of $10.2  and $287.9, respectively are one-time  settlements,
    after  associated expenses,  reached with  various camera  manufacturers for
    their use of Honeywell's patented automatic focus camera technology.
 
(2) Extraordinary item resulting from the loss on early redemption of debt.
 
(3) The  cumulative effect  of  accounting changes  is  the result  of  adopting
    Statement  of  Financial Accounting  Standards  (SFAS) No.  106, "Employers'
    Accounting for Postretirement Benefits  Other Than Pensions," which  reduced
    net income by $151.3 ($1.09 per share); SFAS No. 109, "Accounting for Income
    Taxes,"  which increased net income by $31.4 ($0.23 per share); and SFAS No.
    112, "Employers' Accounting for Postemployment Benefits," which reduced  net
    income by $24.6 ($0.18 per share).
 
                                       10
<PAGE>
                        HONEYWELL INC. AND SUBSIDIARIES
           (DOLLARS AND SHARES IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                  1996        1995         1994         1993         1992         1991
                                               ----------  -----------  -----------  -----------  -----------  -----------
<S>                                            <C>         <C>          <C>          <C>          <C>          <C>
Sales
  Home and Building Control..................  $  3,327.1  $   3,034.7  $   2,664.5  $   2,424.3  $   2,393.6  $   2,249.1
  Industrial Control.........................     2,199.6      2,035.9      1,835.3      1,691.5      1,743.9      1,626.8
  Space and Aviation Control.................     1,640.0      1,527.4      1,432.0      1,674.9      1,933.1      2,132.3
  Other......................................       144.9        133.3        125.2        172.3        152.0        184.7
                                               ----------  -----------  -----------  -----------  -----------  -----------
                                               $  7,311.6  $   6,731.3  $   6,057.0  $   5,963.0  $   6,222.6  $   6,192.9
                                               ----------  -----------  -----------  -----------  -----------  -----------
                                               ----------  -----------  -----------  -----------  -----------  -----------
Operating Profit (1)(2)
  Home and Building Control..................  $    345.8  $     308.6  $     236.5  $     232.7  $     193.4  $     229.1
  Industrial Control.........................       254.9        233.8        206.6        189.7        156.9        224.0
  Space and Aviation Control.................       163.3        127.6         80.9        148.1        175.8        226.1
  Other......................................         6.2          2.8                      (1.8)        (9.5)        (3.1)
                                               ----------  -----------  -----------  -----------  -----------  -----------
  Total operating profit.....................       770.2        672.8        524.0        568.7        516.6        676.1
  Operating profit as a percent of sales.....        10.5%        10.0%         8.7%         9.5%         8.3%        10.9%
  Interest expense...........................       (81.4)       (83.3)       (75.5)       (68.0)       (89.9)       (89.4)
  Litigation settlements.....................                                               32.6        287.9
  Gain on sale of assets.....................
  Equity income..............................        13.3         13.6         10.5         17.8         15.8         14.6
  General corporate expense..................       (91.9)       (97.6)       (89.3)       (72.6)       (95.7)       (91.9)
                                               ----------  -----------  -----------  -----------  -----------  -----------
  Income before income taxes.................  $    610.2  $     505.5  $     369.7  $     478.5  $     634.7  $     509.4
                                               ----------  -----------  -----------  -----------  -----------  -----------
                                               ----------  -----------  -----------  -----------  -----------  -----------
Assets
  Home and Building Control..................  $  2,144.3  $   1,727.2  $   1,529.8  $   1,327.3  $   1,302.4  $   1,282.8
  Industrial Control.........................     1,376.1      1,307.2      1,273.3      1,059.8      1,057.5      1,001.7
  Space and Aviation Control.................     1,037.3        971.1      1,174.9      1,219.6      1,403.6      1,594.5
  Corporate and Other........................       935.6      1,054.7        907.9        991.4      1,106.6        927.7
  Discontinued Operations....................
                                               ----------  -----------  -----------  -----------  -----------  -----------
                                               $  5,493.3  $   5,060.2  $   4,885.9  $   4,598.1  $   4,870.1  $   4,806.7
                                               ----------  -----------  -----------  -----------  -----------  -----------
                                               ----------  -----------  -----------  -----------  -----------  -----------
Additional information
  Average number of common shares
   outstanding...............................       126.6        127.1        129.4        134.2        138.5        140.9
  Return on average stockholders' equity.....        19.7%        17.1%        15.6%        18.4%        13.8%        19.2%
  Stockholders' equity per common share......  $    17.44  $     16.09  $     14.57  $     13.48  $     13.10  $     13.25
  Price/Earnings ratio (3)...................        20.7         18.6         14.7         14.3         11.5         13.9
  Percent of debt to total capitalization....          31%          28%          32%          28%          28%          30%
  Research and development
    Honeywell-funded.........................  $    353.3  $     323.2  $     319.0  $     337.4  $     312.6  $     300.7
    Customer-funded..........................       341.4        336.6        340.5        404.8        390.5        373.5
  Capital expenditures.......................       296.5        238.1        262.4        232.1        244.1        240.2
  Depreciation and amortization..............       287.5        292.9        287.4        284.9        292.7        286.0
  Employees at year end......................      53,000       50,100       50,800       52,300       55,400       58,200
</TABLE>
 
--------------------------
(1)  Operating profit is  net of special  charges amounting to  $62.7, $51.2 and
    $128.4 in 1994, 1993 and 1992,  respectively, as follows: Home and  Building
    Control,  $28.7, $9.9 and $42.7; Industrial  Control, $14.4, $9.0 and $38.6;
    Space and Aviation  Control, $19.6, $7.4  and $34.9; Other,  $--, $16.4  and
    $2.6; and General Corporate Expense, $--, $8.5 and $9.6.
 
(2)  Operating  profit is  net  of the  additional  operating expense  impact of
    adopting SFAS 106 and SFAS 112 amounting to $16.4 and $3.8, respectively, in
    1992 as  follows:  Home and  Building  Control, $4.3  and  $1.0;  Industrial
    Control,  $4.0 and $0.9;  Space and Aviation Control,  $7.0 and $1.6; Other,
    $0.5 and $0.1; and General Corporate Expense, $0.6 and $0.2.
 
(3) Price/Earnings ratio calculated using earnings from continuing operations
 
                                       11
<PAGE>
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS
 
                                   OPERATIONS
 
SALES
 
    Honeywell's  sales increased to $7.312 billion in 1996, compared with $6.731
billion in 1995 and $6.057 billion in 1994. Sales in the United States of $4.478
billion were  up 10  percent,  as a  result of  increased  volume in  all  three
business  units. International sales, which represent 39 percent of total sales,
increased seven percent to $2.834 billion in 1996.
 
    The international sales increase was the result of positive sales growth  of
nine  percent measured in local currency,  partially offset by negative currency
effects as the U.S. dollar strengthened an average of two percent against  local
currencies  in  countries  where  Honeywell does  business.  U.S.  export sales,
including exports to  foreign affiliates,  were $973 million  in 1996,  compared
with $839 million in 1995 and $780 million in 1994.
 
COST OF SALES
 
    Cost of sales was $4.975 billion in 1996, or 68.0 percent of sales, compared
with  $4.584 billion (68.1 percent) in 1995 and $4.082 billion (67.4 percent) in
1994. Cost as a percentage of sales  decreased slightly in 1996 due to  improved
gross-margins  in the commercial Space and Aviation business. In 1995, cost as a
percent of sales increased, from 1994, due to the increased sales in lower gross
margin Space and Aviation business and service business in Industrial Control.
 
RESEARCH AND DEVELOPMENT
 
    Honeywell spent  $353 million,  or 4.8  percent of  sales, on  research  and
development  in 1996, compared with $323 million  (4.8 percent) in 1995 and $319
million  (5.3  percent)  in  1994.  The  1994  percentage  reflects  significant
investments  in integrated avionics  for the new  Boeing 777 aircraft. Honeywell
expects to maintain its current  rate of R&D spending in  1997 as we invest  for
the  future. Honeywell also  received $341 million  in funds for customer-funded
research and development in  1996, compared with $337  million in 1995 and  $340
million in 1994.
 
OTHER EXPENSES AND INCOME
 
    Selling,  general and administrative  expenses were $1.313  billion, or 18.0
percent of sales in  1996, compared with $1.263  billion (18.8 percent) in  1995
and  $1.174 billion (19.4 percent) in  1994. Selling, general and administrative
expenses declined in  1996 as a  result of the  continued emphasis on  improving
processes,  automation  and  productivity.  The higher  percentage  in  1994 was
primarily due to increased legal costs.
 
    In 1994, Honeywell recorded special charges  of $63 million, or $38  million
($0.29 per share) after income tax.
 
    Net  interest expense was $73  million in 1996, $69  million in 1995 and $60
million in  1994. Interest  expense was  8.3 percent  of average  debt in  1996,
compared  with 9.5 and 9.0 percent in  1995 and 1994, respectively. Net interest
expense decreased slightly as a percent of  average debt in 1996 largely due  to
lower  interest  rates on  the  $300 million  of  notes issuances.  Net interest
expense increased in 1995, as compared to 1994, due to both higher average  debt
and  higher market  interest rates. Information  concerning Honeywell's exposure
to, and  management  of,  interest  rate risk  through  the  use  of  derivative
financial instruments is provided on page 19 and in Notes 12 and 13 to Financial
Statements on page 33.
 
    Earnings   of  companies   owned  20   percent  to   50  percent  (primarily
Yamatake-Honeywell Co., Ltd.), which are accounted for using the equity  method,
were $13 million in 1996, $14 million in 1995 and $11 million in 1994.
 
                                       12
<PAGE>
INCOME TAXES
 
    The  provision for income  taxes was $208  million in 1996  or 34%, compared
with $172 million in 1995 (34 percent) and $91 million in 1994 (25 percent). The
1994 income tax  provision was reduced  by $38  million ($0.29 per  share) as  a
result  of a favorable tax settlement. Further information about income taxes is
provided in Note 3 to Financial Statements on page 27.
 
NET INCOME
 
    Honeywell's net  income  increased 21  percent  in 1996,  primarily  due  to
increased sales volume and lower operating expenses. Net income was $403 million
($3.18  per share) in 1996, compared with $334 million ($2.62 per share) in 1995
and $279 million  ($2.15 per  share) in  1994. Net  income in  1994 included  an
after-tax  provision for special charges of $38  million ($0.29 per share) and a
reduction of the  provision for income  taxes of $38  million ($0.29 per  share)
from a favorable tax settlement.
 
RETURN ON EQUITY AND INVESTMENT
 
    Return  on equity (ROE) was  19.7 percent in 1996,  17.1 percent in 1995 and
15.6 percent in 1994. Return on investment (ROI) was 15.1 percent in 1996,  13.5
percent in 1995 and 12.3 percent in 1994.
 
OTHER OPERATING SEGMENTS
 
    The "other" category which generated revenues of $145, $133 and $125 million
in  1996, 1995 and  1994, respectively, is primarily  the results of Honeywell's
research operations.  Operating  profit  for the  other  operations  totaled  $6
million  in 1996, compared to $3 million in 1995 and a break-even performance in
1994.
 
CURRENCY
 
    The U.S. dollar strengthened an average of two percent in 1996 compared with
1995, in  relation  to  the  principal foreign  currencies  in  countries  where
Honeywell  products  are  sold.  A  stronger dollar  has  a  negative  effect on
international  results   because   foreign-exchange   denominated   transactions
translate  into fewer U.S. dollars, which  Honeywell manages through its hedging
strategies. Information  about  Honeywell's  exposure  to,  and  management  of,
currency risk through the use of derivative financial instruments is provided on
page  19 and in Notes 4,  12 and 13 to Financial  Statements on pages 28, 33 and
33, respectively.
 
INFLATION
 
    Highly competitive market  conditions have minimized  inflation's impact  on
the  selling  prices  of Honeywell's  products  and  the cost  of  its purchased
materials. Productivity improvements  and cost-reduction  programs have  largely
offset the effects of inflation on other costs and expenses.
 
EMPLOYMENT
 
    Honeywell  employed 53,000 people worldwide  at year-end 1996, compared with
50,100 people in 1995 and 50,800 people in 1994. Approximately 30,300  employees
work  in the United States, with 22,700  employed in other regions, primarily in
Europe. Total compensation and benefits in 1996 were $2.8 billion, or 42 percent
of total costs and expenses. Sales per employee were $138,500 in 1996,  compared
with $132,800 in 1995 and $118,600 in 1994.
 
ENVIRONMENTAL MATTERS
 
    Honeywell   is  committed  to  protecting   the  environment,  both  through
Honeywell's products and in our manufacturing operations. Our use and release of
chemicals to the environment  continues to decline  steadily. Releases of  toxic
and  ozone-depleting chemicals  are being  phased out  well ahead  of regulatory
requirements.  We  are  increasing  our  commitment  to  pollution   prevention:
reducing, reusing and recycling to minimize wastes. The costs of managing wastes
are  decreasing as well. For more information on environmental matters, see Note
20 on page 45.
 
                                       13
<PAGE>
NEW ACCOUNTING STANDARDS
 
    In June 1996, the Financial  Accounting Standards Board issued Statement  of
Financial  Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." In accordance with this
standard, after  a transfer  of financial  assets has  occurred, Honeywell  will
recognize  the financial and servicing assets it controls and the liabilities it
has incurred, derecognize financial assets when control has been surrendered and
derecognize liabilities  when  extinguished.  This statement  is  effective  for
transfers  and servicing of  financial assets and  extinguishment of liabilities
occurring after December 31, 1996, and shall be applied prospectively.  Adoption
by  Honeywell is not expected to have a material effect on results of operations
or financial position.
 
    In October  1996, The  American Institute  of Certified  Public  Accountants
issued   Statement   of   Position   (SOP)   96-1,   "Environmental  Remediation
Liabilities." This SOP provides guidance on specific accounting issues that  are
present in the recognition, measurement, display and disclosure of environmental
remediation  liabilities. The  provisions of  the SOP  are effective  for fiscal
years beginning after December  15, 1996, and adoption  by Honeywell in 1997  is
not  expected to have  a material effect  on results of  operations or financial
position.
 
SAFE HARBOR CAUTIONARY STATEMENT
 
    Honeywell may  occasionally make  statements  regarding its  businesses  and
their  respective markets, such as projections of future performance, statements
of management's  plans and  objectives,  forecasts of  market trends  and  other
matters,  which  to the  extent  they are  not  historical fact,  may constitute
"forward-looking statements"  within  the  meaning  of  the  Private  Securities
Litigation  Reform Act of 1995. Statements containing the words or phrases "will
likely  result",  "are   expected  to,"  "will   continue,"  "is   anticipated,"
"estimate," "project," "outlook" or similar expressions, which may appear herein
or   in  certain  documents,  reports,  press  releases,  and  written  or  oral
presentations made  by  officers  of  the  company  to  analysts,  shareholders,
investors,   news  organizations  and   others,  identify  such  forward-looking
statements. No assurance can  be given that the  results in any  forward-looking
statements  will be achieved and actual results could be affected by one or more
factors,  which  could   cause  them  to   differ  materially.  Therefore,   all
forward-looking  statements are qualified in their entirety by reference to, and
are accompanied  by, the  factors listed  in Exhibit  99(i) to  this report  and
subsequent  quarterly  reports on  Form 10Q,  as filed  with the  Securities and
Exchange Commission,  which could  cause Honeywell's  actual results  to  differ
materially from those projected in such forward-looking statements.
 
                       DISCUSSION AND ANALYSIS BY SEGMENT
 
HOME AND BUILDING CONTROL
 
    Home  and  Building Control  is a  global  leader in  providing comfortable,
healthy, safe and energy-efficient indoor environments. Customer loyalty to  our
brand  is  based on  more  than 3,500  products, a  broad  range of  systems and
services, and  an  unmatched distribution  network  that supports  our  customer
solutions.
 
    THREE-YEAR SALES OVERVIEW
 
    Sales  in 1996 were $3.327 billion compared  with $3.035 billion in 1995 and
$2.665 billion in 1994.  Home Control experienced strong  sales growth from  the
retail  business, new product introductions in  Europe, expansion of our overall
distribution business, and OEM product globalization. Our Building Control sales
increased as we grew  our presence in small-  and mid-sized buildings,  enhanced
our  EXCEL 5000-Registered  Trademark- building management  systems and expanded
our European building service presence.
 
    Strategic expansion through acquisitions helped drive sales growth. The 1996
acquisition of  Duracraft  combined our  strong  brand equity  with  Duracraft's
product portfolio, cost-effectiveness
 
                                       14
<PAGE>
and  speed to market. This acquisition  optimizes our strength in retail markets
and multiplies  our visibility  to homeowners.  We also  acquired Filtercold,  a
premium  water purification manufacturer.  Another acquisition, Applied Products
Technology, adds compressed air control systems to our energy retrofit portfolio
and gives us a critical foothold  into a large, untapped industrial market.  Ten
acquisitions  in  Europe  strengthened  our  capabilities  there.  For  example,
Satronic Holding A.G., a Swiss  manufacturer, expands our global boiler  control
business.
 
    We  continue  to  grow  through alliances  forged  with  utilities  and with
customers.
 
    Because of our  alliances with three  energy suppliers --  LG&E, CNG  Energy
Services  Corp. and U.S.  Energy Partners -- our  customers in education, health
care, government and industrial markets can purchase natural gas at  competitive
rates and reduce their energy costs.
 
    Disney  made  us  their  preferred supplier  of  home  comfort, convenience,
entertainment, security  and indoor  environment  systems for  the new  town  of
Celebration,   Florida.  Our   Perfect-TM-  Climate  system   products  and  the
TotalHome-Registered Trademark- home automation system will play prominent roles
in Celebration homes.
 
    Our alliance with  Lucent Technologies  brings to  customers an  intelligent
building solution through integration of heating, ventilating, air conditioning,
fire,  security,  data and  video communications  in a  single cable.  Work with
Electric Power  Research  Institute  resulted in  a  programmable  line  voltage
thermostat that dramatically improves comfort and reduces energy costs.
 
    Sales  in  1995 benefitted  from  growth in  Europe  and Asia  Pacific. Home
Control grew sales  from acquisitions,  trade and retail  business, and  product
additions.  Building Control's strong  sales growth was fueled  by Europe and by
U.S. energy retrofit and service business. Sales in 1994 grew moderately as  the
U.S. economy and consumer confidence improved.
 
    THREE-YEAR OPERATING PROFIT OVERVIEW
 
    Home  and Building Control  1996 operating profit  was $346 million compared
with $309 million in 1995 and $236  million in 1994, which included $29  million
in special charges to streamline operations. In 1996, operating profit increased
12  percent.  Home Control  profit improved  through  volume increases  and cost
reductions. Building Control profits declined  due to a very competitive  energy
retrofit business and investment in programs to enhance productivity.
 
    In   1995,  operating  profit   rose  16  percent,   primarily  from  strong
international volume  increases, new  products  and cost  reductions.  Excluding
special  charges, 1994 operating profit increased moderately, due to improvement
in the U.S. economy and growing consumer confidence.
 
    BUSINESS STRATEGIES
 
    Increased regulation of the  environment and a  focus on energy  management,
coupled  with customer demands  for greater comfort  and security, position Home
and Building Control well  for the future.  Growth strategies include  expanding
and  globalizing the product portfolio, including consumer products and heating,
ventilation, and air conditioning (HVAC)  products. Our strategies also  include
broadening  solution  capabilities  with  a  focus  on  open  system technology,
globalizing energy retrofit  and district  energy solutions  and enhancing  life
cycle building service offerings.
 
INDUSTRIAL CONTROL
 
    Industrial  Control is a global leader  in automation solutions from sensors
to integrated solutions.  Industrial Automation and  Control provides  one-stop,
integrated  system  solutions  including  systems,  products,  and  services for
process industries such as hydrocarbon processing, chemicals and pulp and paper.
Sensing and Control manufactures switches,  sensors and solenoid valves for  use
in  vehicles, consumer products, data communication and industrial applications,
as well as  smart position-sensing  devices and  systems used  in factories  and
package distribution systems.
 
                                       15
<PAGE>
    THREE-YEAR SALES OVERVIEW
 
    Industrial  Control sales in 1996 were  $2.200 billion, compared with $2.036
billion in 1995 and $1.835 billion in 1994. Sales benefitted from the successful
introduction of new measurement, sensing  and control products that  incorporate
leading technology; the excellent market reception of our
TotalPlant-Registered Trademark- open solutions; and continued strong demand for
upgrades  and services that increase the value of our installed control systems.
Through our  leading technologies,  industry  expertise and  balanced  worldwide
distribution,  we were  able to  expand global  alliances with  major customers.
Sales in  developing markets,  including Asia  and Eastern  Europe,  experienced
solid  growth  as these  markets invested  in advanced  technology to  equip new
factories and processing plants.
 
    Industrial Automation and Control introduced the new
TotalPlant-Registered Trademark-  Solution (TPS)  system, the  first  industrial
automation  system that  unifies business  and control  information throughout a
plant or mill. TPS was supplemented  by 30 new products and services  introduced
in 1996.
 
    We  expanded  our  measurement  and  control  product  portfolio  with smart
pressure and temperature  instruments that transmit  system control  information
from  remote field  locations, such as  pipelines. In addition,  we acquired the
line of analytical instruments  and fully integrated the  operations of Leeds  +
Northrup.
 
    Sensing  and  Control  sales  continued  to  benefit  from  our  strategy of
integrating  factory  floor  solutions   and  intelligent  sensors.  Our   Smart
Distributed  System, which allows customers  to link intelligent control devices
through a simple, open network, has enjoyed rapid acceptance.
 
    In 1995  and 1994,  Industrial  Control sales  increased moderately  due  to
widespread   demand  for  TotalPlant-Registered  Trademark-  open  solutions  in
domestic and international markets.  We also saw  strong international sales  of
commercial sensors and switches.
 
    THREE-YEAR OPERATING PROFIT OVERVIEW
 
    Industrial  Control operating profit in 1996  was $255 million, $234 million
in 1995 and $207 million in 1994.  Operating profits increased in 1996, and  the
profit rate also showed improvement, as a result of continuing strategic actions
to   reduce  overhead,  streamline  business  operations,  improve  the  mix  of
higher--margin field instruments and automate component manufacturing.
 
    In  1995,  operating  profit   increased,  spurred  by   a  sharp  rise   in
profitability  in Sensing and  Control as switch margins  improved in the United
States and  as Europe  experienced favorable  volumes and  lower product  costs.
Operating  profit in 1994 included special  charges of $14 million to streamline
operations and improve productivity.
 
    BUSINESS STRATEGIES
 
    Industry consolidation and  introduction of new  standards for open  systems
generate opportunities for new products and applications, as customers look to a
single control partner to improve productivity and meet safety and environmental
regulations.  Industrial Control growth and value creation strategies complement
these trends. Industrial Automation and Control will grow by providing the  best
value integrated solutions for process industries, expanding the measurement and
control  product  business, broadening  our  service portfolio  and  focusing on
fast-growing global markets such as Asia, Middle East, Eastern Europe and  Latin
America.
 
    Sensing and Control's strategies include broadening offerings in the rapidly
growing   smart  sensor   market,  integrating  factory   floor  solutions  with
intelligent sensors  and  focusing on  fast-growing  customer segments  such  as
information technology and on-board automotive sensors.
 
                                       16
<PAGE>
SPACE AND AVIATION CONTROL
 
    As  a leading supplier of avionics  systems and products for the commercial,
military and  space markets,  our  Space and  Aviation Control  business  serves
customers that range from aircraft manufacturers and business aircraft operators
to  prime space contractors  and the U.S.  government. Our systems  are on board
virtually every commercial aircraft produced in  the Western world, and we  have
also been aboard every manned space flight launched in the U.S.
 
    THREE-YEAR SALES OVERVIEW
 
    In 1996, Space and Aviation Control sales were $1.640 billion, compared with
$1.527 billion in 1995 and $1.432 billion in 1994. The sales growth results from
increased  commercial aviation  OEM business  and our  strategies to  expand our
GPS-based guidance products and systems, pursue retrofit opportunities and bring
our Boeing 777 technology to all market segments worldwide.
 
    Space and  Aviation Control  orders were  up overall  in 1996,  with  strong
growth  in  the commercial  aviation business.  Major  wins include  the cockpit
retrofits of Federal Express  DC-10s, several orders  for our enhanced  airborne
collision  avoidance  system  --  TCAS  2000,  and  the  selection  of  the next
generation Primus Epic  advanced integrated avionics  system for Raytheon's  new
Hawker  Horizon business jet. Space Systems orders showed excellent growth, with
a  key  initial  contract  from  NASA  for  an  Integrated  Global   Positioning
System/Inertial  Navigation  System and  major awards  with Lockheed  Martin and
Aerojet for work on a space-based infrared surveillance system
 
    Sales in 1995 increased moderately, driven  by the recovery in the  business
jet  and commuter aircraft market, strength in the retrofit and repair business,
and increased sales from the International Space Station program. Sales in  1994
experienced   an  anticipated  decline  because  of  lower  commercial  aircraft
production rates and reduced government spending.
 
    THREE-YEAR OPERATING PROFIT OVERVIEW
 
    Space and Aviation Control 1996  operating profit was $163 million  compared
to  $128 million  in 1995 and  $81 million  in 1994. In  1996, operating profits
increased  28  percent,  driven  by  improvements  in  the  commercial  markets,
continued productivity improvements and reductions in overhead expenses.
 
    Operating  profit in  1995 increased due  to improved  margins in commercial
aviation systems,  lower  development expenses  and  productivity  improvements.
Operating profits in 1994 included special charges of $20 million to consolidate
facilities.
 
    BUSINESS STRATEGIES
 
    The  commercial aircraft  industry is poised  for strong growth  in 1997 and
beyond.  Government   spending  for   electronic  components   is   stabilizing,
international  opportunities for  military avionics retrofits  and space systems
are increasing, and commercial space programs are growing at a fast pace.  Space
and Aviation Control strategies are positioned to take advantage of these trends
with a strong portfolio of products and solutions.
 
    Growth  strategies include  expanding our  global positioning-based guidance
products and systems; enhancing our offerings in growth markets such as aircraft
service and airport control; broadening  our role in international military  and
space  programs; pursuing retrofit opportunities; and continuing to optimize our
investment in 777 technology application.
 
                               FINANCIAL POSITION
 
FINANCIAL CONDITION
 
    At year-end 1996,  Honeywell's capital structure  comprised $253 million  of
short-term   debt,  $715  million  of  long-term  debt  and  $2.205  billion  of
stockholders' equity.  The  ratio  of  debt-to-total  capital  was  31  percent,
compared with 28 percent at year-end 1995.
 
                                       17
<PAGE>
    Total  debt increased $175 million during 1996 to $968 million. The increase
was used to fund acquisitions.
 
    Stockholders' equity increased $165 million  in 1996 to $2.205 billion.  The
increase  was primarily due to an increase  in retained earnings of $403 million
from net income, a $96 million increase from stock option exercises and employee
stock plans, and  a $15 million  increase in the  pension liability  adjustment,
offset  by a $52  million decrease in  accumulated foreign currency translation,
dividends of $134 million, and $163 million of treasury stock purchases.
 
CASH GENERATION AND DEPLOYMENT
 
    In 1996,  $494 million  of  cash was  generated from  operating  activities,
compared  with $573 million  in 1995 and  $470 million in  1994. The decrease in
1996 was largely due to increased working capital. In 1996, cash generated  from
investing  and financing activities  included $171 million  from the issuance of
debt, $90  million of  proceeds  from the  sale of  assets  and $57  million  of
proceeds  from employee  stock plans  and the  exercise of  Honeywell Foundation
stock options. These funds were used to support $376 million in acquisitions net
of cash acquired, $296 million of capital expenditures, $134 million of dividend
payments and  $163 million  of  payments for  share repurchases.  Cash  balances
decreased $165 million in 1996.
 
CONTROLLED WORKING CAPITAL
 
    Cash  used for increases in "controlled working capital" consisting of trade
and long-term  receivables  and  inventories, offset  by  accounts  payable  and
customer  advances,  was $195  million  in 1996.  Average  working capital  as a
percentage of sales  was 24.6 percent,  an improvement of  60 basis points  from
1995, in a continuing effort to reduce "controlled working capital" as a percent
of sales. The increase in receivable and payable balances in 1996 was consistent
with the increase in fourth-quarter sales.
 
CAPITAL EXPENDITURES AND ACQUISITIONS
 
    Capital  expenditures for property, plant and equipment were $296 million in
1996, compared with  $238 million in  1995 and  $262 million in  1994. The  1996
depreciation  charges were $236 million. Honeywell continues to invest at levels
believed to  be necessary  to maintain  its technological  leadership  position.
During   1996,  Honeywell  invested  $411   million  in  complementary  business
acquisitions.
 
SHARE REPURCHASE PROGRAMS
 
    In December 1994, the Board of Directors authorized a program to purchase up
to 2 million Honeywell shares. This  program was completed in the third  quarter
of  1995. In July 1995, the Board  of Directors authorized an open-ended program
to repurchase $250 million of Honeywell shares, of which $49 million was used in
the second  half of  1995, and  $163 million  during 1996.  The purpose  of  the
repurchase  plan is to  offset the shares  issued as part  of the 1993 Honeywell
Stock and Incentive Plan and other issuances (see Note 15 on page 35.) Honeywell
repurchased $129 million of shares in 1995, and $168 million of shares in 1994.
 
    At year-end  1996, Honeywell  had  188 million  shares issued,  126  million
shares  outstanding  and  31,734  stockholders  of  record.  At  year-end  1995,
Honeywell had  188 million  shares issued,  127 million  shares outstanding  and
32,569 stockholders of record.
 
DIVIDENDS
 
    Honeywell  has paid  a quarterly dividend  since 1932 and  has increased the
annual payout per  share in each  of the last  21 years. In  November 1995,  the
Board  of  Directors approved  a  four percent  increase  in the  regular annual
dividend to  $1.04 per  share, from  $1.00 per  share, effective  in the  fourth
quarter  1995. In July 1996, the Board  of Directors approved an additional four
percent increase in the regular annual dividend to $1.08 per share effective  in
the  third quarter 1996.  Honeywell paid $1.06  per share in  dividends in 1996,
compared with $1.01 in 1995 and $0.97 in 1994.
 
                                       18
<PAGE>
EMPLOYEE STOCK PROGRAM
 
    In 1996, Honeywell contributed 395,000  shares of Honeywell common stock  to
employees under its U.S. employee stock match savings plan. The number of shares
contributed  under this program  depends on employee  savings levels and company
performance.
 
PENSION CONTRIBUTIONS
 
    Cash contributions to Honeywell's pension  and retirement plans amounted  to
$201 million in 1996, $172 million in 1995 and $141 in 1994.
 
TAXES
 
    In  1996, taxes  paid were  $113 million.  Accrued income  taxes and related
interest increased $42 million during 1996.
 
LIQUIDITY
 
    Short-term debt at year-end 1996 was $253 million, consisting of $87 million
of commercial paper,  $67 million of  notes payable and  $99 million of  current
maturities  of long-term  debt. Short-term  debt at  year-end 1995  totaled $312
million, consisting of  $65 million of  commercial paper, $63  million of  notes
payable and $184 million of current maturities of long-term debt.
 
    Through  its  banks,  Honeywell  has access  to  various  credit facilities,
including committed credit lines  for which Honeywell  pays commitment fees  and
uncommitted  lines  provided by  banks on  a non-committed,  best-efforts basis.
Available general-purpose  lines  of  credit at  year-end  1996  totaled  $1.128
billion.  This  consisted of  $725  million of  committed  credit lines  to meet
Honeywell's financing requirements,  including support of  commercial paper  and
bank  note borrowings, and $403 million of uncommitted credit lines available to
certain foreign subsidiaries.  This compared  with $1.089  billion of  available
credit  lines at year-end  1995, consisting of $725  million of committed credit
lines for general financing requirements and $364 million of uncommitted  credit
lines  available to certain foreign subsidiaries. On January 30, 1997, Honeywell
increased its committed credit lines from $725 million to $1,375 billion.
 
    Honeywell also has  access to the  public debt markets  as evidenced by  its
$500  million medium-term  note program initiated  in May  1996. The medium-term
note program  allows  note issuances  with  maturities beyond  nine  months.  At
December  31, 1996, no notes had been  issued under this program. Long-term debt
maturities consist  of $99  million in  1997,  $105 million  in 1998,  and  $108
million in 1999.
 
    In  addition, Honeywell has agreements with two major financial institutions
whereby it may convert designated pools of trade accounts receivable to cash  up
to approximately $85 million on an on-going basis (See Note 6 on page 30).
 
    Cash  and short-term investments  totaled $136 million  at year-end 1996 and
$301 million at year-end 1995. Honeywell believes its available cash,  committed
credit  lines,  receivable  programs, and  access  to the  public  debt markets,
through its medium-term  note and  commercial paper  programs, provide  adequate
short-term and long-term liquidity.
 
DERIVATIVE FINANCIAL INSTRUMENTS
 
    Honeywell  is  exposed to  market risk  from changes  in interest  rates and
foreign currency  exchange rates,  which  may adversely  affect its  results  of
operations  and financial condition. In seeking to minimize this risk, Honeywell
manages exposure to changes in interest rates and foreign currency rates through
its regular operating  and financing  activities and,  when deemed  appropriate,
through  the use of derivative financial instruments. Honeywell policy prohibits
the use of  derivative financial  instruments for trading  or other  speculative
purposes and Honeywell is not a party to leveraged financial instruments.
 
                                       19
<PAGE>
    Honeywell  has  entered  into various  foreign  currency  exchange contracts
designed to manage  its net exposure  to exchange rate  fluctuations on  foreign
currency  transactions (see Notes 4, 12 and 13 to Financial Statements on pages,
28, 33  and  33 respectively).  Foreign  exchange contracts  reduce  Honeywell's
overall exposure to exchange rate movements, since the gains and losses on these
contracts  offset losses and  gains on the  assets, liabilities and transactions
being hedged. Transactions that are hedged include foreign currency  denominated
receivables  and payables  on the balance  sheet, firm purchase  orders and firm
sales commitments. At year-end 1996, the notional amount of outstanding  foreign
exchange contracts was $1.111 billion.
 
    It  is Honeywell's practice to manage  the relative proportions of its fixed
and floating rate  debt in  the context of  the interest  rate environment.  The
objective  is to manage the cost of  Honeywell's debt financing over an extended
period of time. To manage this mix in a cost efficient manner, Honeywell  enters
into interest rate swap agreements, in which it agrees to exchange, at specified
intervals, the difference between fixed and variable interest amounts calculated
by reference to an agreed-upon notional principal amount (see Notes 12 and 13 to
Financial  Statements  on page  33). At  year-end 1996,  the notional  amount of
outstanding interest rate swaps was $390 million.
 
LITIGATION
 
    On March 13, 1990, Litton Systems, Inc. filed suit against Honeywell in U.S.
District Court,  Central  District  of  California,  alleging  Honeywell  patent
infringement  relating  to  the  process  used  by  Honeywell  to  coat  mirrors
incorporated in its ring laser gyroscopes; intentional interference by Honeywell
with Litton's  prospective advantage  with customers  and with  its  contractual
relationships  with  Ojai  Research,  Inc.;  and  attempted  monopolization  and
predatory  pricing  by  Honeywell  in  certain  alleged  markets  for   products
containing  ring laser  gyroscopes. Honeywell generally  denied Litton's patent,
tort and antitrust allegations; contested both the validity and infringement  of
the  patent;  and  alleged  that  the  patent  had  been  obtained  by  Litton's
inequitable conduct before the United States Patent and Trademark Office.
 
    Separate trials were  held on the  patent and antitrust  claims, and at  the
conclusion  of both trials, juries  awarded Litton significant monetary damages.
However, the damage awards  were set aside  by the trial court  judge and a  new
trial  ordered on the  issue of damages  for both claims.  The parties have also
appealed various  legal issues  related  to these  cases.  For a  more  detailed
discussion  of this litigation,  see Note 20 to  the financial statements, which
appears on page 43 of this report.
 
CREDIT RATINGS
 
    Honeywell's credit ratings by Standard  and Poor's Corporation and Duff  and
Phelps  Corporation are  at A/A-1 and  A/Duff1, respectively  for short-term and
long-term debt. Honeywell's  credit rating  by Moody's  Investors Service,  Inc.
improved to A2/P1 in 1996.
 
    On  January 27, 1997, Honeywell announced  a definitive agreement to acquire
Measurex Corporation for approximately $600 million in cash (see Note 22 on page
46). The  acquisition  will be  financed  with  debt. After  careful  review  of
Honeywell's  capital structure and  financial position given  the debt increase,
the major credit rating agencies confirmed Honeywell's current credit ratings.
 
STOCK PERFORMANCE
 
    The market price of Honeywell stock ranged from $69 7/8 to $44 3/8 in  1996,
and  was $65 3/4 at year end. Book value per common share at year end was $17.44
in 1996 and $16.09 in 1995.
 
                                       20
<PAGE>
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
                          INDEPENDENT AUDITORS' REPORT
 
To the Stockholders of Honeywell Inc.:
 
    We  have audited the  statement of financial position  of Honeywell Inc. and
subsidiaries as of  December 31, 1996  and 1995, and  the related statements  of
income  and cash flows for each of the  three years in the period ended December
31, 1996. Our audits  also included the financial  statement schedule listed  at
Part IV, Item 14(a)(2). 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 have 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  financial statements present  fairly, in all  material
respects,  the financial position of Honeywell Inc. 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. Also,  in  our  opinion,  such
financial statement schedule, when considered in relation to the basic financial
statements  taken  as a  whole,  presents fairly  in  all material  respects the
information set forth therein.
 
Deloitte & Touche LLP
Minneapolis, Minnesota
February 12, 1997
 
                                       21
<PAGE>
                                INCOME STATEMENT
                        HONEYWELL INC. AND SUBSIDIARIES
                        (DOLLARS AND SHARES IN MILLIONS
                           EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                                     YEARS ENDED DECEMBER 31
                                                                                ---------------------------------
                                                                                  1996        1995        1994
                                                                                ---------  ----------  ----------
<S>                                                                             <C>        <C>         <C>
Sales.........................................................................  $ 7,311.6  $  6,731.3  $  6,057.0
Costs and Expenses
  Cost of sales...............................................................    4,975.4     4,584.2     4,082.1
  Research and development....................................................      353.3       323.2       319.0
  Selling, general and administrative.........................................    1,313.1     1,263.1     1,173.8
  Special charges.............................................................                               62.7
                                                                                ---------  ----------  ----------
                                                                                  6,641.8     6,170.5     5,637.6
                                                                                ---------  ----------  ----------
Interest
  Interest expense............................................................       81.4        83.3        75.5
  Interest income.............................................................        8.5        14.4        15.3
                                                                                ---------  ----------  ----------
                                                                                     72.9        68.9        60.2
                                                                                ---------  ----------  ----------
Equity Income.................................................................       13.3        13.6        10.5
                                                                                ---------  ----------  ----------
Income before Income Taxes....................................................      610.2       505.5       369.7
Provision for Income Taxes....................................................      207.5       171.9        90.8
                                                                                ---------  ----------  ----------
Net Income....................................................................  $   402.7  $    333.6  $    278.9
                                                                                ---------  ----------  ----------
                                                                                ---------  ----------  ----------
Earnings Per Common Share.....................................................  $    3.18  $     2.62  $     2.15
                                                                                ---------  ----------  ----------
                                                                                ---------  ----------  ----------
Average Number of Common Shares Outstanding...................................      126.6       127.1       129.4
</TABLE>
 
                See accompanying Notes to Financial Statements.
 
                                       22
<PAGE>
                        STATEMENT OF FINANCIAL POSITION
                        HONEYWELL INC. AND SUBSIDIARIES
                             (DOLLARS IN MILLIONS)
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                                              1996        1995
                                                                                           ----------  ----------
<S>                                                                                        <C>         <C>
Current Assets
  Cash and cash equivalents..............................................................  $    127.1  $    291.6
  Short-term investments.................................................................         8.6         9.0
  Receivables............................................................................     1,714.7     1,477.3
  Inventories............................................................................       937.6       794.4
  Deferred income taxes..................................................................       193.2       194.6
                                                                                           ----------  ----------
                                                                                              2,981.2     2,766.9
Investments and Advances.................................................................       247.6       244.8
Property, Plant and Equipment
  Property, plant and equipment..........................................................     2,973.6     2,857.1
  Less accumulated depreciation..........................................................     1,839.4     1,758.2
                                                                                           ----------  ----------
                                                                                              1,134.2     1,098.9
Other Assets
  Long-term receivables..................................................................        25.7        46.8
  Goodwill...............................................................................       507.7       240.7
  Patents, licenses and trademarks.......................................................        34.1        43.4
  Software and other intangibles.........................................................       149.1       340.1
  Deferred income taxes..................................................................        33.0        71.8
  Other..................................................................................       380.7       206.8
                                                                                           ----------  ----------
    Total Assets.........................................................................  $  5,493.3  $  5,060.2
                                                                                           ----------  ----------
                                                                                           ----------  ----------
 
                                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
  Short-term debt........................................................................  $    252.4  $    312.4
  Accounts payable.......................................................................       584.8       491.5
  Customer advances......................................................................       202.0       158.2
  Accrued compensation and benefit costs.................................................       287.8       374.3
  Accrued income taxes...................................................................       316.9       274.8
  Deferred income taxes..................................................................        21.9        20.4
  Other accrued liabilities..............................................................       401.1       390.9
                                                                                           ----------  ----------
                                                                                              2,066.9     2,022.5
Long-Term Debt...........................................................................       715.3       481.0
Other Liabilities
  Accrued benefit costs..................................................................       382.0       416.3
  Deferred income taxes..................................................................        46.0        39.2
  Other..................................................................................        78.2        61.1
                                                                                           ----------  ----------
                                                                                              3,288.4     3,020.1
Stockholders' Equity
  Common stock -- $1.50 par value
  Authorized -- 250,000,000 shares
  Issued -- 1996 -- 187,809,512 shares...................................................       281.7
           1995 -- 188,126,704 shares....................................................                   282.2
  Additional paid-in capital.............................................................       528.8       481.3
  Retained earnings......................................................................     3,074.7     2,805.8
  Treasury stock -- 1996 -- 61,360,813 shares............................................    (1,763.5)
                   1995 -- 61,306,251 shares.............................................                (1,650.2)
  Accumulated foreign currency translation...............................................        88.2       140.9
  Pension liability adjustment...........................................................        (5.0)      (19.9)
                                                                                           ----------  ----------
                                                                                              2,204.9     2,040.1
                                                                                           ----------  ----------
    Total Liabilities and Stockholders' Equity...........................................  $  5,493.3  $  5,060.2
                                                                                           ----------  ----------
                                                                                           ----------  ----------
</TABLE>
 
                See accompanying Notes to Financial Statements.
 
                                       23
<PAGE>
                            STATEMENT OF CASH FLOWS
                        HONEYWELL INC. AND SUBSIDIARIES
                             (DOLLARS IN MILLIONS)
 
<TABLE>
<CAPTION>
                                                                                       YEARS ENDED DECEMBER 31
                                                                                   -------------------------------
                                                                                     1996       1995       1994
                                                                                   ---------  ---------  ---------
<S>                                                                                <C>        <C>        <C>
Cash Flows from Operating Activities
  Net income.....................................................................  $   402.7  $   333.6  $   278.9
  Adjustments to reconcile net income to net cash flows from operating
   activities:
    Depreciation.................................................................      236.1      236.1      235.3
    Amortization of intangibles..................................................       51.4       56.8       52.1
    Deferred income taxes........................................................       38.5       67.2       14.0
    Equity income, net of dividends received.....................................      (10.8)     (11.0)      (7.6)
    (Gain) Loss on sale of assets................................................      (12.0)       7.2        1.0
    Contributions to employee stock plans........................................       38.2       27.4       26.5
    Increase in receivables......................................................     (203.0)     (38.4)     (83.8)
    (Increase) decrease in inventories...........................................      (89.9)     (27.6)      20.9
    Increase in accounts payable.................................................       51.8       50.1       27.7
    Increase (decrease) in accrued income taxes and interest.....................       57.4      (35.4)      (4.6)
    Other changes in working capital, excluding short term investments and
     short-term debt.............................................................      (81.4)     (99.1)     (93.9)
    Other noncurrent items -- net................................................     (148.0)       5.6        3.0
                                                                                   ---------  ---------  ---------
Net cash flows from operating activities.........................................      493.8      572.5      469.5
                                                                                   ---------  ---------  ---------
Cash Flows from Investing Activities
  Proceeds from sale of assets...................................................       90.3       18.7       22.6
  Capital expenditures...........................................................     (296.5)    (238.1)    (262.4)
  Investment in acquisitions.....................................................     (376.2)     (37.7)    (104.6)
  (Increase) decrease in short-term investments..................................       (0.2)      (1.4)       6.7
  Other -- net...................................................................        0.4       (5.2)      10.5
                                                                                   ---------  ---------  ---------
Net cash flows from investing activities.........................................     (582.2)    (263.7)    (327.2)
                                                                                   ---------  ---------  ---------
Cash Flows from Financing Activities
  Net increase (decrease) in short-term debt.....................................       18.8     (101.0)      35.7
  Proceeds from issuance of long-term debt.......................................      340.4      167.5      126.5
  Repayment of long-term debt....................................................     (188.8)    (156.4)      (1.8)
  Purchase of treasury stock.....................................................     (163.2)    (137.3)    (162.5)
  Proceeds from exercise of stock options........................................       57.3       60.4        5.9
  Dividends paid.................................................................     (133.5)    (127.5)    (125.6)
                                                                                   ---------  ---------  ---------
Net cash flows from financing activities.........................................      (69.0)    (294.3)    (121.8)
                                                                                   ---------  ---------  ---------
Effect of exchange rate changes on cash..........................................       (7.1)       9.7        4.6
                                                                                   ---------  ---------  ---------
Increase (decrease) in cash and cash equivalents.................................     (164.5)      24.2       25.1
Cash and cash equivalents at beginning of year...................................      291.6      267.4      242.3
                                                                                   ---------  ---------  ---------
Cash and cash equivalents at end of year.........................................  $   127.1  $   291.6  $   267.4
                                                                                   ---------  ---------  ---------
                                                                                   ---------  ---------  ---------
</TABLE>
 
                See accompanying Notes to Financial Statements.
 
                                       24
<PAGE>
                         NOTES TO FINANCIAL STATEMENTS
                        HONEYWELL INC. AND SUBSIDIARIES
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
NOTE 1 -- ACCOUNTING POLICIES
 
CONSOLIDATION
 
    The   consolidated  financial  statements  and  accompanying  data  comprise
Honeywell Inc.  and subsidiaries.  All  material intercompany  transactions  are
eliminated.
 
ESTIMATES
 
    The  preparation  of  financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  Honeywell  to  make  estimates   and
assumptions  that  affect the  reported amounts  of  assets and  liabilities and
disclosure of contingent assets  and liabilities at the  dates of the  financial
statements  and  the  reported  amounts  of  revenues  and  expenses  during the
reporting periods. Actual results can differ from estimates.
 
SALES
 
    Product sales  are recorded  when title  is passed  to the  customer,  which
usually  occurs at  the time  of delivery  or acceptance.  Sales under long-term
contracts are recorded  on the percentage-of-completion  method measured on  the
cost-to-cost  basis  for  engineering-type contracts  and  the units-of-delivery
basis for  production-type  contracts.  Provisions  for  anticipated  losses  on
long-term contracts are recorded in full when such losses become evident.
 
EARNINGS PER COMMON SHARE
 
    Earnings  per common share are based on  the average number of common shares
outstanding during the year.
 
STATEMENT OF CASH FLOWS
 
    Cash equivalents are all highly  liquid, temporary cash investments with  an
original maturity of three months or less.
 
    Cash  flows from purchases and maturities of held-to-maturity securities are
classified as cash flows  from investing activities.  Cash flows from  contracts
used to hedge cash dividend payments from subsidiaries are classified as part of
the effect of exchange rate changes on cash.
 
INVENTORIES
 
    Inventories  are valued at the  lower of cost or  market. Cost is determined
using the weighted-average method. Market is based on net realizable value.
 
    Payments received  from customers  relating to  the uncompleted  portion  of
contracts are deducted from applicable inventories.
 
INVESTMENTS
 
    Investments  in companies owned 20 to 50 percent are accounted for using the
equity method.
 
PROPERTY
 
    Property  is  carried   at  cost   and  depreciated   primarily  using   the
straight-line method over estimated useful lives of 10 to 40 years for buildings
and improvements, and three to 15 years for machinery and equipment.
 
INTANGIBLES
 
    Intangibles are carried at cost and amortized using the straight-line method
over  their estimated useful lives of not more than 40 years for goodwill (15-25
years for recent acquisitions), four to 17
 
                                       25
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                        HONEYWELL INC. AND SUBSIDIARIES
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
NOTE 1 -- ACCOUNTING POLICIES (CONTINUED)
years for patents, licenses and trademarks,  and three to 24 years for  software
and  other  intangibles.  Intangibles  also  include  the  asset  resulting from
recognition of  the defined  benefit pension  plan minimum  liability, which  is
amortized as part of net periodic pension cost.
 
DERIVATIVES
 
    Derivative  financial instruments are  used by Honeywell  to manage interest
rate and  foreign  exchange risks.  These  financial exposures  are  managed  in
accordance  with Corporate  polices and procedures.  Honeywell does  not hold or
issue derivative financial instruments for trading purposes.
 
    Foreign exchange contracts are  accounted for as hedges  to the extent  they
are  designated  as,  and are  effective  as,  hedges of  firm  foreign currency
commitments. Other such  foreign exchange  contracts are  marked-to-market on  a
current  basis and are included in  selling, general and administrative expenses
on the income statement and were not material in any year.
 
    Interest rate contracts designated  and effective as  a hedge of  underlying
debt  obligations are  not marked-to-market, but  cash flow  from such contracts
results in  adjustments to  interest expense  recognized over  the life  of  the
underlying  debt  agreement.  Gains  and losses  from  terminated  contracts are
deferred and amortized over the remaining period of the original contract.  Open
interest  rate  contracts  are reviewed  regularly  to ensure  that  they remain
effective as hedges of interest rate exposure.
 
FOREIGN CURRENCY
 
    Foreign currency assets and liabilities are generally translated into U.  S.
dollars  using  the  exchange rates  in  effect  at the  statement  of financial
position date. Results of operations are generally translated using the  average
exchange  rates throughout the period. The effects of exchange rate fluctuations
on translation of assets, liabilities and hedges of cash dividend payments  from
subsidiaries  are  reported  as  accumulated  foreign  currency  translation and
increased/(reduced) stockholders' equity:  $(52.7) in 1996,  $33.5 in 1995,  and
$54.5 in 1994.
 
LONG-LIVED ASSETS
 
    In  1996, Honeywell adopted Statement  of Financial Accounting Standards No.
121 (SFAS 121),  "Accounting for  the Impairment  of Long-Lived  Assets and  for
Long-Lived  Assets to  Be Disposed Of".  In accordance with  SFAS 121, Honeywell
evaluates the carrying value of long-lived assets when events and  circumstances
warrant  such a review. The adoption of SFAS  121 did not have a material effect
on the results of operations or financial position in 1996.
 
STOCK BASED COMPENSATION
 
    In 1996, Honeywell adopted Statement  of Financial Accounting Standards  No.
123  (SFAS 123), "Accounting  for Stock-Based Compensation".  As permitted under
this standard, Honeywell will continue to apply the recognition and  measurement
principles  of Accounting Principles Board (APB) No. 25 to its stock options and
other stock-based employee compensation awards. The disclosure of the pro  forma
net  income and pro forma earnings per share as if the fair value method of SFAS
123 had been applied can be found in Note 15 to the financial statements on page
35.
 
BASIS OF PRESENTATION
 
    Certain prior  year  amounts have  been  reclassified to  conform  with  the
current year presentation.
 
                                       26
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                        HONEYWELL INC. AND SUBSIDIARIES
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
NOTE 2 -- ACQUISITIONS AND SALE OF ASSETS
    Honeywell  acquired 17  companies in  1996, nine  companies in  1995, and 15
companies in 1994 for  $411.2 (including cash acquired  of $35.0 and $290.6  for
Duracraft  Corp.), $37.7, and  $104.6 in cash,  respectively. These acquisitions
were accounted for as purchases, and accordingly, the assets and liabilities  of
the  acquired entities have been recorded at  their estimated fair values at the
dates of  acquisition. The  excess of  purchase price  over the  estimated  fair
values  of the net  assets acquired, in the  amount of $294.7  in 1996, $32.4 in
1995, and $87.4 in  1994, has been  recorded as goodwill  and is amortized  over
estimated  useful lives. The pro forma results for 1996, 1995 and 1994, assuming
these acquisitions had  been made at  the beginning  of the year,  would not  be
significantly different from reported results.
 
    Proceeds  from the sale of assets, including facilities located in St. Louis
Park, Minnesota;  Arlington  Heights,  Illinois;  Durham,  North  Carolina;  and
Shoenaich,  Germany and the collection of notes receivable from asset sales made
in previous years, amounted to $90.3 in 1996. Proceeds from asset sales in  1995
and  1994 were $18.7 and $22.6, respectively.  Gains and losses from asset sales
were not  material  in  any  year  and are  included  in  selling,  general  and
administrative expenses on the income statement.
 
NOTE 3 -- INCOME TAXES
    The components of income before income taxes consist of the following:
 
<TABLE>
<CAPTION>
                                                                              1996       1995       1994
                                                                            ---------  ---------  ---------
<S>                                                                         <C>        <C>        <C>
Domestic..................................................................  $   349.4  $   285.4  $   208.4
Foreign...................................................................      260.8      220.1      161.3
                                                                            ---------  ---------  ---------
                                                                            $   610.2  $   505.5  $   369.7
</TABLE>
 
    The provision for income taxes on that income is as follows:
 
<TABLE>
<CAPTION>
                                                                               1996       1995       1994
                                                                             ---------  ---------  ---------
<S>                                                                          <C>        <C>        <C>
Current tax expense
  United States............................................................  $    60.8  $    39.8  $    33.8
  Foreign..................................................................       84.7       59.9       40.6
  State and local..........................................................       27.2        8.9        2.9
                                                                             ---------  ---------  ---------
  Total current............................................................      172.7      108.6       77.3
                                                                             ---------  ---------  ---------
Deferred tax expense
  United States............................................................       27.4       41.7       13.0
  Foreign..................................................................        4.0       17.5       (0.8)
  State and local..........................................................        3.4        4.1        1.3
                                                                             ---------  ---------  ---------
  Total deferred...........................................................       34.8       63.3       13.5
                                                                             ---------  ---------  ---------
Provision for income taxes.................................................  $   207.5  $   171.9  $    90.8
</TABLE>
 
    A  favorable tax settlement  reduced the 1994 provision  for income taxes by
$37.6 ($0.29 per share).
 
                                       27
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                        HONEYWELL INC. AND SUBSIDIARIES
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
NOTE 3 -- INCOME TAXES (CONTINUED)
    A reconciliation of the  provision for income taxes  to the amount  computed
using U.S. federal statutory rates is as follows:
 
<TABLE>
<CAPTION>
                                                                              1996       1995       1994
                                                                            ---------  ---------  ---------
<S>                                                                         <C>        <C>        <C>
Taxes on income at U.S. federal statutory rates...........................  $   213.6  $   176.9  $   129.4
Tax effects of foreign income.............................................      (15.9)     (11.7)     (15.5)
State taxes...............................................................       21.1        9.9        4.2
Tax effect of settlement..................................................                            (37.6)
Adjustments to effective tax rates used in recording tax assets
 andliabilities...........................................................                              2.7
Other.....................................................................      (11.3)      (3.2)       7.6
                                                                            ---------  ---------  ---------
Provision for income taxes................................................  $   207.5  $   171.9  $    90.8
</TABLE>
 
    Interest  costs  related to  prior  years' tax  issues  are included  in the
provision for income taxes. Taxes paid were  $113.1 in 1996, $128.3 in 1995  and
$79.4 in 1994.
 
    Deferred income taxes are provided for the temporary differences between the
financial   reporting  basis  and  the  tax  basis  of  Honeywell's  assets  and
liabilities. Temporary differences  comprising the net  deferred taxes shown  in
the statement of financial position are:
 
<TABLE>
<CAPTION>
                                                                                        1996       1995
                                                                                      ---------  ---------
<S>                                                                                   <C>        <C>
Employee benefits...................................................................  $    64.9  $   101.6
Miscellaneous accruals..............................................................       85.1       76.4
Excess of tax over book depreciation/amortization...................................       (2.4)      (8.4)
Asset valuation reserves............................................................       36.3       37.6
Long-term contracts.................................................................       14.0       16.0
State taxes.........................................................................       20.9       24.3
Pension liability adjustment........................................................        3.4       12.7
Other...............................................................................      (63.9)     (53.4)
                                                                                      ---------  ---------
                                                                                          158.3  $   206.8
</TABLE>
 
    The  components of  net deferred taxes  shown in the  statement of financial
position are:
 
<TABLE>
<CAPTION>
                                                                                        1996       1995
                                                                                      ---------  ---------
<S>                                                                                   <C>        <C>
Deferred tax assets.................................................................  $   458.8  $   463.7
Deferred tax liabilities............................................................      300.5      256.9
</TABLE>
 
    Provision has not been made for  U.S. or additional foreign taxes on  $669.1
of  undistributed earnings of international  subsidiaries, as those earnings are
considered to be permanently reinvested in the operations of those subsidiaries.
It is not practicable to estimate the amount of tax that might be payable on the
eventual remittance of such earnings.
 
    At  December  31,  1996,  foreign   subsidiaries  had  tax  operating   loss
carryforwards of $14.7.
 
NOTE 4 -- FOREIGN CURRENCY
    Honeywell  has  entered  into various  foreign  currency  exchange contracts
(primarily Belgian  francs, Deutsche  marks and  Canadian dollars)  designed  to
manage   its  exposure  to  exchange   rate  fluctuations  on  foreign  currency
transactions.   Foreign   exchange   contracts   reduce   Honeywell's    overall
 
                                       28
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                        HONEYWELL INC. AND SUBSIDIARIES
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
NOTE 4 -- FOREIGN CURRENCY (CONTINUED)
exposure  to  exchange  rate movements,  since  the  gains and  losses  on these
contracts offset losses and gains  on the assets, liabilities, and  transactions
being  hedged.  Honeywell  hedges a  significant  portion of  all  known foreign
exchange exposures, including non-functional  currency receivables and  payables
and  foreign currency  imports and exports.  The notional  amount of Honeywell's
outstanding  foreign  currency  contracts,  consisting  of  forwards,  purchased
options and swaps, was approximately $1,111.2 and $1,262.2 at December 31, 1996,
and  1995, respectively. These contracts generally have  a term of less than one
year.
 
NOTE 5 -- INVESTMENTS IN DEBT AND EQUITY SECURITIES
    Honeywell's investments  in  held-to-maturity  securities  are  reported  at
amortized cost in the statement of financial position as follows:
 
<TABLE>
<CAPTION>
                                                                                         1996       1995
                                                                                       ---------  ---------
<S>                                                                                    <C>        <C>
Cash equivalents.....................................................................  $    42.9  $   161.6
Short-term investments...............................................................        8.6        9.0
Investments and advances.............................................................        5.5        6.9
                                                                                       ---------  ---------
                                                                                       $    57.0  $   177.5
</TABLE>
 
    Held-to-maturity securities generally mature within one year and include the
following:
 
<TABLE>
<CAPTION>
                                                                                         1996       1995
                                                                                       ---------  ---------
<S>                                                                                    <C>        <C>
Time deposits with financial institutions............................................  $    40.5  $    53.4
Commercial paper.....................................................................        0.0      109.3
Other................................................................................       16.5       14.8
                                                                                       ---------  ---------
                                                                                       $    57.0  $   177.5
</TABLE>
 
    Honeywell's  purchases of held-to-maturity  securities, consisting primarily
of commercial  paper,  amounted to  $4,128.0  and  $3,528.0 in  1996  and  1995,
respectively.  Proceeds from maturities  of held-to-maturity securities amounted
to $4,248.5  in 1996  and $3,494.3  in  1995. Honeywell  has no  investments  in
trading  securities,  and available-for-sale  securities  are not  material. The
estimated aggregate fair value of  these securities approximates their  carrying
amounts  in the statement of financial  position. Gross unrealized holding gains
and losses were not material in any year.
 
NOTE 6 -- RECEIVABLES
    Receivables have  been reduced  by  an allowance  for doubtful  accounts  as
follows:
 
<TABLE>
<CAPTION>
                                                                                          1996       1995
                                                                                        ---------  ---------
<S>                                                                                     <C>        <C>
Receivables, current..................................................................  $    33.5  $    34.5
Long-term receivables.................................................................        0.7        0.7
</TABLE>
 
    Receivables  include approximately $19.8 in 1996 and $20.1 in 1995 billed to
customers but not paid pursuant to contract retainage provisions. These balances
are due upon completion of the contracts, generally within one year.
 
    Unbilled receivables related  to long-term  contracts amount  to $360.5  and
$314.0  at December 31, 1996, and 1995, respectively, and are generally billable
and collectible within one year.
 
    Long-term, interest-bearing notes  receivable from the  sale of assets  have
been reduced by valuation reserves of $1.7 in 1996 and $1.8 in 1995 to an amount
that approximates realizable value.
 
                                       29
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                        HONEYWELL INC. AND SUBSIDIARIES
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
NOTE 6 -- RECEIVABLES (CONTINUED)
    Honeywell   maintains  an  agreement  with  a  large  international  banking
institution whereby it can  sell an undivided interest  in a designated pool  of
trade  accounts receivable  up to  a maximum  of $50.0  on an  ongoing basis and
without recourse. As collections reduce accounts receivable sold, Honeywell  may
sell  an additional  undivided interest in  new receivables to  bring the amount
sold up to  the $50.0 maximum.  Proceeds received from  the sale of  receivables
amounted  to $238.8 in  1996, $22.4 in  1995 and $34.4  in 1994. The uncollected
balance of receivables sold amounted to $7.0 and $1.5 at December 31, 1996,  and
1995,  respectively, and averaged $23.2 and  $2.7 during those respective years.
Honeywell, as agent  for the  purchaser, retains  collection and  administrative
responsibilities for the participating interests sold.
 
    In 1996, Honeywell entered into an asset securitization program with a large
financial  institution to sell, with recourse, up to a maximum of $50.0 Canadian
dollars (approximately  $36.5  US  Dollars  at December  31,  1996)  of  certain
eligible  trade receivables to a trust.  As receivables transferred to the trust
are  collected,  Honeywell  may  transfer  additional  receivables  up  to   the
predetermined  facility  limits.  Gross  receivables  transferred  to  the trust
amounted to $31.5 in 1996. Honeywell retains the right to repurchase transferred
receivables under the program and included at year-end are $31.5 of  uncollected
receivables held in trust.
 
NOTE 7 -- INVENTORIES
 
<TABLE>
<CAPTION>
                                                                              1996       1995
                                                                            ---------  ---------
<S>                                                                         <C>        <C>
Finished goods............................................................  $   386.5  $   356.6
Inventories related to long-term contracts................................      122.7       73.6
Work in process...........................................................      185.8      159.5
Raw materials and supplies................................................      242.6      204.7
                                                                            ---------  ---------
                                                                            $   937.6  $   794.4
</TABLE>
 
    Inventories related to long-term contracts are net of payments received from
customers  relating to the uncompleted portions of such contracts in the amounts
of $60.7 and $56.4 at December 31, 1996, and 1995, respectively.
 
NOTE 8 -- GROSS PROPERTY, PLANT AND EQUIPMENT
 
<TABLE>
<CAPTION>
                                                                          1996        1995
                                                                        ---------  ----------
<S>                                                                     <C>        <C>
Land..................................................................  $    71.6  $     77.7
Buildings and improvements............................................      600.7       585.8
Machinery and equipment...............................................    2,208.7     2,100.3
Construction in progress..............................................       92.6        93.3
                                                                        ---------  ----------
                                                                        $ 2,973.6  $  2,857.1
</TABLE>
 
                                       30
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                        HONEYWELL INC. AND SUBSIDIARIES
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
NOTE 9 -- FOREIGN SUBSIDIARIES
    The  following  is  a  summary  of  financial  data  pertaining  to  foreign
subsidiaries:
 
<TABLE>
<CAPTION>
                                                              1996        1995        1994
                                                            ---------  ----------  ----------
<S>                                                         <C>        <C>         <C>
Net income................................................  $   172.9  $    142.9  $    121.5
Assets....................................................  $ 1,847.8  $  1,849.4  $  1,742.3
Liabilities...............................................      838.5       802.8       726.4
                                                            ---------  ----------  ----------
Net assets................................................  $ 1,009.3  $  1,046.6  $  1,015.9
</TABLE>
 
    Insofar  as  can be  reasonably  determined, there  are  no foreign-exchange
restrictions that  materially affect  the financial  position or  the  operating
results of Honeywell and its subsidiaries.
 
NOTE 10 -- INVESTMENTS IN OTHER COMPANIES
    Following  is a summary of  financial data pertaining to  companies 20 to 50
percent owned. The principal company  included is Yamatake-Honeywell Co.,  Ltd.,
of  which  Honeywell owns  23.3 percent  of the  outstanding common  stock. This
investment had a market  value of $329.8  and $316.3 at  December 31, 1996,  and
1995, respectively.
 
<TABLE>
<CAPTION>
                                                              1996        1995        1994
                                                            ---------  ----------  ----------
<S>                                                         <C>        <C>         <C>
Sales.....................................................  $ 1,949.2  $  2,065.1  $  1,877.0
Gross profit..............................................      688.8       743.5       680.7
Net income................................................       51.8        54.2        48.4
Equity in net income......................................       13.3        13.6        10.5
Current assets............................................  $ 1,576.9  $  1,400.6  $  1,371.4
Noncurrent assets.........................................      421.1       598.8       616.8
                                                            ---------  ----------  ----------
                                                              1,998.0     1,999.4     1,988.2
                                                            ---------  ----------  ----------
Current liabilities.......................................      853.5       742.6       841.6
Noncurrent liabilities....................................      181.4       327.8       225.8
                                                            ---------  ----------  ----------
                                                              1,034.9     1,070.4     1,067.4
                                                            ---------  ----------  ----------
Net assets................................................  $   963.1  $    929.0  $    920.8
Equity in net assets......................................  $   241.0  $    236.8  $    225.5
</TABLE>
 
NOTE 11 -- INTANGIBLE ASSETS
    Intangible assets have been reduced by accumulated amortization as follows:
 
<TABLE>
<CAPTION>
                                                                              1996       1995
                                                                            ---------  ---------
<S>                                                                         <C>        <C>
Goodwill..................................................................  $    74.9  $    49.2
Patents, licenses and trademarks..........................................       83.4       75.8
Software and other intangibles............................................      189.1      168.1
</TABLE>
 
NOTE 12 -- DEBT
 
SHORT-TERM DEBT
 
    Honeywell had general purpose lines of credit available totaling $1,127.9 at
December  31, 1996. Committed revolving credit lines with 21 banks total $725.0,
which management  believes  is  adequate to  meet  its  financing  requirements,
including support of commercial paper and bank note borrowings. These lines have
commitment fee requirements. There were no borrowings on these lines at December
31,  1996.  The remaining  credit  facilities of  $402.9  have been  arranged by
non-U.S. subsidiaries in
 
                                       31
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                        HONEYWELL INC. AND SUBSIDIARIES
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
NOTE 12 -- DEBT (CONTINUED)
accordance with customary  lending practices  in their  respective countries  of
operation.  Borrowings against  these lines  amounted to  $53.5 at  December 31,
1996. The weighted-average interest rate on short-term borrowings outstanding at
December 31, 1996, and 1995, respectively, was as follows: commercial paper, 4.2
percent and 6.0 percent; and notes payable, 3.9 percent and 6.5 percent.
 
    Short-term debt consists of the following:
 
<TABLE>
<CAPTION>
                                                                              1996       1995
                                                                            ---------  ---------
<S>                                                                         <C>        <C>
Commercial paper..........................................................  $    86.5  $    65.0
Notes payable.............................................................       67.2       62.8
    Current maturities of long-term debt..................................       98.7      184.6
                                                                            ---------  ---------
                                                                            $   252.4  $   312.4
</TABLE>
 
LONG-TERM DEBT
 
<TABLE>
<CAPTION>
                                                                              1996       1995
                                                                            ---------  ---------
<S>                                                                         <C>        <C>
Honeywell Inc.
  7 7/8% due 1996.........................................................             $   100.0
  6 1/4% Deutsche mark bonds due 1997.....................................  $    96.6      104.7
  7.15% to 7.71% medium-term notes due 1998...............................       50.0       50.0
  7.36% to 7.46% medium-term notes due 1999...............................       70.5       70.5
  7.35% medium-term notes due 2000........................................       75.0       75.0
  6.60% due 2001..........................................................      100.0
  8 5/8% due 2006.........................................................      100.0      100.0
  7 1/8% due 2008.........................................................      200.0
  7.45 % to 10 1/2% due 2001 to 2010......................................       27.1       28.0
Subsidiaries
  9.6% Canadian dollar notes due 1996.....................................                  84.4
  3.02% to 10.0% due 1997 to 2008, various currencies.....................       94.8       53.0
                                                                            ---------  ---------
                                                                                814.0      665.6
Less amount included in short-term debt...................................       98.7      184.6
                                                                            ---------  ---------
                                                                            $   715.3  $   481.0
</TABLE>
 
    The 7  7/8 percent  notes matured  in May,  1996. The  9.6 percent  Canadian
dollar  notes matured in  December, 1996 and were  refinanced with a receivables
securitization agreement,  as  discussed  in  Note 6,  and  a  commercial  paper
program. Included in Notes Payable are $31.5 of liabilities related to the asset
securitization  program.  In 1993,  Honeywell  entered into  interest  rate swap
agreements effectively  converting  the 9.6  percent  Canadian dollar  notes  to
floating-rate  debt based on three-month  Canadian bankers acceptance rates. The
swap agreements  for the  9.6  percent Canadian  dollar  notes also  expired  in
December 1996.
 
    The  6 1/4  percent Deutsche mark  bonds due  1997 are linked  to a currency
exchange agreement that converts principal and interest payments into fixed U.S.
dollar obligations with an interest cost of 8.17 percent.
 
    In August  1994,  Honeywell  initiated a  $500.0  medium-term  note  program
whereby  it  may  issue  notes  with  maturities  of  nine  months  to  30 years
denominated in U.S. dollars or foreign currencies
 
                                       32
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                        HONEYWELL INC. AND SUBSIDIARIES
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
NOTE 12 -- DEBT (CONTINUED)
with fixed or  variable interest rates.  Honeywell issued $121.0  and $100.5  of
U.S.  dollar fixed-rate medium-term  notes in 1995  and 1994, respectively. This
facility was fully  utilized in  the first  half of  1996 with  the issuance  of
$100.0  of 6.6 percent debt due in 2001 and  $200.0 of 7 1/8 percent debt due in
2008.
 
    In May 1996, Honeywell established a $500.0 medium term note program whereby
it may issue notes with maturities beyond nine months in U.S. dollars or foreign
currencies with fixed or variable interest rates. At December 31, 1996, no notes
have been issued against this facility.
 
    Honeywell uses interest rate swaps to manage its interest rate exposures and
its mix of fixed  and floating interest rates.  In 1994, Honeywell entered  into
interest  rate  swap agreements  effectively converting  $50.0  of the  $70.5 of
medium-term notes due in 1999 to  floating rate debt based on three-month  LIBOR
rates.  In 1995,  interest rate  swap agreements  were initiated  to effectively
convert $40.0 of medium-term notes back  to fixed-rate debt. In 1996,  Honeywell
entered into interest rate swap agreements converting the $100.0 of bonds due in
2001  and $200.0 of bonds due in 2008  to floating rate debt based on six months
LIBOR rates. The  swap agreements  outstanding at  December 31,  1996 expire  as
follows:  $20.0 in July 1997, $20.0 in May 1998, $50.0 in August 1999, $100.0 in
April 2001, and $200.0 in April 2008.
 
    Annual sinking-fund and  maturity requirements  for the next  five years  on
long-term debt outstanding at December 31, 1996, are as follows:
 
<TABLE>
<S>                                                      <C>
1997...................................................  $    98.7
1998...................................................      104.6
1999...................................................      107.7
2000...................................................       75.2
2001...................................................      116.2
</TABLE>
 
    Interest  paid amounted to $77.3, $86.0, and  $69.1 in 1996, 1995, and 1994,
respectively.
 
NOTE 13 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
    All financial  instruments are  held for  purposes other  than trading.  The
estimated  fair values  of all  nonderivative financial  instruments approximate
their carrying amounts in the statement of financial position with the exception
of long-term debt. The estimated fair value of long-term debt is based on quoted
market prices for the same  or similar issues or  on current rates available  to
Honeywell  for debt  of the  same remaining  maturities. The  carrying amount of
long-term  debt  was  $814.0  and  $665.6  at  December  31,  1996,  and   1995,
respectively; and the fair value was $833.4 and $702.6 at December 31, 1996, and
1995, respectively.
 
    The estimated fair value of interest rate swaps, foreign currency contracts,
and  option contracts, which is the net unrealized market gain or loss, is based
primarily on quotes obtained from various
 
                                       33
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                        HONEYWELL INC. AND SUBSIDIARIES
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
NOTE 13 -- FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
financial institutions that deal  in these types  of instruments. The  following
table   summarizes  the  notional  value,  carrying  value  and  fair  value  of
Honeywell's derivative financial instruments on and off the balance sheet.
 
<TABLE>
<CAPTION>
                                      AT DECEMBER 31, 1996                At December 31, 1995
                                ---------------------------------  ----------------------------------
                                NOTIONAL    CARRYING      FAIR      Notional    Carrying      Fair
                                  VALUE       VALUE       VALUE      Value        Value       Value
                                ---------  -----------  ---------  ----------  -----------  ---------
<S>                             <C>        <C>          <C>        <C>         <C>          <C>
Interest rate swaps...........  $   390.0   $     0.0   $     7.2  $    225.0   $     0.0   $    (4.7)
Currency contracts............  $ 1,111.2        17.6   $    22.9     1,262.2        25.7         4.7
                                ---------       -----   ---------  ----------       -----   ---------
Total.........................  $ 1,501.2   $    17.6   $    30.1  $  1,487.2   $    25.7   $     0.0
                                ---------       -----   ---------  ----------       -----   ---------
                                ---------       -----   ---------  ----------       -----   ---------
</TABLE>
 
    Honeywell is exposed to credit risk  to the extent of nonperformance by  the
counterparties  to the  foreign currency contracts  and the  interest rate swaps
shown above. However, the credit ratings of the counterparties, which consist of
a diversified group of financial institutions, are regularly monitored and  risk
of default is considered remote.
 
NOTE 14 -- LEASING ARRANGEMENTS
    As  lessee, Honeywell  has minimum  annual lease  commitments outstanding at
December 31,  1996, with  the  majority of  the  leases having  initial  periods
ranging  from  one  to 10  years.  Following  is a  summary  of  operating lease
information.
 
<TABLE>
<CAPTION>
                                                                            OPERATING
                                                                             LEASES
                                                                           -----------
<S>                                                                        <C>
1997.....................................................................   $   103.0
1998.....................................................................        79.7
1999.....................................................................        60.0
2000.....................................................................        44.7
2001.....................................................................        31.4
2002 and beyond..........................................................        84.0
                                                                           -----------
                                                                            $   402.8
</TABLE>
 
    Rent expense for operating  leases was $153.7 in  1996, $143.4 in 1995,  and
$136.9 in 1994.
 
    Substantially  all  leases  are  for  plant,  warehouse,  office  space  and
automobiles. A number of the leases contain renewal options ranging from one  to
10 years.
 
                                       34
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                        HONEYWELL INC. AND SUBSIDIARIES
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
NOTE 15 -- CAPITAL STOCK
 
<TABLE>
<CAPTION>
                                                                         ADDITIONAL
                                                              COMMON       PAID-IN     TREASURY
                                                               STOCK       CAPITAL       STOCK
                                                            -----------  -----------  -----------
<S>                                                         <C>          <C>          <C>
Balance January 1, 1994...................................   $   282.5    $   431.5   $  (1,428.4)
Purchase of treasury stock --
  5,223,800 shares........................................                                 (168.0)
Issued for employee stock plans --
  962,242 treasury shares                                                      15.4          19.9
  42,570 shares canceled..................................        (0.1)
                                                            -----------  -----------  -----------
Balance December 31, 1994.................................       282.4        446.9      (1,576.5)
Purchase of treasury stock --
  3,090,400 shares........................................                                 (129.3)
Issued for Honeywell Foundation Pledge --
  1,000,000 treasury shares...............................                     13.4          21.7
Issued for employee stock plans --
  1,814,714 treasury shares                                                    21.0          33.9
  159,296 shares canceled.................................        (0.2)
                                                            -----------  -----------  -----------
Balance December 31, 1995.................................       282.2        481.3      (1,650.2)
Purchase of treasury stock --
  2,904,000 shares........................................                                 (163.2)
Issued for Honeywell Foundation Pledge --
  450,000 treasury shares.................................                      8.3           9.2
Issued for employee stock plans --
  2,399,438 treasury shares...............................                     39.2          40.7
  317,192 shares canceled.................................        (0.5)
                                                            -----------  -----------  -----------
Balance December 31, 1996.................................   $   281.7    $   528.8   $  (1,763.5)
</TABLE>
 
STOCK-BASED COMPENSATION PLANS FOR KEY EMPLOYEES
 
    In  1993, the Board of Directors adopted, and the shareholders approved, the
1993 Honeywell Stock and Incentive Plan. The plan, which terminates December 31,
1998, provides for  the award of  up to  7,500,000 shares of  common stock.  The
purpose of the plan is to align the personal interests of key employees, through
the  ownership  of shares  of common  stock  and other  incentives, to  those of
Honeywell shareholders and provide  flexibility to Honeywell  in its ability  to
motivate,  attract and retain  the services of  such key employees  who have the
ability to enhance  the value  of Honeywell  and its  subsidiaries. Awards  made
under  the plan may be  in the form of stock  options, restricted stock or other
stock-based awards.  The  plan  replaced similar  plans,  and  awards  currently
outstanding  under those  plans, were not  affected. At December  31, 1996 there
were 6,843,074 shares reserved for all key employee plans.
 
    In 1996, Honeywell  adopted Statement of  Financial Accounting Standard  No.
123  (SFAS 123), "Accounting for Stock-Based Compensation". As permitted by SFAS
123, Honeywell has  elected to  continue following the  guidance of  APB 25  for
measurement and recognition of stock-based transactions with employees (See Note
1  on page 26). The compensation cost  that has been charged against income, for
the restricted stock and other stock-based  awards, was $12.2, $3.2 and $5.6  in
1996,  1995 and 1994, respectively. No compensation cost has been recognized for
the awards made in the form of
 
                                       35
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                        HONEYWELL INC. AND SUBSIDIARIES
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
NOTE 15 -- CAPITAL STOCK (CONTINUED)
stock options.  If compensation  cost for  Honeywell's stock-based  compensation
plans  had been determined based on the fair value at the grant dates for awards
under those plans, consistent with the  method provided in FAS 123,  Honeywell's
net  income and  earnings per  share would  have been  reduced to  the pro forma
amounts indicated below:
 
<TABLE>
<CAPTION>
                                                              1996       1995
                                                            ---------  ---------
<S>                                         <C>             <C>        <C>
Net Income................................  As reported     $   402.7  $   333.6
                                            Pro forma       $   392.6  $   329.7
Earnings Per Share........................  As reported     $    3.18  $    2.62
                                            Pro forma       $    3.10  $    2.59
</TABLE>
 
FIXED STOCK OPTIONS
 
    All stock option grants are reviewed and approved by the Personnel Committee
of the Board of  Directors. Stock options are  granted periodically at the  fair
market  value of Honeywell common stock on the date of the grant and exercisable
one year from the date of the grant. In 1995, the Committee extended the vesting
period for certain newly granted stock options to eighteen months.
 
    A summary of the status of the fixed stock options as of December 31,  1996,
1995  and 1994 and changes  during the years ending  on those dates is presented
below:
 
<TABLE>
<CAPTION>
                                                   1996                         1995                          1994
                                        --------------------------  ----------------------------  ----------------------------
                                         SHARES     WEIGHTED AVG     Shares      Weighted Avg      Shares      Weighted Avg
                                          (000)    EXERCISE PRICE     (000)     Exercise Price      (000)     Exercise Price
                                        ---------  ---------------  ---------  -----------------  ---------  -----------------
<S>                                     <C>        <C>              <C>        <C>                <C>        <C>
Fixed Options
  Outstanding at beginning of year....      5,963     $      35         5,346      $      30          4,740      $      29
  Granted.............................        423            54         1,891             43          1,001             33
  Exercised...........................      1,821            31         1,248             28            320             22
  Forfeited...........................         58            42            26             39             75             33
  Outstanding at end of year..........      4,507            39         5,963             35          5,346             30
  Options exercisable at year end.....      4,088            37         4,087             31          4,390             30
  Weighted average fair value of
   options granted during the year....  $   14.19                   $   10.43
</TABLE>
 
    The weighted average  fair value of  each option grant  is estimated on  the
date  of grant using  the Black-Scholes option-pricing  model and represents the
difference between the fair market value on the date of grant and the  estimated
market  value on the  exercise date. The  following weighted-average assumptions
are used in the Black Scholes model  for grants in 1996 and 1995,  respectively:
dividend  yield of two percent  for all years; expected  volatility of 27 and 24
percent, risk-free interest rates of 6.3 and 6.0 percent, and expected lives  of
four for all years.
 
                                       36
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                        HONEYWELL INC. AND SUBSIDIARIES
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
NOTE 15 -- CAPITAL STOCK (CONTINUED)
    The  following  table  summarizes  information  about  fixed  stock  options
outstanding at December 31, 1996. The fixed options outstanding include  options
issued  under the 1993 Honeywell Stock and Incentive Plan and the previous plans
which the 1993 plan replaced.
 
<TABLE>
<CAPTION>
                                   OPTIONS OUTSTANDING                       OPTIONS EXERCISABLE
                     -----------------------------------------------  ----------------------------------
                         SHARES        REMAINING                          SHARES
     RANGE OF        OUTSTANDING AT   CONTRACTUAL  WEIGHTED AVERAGE   EXERCISABLE AT   WEIGHTED AVERAGE
  EXERCISE PRICES    12/31/96 (000)      LIFE       EXERCISE PRICE    12/31/96 (000)    EXERCISE PRICE
-------------------  ---------------  -----------  -----------------  ---------------  -----------------
<S>                  <C>              <C>          <C>                <C>              <C>
$16-$24                       195        2.2 yrs       $      20               195         $      20
$25-$36                     1,609        5.9 yrs              32             1,609                32
$37-$54                     2,616        8.2 yrs              44             2,284                42
$55-$69                        87        9.8 yrs              62                 0                 0
</TABLE>
 
RESTRICTED STOCK AWARDS
 
    Restricted shares of  common stock are  issued to certain  key employees  as
compensation  and as incentives tied to Honeywell performance. Restricted shares
issued as compensation are awarded with a fixed restriction period ranging  from
three  to six years. In  1993, shares were issued  and tied to performance goals
which restricted the shares until the  earlier to occur of: (i) the  achievement
of  performance goals within a specified measurement period, not more than three
years, or (ii) nine years. The vesting of performance shares awarded in 1996  to
senior  executives  was  established  at  not more  than  two  years.  Owners of
restricted shares  have  the rights  of  shareholders, including  the  right  to
receive cash dividends and the right to vote. Restricted shares forfeited revert
to  Honeywell  at no  cost. Restricted  shares issued  totaled 371,917  in 1996,
212,781 in  1995,  and  141,376  in 1994.  At  December  31,  restricted  shares
outstanding  under key employee plans totaled  835,443 in 1996, 665,005 in 1995,
and 705,030 in 1994 with a weighted average grant-date fair value of $46 and $37
in 1996 and 1995, respectively.
 
EMPLOYEE STOCK MATCH PLANS
 
    In 1990, Honeywell  adopted Stock  Match and Performance  Stock Match  plans
under  which Honeywell matches,  in the form of  Honeywell common stock, certain
eligible U.S. employee savings plan  contributions. Employees are vested in  the
shares  after three  years of  employment. Shares  issued under  the stock match
plans totaled 394,534  in 1996, 571,905  shares in 1995,  and 634,561 shares  in
1994  at a  cost of  $23.4, $24.2  and $20.7,  respectively. There  were 747,295
shares reserved for employee stock match plans at December 31, 1996.
 
STOCK PLEDGE
 
    In 1993, Honeywell pledged to the Honeywell Foundation a five-year option to
purchase 2,000,000  shares of  common stock  at $33  per share.  This option  is
transferable  to charitable organizations  and exercisable in  whole or in part,
subject to  certain  conditions, from  time  to  time during  its  term.  Shares
purchased under the option totaled 450,000 in 1996 and 1,000,000 in 1995.
 
PREFERENCE STOCK
 
    Twenty-five  million  preference shares  with a  par value  of $1  have been
authorized. None have been issued at December 31, 1996.
 
                                       37
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                        HONEYWELL INC. AND SUBSIDIARIES
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
NOTE 16 -- RETAINED EARNINGS
 
<TABLE>
<CAPTION>
                                                              1996        1995        1994
                                                            ---------  ----------  ----------
<S>                                                         <C>        <C>         <C>
Balance January 1.........................................  $ 2,805.8  $  2,600.4  $  2,447.3
Net income................................................      402.7       333.6       278.9
Dividends
  1996-$1.06 PER SHARE....................................     (133.8)
  1995-$1.01 per share....................................                 (128.2)
  1994-$0.97 per share....................................                             (125.8)
                                                            ---------  ----------  ----------
Balance December 31.......................................  $  3074.7  $  2,805.8  $  2,600.4
</TABLE>
 
    Included in retained earnings are undistributed earnings of companies 20  to
50 percent owned, amounting to $155.2 at December 31, 1996.
 
NOTE 17 -- SEGMENT INFORMATION
    Honeywell  is a  global controls company  focused on  creating value through
control technology.  Honeywell  serves customers  worldwide  through  operations
engaged  in  the  design,  development, manufacture,  marketing  and  service of
control solutions  in three  industry  segments --  Home and  Building  Control,
Industrial  Control and Space  and Aviation Control.  Honeywell's broad range of
products, systems, and  services provide  solutions worldwide  as our  customers
look  to improve  productivity, energy efficiency  and environmental protection,
increase safety, and enhance comfort.
 
    Home  and  Building  Control  provides  products  and  services  to   create
efficient,  safe,  comfortable environments  by  offering controls  for heating,
ventilation, humidification and  air-conditioning equipment;  security and  fire
alarm  systems;  home  automation systems;  energy-efficient  lighting controls;
building management systems  and services; and  home comfort consumer  products.
Customers  include building  managers and owners;  distributors and wholesalers;
heating, ventilation  and air  conditioning manufacturers;  home builders;  home
owners; and original equipment manufacturers.
 
    Industrial  Control  produces  systems  for the  automation  and  control of
process operations in  industries such as  oil refining, oil  and gas  drilling,
pulp  and paper manufacturing, food processing, chemical manufacturing and power
generation; solid-state sensors  for position, pressure,  air flow,  temperature
and  current;  precision electromechanical  switches; manual  controls; advanced
vision-based sensors; fiber-optic components; and solenoid valves used in  fluid
control  and processing  industries. Customers  include appliance manufacturers;
automotive companies; food processing companies; oil and gas producers; refining
and petrochemical  companies;  pharmaceutical companies;  paper  companies;  and
utilities.
 
    Space  and Aviation  Control is  a full-line  avionics supplier  and systems
integrator for commercial, military and space applications, providing  automatic
flight  control systems, electronic cockpit displays, flight management systems,
navigation, surveillance and warning  systems, severe weather avoidance  systems
and   flight  reference  sensors.   Customers  include  airframe  manufacturers;
international,  national  and  regional  airlines;  NASA;  prime  U.S.   defense
contractors; and the U.S. Department of Defense.
 
    In  addition to the three industry  segments, Honeywell has two research and
development operations that  promote technology  and products  to both  external
customers and operating units. The results of these research operations comprise
primarily the "other" category.
 
                                       38
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                        HONEYWELL INC. AND SUBSIDIARIES
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
NOTE 17 -- SEGMENT INFORMATION (CONTINUED)
    Information  concerning Honeywell's sales, operating profit and identifiable
assets by industry segment can be found  on page 11. This information for  1996,
1995  and 1994 is an integral part  of these financial statements. Sales include
external sales only. Intersegment sales are not significant. Corporate and other
assets include the  assets of  the entities in  the "other"  category and  cash,
short-term  investments,  investments,  property  and  deferred  taxes  held  by
corporate.
 
    Following is additional financial information relating to industry segments:
 
<TABLE>
<CAPTION>
                                                                    1996       1995       1994
                                                                  ---------  ---------  ---------
<S>                                                               <C>        <C>        <C>
Capital expenditures
  Home and Building Control.....................................  $   106.8  $    87.2  $    95.6
  Industrial Control............................................       74.8       73.0       73.6
  Space and Aviation Control....................................       55.8       42.9       54.9
  Corporate and other...........................................       59.1       35.0       38.3
                                                                  ---------  ---------  ---------
                                                                  $   296.5  $   238.1  $   262.4
Depreciation and amortization
  Home and Building Control.....................................  $    98.4  $    87.4  $    71.8
  Industrial Control............................................       72.3       69.3       67.1
  Space and Aviation Control....................................       84.0      109.7      120.0
  Corporate and other...........................................       32.8       26.5       28.5
                                                                  ---------  ---------  ---------
                                                                  $   287.5  $   292.9  $   287.4
</TABLE>
 
    Honeywell is a global company and as such engages in material operations  in
countries  worldwide.  Geographic  areas of  operation  include  Europe, Canada,
Mexico, Asia, Australia, and South America.
 
    Following is financial information relating to geographic areas:
 
<TABLE>
<CAPTION>
                                                              1996        1995        1994
                                                            ---------  ----------  ----------
<S>                                                         <C>        <C>         <C>
External sales
  United States...........................................  $ 4,477.9  $  4,087.5  $  3,824.7
  Europe..................................................    1,981.7     1,858.9     1,528.5
  Other areas.............................................      852.0       784.9       703.8
                                                            ---------  ----------  ----------
                                                            $ 7,311.6  $  6,731.3  $  6,057.0
Transfers between geographic areas
  United States...........................................  $   364.4  $    318.6  $    293.3
  Europe..................................................       73.2        67.1        46.3
  Other areas.............................................       77.5        61.5        54.3
                                                            ---------  ----------  ----------
                                                            $   515.1  $    447.2  $    393.9
Total sales
  United States...........................................  $ 4,842.3  $  4,406.1  $  4,118.0
  Europe..................................................    2,054.9     1,926.0     1,574.8
  Other areas.............................................      929.5       846.4       758.1
  Eliminations............................................     (515.1)     (447.2)     (393.9)
                                                            ---------  ----------  ----------
                                                            $ 7,311.6  $  6,731.3  $  6,057.0
</TABLE>
 
                                       39
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                        HONEYWELL INC. AND SUBSIDIARIES
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
NOTE 17 -- SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
                                                              1996        1995        1994
                                                            ---------  ----------  ----------
Operating profit
<S>                                                         <C>        <C>         <C>
  United States...........................................  $   484.2  $    425.4  $    343.7
  Europe..................................................      203.0       191.7       139.1
  Other areas.............................................       83.0        55.7        41.2
                                                            ---------  ----------  ----------
  Operating profit........................................      770.2       672.8       524.0
  Interest expense........................................      (81.4)      (83.3)      (75.5)
  Equity income...........................................       13.3        13.6        10.5
  General corporate expense...............................      (91.9)      (97.6)      (89.3)
                                                            ---------  ----------  ----------
  Income before income taxes..............................  $   610.2  $    505.5  $    369.7
Identifiable Assets
  United States...........................................  $ 2,828.3  $  2,331.1  $  2,356.2
  Europe..................................................    1,479.9     1,375.0     1,303.1
  Other areas.............................................      444.9       461.4       434.9
  Corporate...............................................      740.2       892.7       791.7
                                                            ---------  ----------  ----------
                                                            $ 5,493.3  $  5,060.2  $  4,885.9
</TABLE>
 
    Honeywell transfers  products  from  one geographic  region  for  resale  in
another.  These transfers  are priced  to provide  both areas  with an equitable
share of the overall profit.
 
    In December  1994,  Honeywell committed  itself  to  a plan  of  action  and
recorded  special  charges of  $62.7 to  consolidate manufacturing  capacity and
reduce the  overhead structure.  At  December 31,  1996,  the accruals  made  in
December  1994 had  been paid  and were  funded by  cash flows  from operations.
Operating profit is net of provisions for special charges amounting to $62.7  in
1994 as follows: United States, $23.2; Europe, $29.6; other areas, $9.9.
 
NOTE 18 -- PENSION PLANS
    Honeywell  and its subsidiaries have noncontributory defined benefit pension
plans that cover substantially  all of their U.S.  employees. The plan  covering
non-union employees provides pension benefits based on employee average earnings
during  the highest paid 60 consecutive calendar months of employment during the
10 years prior to retirement. The plan covering union employees provides pension
benefits of stated amounts for each year of credited service. Funding for  these
plans  is provided solely through contributions from Honeywell determined by the
Board of  Directors  after  consideration of  recommendations  from  the  plans'
independent  actuary. Such recommendations are  based on actuarial valuations of
benefits payable under the plans.
 
    The components of net periodic pension cost for U.S. defined benefit pension
plans are as follows:
 
<TABLE>
<CAPTION>
                                                                  1996       1995       1994
                                                                ---------  ---------  ---------
<S>                                                             <C>        <C>        <C>
Service cost of benefits earned during the period.............  $    55.6  $    50.5  $    53.8
Interest cost of projected benefit obligation.................      226.3      222.8      201.5
Actual return on assets.......................................     (339.1)    (400.8)     (73.3)
Net amortization and deferral.................................      130.6      228.9      (92.6)
                                                                ---------  ---------  ---------
                                                                $    73.4  $   101.4  $    89.4
</TABLE>
 
                                       40
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                        HONEYWELL INC. AND SUBSIDIARIES
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
NOTE 18 -- PENSION PLANS (CONTINUED)
    Following is a summary  of assumptions used in  the accounting for the  U.S.
defined benefit plans.
 
<TABLE>
<CAPTION>
                                                                         1996       1995       1994
                                                                       ---------  ---------  ---------
<S>                                                                    <C>        <C>        <C>
Discount rate used in determining present values.....................       7.8%       7.5%       8.5%
Annual increase in future compensation levels........................       4.7%       4.4%       5.4%
Expected long-term rate of return on assets..........................       9.5%       8.5%       8.5%
</TABLE>
 
    Employees  in foreign  countries who  are not  U.S. citizens  are covered by
various retirement  benefit arrangements,  some of  which are  considered to  be
defined  benefit  pension plans  for accounting  purposes. The  net cost  of all
foreign pension plans  amounted to $10.9  in 1996,  $(3.6) in 1995  and $1.2  in
1994.
 
    The  components of  net periodic  pension cost  for foreign  defined benefit
pension plans are as follows:
 
<TABLE>
<CAPTION>
                                                                    1996       1995       1994
                                                                  ---------  ---------  ---------
<S>                                                               <C>        <C>        <C>
Service cost of benefits earned during the period...............  $    33.6  $    31.2  $    30.3
Interest cost of projected benefit obligation...................       58.3       55.7       47.6
Actual return on assets.........................................     (102.8)     (90.6)     (43.2)
Net amortization and deferral...................................       19.6       (3.2)     (37.1)
                                                                  ---------  ---------  ---------
                                                                  $     8.7  $    (6.9) $    (2.4)
</TABLE>
 
    Assumptions used in the accounting for foreign defined benefit plans were:
 
<TABLE>
<CAPTION>
                                                             1996         1995         1994
                                                          ----------  ------------  ----------
<S>                                                       <C>         <C>           <C>
Discount rate used in determining present values........    4.5-9.0%      4.5-9.5%    4.5-9.0%
Annual increase in future compensation levels...........    2.0-7.0%     2.0-7.25%    2.0-8.0%
Expected long-term rate of return on assets.............    5.5-9.0%      5.5-9.0%    5.5-9.5%
</TABLE>
 
                                       41
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                        HONEYWELL INC. AND SUBSIDIARIES
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
NOTE 18 -- PENSION PLANS (CONTINUED)
    The plans' funded  status as of  September 30, adjusted  for fourth  quarter
contributions,  and  amounts recognized  in  Honeywell's statement  of financial
position for its pension plans are summarized below.
 
<TABLE>
<CAPTION>
                                                                                       Plans Whose    Plans Whose
                                                                                      Assets Exceed   Accumulated
                                                                                       Accumulated     Benefits
1996 (U.S. and Foreign)                                                                 Benefits     Exceed Assets
------------------------------------------------------------------------------------  -------------  -------------
<S>                                                                                   <C>            <C>
Actuarial present value of benefit obligations:
  Vested benefit obligation.........................................................   $  (3,193.1)    $  (163.0)
  Accumulated benefit obligation....................................................   $  (3,462.2)    $  (192.5)
  Projected benefit obligation......................................................   $  (3,798.9)    $  (211.3)
Plan assets at fair value...........................................................       3,845.0         118.9
                                                                                      -------------  -------------
Projected benefit obligation (in excess of) less than plan assets...................          46.1         (92.4)
Remaining unrecognized net transition obligation (asset)............................         (81.1)         41.4
Unrecognized prior service cost.....................................................         233.2           9.0
Unrecognized net loss...............................................................          40.5          25.0
Other...............................................................................           0.1          (1.3)
Fourth-quarter 1996 contributions to plans..........................................          20.3           0.6
Adjustment to recognize minimum liability...........................................                       (17.8)
                                                                                      -------------  -------------
Overfunded (unfunded) pension asset (liability) recognized in the statement of
 financial position.................................................................   $     259.1     $   (35.5)
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                       Plans Whose    Plans Whose
                                                                                      Assets Exceed   Accumulated
                                                                                       Accumulated     Benefits
1995 (U.S. and Foreign)                                                                 Benefits     Exceed Assets
------------------------------------------------------------------------------------  -------------  -------------
<S>                                                                                   <C>            <C>
Actuarial present value of benefit obligations:
  Vested benefit obligation.........................................................   $    (503.3)   $  (2,778.7)
  Accumulated benefit obligation....................................................   $    (506.5)   $  (2,988.4)
  Projected benefit obligation......................................................   $    (631.4)   $  (3,236.0)
Plan assets at fair value...........................................................         809.2        2,740.5
                                                                                      -------------  -------------
Projected benefit obligation (in excess of) less than plan assets...................         177.8         (495.5)
Remaining unrecognized net transition obligation (asset)............................         (68.6)          11.1
Unrecognized prior service cost.....................................................           3.8          205.9
Unrecognized net (gain) loss........................................................         (34.6)         259.8
Fourth-quarter 1995 contributions to plans..........................................                         36.1
Adjustment to recognize minimum liability...........................................                       (220.2)
                                                                                      -------------  -------------
Overfunded (unfunded) pension asset (liability) recognized in the statement of
 financial position.................................................................   $      78.4    $    (202.8)
</TABLE>
 
    Adjustments recorded to recognize the minimum liability required for defined
benefit pension plans whose accumulated benefits exceed assets amounted to $17.8
in 1996  and  $220.2  in 1995.  A  corresponding  amount was  recognized  as  an
intangible   asset  to  the  extent  of  unrecognized  prior  service  cost  and
unrecognized transition obligation. At December 31, 1996, $8.0 of excess minimum
 
                                       42
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                        HONEYWELL INC. AND SUBSIDIARIES
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
NOTE 18 -- PENSION PLANS (CONTINUED)
liability resulted in a reduction in shareholders' equity, net of income  taxes,
of  $4.9. At December 31, 1995, $32.6  of excess minimum liability resulted in a
reduction in shareholders' equity, net of income taxes, of $19.9.
 
    Plan assets are held  by trust funds devoted  to servicing pension  benefits
and  are not  available to  Honeywell until  all covered  benefits are satisfied
after a plan  is terminated. The  assets held by  the trust funds  consist of  a
diversified portfolio of fixed-income investments and equity securities.
 
NOTE 19 -- POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
    Substantially  all of Honeywell's domestic and Canadian employees who retire
from Honeywell between the ages  of 55 and 65 with  10 or more years of  service
are  eligible to receive health-care benefits,  until age 65, identical to those
available to  active employees.  Honeywell funds  postretirement benefits  on  a
pay-as-you-go basis.
 
    The components of net periodic postretirement benefit cost are as follows:
 
<TABLE>
<CAPTION>
                                                                        1996       1995       1994
                                                                      ---------  ---------  ---------
<S>                                                                   <C>        <C>        <C>
Service cost of benefits earned during the period...................  $    13.0  $    11.5  $    10.4
Interest cost on accumulated postretirement benefit obligation......       22.4       23.1       18.0
Net amortization....................................................        0.9        1.1        0.5
                                                                      ---------  ---------  ---------
                                                                      $    36.3  $    35.7  $    28.9
</TABLE>
 
    The amounts recognized in Honeywell's statement of financial position are as
follows:
 
<TABLE>
<CAPTION>
                                                                              1996       1995
                                                                            ---------  ---------
<S>                                                                         <C>        <C>
Accumulated postretirement benefit obligation:
  Retirees................................................................  $    78.9  $    90.4
  Fully eligible active plan participants.................................       60.2       63.8
  Other active plan participants..........................................      148.3      175.5
  Unrecognized prior service cost.........................................       (6.0)      (6.9)
  Unrecognized net gain (loss)............................................       41.0      (14.8)
                                                                            ---------  ---------
Accrued postretirement benefit cost.......................................  $   322.4  $   308.0
</TABLE>
 
    The  discount rate used in determining the  APBO was 7.5 percent in 1996 and
7.0 percent in 1995. The assumed  health-care cost trend rate used in  measuring
the  APBO was  5.7 percent.  The health-care  cost trend  rate assumption  has a
significant effect on the amounts reported. For example, a one percent  increase
in  the  health-care trend  rate  would increase  the  APBO by  11.0  percent at
December 31, 1996,  and the  net periodic  postretirement benefit  cost by  14.4
percent for 1996.
 
NOTE 20 -- CONTINGENCIES
 
LITTON LITIGATION
 
    On March 13, 1990, Litton Systems, Inc. filed suit against Honeywell in U.S.
District  Court, Central  District of  California, alleging  patent infringement
relating to a process used by Honeywell to coat mirrors incorporated in its ring
laser  gyroscopes;   intentional  interference   by  Honeywell   with   Litton's
prospective advantage with customers and with its contractual relationships with
Ojai  Research,  Inc.; and  attempted  monopolization and  predatory  pricing by
Honeywell in certain alleged
 
                                       43
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                        HONEYWELL INC. AND SUBSIDIARIES
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
NOTE 20 -- CONTINGENCIES (CONTINUED)
markets for products containing ring laser gyroscopes. Honeywell denied Litton's
allegations; contested both  the validity  and infringement of  the patent;  and
alleged that the patent had been obtained by Litton's inequitable conduct before
the United States Patent and Trademark Office.
 
    U.S.  District Judge Mariana Pfaelzer presided  over the trial of the patent
and two state tort claims and on August  31, 1993, a jury returned a verdict  in
favor  of Litton  and awarded  damages against Honeywell  in the  amount of $1.2
billion for these claims. On January 9, 1995, the trial court set aside the jury
verdict and damage award, ruling, among other things, that the Litton patent was
unenforceable and invalid. The trial court  also ruled that if its rulings  were
vacated  or reversed on  appeal, Honeywell would  be granted a  new trial on the
issue of damages because the jury's award was inconsistent with the clear weight
of the evidence.
 
    Litton appealed  to the  United  States Court  of  Appeals for  the  Federal
Circuit,  and on July 3,  1996, a three judge  panel overruled the trial court's
rulings of patent  invalidity, unenforceability and  non-infringement, and  also
found  Honeywell liable  under Litton's  state tort  claims. However,  the panel
upheld the trial court's ruling  that Honeywell is entitled  to a new trial  for
damages  on  all  claims,  as  well as  its  granting  to  Honeywell  of certain
intervening patent rights. Honeywell requested a rehearing by the full Court  of
Appeals, which was denied on September 11, 1996. On November 26, 1996, Honeywell
petitioned  the U.S.  Supreme Court  for review  of the  panel's decision, which
petition is still pending. In the interim, Litton filed a motion with the  trial
court seeking injunctive relief which was denied on December 23, 1996.
 
    The  patent and tort damages  retrial is scheduled to  begin May 6, 1997. On
February 7, 1997,  Litton submitted damage  studies seeking damages  as high  as
$1.9  billion. Honeywell  believes that Litton's  damage studies  are flawed and
speculative for a number of reasons. Although it is not possible to predict  the
verdict  of the jury in the upcoming trial,  and such verdict could result in an
award which is material, Honeywell believes that any award should be based on  a
royalty  which reasonably reflects the value  of the mirror coating process, and
that such an award  would not be material  to Honeywell's financial position  or
results of operations.
 
    The  jury trial for the antitrust case  began November 20, 1995, also before
Judge Pfaelzer.  The  trial court  dismissed,  for failure  of  proof,  Litton's
contentions  that  Honeywell engaged  in  below-cost predatory  pricing, illegal
tying and bundling, and  an illegal acquisition of  Sperry Avionics in 1986.  On
February   2,  1996,  the  case  was  submitted  to  the  jury  on  two  claims,
monopolization and attempt to monopolize. These claims were based on allegations
that Honeywell  entered into  certain long-term  exclusive dealing  and  penalty
arrangements with aircraft manufacturers and airlines to exclude Litton from the
commercial  aircraft market,  and that Honeywell  failed to  provide Litton with
access to certain proprietary software. On February 29, 1996, the jury  returned
a  $234 million single damages verdict  against Honeywell for the monopolization
claim, which would have been automatically  trebled. On March 1, 1996, the  jury
indicated  that it was  unable to reach  a verdict on  damages for the attempted
monopolization claim, and a mistrial was  declared on that claim. Following  the
verdict,  Honeywell filed a Motion for Judgment as  a Matter of Law and a Motion
for a New Trial, contending that the jury's partial verdict should be overturned
because Litton (i)  failed to  prove essential  elements of  liability and  (ii)
failed to submit competent evidence to support its claim for damages by offering
only  a speculative, all-or-nothing $298.5 million  damage study. Litton filed a
Motion for Injunctive Relief and a Motion for Entry of Judgment.
 
                                       44
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                        HONEYWELL INC. AND SUBSIDIARIES
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
NOTE 20 -- CONTINGENCIES (CONTINUED)
    On July 24, 1996, the trial court denied Honeywell's Motion for Judgment  as
a  Matter of Law but concluded, that Litton's damage study was seriously flawed,
and granted Honeywell a retrial on damages only. The court also denied  Litton's
Motion  for Injunctive Relief and Litton's Motion for Entry of Judgment. No date
has been set for the retrial on damages. Honeywell believes there are  questions
concerning  what conduct the original jury  found anti-competitive that may give
rise to damages  in a retrial,  and consequently a  damages retrial should  also
require  a retrial of  liability issues in some  respects. Following the damages
retrial, Honeywell will have the right to appeal both the liability and  damages
verdicts. Therefore, no provision has been made in the financial statements with
respect to this contingent liability.
 
    In  the fall of 1996, Litton and Honeywell commenced court ordered mediation
of the  patent, tort  and antitrust  claims.  No resolution  of the  claims  has
occurred and the mediation is currently in recess.
 
ENVIRONMENTAL MATTERS
 
    Honeywell's  manufacturing  sites generate  both hazardous  and nonhazardous
wastes, the treatment, storage, transportation and disposal of which are subject
to various  local,  state  and  federal  laws  relating  to  protection  of  the
environment.  Honeywell is in varying stages  of investigation or remediation of
potential, alleged  or acknowledged  contamination  at currently  or  previously
owned  or operated sites and  at off-site locations where  its wastes were taken
for treatment or disposal.  In connection with the  cleanup of various  off-site
locations,  Honeywell, along  with a  large number  of other  entities, has been
designated a  potentially  responsible party  (PRP)  by the  U.S.  Environmental
Protection  Agency under the  Comprehensive Environmental Response, Compensation
and Liability Act  or by state  agencies under similar  state laws  (Superfund),
which  potentially subject PRPs to joint and  several liability for the costs of
such  cleanup.  In   addition,  Honeywell   is  incurring   costs  relating   to
environmental  remediation  pursuant to  the  federal Resource  Conservation and
Recovery Act. Based on Honeywell's assessment  of the costs associated with  its
environmental  responsibilities, compliance  with federal, state  and local laws
regulating the  discharge  of  materials  into  the  environment,  or  otherwise
relating  to the protection of the environment,  has not had and, in the opinion
of Honeywell  management,  will  not  have  a  material  effect  on  Honeywell's
financial  position, net  income, capital expenditures  or competitive position.
Honeywell's opinion with regard to Superfund matters is based on its  assessment
of  the predicted investigation, remediation  and associated costs, its expected
share of those costs, and the availability of legal defenses. Honeywell's policy
is to  record  environmental liabilities  when  loss amounts  are  probable  and
reasonably estimable.
 
OTHER MATTERS
 
    Honeywell  is a party to a large  number of other legal proceedings, some of
which are for  substantial amounts.  It is the  opinion of  management that  any
losses  in connection  with these  matters will  not have  a material  effect on
Honeywell's net income, financial position or liquidity.
 
    Honeywell  has  entered  into  letter  of  credit  agreements  with  various
financial  institutions to  support certain financing  instruments and insurance
policies aggregating approximately $185.2 at December 31, 1996.
 
                                       45
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                        HONEYWELL INC. AND SUBSIDIARIES
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
NOTE 21 -- QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
1996                                           1ST QTR.    2ND QTR.    3RD QTR.    4TH QTR.
--------------------------------------------  ----------  ----------  ----------  ----------
<S>                                           <C>         <C>         <C>         <C>
Sales.......................................  $  1,619.5  $  1,771.6  $  1,803.1  $  2,117.4
Cost of sales...............................     1,109.0     1,222.6     1,221.7     1,422.1
Net income..................................        65.1        83.3       101.1       153.2
  Per share.................................        0.51        0.66        0.80        1.21
 
<CAPTION>
 
1995                                           1st Qtr.    2nd Qtr.    3rd Qtr.    4th Qtr.
--------------------------------------------  ----------  ----------  ----------  ----------
<S>                                           <C>         <C>         <C>         <C>
Sales.......................................  $  1,478.7  $  1,655.6  $  1,680.3  $  1,916.7
Cost of sales...............................     1,013.2     1,137.8     1,148.1     1,285.1
Net income..................................        54.7        68.9        84.2       125.8
  Per share.................................        0.43        0.54        0.66        0.99
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                     Common Stock Price
                                                                                      (New York Stock
                                                                                    Exchange Composite)
                                                                     Dividends Per  --------------------
                                                                         Share        High        Low
                                                                     -------------  ---------  ---------
<S>        <C>                                                       <C>            <C>        <C>
1996       FIRST QUARTER...........................................    $     .26    $  57 1/2  $  44 3/8
           SECOND QUARTER..........................................          .26       56 5/8     49 3/8
           THIRD QUARTER...........................................          .27       65 7/8     48 1/4
           FOURTH QUARTER..........................................          .27       69 7/8     59 7/8
1995       First Quarter...........................................    $     .25    $  38 1/2  $  30 3/4
           Second Quarter..........................................          .25       44 3/4     36 3/4
           Third Quarter...........................................          .25       46 1/2     40 5/8
           Fourth Quarter..........................................          .26       49 1/2     39 1/4
</TABLE>
 
    Shareholders of record on January 31, 1997, totaled 31,658.
 
NOTE 22 -- SUBSEQUENT EVENT
 
    On  January  27,  1997,  Honeywell  announced that  it  had  entered  into a
definitive agreement to acquire Measurex Corporation for approximately $600.0 in
cash. Under the  terms of the  agreement, which  was approved by  the Boards  of
Directors  of both companies,  a Honeywell subsidiary has  commenced an all cash
tender offer for  all the  shares of Measurex.  The offer  is conditioned  upon,
among  other things, there having been validly tendered, and not withdrawn prior
to the expiration of the tender offer, a number of Measurex shares which equal a
majority of the shares outstanding on  a fully diluted basis and the  expiration
of  governmental  waiting  periods  relating  to  acquisitions  and satisfactory
completion of  certain  environmental  tests. On  January  30,  1997,  Honeywell
increased the amounts available under its committed credit lines, under which it
may  borrow to finance the acquisition, from  $725 million to $1.375 billion. It
is anticipated that borrowings, if any, in connection with the acquisition  will
be  repaid  for  internally generated  funds  of Honeywell  and  Measurex and/or
refinanced in the private or public markets. Measurex Corporation is a  supplier
of   computer-integrated  measurement,  control   and  information  systems  and
services. For the year ended December 1, 1996, Measurex reported sales of $416.0
and net income of $37.0. The acquisition will be accounted for as a purchase and
will be included in the Industrial Automation and Control business unit.
 
                                       46
<PAGE>
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
    No  report  on  Form  8-K  reporting  a  change  in  Honeywell's  certifying
independent accountants has been filed within the 24 months prior to the date of
the most recent financial statements.
 
                                    PART III
 
ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
    Pages 6 through 11 of the Honeywell Notice of 1997 Annual Meeting and  Proxy
Statement are incorporated herein by reference.
 
ITEM 11.  EXECUTIVE COMPENSATION
 
    Pages 17 through 26 of the Honeywell Notice of 1997 Annual Meeting and Proxy
Statement are incorporated herein by reference.
 
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
    Page  16 of the Honeywell Notice of  1997 Annual Meeting and Proxy Statement
are incorporated herein by reference.
 
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
    None.
 
                                    PART IV
 
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
    (A) DOCUMENTS FILED AS A PART OF THIS REPORT
 
1.  FINANCIAL STATEMENTS
    The financial statements required to be filed as part of this Annual  Report
on Form 10-K are listed below with their location in this report.
 
<TABLE>
<CAPTION>
                                                                                         PAGE
                                                                                       ---------
<S>                                                                                    <C>
Honeywell Inc. and Subsidiaries:
  Independent Auditors' Report.......................................................         21
  Income Statement...................................................................         22
  Statement of Financial Position....................................................         23
  Statement of Cash Flows............................................................         24
  Notes to Financial Statements......................................................         25
</TABLE>
 
2.  FINANCIAL STATEMENT SCHEDULES
    The  schedules required to  be filed as  part of this  Annual Report on Form
10-K are listed below with their location in this report.
 
                                                                       PAGE
                                                                       ----
Honeywell Inc. and Subsidiaries:
  Independent Auditors' Report......................................     21
  Schedules for the Years Ended December 31, 1996, 1995 and 1994:
       II   --    Valuation Reserves................................     51
 
    All schedules,  other  than indicated  above,  are omitted  because  of  the
absence  of  the  conditions  under  which  they  are  required  or  because the
information required is shown in the financial statements or notes thereto.
 
                                       47
<PAGE>
3.  EXHIBITS
    Documents Incorporated by Reference:
 
<TABLE>
<S>          <C>
 (3)(i)      Restated Certificate of Incorporation of Honeywell Inc. dated June 18, 1991
             is incorporated by reference to Exhibit 3(a) to Honeywell Annual Report  on
             Form  10-K for  the fiscal  year ended  December 31,  1992, Commission file
             number 1-971.
 (4)(i)      Rights Agreement  between Honeywell  Inc. and  Chemical Mellon  Shareholder
             Services  L.L.C.,  as  Rights  Agent,  dated  as  of  January  16,  1996 is
             incorporated by reference  to Exhibit  4 to Honeywell's  Current Report  on
             Form 8-K dated January 31, 1996.
 (4)(ii)(a)  Indenture, dated as of August 1, 1994, between Honeywell Inc. and The Chase
             Manhattan  Bank  (National  Association),  as  Trustee  for  Honeywell Inc.
             Medium-Term Notes, Series A is incorporated by reference to Exhibit  (4)(b)
             to  Honeywell's  Annual  Report on  Form  10-K  for the  fiscal  year ended
             December 31, 1994.
 (4)(ii)(b)  Indenture, dated as of July 15, 1996, between Honeywell Inc., as Guarantor,
             Honeywell Canada  Limited,  Honeywell N.V.  and  The Chase  Manhattan  Bank
             (National  Association), as  Trustee for  Honeywell Inc.,  Honeywell Canada
             Limited, Honeywell  N.V. is  incorporated by  reference to  Exhibit 4.2  to
             Honeywell's Current Report on Form 8-K dated July 18, 1996.
(10)(i)(a)   Form  of Revolving  Credit dated as  of October 1,  1995 betweeen Honeywell
             Inc., Honeywell Finance  Inc., and each  of the 21  banks a party  thereto,
             providing  for loans of up to $725 million in the aggregate is incorporated
             by reference to  Exhibit 99.B.1  to Schedule 14D-1  Tender Offer  Statement
             filed  by Honeywell Acquisition Corp. and  Honeywell Inc. dated January 31,
             1997.
(10)(i)(b)   Revolving Credit Agreement  dated as  of January 30,  1997 among  Honeywell
             Inc.,  The Chase  Manhattan Bank and  Morgan Guaranty Trust  Company of New
             York, The Chase Manhattan Bank, as Administrative Agent and Morgan Guaranty
             Trust Company  of  New York,  as  Documentation Agent  is  incorporated  by
             reference  to Exhibit 99.B.1 to Schedule 14D-1 Tender Offer Statement filed
             by Honeywell Acquisition Corp. and Honeywell Inc. dated January 31, 1997.
(10)(iii)(a) Honeywell Key  Employee  Severance  Plan, as  amended  is  incorporated  by
             reference to Exhibit (10)(iii)(a) to Honeywell's Annual Report on Form 10-K
             for the fiscal year ended December 31, 1994.*
(10)(iii)(b) Honeywell  Supplementary Executive Retirement Plan for Mid-Career Hires, as
             amended is incorporated by reference to Exhibit (10)(iii)(b) to Honeywell's
             Annual Report on Form 10-K for the fiscal year ended December 31, 1994.*
(10)(iii)(c) Honeywell-Norwest Rabbi  Trust Agreement,  as  amended is  incorporated  by
             reference to Exhibit (10)(iii)(c) to Honeywell's Annual Report on Form 10-K
             for the fiscal year ended December 31, 1994.*
(10)(iii)(d) 1993  Honeywell Stock  and Incentive  Plan, as  amended is  incorporated by
             reference to Exhibit (10)(iii)(d) to Honeywell's Annual Report on Form 10-K
             for the fiscal year ended December 31, 1994.*
(10)(iii)(e) 1988 Honeywell  Stock and  Incentive Plan,  as amended  is incorporated  by
             reference to Exhibit (10)(iii)(e) to Honeywell's Annual Report on Form 10-K
             for the fiscal year ended December 31, 1994.*
</TABLE>
 
                                       48
<PAGE>
3.  EXHIBITS (CONTINUED)
<TABLE>
<S>          <C>
(10)(iii)(g) Honeywell Corporate Executive Compensation Plan, as amended is incorporated
             by  reference to Exhibit (10)(iii)(g) to  Honeywell's Annual Report on Form
             10-K for the fiscal year ended December 31, 1996.*
(10)(iii)(h) Honeywell Supplementary  Executive  Retirement  Plan  for  Compensation  in
             Excess  of $200,000,  as amended  is incorporated  by reference  to Exhibit
             (10)(iii)(h) to Honeywell's Annual Report on Form 10-K for the fiscal  year
             ended December 31, 1994.*
(10)(iii)(i) Honeywell Supplementary Executive Retirement Plan for CECP Participants, as
             amended is incorporated by reference to Exhibit (10)(iii)(i) to Honeywell's
             Annual Report on Form 10-K for the fiscal year ended December 31, 1994.*
(10)(iii)(j) Honeywell  Supplementary  Retirement Plan,  as  amended is  incorporated by
             reference to Exhibit (10)(iii)(j) to Honeywell's Annual Report on Form 10-K
             for the fiscal year ended December 31, 1994.*
(10)(iii)(k) Honeywell Supplementary Executive Retirement Plan for Benefits in Excess of
             Limits Under  Tax  Reform  Act  of 1986,  as  amended  is  incorporated  by
             reference to Exhibit (10)(iii)(k) to Honeywell's Annual Report on Form 10-K
             for the fiscal year ended December 31, 1994.*
(10)(iii)(l) Honeywell  Executive Life Insurance Agreement, is incorporated by reference
             to Exhibit 10(iii)(m)  to Honeywell's Annual  Report on Form  10-K for  the
             fiscal year ended December 31, 1993.*
(10)(iii)(m) Form  of  Executive Termination  Contract is  incorporated by  reference to
             Exhibit (10)(iii)(m)  to Honeywell's  Annual Report  on Form  10-K for  the
             fiscal year ended December 31, 1994.*
(10)(iii)(n) Honeywell  Senior Management Performance Incentive  Plan is incorporated by
             reference to Exhibit (10)(iii)(o) to Honeywell's Annual Report on Form 10-K
             for the fiscal year ended 1996.*
(99)(ii)     Honeywell Notice of 1997 Annual Meeting and Proxy Statement.**
Exhibits submitted herewith:
 (3)(ii)     By-laws of Honeywell Inc., as amended through February 18, 1997.
(10)(iii)(f) Honeywell Non-Employee Directors Fee and Stock Unit Plan.*
(11)         Computation of Earnings Per Share.
(12)         Computation of Ratios of Earnings to Fixed Charges.
(21)         Subsidiaries of Honeywell.
(23)         Consent of Independent Auditors.
(24)         Powers of Attorney.
(27)         Financial Data Schedule.
(99)(i)      Cautionary Statements for  Purposes of  the Safe Harbor  Provisions of  The
             Private Securities Litigation Reform Act of 1995.
(B)  REPORTS ON FORM 8-K
None
</TABLE>
 
------------------------
 *Management contract or compensatory plan or arrangement.
**Only  the portions of Exhibit  (99)(ii) specifically incorporated by reference
  are deemed filed with the Commission.
 
                                       49
<PAGE>
                                   SIGNATURES
 
    Pursuant  to  the requirements  of  Section 13  or  15(d) of  the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
 
                                HONEYWELL INC.
 
                                By:            /s/ SIGURD UELAND, JR.
                                     -----------------------------------------
                                         Sigurd Ueland, Jr., VICE PRESIDENT
 
Dated: February 25, 1997
 
    Pursuant to the requirements  of the Securities Exchange  Act of 1934,  this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities and on the dates indicated.
 
<TABLE>
<CAPTION>
          SIGNATURE                                               TITLE
-----------------------------  ----------------------------------------------------------------------------
 
<S>                            <C>
M. R. BONSIGNORE               Chairman of the Board and Chief Executive Officer and Director
 
L.W. STRANGHOENER              Vice President and Chief Financial Officer
 
P. M. PALAZZARI                Vice President and Controller, and Principal Accounting Officer
 
A. J. BACIOCCO, JR.            Director
 
E. E. BAILEY                   Director
 
E. H. CLARK, JR.               Director
 
W. H. DONALDSON                Director
 
R. D. FULLERTON                Director
 
J. J. HOWARD                   Director
 
B. E. KARATZ                   Director
 
D. L. MOORE                    Director
 
A. B. RAND                     Director
 
S. G. ROTHMEIER                Director
 
M. W. WRIGHT                   Director
</TABLE>
 
By:    /s/ SIGURD UELAND, JR.
      -------------------------
         Sigurd Ueland, Jr.,
          ATTORNEY-IN-FACT
          February 25, 1997
 
                                       50
<PAGE>
                                                                     SCHEDULE II
                        HONEYWELL INC. AND SUBSIDIARIES
 
                               VALUATION RESERVES
 
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                             (DOLLARS IN MILLIONS)
 
<TABLE>
<CAPTION>
                                                                  BALANCE AT    ADDITIONS    DEDUCTIONS    BALANCE
                                                                   BEGINNING   CHARGED TO       FROM      AT CLOSE
                                                                    OF YEAR      INCOME       RESERVES     OF YEAR
                                                                  -----------  -----------  ------------  ---------
<S>                                                               <C>          <C>          <C>           <C>
Reserves deducted from assets to which they apply -- allowance
 for doubtful accounts:
RECEIVABLES -- CURRENT
Year ended December 31, 1996....................................   $    34.5   $  10.5 (1)  $   11.5 (2)       33.5
Year ended December 31, 1995....................................        31.1      10.4 (1)       7.0 (2)       34.5
Year ended December 31, 1994....................................        24.3      12.5 (1)       5.7 (2)       31.1
LONG-TERM RECEIVABLES
Year ended December 31, 1996....................................         0.7            --            --        0.7
Year ended December 31, 1995....................................         0.7            --            --        0.7
Year ended December 31, 1994....................................         0.5            --      (0.2)(2)        0.7
Reserves deducted from assets to which they apply -- valuation
 reserve:
LONG-TERM RECEIVABLES
Year ended December 31, 1996....................................         1.8      (0.1)(1)            --        1.7
Year ended December 31, 1995....................................         1.9      (0.1)(1)            --        1.8
Year ended December 31, 1994....................................         3.6      (1.7)(1)            --        1.9
Reserves deducted from assets to which they apply -- allowance
 for amortization of intangibles:
GOODWILL
Year ended December 31, 1996....................................        49.2      21.5 (3)      (4.2)(4)       74.9
Year ended December 31, 1995....................................        42.3      12.6 (3)       5.7 (4)       49.2
Year ended December 31, 1994....................................        34.3       8.6 (3)       0.6 (4)       42.3
PATENTS, LICENSES AND TRADEMARKS
Year ended December 31, 1996....................................        75.8       9.8 (3)       2.2 (4)       83.4
Year ended December 31, 1995....................................       175.4      24.0 (3)     123.6 (4)       75.8
Year ended December 31, 1994....................................       170.0      24.2 (3)      18.8 (4)      175.4
SOFTWARE AND OTHER INTANGIBLES
Year ended December 31, 1996....................................       168.1      20.1 (3)      (0.9)(4)      189.1
Year ended December 31, 1995....................................       152.4      20.2 (3)       4.5 (4)      168.1
Year ended December 31, 1994....................................       135.4      19.3 (3)       2.3 (4)      152.4
</TABLE>
 
------------------------
Notes:
 
(1) Represents amounts included in selling, general and administrative expense.
 
(2)   Represents  uncollectible  accounts  written   off,  less  recoveries  and
    translation adjustments.
 
(3) Represents amounts included in cost of sales.
 
(4) Represents removal of fully amortized amounts and translation adjustments.
 
                                       51