<PAGE>
1998
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
 
                                   FORM 10-K
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
 
<TABLE>
<C>          <S>
(Mark One)
    [X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
             SECURITIES EXCHANGE ACT OF 1934
 
                          For the fiscal year ended December 31, 1998
 
                                               OR
 
    [ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
             THE SECURITIES EXCHANGE ACT OF 1934
</TABLE>
 
For the transition period from ....................... to ......................
 
                          Commission file number 1-971
 
                                 HONEYWELL INC.
             (Exact name of registrant as specified in its charter)
 
<TABLE>
<S>                                              <C>
                   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)
</TABLE>
 
        Registrant's telephone number, including area code 612-951-1000
 
          Securities registered pursuant to Section 12(b) of the Act:
 
<TABLE>
<CAPTION>
          Title of each class            Name of each exchange on which registered
---------------------------------------  -----------------------------------------
<S>                                      <C>
Common Stock, par value $1.50 per share           New York Stock Exchange
 
Preferred Stock Purchase Rights                   New York Stock Exchange
</TABLE>
 
    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 $71.8125 on February 19, 1999, the
aggregate market value of the voting stock held by nonaffiliates of the
registrant was $9,033,816,021.
 
    As of February 19, 1999, the number of shares outstanding of the
registrant's common stock, par value $1.50 per share, was 126,308,756 shares.
 
                  DOCUMENTS INCORPORATED IN PART BY REFERENCE
 
<TABLE>
<CAPTION>
Incorporated Documents                                                   Location in Form 10-K
-----------------------------------------------------------------------  ----------------------
<S>                                                                      <C>
Honeywell Notice of 1999 Annual Meeting and Proxy Statement                     Part III
</TABLE>
 
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
                                     PART I
 
ITEM 1.  BUSINESS
 
    Honeywell, Inc. is an international controls company that develops and
supplies advanced-technology products, systems and services to homes and
buildings, industry, and space and aviation. These products, systems and
services are designed to conserve energy, protect the environment, improve
productivity, enhance comfort and increase safety.
 
    Honeywell was incorporated in the State of Delaware in 1927. Its principal
offices are located in Minneapolis, Minnesota.
 
                          INDUSTRY SEGMENT INFORMATION
 
    Honeywell's businesses 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 14.
 
HOME AND BUILDING CONTROL
 
    Home and Building Control provides products and services which, are intended
to create efficient, safe, comfortable environments, such as: 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.
 
    Home and Building Control manufactures, markets and installs mechanical,
pneumatic, electrical and electronic control products for heating, ventilation,
air conditioning and lighting in homes, and commercial, industrial and public
buildings. These controls are produced for a variety of applications and
products, including: burner and boiler control, lighting, thermostatic
radiators, pressure regulators for water systems, thermostats, valves and
actuators, ignition controls, humidistats, relays, contactors, transformers,
air-quality products and security products. Home and Building Control systems,
which may be generic or specifically designed for each application, may include
panels and control systems to centralize mechanical and electrical functions.
Through its Consumer Products business, Home and Building Control produces
standalone products such as fans, heaters, thermostats, humidifiers, and air and
water filtration products.
 
    Home and Building Control's Solutions and Services business provides: indoor
air-quality services, and central-station burglary and fire protection services
for homes and commercial buildings; video surveillance, and 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; and energy management
and energy retrofit services. This business also provides enterprise building
solutions designed to improve business outcomes, including building controls,
facility integration, critical environments, energy and process utilities,
integrated security and asset management, and building information services.
 
    Most of Home and Building Control's products, systems and services are sold
directly to original equipment manufacturers, including manufacturers of heating
and air conditioning equipment, architects and developers, building managers and
owners, and consulting engineers; and through wholesalers, distributors,
dealers, contractors, hardware stores, home-care centers and Honeywell's
nationwide sales and service organization. Standalone consumer products are sold
primarily through retailers such as hardware stores and home-care centers.
 
                                       1
<PAGE>
INDUSTRIAL CONTROL
 
    Industrial Control serves the automation and control needs of its worldwide
industrial customers by supplying products, systems and services ranging from
sensors to integrated systems designed for specific applications, to help
customers improve productivity and meet increasingly stringent environmental and
safety requirements.
 
    Industrial Control's Automation and Control business provides process
control systems, and associated application software and services, to customers
to a broad range of markets, including process industries such as: refining oil
and gas, petrochemical, bulk and fine chemical, and pulp-and-paper, as well as
the electric utility, food and consumer goods, pharmaceutical, metals and
transportation industries. Industrial Control also designs and manufactures
process instruments, process controllers, recorders, programmers, programmable
controllers, transmitters and other field instruments, which may be sold as
stand-alone products or integrated into control systems. These products are
generally used in indicating, recording and automatically controlling process
variables in manufacturing processes.
 
    Industrial Control's Sensing and Control business 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, 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 Sensing and Control products include optoelectronic
devices, and fiber-optic systems and components, as well as transducers, and
high-accuracy noncontact measurement and detection products for factory
automation, quality inspection and robotics applications.
 
    The Honeywell-Measurex organization within Industrial Control supplies
measurements, control and industrial automation systems that unify business and
control information for the pulp and paper and other continuous web producers.
Honeywell-Measurex serves the paper, plastics, metals, rubber, non-wovens and
printing industries worldwide with sensor-based quality control, distributed
control and cross-directional control systems, web inspection systems, paper
machine actuators and professional services including consulting, optimization,
engineering and installation.
 
    Industrial Control also furnishes industrial customers with: product and
component testing services; project management, engineering and installation
services; instrument maintenance, repair and calibration services; various
contract services for industrial control equipment, including third-party
maintenance for CAD/CAM and other industrial control equipment; advanced
control, and networking and optimization services; as well as training,
customized products for customer applications and a range of other customer
support services.
 
    Industrial Control has an extensive customer base worldwide, including most
of the leading oil refiners, pulp and paper manufacturers, and chemical
companies. Its systems and services are generally sold directly to users on a
monthly or annual contract basis. Products are customarily sold directly to end
users, equipment manufacturers and contractors on a delivered, supervised or
installed basis, or through third-party channels such as distributors and
systems houses.
 
SPACE AND AVIATION CONTROL
 
    Honeywell's Space and Aviation Control segment supplies a full-line of
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, and airports.
 
    Products manufactured for aircraft use include: integrated avionics systems,
ring laser gyro-based inertial flight reference systems, navigation and guidance
systems, flight control systems, flight
 
                                       2
<PAGE>
management systems, severe weather avoidance systems, inertial sensors, air data
computers, radar altimeters, automatic test equipment, cockpit display systems,
and other communication and flight instrumentation. Space and Aviation Control
also provides satellite landing systems, airfield lighting products for
airports, surface vehicle tracking systems, and other electronic systems,
including navigational and guidance systems for missiles and military land
vehicles.
 
    Space and Aviation Control 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, surveillance and warning systems, and on-board data processing. Other
products and services include spacecraft attitude and positioning systems,
precision pointing and isolation systems, and communications services.
 
    Space and Aviation Control's avionics have been purchased by leading
airframe 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, the Bombardier Global Express; and by international, national
and regional airlines. In the military and space markets, where customers
include NASA, prime U.S. defense contractors and the U.S. Department of Defense,
Space and Aviation Control 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.
 
OTHER
 
    In addition to the three segments described above, Honeywell has two
research and development operations that promote technology and products to both
external customers and operating units.
 
    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.
 
    These operations, as well as transactions involving businesses which have
been discontinued by Honeywell, are reported in the Financial Statements under
the "Other" category.
 
                              GENERAL INFORMATION
 
RAW MATERIALS
 
    Honeywell experienced no significant or unusual problems in the purchase of
raw materials and commodities in 1998. 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 1999.
 
                                       3
<PAGE>
PATENTS, TRADEMARKS, LICENSES AND DISTRIBUTION RIGHTS
 
    Honeywell's business as a whole, and that of its segments and their
strategic business units, is not dependent upon any single patent or related
group of patents, or any licenses or 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. Honeywell also 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 8 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. 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
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 $4,388.0 million at December 31, 1998, and $4,244 million at
December 31, 1997. All but approximately $849.6 million of the 1998 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.
 
COMPETITION
 
    Honeywell is subject to active competition in substantially all product and
service areas. Competitors generally are engaged in business on a national 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 over 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
 
                                       4
<PAGE>
nature of such businesses. In engineering, construction, consulting and research
activities, technological capability and a record of proven reliability are
generally the principal competitive factors. Although Honeywell may have
relatively few significant competitors in the small number of the markets for
its highly specialized products and services, in most markets there are many
competitors.
 
RESEARCH AND DEVELOPMENT
 
    During 1998, Honeywell spent approximately $482 million on research and
development activities, compared with $447 million in 1997 and $353 million in
1996. In 1998, Honeywell also received approximately $300 million, primarily
from the U.S. government, in customer-funded research relating to the
development of new products or services, or the improvement of existing products
or services. Honeywell received $323 million and $341 million, primarily from
the U.S. government, in customer-funded research, in 1997 and 1996 respectively.
 
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 18 for further
information concerning environmental matters.
 
EMPLOYEES
 
    Honeywell employed approximately 57,000 persons in total operations as of
December 31, 1998.
 
GEOGRAPHIC AREAS
 
    Honeywell engages in operations in over 95 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 limited exposure in high risk countries and has taken
action to mitigate such risks.
 
    Financial information related to geographic areas is included in Note 19 to
the financial statements in Part II, Item 8 at page 55.
 
                                       5
<PAGE>
                      EXECUTIVE OFFICERS OF THE REGISTRANT
 
<TABLE>
<CAPTION>
                                                                                               POSITION HELD    AGE AT
                NAME                                          OFFICE                               SINCE        3/1/99
------------------------------------  -------------------------------------------------------  -------------  -----------
<S>                                   <C>                                                      <C>            <C>
Michael R. Bonsignore (1)             Chairman of the Board and Chief Executive Officer               1993            57
 
Giannantonio Ferrari (2)              President and Chief Operating Officer                           1997            59
 
J. Kevin Gilligan (3)                 President, Solutions and Services Business, Home and            1997            44
                                      Building Control
 
Edward D. Grayson (4)                 Vice President and General Counsel                              1992            60
 
William M. Hjerpe (5)                 President, Honeywell Europe                                     1997            47
 
Philip M. Palazzari (6)               Vice President and Controller                                   1994            51
 
James T. Porter (7)                   Vice President and Chief Administrative Officer                 1996            47
 
Donald K. Schwanz (8)                 President, Space and Aviation Control                           1997            54
 
Lawrence W. Stranghoener (9)          Vice President and Chief Financial Officer                      1997            44
 
Markos I. Tambakeras (10)             President, Industrial Control                                   1997            47
 
Albrecht Weiss (11)                   President, Products Business, Home and Building Control         1997            47
</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.
 
(2) Mr. Ferrari was elected to this position effective April 15, 1997. From
    January 1992 to March 1997, he was President, Honeywell Europe S.A.
 
(3) Mr. Gilligan was elected to this position effective September 16, 1997. From
    May 1994 to September 1997, he was Vice President and General Manager of
    Honeywell Home and Building Control's North American Region. From October
    1992 to May 1994, he was Vice President of the Building Control business in
    Europe.
 
(4) Mr. Grayson was elected to this position effective April 1, 1992.
 
(5) Mr. Hjerpe was elected to this position effective March 1, 1997. From
    October 1994 to January 1997, he was Vice President and Chief Financial
    Officer of the company. From February 1992 to October 1994, he was Vice
    President and Controller of the company.
 
(6) Mr. Palazzari was elected to this position effective October 16, 1994. From
    May 1993 to October 1994, he was Vice President, Finance, Home and Building
    Control.
 
(7) Mr. Porter was elected to this position effective January 1, 1998. From May
    1993 to December 1997, he was Corporate Vice President, Human Resources.
 
(8) 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 Space and Aviation Control's Air Transport Systems division.
 
(9) 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,
    Finance, Industrial Automation and Control.
 
                                       6
<PAGE>
(10) 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, Honeywell
    Asia Pacific.
 
(11) Mr. Weiss was elected to this position effective September 16, 1997. From
    January 1991 to September 1997, he was Vice President, Home and Building
    Control Europe.
 
ITEM 2.  PROPERTIES
 
    Honeywell and its subsidiaries operate facilities worldwide comprising
approximately 21,232,700 square feet of space for use as manufacturing, office
and warehouse space, of which approximately 10,959,400 square feet is owned and
approximately 10,273,300 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 2,611,800 square feet of space, of which
approximately 1,406,100 square feet is owned and approximately 1,205,700 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 726,800 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 3,195,400 square feet of previously
leased space in the United States is under assignment to third parties
(including 1,499,100 square feet, 437,100 square feet and 60,800 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 3,384,600 square feet of
space for operations in the United States, of which approximately 1,396,200
square feet is owned and approximately 1,988,400 square feet is leased.
 
    Outside the United States, Home and Building Control operations occupy
approximately 3,961,600 square feet, of which approximately 1,326,100 square
feet is owned and approximately 2,635,500 square feet is leased. Principal
facilities operated outside the United States are located in Canada, China,
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>
Golden Valley, Minn.      Manufacturing                           1,185,300     Owned
Memphis, Tenn.            Warehouse/Distribution Center             600,000    Leased
</TABLE>
 
INDUSTRIAL CONTROL
 
    Industrial Control occupies approximately 3,510,500 square feet of space for
operations in the United States, of which approximately 2,248,200 square feet is
owned and approximately 1,262,300 square feet is leased.
 
    Outside the United States, Industrial Control operations occupy
approximately 2,766,000 square feet, of which approximately 1,077,500 square
feet is owned and approximately 1,688,500 square feet
 
                                       7
<PAGE>
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           365,000     Owned
Freeport, Ill.              Office                  316,000     Owned
Phoenix, Ariz.              Manufacturing           550,000     Owned
</TABLE>
 
SPACE AND AVIATION CONTROL
 
    Space and Aviation Control occupies approximately 4,548,000 square feet of
space for operations in the United States, of which approximately 3,207,300
square feet is owned and approximately 1,340,700 square feet is leased.
 
    Outside the United States, Space and Aviation Control operations occupy
approximately 259,200 square feet, of which approximately 107,000 square feet is
owned and approximately 152,200 square feet is leased. Principal facilities
operated outside the United States are located in Canada, the United Kingdom,
France and Germany.
 
    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>
Albuquerque, N. Mex.        Manufacturing           526,600     Owned
Clearwater, Fla.            Manufacturing           914,800     Owned
Minneapolis, Minn.          Manufacturing           550,000     Owned
Phoenix, Ariz.              Manufacturing           939,000     Owned
</TABLE>
 
ITEM 3.  LEGAL PROCEEDINGS
 
    LITTON LITIGATION
 
    On March 13, 1990, Litton Systems, Inc. filed a legal action against
Honeywell in U.S. District Court, Central District of California, Los Angeles
(the "trial court") with claims that were subsequently split into two separate
cases. One alleges patent infringement under federal law for using an ion-beam
process to coat mirrors incorporated in Honeywell's ring laser gyroscopes, and
tortious interference under state law for interfering with Litton's prospective
advantage with customers and contractual relationships with an inventor and his
company, Ojai Research, Inc. The other case alleges monopolization and attempted
monopolization under federal antitrust laws by Honeywell in the sale of inertial
reference systems containing ring laser gyroscopes into the commercial aircraft
market. Honeywell generally denied Litton's allegations in both cases. In the
patent/tort case, Honeywell also contested the validity as well as the
infringement of the patent, alleging, among other things, that the patent had
been obtained by Litton's inequitable conduct before the United States Patent
and Trademark Office.
 
    PATENT/TORT CASE
 
    U.S. District Court Judge Mariana Pfaelzer presided over a three month
patent infringement and tortious interference trial in 1993. On August 31, 1993
a jury returned a verdict in favor of Litton, awarding damages against Honeywell
in the amount of $1.2 billion on three claims. Honeywell filed post-trial
motions contesting the verdict and damage award. On January 9, 1995, the trial
court set them all aside, ruling, among other things, that the Litton patent was
invalid due to obviousness, unenforceable because of Litton's inequitable
conduct before the Patent and Trademark Office, and in
 
                                       8
<PAGE>
any case, not infringed by Honeywell's current process. It further ruled that
Litton's state tort claims were not supported by sufficient evidence. The trial
court also held that if its rulings concerning liability were vacated or
reversed on appeal, Honeywell should at least be granted a new trial on the
issue of damages because the jury's award was inconsistent with the clear weight
of the evidence and based upon a speculative damage study.
 
    The trial court's rulings were appealed to the U.S. Court of Appeals for the
Federal Circuit (the "Federal Circuit"), and on July 3, 1996, in a two to one
split decision, a three judge panel of that court reversed the trial court's
rulings of patent invalidity, unenforceability and non-infringement, and also
found Honeywell to have violated California law by intentionally interfering
with Litton's consultant contracts and customer prospects. However, the panel
upheld two trial court rulings favorable to Honeywell, namely that Honeywell was
entitled to a new trial for damages on all claims, and also to a grant of
intervening patent rights which are to be defined and quantified by the trial
court. After unsuccessfully requesting a rehearing of the panel's decision by
the full Federal Circuit appellate court, Honeywell filed a petition with the
U.S. Supreme Court on November 26, 1996, seeking review of the panel's decision.
In the interim, Litton filed a motion and briefs with the trial court seeking
injunctive relief against Honeywell's commercial ring laser gyroscope sales.
After Honeywell and certain aircraft manufacturers filed briefs and made oral
arguments opposing the injunction, the trial court denied Litton's motion on
public interest grounds on December 23, 1996, and then scheduled the patent/tort
damages retrial for May 6, 1997.
 
    On March 17, 1997, the U.S. Supreme Court granted Honeywell's petition for
review and vacated the July 3, 1996, Federal Circuit panel decision. The case
was remanded to the Federal Circuit panel for reconsideration in light of a
recent decision by the U.S. Supreme Court in the WARNER-JENKINSON VS. HILTON
DAVIS case, which refined the law concerning patent infringement under the
doctrine of equivalents. On March 21, 1997, Litton filed a notice of appeal to
the Federal Circuit of the trial court's December 23, 1996 decision to deny
injunctive relief, but the Federal Circuit stayed any briefing or consideration
of that matter until such time as it completed its reconsideration of liability
issues ordered by the U.S. Supreme Court.
 
    The liability issues were argued before the same three judge Federal Circuit
panel on September 30, 1997. On April 7, 1998, the panel issued its decision:
 
        (i) affirming the trial court's ruling that Honeywell's hollow cathode
    and RF ion-beam processes do not literally infringe the asserted claims of
    Litton's '849 reissue patent ("Litton's patent");
 
        (ii) vacating the trial court's ruling that Honeywell's RF ion-beam
    process does not infringe the asserted claims of Litton's patent under the
    doctrine of equivalents, but also vacating the jury's verdict on that issue
    and remanding that issue to the trial court for further proceedings in
    accordance with the WARNER-JENKINSON decision;
 
       (iii) vacating the jury's verdict that Honeywell's hollow cathode process
    infringes the asserted claims of Litton's patent under the doctrine of
    equivalents and remanding that issue to the trial court for further
    proceedings;
 
       (iv) reversing the trial court's ruling with respect to the torts of
    intentional interference with contractual relations and intentional
    interference with prospective economic advantage, but also vacating the
    jury's verdict on that issue, and remanding the issue to the trial court for
    further proceedings in accordance with California state law;
 
        (v) affirming the trial court's grant of a new trial to Honeywell on
    damages for all claims, if necessary;
 
                                       9
<PAGE>
       (vi) affirming the trial court's order granting intervening rights to
    Honeywell in the patent claim;
 
       (vii) reversing the trial court's ruling that the asserted claims of
    Litton's patent were invalid due to obviousness and reinstating the jury's
    verdict on that issue; and
 
      (viii) reversing the trial court's determination that Litton had obtained
    its '849 reissue patent through inequitable conduct.
 
    Litton's request for a rehearing of the panel's decision by the full Federal
Circuit court was denied and its appeal of the denial of an injunction was
dismissed. The case was remanded to the trial court for further legal and
perhaps factual review. A status conference was held on August 17, 1998 and the
review was held in abeyance during a retrial of damages in the antitrust case in
1998. Honeywell intends to file motions with the trial court to dispose of the
remanded issues as matters of law, but the review procedures remain to be
defined and scheduled by the trial court. If some of the remanded issues are not
disposed of by legal motions, a jury trial of the remaining issues may be
necessary.
 
    When preparing for the patent/tort damages retrial that was scheduled for
May 1997, Litton had submitted a revised damage study to the trial court,
seeking damages as high as $1.9 billion. Honeywell believes that its ion-beam
processes do not infringe Litton's patent, and further, that Litton's damage
study remains flawed and speculative for a number of reasons. Based on the U.S.
Supreme Court's decision in the WARNER-JENKINSON VS. HILTON DAVIS case which
refined the law concerning patent infringement under the doctrine of
equivalents, and the Federal Circuit panel's recent decision remanding certain
issues in the patent/tort case to the trial court, Honeywell also believes that
it is reasonably possible that the trial court will conclude that Honeywell did
not infringe Litton's patent or interfere with its contractual relationships,
and that no damages will ultimately be awarded to Litton. Although is not
possible at this time to predict the outcome of the issues remanded to the trial
court or any further appeals in this case, some potential does remain for
adverse judgments which could be material to Honeywell's financial position or
results of operations. Honeywell believes however, that any potential award of
damages for an adverse judgment of infringement or interference should be based
upon a reasonable royalty reflecting the value of the ion-beam coating process,
and further that such an award would not be material to Honeywell's financial
position or results of operations. As a result of the uncertainty regarding the
outcome of this matter, no provision has been made in the financial statements
with respect to this contingent liability.
 
    ANTITRUST CASE -- Preparations for, and conduct of, the trial in the
antitrust case have generally followed the completion of comparable proceedings
in the patent/tort case. The antitrust trial did not begin until November 20,
1995. Judge Pfaelzer also presided over the trial, but it was held before a
different jury. At the close of evidence and before jury deliberations began,
the trial court dismissed, for failure of proof, Litton's contentions that
Honeywell had illegally monopolized and attempted to monopolize by:
 
        (i) engaging in below-cost predatory pricing;
 
        (ii) tying and bundling product offerings under packaged pricing;
 
       (iii) misrepresenting its products and disparaging Litton products; and
 
       (iv) acquiring the Sperry Avionics business in 1986.
 
    On February 2, 1996, the case was submitted to the jury on the remaining
allegations that Honeywell had illegally monopolized and attempted to monopolize
by:
 
        (i) entering into certain long-term exclusive dealing and penalty
    arrangements with aircraft manufacturers and airlines to exclude Litton from
    the commercial aircraft market, and
 
                                       10
<PAGE>
        (ii) failing to provide Litton with access to proprietary software used
    in the cockpits of certain business jets.
 
    On February 29, 1996, the jury returned a $234 million single damages
verdict against Honeywell for illegal monopolization, which verdict would have
been automatically trebled. On March 1, 1996, the jury indicated that it was
unable to reach a verdict on damages for the attempt to monopolize claim, and a
mistrial was declared as to that claim.
 
    Honeywell subsequently filed a motion for judgment as a matter of law and a
motion for a new trial, contending, among other things, that the jury's partial
verdict should be overturned because Honeywell was prejudiced at trial, and
Litton failed to prove essential elements of liability or submit competent
evidence to support its speculative, all-or-nothing $298.5 million damage claim.
Litton filed motions for entry of judgment and injunctive relief. On July 24,
1996, the trial court denied Honeywell's alternative motions for judgment as a
matter of law or a complete new trial, but concluded that Litton's damage study
was seriously flawed and granted Honeywell a retrial on damages only. The court
also denied Litton's two motions. At that time, Judge Pfaelzer was expected to
conduct the retrial of antitrust damages sometime following the retrial of
patent/tort damages. However, after the U.S. Supreme Court remanded the
patent/tort case to the Federal Circuit in March 1997, Litton moved to have the
trial court expeditiously schedule the antitrust damages retrial. In September
1997, the trial court rejected that motion, indicating that it wished to know
the outcome of the current patent/ tort appeal before scheduling retrials of any
type.
 
    Following the April 7, 1998 Federal Circuit panel decision in the
patent/tort case, Litton again petitioned the trial court to schedule the
retrial of antitrust damages. The trial court tentatively scheduled the trial to
commence in the fourth quarter of 1998, and reopened limited discovery and other
pretrial preparations. Litton then filed another antitrust damage claim of
nearly $300 million.
 
    The damages only retrial began October 29, 1998, before Judge Pfaelzer, but
a different jury. On December 9, 1998, the jury returned verdicts against
Honeywell totaling $250 million, $220 million of which is in favor of Litton
Systems Inc. and $30 million of which is in favor of its sister corporation LSL,
Canada.
 
    On January 27, 1999, the court vacated its prior mistrial ruling with
respect to the attempt to monopolize claim and entered a treble damages judgment
in the total amount of $750 million for actual and attempted monopolization.
 
    Honeywell believes that there was no factual or legal basis for the
magnitude of the jury's award in the damages retrial and that, as was the case
in the first trial, the jury's award should be overturned. Honeywell also
believes there are serious questions concerning the identity and nature of the
business arrangements and conduct which were found by the first antitrust jury
in 1996 to be anti-competitive and damaging to Litton, and there are very strong
grounds to overturn the verdict of liability as a matter of law. Honeywell is
now filing appropriate post-judgment motions with the trial court and Litton
will soon file motions seeking to add substantial attorney's fees and costs to
the judgment. Once the trial court has ruled on those motions, the parties will
have the right to appeal the eventual judgment, as to both liability and
damages, to the U.S. Court of Appeals for the Ninth Circuit. Execution of the
trial court's judgment will be stayed pending resolution of Honeywell's
post-judgment motions and the disposition of any appeals filed by the parties.
 
    Although is not possible at this time to predict the outcome of the motions
before the trial court or any eventual appeals in this case, some potential
remains for adverse judgments which could be material to Honeywell's financial
position or results of operations. As a result of the uncertainty regarding the
outcome of this matter, no provision has been made in the financial statements
with respect to this contingent liability. Honeywell also believes that it would
be inappropriate for Litton to obtain recovery of the same damages, e.g. losses
it suffered due to Honeywell's sales of ring laser
 
                                       11
<PAGE>
gyroscope-based inertial systems to OEMs and airline customers, under multiple
legal theories, claims, and cases, and that eventually any duplicative recovery
would be eliminated from the antitrust and patent/tort cases.
 
    In the fall of 1996, Litton and Honeywell commenced a court ordered
mediation of the patent, tort and antitrust claims. No claim was resolved or
settled, and the mediation is currently in recess.
 
    OTHER PROCEEDINGS
 
    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 1998.
 
                                       12
<PAGE>
                                    PART II
 
ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREOWNER MATTERS
 
    The principal U.S. market for Honeywell's common stock is the New York Stock
Exchange. Dividends are paid by Honeywell on its common stock on a quarterly
basis. The high and low sales prices for Honeywell's common stock, within the
two most recent fiscal years, as reported by the consolidated transaction
reporting system, as well as quarterly dividends paid by Honeywell during such
period, are as follows:
 
<TABLE>
<CAPTION>
                                               COMMON STOCK PRICE
                                                 (NEW YORK STOCK
                                               EXCHANGE COMPOSITE)
                                             -----------------------     DIVIDENDS
                                               HIGH          LOW         PER SHARE
                                             ---------    ----------    -----------
<S>    <C>                                   <C>          <C>           <C>
1998   First Quarter......................   $ 84 3/4     $ 65 1/2         $ .28
       Second Quarter.....................     96 3/8       77 1/2           .28
       Third Quarter......................     90 3/16      61 3/4           .28
       Fourth Quarter.....................     84 3/8       58 5/8           .29
 
1997   First Quarter......................   $ 76 5/8     $ 63 7/8         $ .27
       Second Quarter.....................     78 3/4       65 1/2           .27
       Third Quarter......................     80 3/8       66 7/16          .27
       Fourth Quarter.....................     76 3/16      64 15/16         .28
</TABLE>
 
    Information regarding Honeywell's share repurchase programs is set forth in
Part II, Item 7 at page 24.
 
    Shareowners of record on February 19, 1999 totaled 30,509, excluding
individual participants in security position listings.
 
                                       13
<PAGE>
ITEM 6.  SELECTED FINANCIAL DATA
 
                        HONEYWELL INC. AND SUBSIDIARIES
           (DOLLARS AND SHARES IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                             1998        1997        1996        1995        1994
                                                           --------    --------    --------    --------    --------
<S>                                                        <C>         <C>         <C>         <C>         <C>
Results of Operations
  Sales................................................    $8,426.7    $8,027.5    $7,311.6    $6,731.3    $6,057.0
    Sales growth rate..................................         5.0%        9.8%        8.6%       11.1%        1.6%
                                                           --------    --------    --------    --------    --------
  Cost of sales........................................     5,677.0     5,425.1     4,975.4     4,584.2     4,082.1
  Research and development.............................       481.9       446.6       353.3       323.2       319.0
  Selling, general and administrative..................     1,317.9     1,359.4     1,313.1     1,263.1     1,173.8
  Litigation settlements (1)...........................       (23.6)
  Special charges......................................        53.7        90.7                                62.7
  Interest -- net......................................       102.2        92.5        72.9        68.9        60.2
  Gain on sale of businesses...........................                   (77.1)
  Equity income........................................       (11.7)      (12.9)      (13.3)      (13.6)      (10.5)
                                                           --------    --------    --------    --------    --------
                                                            7,597.4     7,324.3     6,701.4     6,225.8     5,687.3
                                                           --------    --------    --------    --------    --------
  Income from continuing operations before income
   taxes...............................................       829.3       703.2       610.2       505.5       369.7
  Provision for income taxes...........................       257.3       232.2       207.5       171.9        90.8
                                                           --------    --------    --------    --------    --------
  Income from continuing operations....................       572.0       471.0       402.7       333.6       278.9
                                                           --------    --------    --------    --------    --------
  Net income...........................................    $  572.0    $  471.0    $  402.7    $  333.6    $  278.9
                                                           --------    --------    --------    --------    --------
                                                           --------    --------    --------    --------    --------
    Net income growth rate.............................        21.4%       17.0%       20.7%       19.6%      (13.4)%
Basic Earnings Per Common Share
  Continuing operations................................    $   4.54    $   3.71    $   3.18    $   2.62    $   2.15
                                                           --------    --------    --------    --------    --------
  Net income...........................................    $   4.54    $   3.71    $   3.18    $   2.62    $   2.15
                                                           --------    --------    --------    --------    --------
                                                           --------    --------    --------    --------    --------
    Basic earnings per share growth rate...............        22.4%       16.7%       21.4%       21.9%      (10.4)%
  Diluted Earnings Per Common Share....................    $   4.48    $   3.65    $   3.11    $   2.58    $   2.15
    Diluted earnings per share growth rate.............        22.7%       17.4%       20.5%       20.0%       (9.7)%
  Cash Dividends Per Common Share......................    $   1.13    $   1.09    $   1.06    $   1.01    $   0.97
    Dividend growth rate...............................         3.7%        2.8%        5.0%        4.1%        6.6%
Financial Position
  Total assets.........................................    $7,170.4    $6,411.4    $5,493.3    $5,060.2    $4,885.9
  Current assets.......................................    $3,621.8    $3,258.2    $2,981.2    $2,766.9    $2,649.4
  Current liabilities..................................    $2,452.7    $2,318.9    $2,066.9    $2,022.5    $2,071.8
                                                           --------    --------    --------    --------    --------
  Working capital......................................    $1,169.1    $  939.3    $  914.3    $  744.4    $  577.6
                                                           --------    --------    --------    --------    --------
                                                           --------    --------    --------    --------    --------
  Current ratio........................................         1.5         1.4         1.4         1.4         1.3
  Short-term debt......................................    $  178.9    $  146.4    $  252.4    $  312.4    $  360.6
  Long-term debt.......................................    $1,299.3    $1,176.8    $  715.3    $  481.0    $  501.5
                                                           --------    --------    --------    --------    --------
  Total debt...........................................    $1,478.2    $1,323.2    $  967.7    $  793.4    $  862.1
  Shareowners' equity..................................    $2,785.5    $2,389.2    $2,204.9    $2,040.1    $1,854.7
                                                           --------    --------    --------    --------    --------
  Capitalization.......................................    $4,263.7    $3,712.4    $3,172.6    $2,833.5    $2,716.8
                                                           --------    --------    --------    --------    --------
                                                           --------    --------    --------    --------    --------
</TABLE>
 
------------------------
 
(1) In 1998, the settlement of long-standing legal claims resulted in a gain on
    $23.6.
 
                                       14
<PAGE>
                        HONEYWELL INC. AND SUBSIDIARIES
           (DOLLARS AND SHARES IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                           1998        1997        1996        1995        1994
                                                         ---------  ----------  ----------  ----------  ----------
<S>                                                      <C>        <C>         <C>         <C>         <C>
Sales
  Home and Building Control............................  $ 3,440.5  $  3,386.6  $  3,327.1  $  3,034.7  $  2,664.5
  Industrial Control...................................    2,516.3     2,547.1     2,199.6     2,035.9     1,835.3
  Space and Aviation Control...........................    2,339.1     1,956.9     1,640.0     1,527.4     1,432.0
  Other................................................      130.8       136.9       144.9       133.3       125.2
                                                         ---------  ----------  ----------  ----------  ----------
  Total sales..........................................  $ 8,426.7  $  8,027.5  $  7,311.6  $  6,731.3  $  6,057.0
                                                         ---------  ----------  ----------  ----------  ----------
                                                         ---------  ----------  ----------  ----------  ----------
Operating Profit (1)(2)
  Home and Building Control............................  $   348.9  $    290.2  $    345.8  $    308.6  $    236.5
  Industrial Control...................................      314.2       309.2       254.9       233.8       206.6
  Space and Aviation Control...........................      334.0       255.7       163.3       127.6        80.9
  Other................................................       31.2        18.8         6.2         2.8
                                                         ---------  ----------  ----------  ----------  ----------
  Total operating profit...............................    1,028.3       873.9       770.2       672.8       524.0
  Operating profit as a percent of sales...............       12.2%       10.9%       10.5%       10.0%        8.7%
  Interest expense.....................................     (113.0)     (101.9)      (81.4)      (83.3)      (75.5)
  Equity income........................................       11.7        12.9        13.3        13.6        10.5
  General corporate expense............................      (97.7)      (81.7)      (91.9)      (97.6)      (89.3)
                                                         ---------  ----------  ----------  ----------  ----------
  Income before income taxes...........................  $   829.3  $    703.2  $    610.2  $    505.5  $    369.7
                                                         ---------  ----------  ----------  ----------  ----------
                                                         ---------  ----------  ----------  ----------  ----------
External sales by region
  United States........................................  $ 5,201.6  $  4,843.5  $  4,477.9  $  4,087.5  $  3,824.7
  Europe...............................................    2,246.0     2,136.1     1,981.7     1,858.9     1,528.5
  Other areas..........................................      979.1     1,047.9       852.0       784.9       703.8
                                                         ---------  ----------  ----------  ----------  ----------
  Total sales..........................................  $ 8,426.7  $  8,027.5  $  7,311.6  $  6,731.3  $  6,057.0
                                                         ---------  ----------  ----------  ----------  ----------
                                                         ---------  ----------  ----------  ----------  ----------
Additional information
  Average number of common shares outstanding..........      126.1       127.1       126.6       127.1       129.4
  Return on average shareowners' equity................       22.8%       20.8%       19.7%       17.1%       15.6%
  Shareowners' equity per average common share.........  $   22.09  $    18.80  $    17.44  $    16.09  $    14.57
  Price/Earnings ratio (3).............................       16.6        18.5        20.7        18.6        14.7
  Percent of debt to total capitalization..............         35%         36%         31%         28%         32%
  Research and development
    Honeywell-funded...................................  $   481.9  $    446.6  $    353.3  $    323.2  $    319.0
    Customer-funded....................................  $   300.3  $    322.5  $    341.4  $    336.6  $    340.5
  Capital expenditures.................................  $   353.0  $    298.3  $    296.5  $    238.1  $    262.4
  Depreciation and amortization........................  $   327.9  $    319.6  $    287.5  $    292.9  $    287.4
  Employees at year-end................................     57,000      57,500      53,000      50,100      50,800
</TABLE>
 
------------------------
 
(1) Operating profit in 1998 includes $23.6 gain on litigation settlements as
    follows: Home and Building Control, $4.6; Industrial Control, $5.3; Space
    and Aviation Control, $1.8; Other, $11.5; and General Corporate Expense,
    $0.4. Operating profit in 1997 includes $77.1 gain on sale of businesses as
    follows: Home and Building Control, $5.7 and Industrial Control, $71.4.
 
(2) Operating profit is net of special charges amounting to $53.7, $90.7 and
    $62.7 in 1998, 1997 and 1994, respectively, as follows: Home and Building
    Control, $25.8, $46.9 and $28.7; Industrial Control, $25.8, $40.8 and $14.4;
    Space and Aviation Control, $1.4, $0.0 and $19.6; Other, $0.0, $3.0 and
    $0.0; and General Corporate Expense, $0.7, $0.0 and $0.0.
 
(3) Price/Earnings ratio calculated using basic earnings per common share from
    continuing operations.
 
                                       15
<PAGE>
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS
 
                                   OPERATIONS
 
SALES
 
    Honeywell's sales increased 5 percent to $8.427 billion in 1998, compared
with $8.028 billion in 1997 and $7.312 billion in 1996. The 1998 increase in
sales was driven by strong growth in Space and Aviation Control offset by
declines in Industrial Control and Home and Building Control's consumer products
business. Sales in the United States of $5.202 billion were up 7 percent,
primarily as a result of increased volume in Space and Aviation Control.
International sales of $3.225 billion increased 4 percent in local currency
terms, and 1 percent after consideration of the stronger U.S. dollar. U.S.
export sales, including exports to foreign affiliates, were $1.211 billion in
1998 compared with $1.165 billion in 1997 and $973 million in 1996.
 
    In 1997, sales benefited from strong demand in Space and Aviation Control's
commercial aviation and commuter jet businesses and the acquisition of Measurex
Corporation. Sales growth in 1996 was the result of increased commercial OEM
business and the introduction of new products in all three businesses.
 
COST OF SALES
 
    Cost of sales was $5.677 billion in 1998, or 67.4 percent of sales, compared
with $5.425 billion (67.6 percent) in 1997 and $4.975 billion (68.0 percent) in
1996. The decrease in the cost as a percent of sales in 1998 was due to
improvements in Industrial Control, offset by deterioration in Home and Building
Control's consumer products business driven by lower sales. In 1997, cost as a
percentage of sales decreased due to a mix of higher margin products, primarily
in the Space and Aviation Control business. Cost as a percentage of sales
decreased slightly in 1996 due to improved gross-margins in the commercial Space
and Aviation Control business.
 
RESEARCH AND DEVELOPMENT
 
    Honeywell spent $482 million, or 5.7 percent of sales, on research and
development in 1998, compared with $447 million (5.6 percent) in 1997 and $353
million (4.8 percent) in 1996. The additional spending in 1998 was a result of
increased investment in Space and Aviation Control as it continues to invest in
market leading technology platforms. Honeywell expects to maintain or slightly
decrease its current rate of R&D spending in 1999 as a result of a strong
technology position in many core markets. Honeywell also received, primarily
from the U.S. government, $300 million in funds for customer-funded research and
development in 1998, compared with $323 million in 1997 and $341 million in
1996.
 
OTHER EXPENSES AND INCOME
 
    Selling, general and administrative expenses were $1.318 billion, or 15.6
percent of sales in 1998, compared with $1.359 billion (16.9 percent) in 1997
and $1.313 billion (18.0 percent) in 1996. Selling, general and administrative
expenses have declined almost 320 basis points since 1995 as a result of the
continued emphasis on improving processes, investment in information systems,
productivity and continued consolidation of our selling, general and
administrative functions. Net interest expense was $102 million in 1998, $93
million in 1997 and $73 million in 1996. Interest expense was 7.8 percent of
average debt in 1998, compared with 7.8 and 8.3 percent in 1997 and 1996,
respectively. Information concerning Honeywell's exposure to, and management of,
interest rate risk through the use of derivative financial instruments is
provided on pages 26 and 27 and in Notes 6, 14 and 15 to the Financial
Statements on pages 44, 47 and 49, respectively.
 
                                       16
<PAGE>
    Earnings of companies owned 20 percent to 50 percent (primarily Yamatake
Corporation), which are accounted for using the equity method, were $12 million
in 1998, $13 million in 1997 and $13 million in 1996.
 
SPECIAL CHARGES
 
    In 1998, Honeywell's management, with the approval of the Board of
Directors, committed itself to a plan of action and recorded special charges of
$53.7 million intended to reduce operating costs and improve margins. The
special charges by segment are as follows: $25.8 million in Home and Building
Control; $25.8 million in Industrial Control; $1.4 million in Space and Aviation
Control; and $0.7 million at corporate level. Special charges include costs for
work force reductions, worldwide facilities consolidations, reorganizations and
other cost reductions. The work force reduction costs of $45.5 million primarily
include severance costs related to involuntary termination programs instituted
to improve efficiency and reduce costs. Approximately 1,200 employees have been
or will be terminated. Facility consolidation costs amounting to $6.0 million
are primarily associated with combining field office locations, and other cost
reductions totaling $2.2 million. For more information on the special charges,
see Note 3 to the Financial Statements on page 41.
 
    In the second half of 1997, Honeywell recorded special charges of $90.7
million. The actions taken included productivity initiatives and the
rationalization of the Honeywell and Measurex product lines. Special charges
were recorded by Home and Building Control ($46.9 million) and Industrial
Control ($40.8 million) with an additional $3.0 million of special charges
recorded by an operation included in the Other operating segment.
 
LITIGATION SETTLEMENTS
 
    In December 1998, Honeywell was awarded a favorable settlement of
long-standing litigation claims. Proceeds, after expenses, resulted in a gain of
$23.6 million.
 
SALES OF BUSINESSES
 
    On July 5, 1998, Honeywell sold Honeywell-Measurex Data Measurement
Corporation located in Gaithersburg, MD, to Metrika Systems Corporation for
$29.0 million in cash. The gain on the sale of this business and the impact on
the financial statements and results of operations were immaterial. In 1997,
Honeywell sold the net assets of Industrial Control's solenoid valve business
for approximately $102 million, resulting in a gain of $64.3 million.
Additionally in 1997, Honeywell sold the control valve business of the
Industrial Control business segment and a small security monitoring business
related to Home and Building Control for approximately $24 million in cash and
receivables for a gain of $12.8 million.
 
INCOME TAXES
 
    The provision for income taxes was $257 million in 1998 or 31 percent,
compared with $232 million in 1997 (33 percent) and $208 million in 1996 (34
percent). The 1998 effective income tax rate was reduced as a result of a
settlement with U.S. tax authorities on previously questioned items. Further
information about income taxes is provided in Note 5 to the Financial Statements
on page 42.
 
NET INCOME
 
    Honeywell's net income increased 21 percent in 1998, primarily due to the
benefits of Honeywell Quality Value (HQV) Operational Excellence, focused on
reducing costs. Net income was $572 million in 1998, compared with $471 million
in 1997 and $403 million in 1996. Honeywell achieved a 22 percent increase in
its Basic Earnings Per Share in 1998 despite an after-tax provision for special
charges of $34.9 million ($0.28 per share). These special charges were mostly
offset by the after-tax gain on a
 
                                       17
<PAGE>
litigation settlement of $14.2 million ($0.11 per share) and the favorable
impact of a settlement with U.S. tax authorities on previously questioned items
of $16.7 million ($0.13 per share). Basic and Diluted Earnings Per Share were
$4.54 and $4.48, respectively, in 1998, compared with $3.71 and $3.65 in 1997
and $3.18 and $3.11 in 1996.
 
RETURN MEASUREMENTS
 
    Return on Equity (ROE) was 22.8 percent in 1998, 20.8 percent in 1997 and
19.7 percent in 1996. Return on Investment (ROI) was 16.2 percent in 1998, 14.6
percent in 1997 and 15.1 percent in 1996. Return on Investment increased
significantly in 1998 due to increased operating margin and more efficient use
of assets.
 
    Economic Value Added (EVA), calculated by subtracting the cost of capital
from operating profits net of tax, continued to improve to $165 million in 1998,
compared to $95 million in 1997, and $92 million in 1996.
 
OTHER OPERATING SEGMENTS
 
    The "Other" category, which generated revenues of $131 million, $137 million
and $145 million in 1998, 1997 and 1996, respectively, is primarily the result
of Honeywell's research operations. Operating profit for the Other operations
totaled $31 million in 1998, compared to $19 million in 1997 and $6 million in
1996. The 1998 increase was primarily the result of the applicable portion of
the favorable litigation settlement. The operating profit increase in 1997 was
driven primarily from improved performance in the research centers and lower
environmental remediation costs associated with discontinued businesses.
 
CURRENCY
 
    The U.S. dollar strengthened over 3 percent in 1998 compared with 1997 based
on the weighted average of profits denominated in the principal foreign
currencies in countries where Honeywell products and services were sold. A
stronger dollar has a negative effect on international results because foreign
exchange denominated transactions translate into fewer U.S. dollars. Information
about Honeywell's exposure to, and management of, currency risk through the use
of derivative financial instruments is provided on pages 26 and 27 and in Notes
6, 14 and 15 to the Financial Statements on pages 44, 47 and 49, 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 57,000 people worldwide at year-end 1998, compared with
57,500 employees in 1997 and 53,000 employees in 1996. Approximately 30,750
employees work in the United States, with 26,250 employed in other regions,
primarily in Europe. Total compensation and benefits in 1998 were $3.2 billion,
or 43 percent of total costs and expenses. Sales per employee were $147,800 in
1998, compared with $139,600 in 1997 and $138,500 in 1996.
 
ENVIRONMENTAL MATTERS
 
    Honeywell is committed to protecting the environment, both through its
products and in its manufacturing operations. A number of its products are
designed to reduce energy consumption and
 
                                       18
<PAGE>
eliminate hazardous materials from the environment. The company has also
established effective internal programs to foster compliance with environmental
laws and regulations worldwide, and increase environmental awareness, health and
safety.
 
    Honeywell's use and release of chemicals to the environment continues to
decline steadily, and releases of toxic and ozone-depleting chemicals are being
phased out well ahead of regulatory requirements. Honeywell has increased its
commitment to pollution prevention; establishing company-wide environmental
health and safety goals targeting reductions in air emissions, hazardous waste
and energy consumption, and the recycling of solid wastes generated, while
decreasing the costs of managing wastes. For more information on these
environmental matters, see Note 20 to the Financial Statements on page 58.
 
NEW ACCOUNTING STANDARDS
 
    In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income,"
which was adopted by Honeywell beginning January 1, 1998. SFAS No. 130 requires
the reporting of comprehensive income and its components in the general-purpose
financial statements. This Statement also requires that an entity classify items
of other comprehensive income by their nature in an annual financial statement.
Honeywell has disclosed this information through a Statement of Shareowners'
Equity on page 37.
 
    In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which was adopted by Honeywell beginning
January 1, 1998. SFAS 131 redefines how operating segments are determined and
requires disclosure of certain financial and descriptive information about a
company's operating segments. Honeywell has concluded that the current
reportable segments are consistent with the "management approach" methodology
outlined in SFAS 131. The additional disclosures can be found in Note 19 to the
Financial Statements on page 19.
 
    In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which is effective for fiscal years
beginning after December 15, 1997. SFAS 132 revises and standardizes disclosures
required by SFAS 87, SFAS 88 and SFAS 106. Honeywell has adopted this standard
for its 1998 fiscal year and the required disclosures can be found in Note 21 to
the Financial Statements on page 63.
 
    In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which is effective for Honeywell on January
1, 2000. SFAS 133 requires companies to record derivatives on the balance sheet
as assets or liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting.
Honeywell is currently reviewing the standard and its effect on the financial
statements.
 
    In 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," which is effective for fiscal years
beginning after December 15, 1998. Honeywell has elected to adopt this SOP
effective January 1, 1998. The accounting change has a positive impact on Income
before Income Taxes and Net Income. The planned impact of the change to Income
before Income Taxes and Net Income for 1998 was $44.1 million and $29.5 million,
respectively. Basic and Diluted Earnings per share were planned to increase
$0.23 as a result of the change. Since the effect of the accounting change is to
account for software in a manner similar to other capital items such as
property, plant, and equipment, management chose to divert other capital
expenditures to software
 
                                       19
<PAGE>
related expenditures in 1998. This accelerated the amount spent on capitalized
software from the planned level of $44.1 million to $52.2 million in 1998.
 
    In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 97-2, "Software Revenue Recognition." This
SOP provides guidance on specific accounting issues that are present in the
recognition and measurement of software revenue. Honeywell has adopted this SOP
effective January 1, 1998, and the impact on results of operations and financial
position is immaterial.
 
    In 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up
Activities," which is effective for fiscal years beginning after December 15,
1998. This SOP requires that companies expense start-up costs and organizational
costs as they are incurred. Honeywell has adopted this SOP effective January 1,
1999, and the impact on results of operations and financial position is expected
to be immaterial.
 
SAFE HARBOR CAUTIONARY STATEMENT
 
    Any statements in this report regarding Honeywell's outlook for 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, are forward-looking statements, some of which
may be identified by such words or phrases as "will likely result," "are
expected to," "will continue," "outlook," "is anticipated," "estimate,"
"project" or similar expressions. No assurance can be given that the results in
any forward-looking statement will be achieved and actual results could be
affected by one or more factors which could cause them to differ materially. For
these statements, Honeywell claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995.
 
    The following is a summary of certain factors, the results of which, if
markedly different from Honeywell's planning assumptions, could cause
Honeywell's future results to differ materially from those expressed in any
forward-looking statements contained in this report:
 
    - foreign currency translations of sales denominated in other currencies,
      which may fluctuate adversely based on local currency valuations;
 
    - changes in macroeconomic conditions in those regions throughout the world
      in which Honeywell does business, such as those which have recently
      occurred in Asia, Latin America and Eastern Europe, or changes in trade or
      monetary policies, any of which may affect customer demand for the
      company's products and services;
 
    - risks pertaining to performance and energy retrofit contracts, including
      dependence on the performance of third parties;
 
    - various competitive pressures, such as new technologies, industry
      consolidation and deregulation of certain industries;
 
    - the ability of material suppliers or key customers of the Company to
      reduce or eliminate risks to their businesses or operations arising from
      the year 2000 issue;
 
    - availability of intellectual property rights for newly developed products
      or key technologies; and
 
    - significant acquisitions or divestitures.
 
    Please refer to Exhibit 99(i) of this report, and subsequent quarterly
reports on Form 10-Q, as filed with the Securities and Exchange Commission, for
a more detailed discussion of these and other factors that could cause
Honeywell's actual results in future periods to differ materially from those
projected in such forward-looking statements.
 
                                       20
<PAGE>
                       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, a large installed base and an unmatched distribution network that
supports our customer solutions worldwide.
 
    THREE-YEAR SALES OVERVIEW
 
    Sales in 1998 were $3.441 billion compared with $3.387 billion in 1997 and
$3.327 billion in 1996. Sales were driven by continued solid growth in the
Services business, with strong contributions from both North American and
European markets. This growth was moderated by a planned reduction in the lower
margin Solutions' business, reduced volume in Consumer Products and unusually
warm winters in North America and Europe.
 
    In 1997, Home and Building Control products business experienced strong
sales growth from the international market, driven by demand in our water
products and combustion control businesses. Sales improvement in 1996 resulted
from growth in the retail business, new product introductions in Europe and the
introduction of small to mid-sized building management systems.
 
    THREE-YEAR OPERATING PROFIT OVERVIEW
 
    Home and Building Control's 1998 operating profit was $349 million including
$26 million in special charges compared with $290 million last year, which
includes $47 million in 1997 special charges. Excluding the planned impact of
software capitalization of $18 million, special charges and gains (see Note 19
to the Financial Statements on page 55), operating profits increased 6 percent.
The key drivers of the margin improvement were the strategic repositioning of
the Solutions and Services business, which included improving the quality and
margins of the Solutions business and growing the higher margin Services
business, and the emphasis placed on HQV Operational Excellence programs.
Despite the challenges posed by weather, the Products business also saw solid
profit growth in 1998, with strong growth from our residential products area.
 
    In 1997, operating profit was $290 million, including special charges of $47
million and a gain of $6 million on the sale of a small international security
monitoring business. Excluding the impact of the gain and special charges,
operating profit declined from 1996 due to the mix of lower margin Products
business and lower than expected volume in Solution and Services. In 1996,
profits from Home and Building Control Products improved through volume
increases and cost reductions while profits in Solutions and Services declined
due to a competitive energy retrofit business and investment in programs to
enhance productivity.
 
    BUSINESS STRATEGIES
 
    Our Home and Building Control business began a strategic repositioning at
the beginning of 1998, and the initiatives showed strong results throughout
1998. Growth initiatives in building security continued with key contract wins
around the globe and several strategic acquisitions, including VVE Security,
Inc., and ESD Electronics. Further acquisitions, including Flica, a German-based
company, and Elm, headquartered in Scotland, expanded our cooling and
refrigeration business, while Westinghouse Security Electronics, Inc., enhanced
our commercial component line.
 
    We also showed strong success from the government vertical market. As part
of the U.S. government's policy to reduce energy use 30 percent by 2005,
Honeywell was selected to participate in contracts worth up to $1 billion to
upgrade federal facilities in the 11-state central region and U.S. Air Force
bases in nine western states.
 
                                       21
<PAGE>
    Operational improvements made in 1998 will enable our customers to decrease
their inventory levels. Working capital is also expected to improve in 1999,
with our build-to-order/build-to-stock program.
 
INDUSTRIAL CONTROL
 
    Industrial Control is a global leader in automation solutions from sensors
to integrated solutions, and provides systems, products and services for process
industries such as hydrocarbon processing, chemicals and pulp and paper.
Additionally, Industrial Control manufactures switches and sensors 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.
 
    THREE-YEAR SALES OVERVIEW
 
    Industrial Control sales in 1998 were $2.516 billion, compared with $2.547
billion in 1997 and $2.200 billion in 1996. Sales in 1998 were down slightly;
however, after adjusting for divestitures and negative currency fluctuations due
to the stronger dollar, Industrial Control increased sales by 4 percent in a
tough external environment. Despite significant weakness in the pulp and paper,
refining and industrial components markets, Industrial Control remains well
positioned in the industry through the introduction of superior technologies,
leveraging of our installed base and increases in the number of our
market-leading strategic alliances.
 
    In 1997, sales reflected strong demand for the TotalPlant Solution (TPS)
system, the introduction of over 80 new products and the successful acquisition
of Measurex Corporation. In 1996, sales benefited from the successful
introduction of new measurement, sensing and control products; the acquisition
of Leeds & Northrup; the excellent market reception of our TotalPlant Solution
(TPS) system; and continued strong demand for upgrades and services that
increase the value of our installed control systems.
 
    THREE-YEAR OPERATING PROFIT OVERVIEW
 
    Industrial Control operating profit in 1998 was $314 million including
special charges of $26 million compared to $309 million in 1997, which included
special charges of $41 million. In 1998, excluding the planned impact of
software capitalization of $13 million, special charges and gains (see Note 19
to the Financial Statements on page 55), operating profits increased by 15
percent. The increase in profit was driven by substantial earnings improvement
from Honeywell Measurex, the contribution of higher margin services and software
growth and ongoing HQV Operational Excellence programs focused on reducing
overhead and product costs.
 
    In 1997, operating profits were driven by higher volume and improvement in
ongoing productivity initiatives, which offset the negative impact of expenses
associated with the Measurex acquisition. Operating profits increased in 1996 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.
 
    BUSINESS STRATEGIES
 
    Superior technologies and a focus on HQV Operational Excellence, coupled
with a balanced business model of sensors, systems solutions and services, are
enhancing Industrial Control's strong industry position. Superior technologies
like Industrial Control's Hi-Spec-TM- Software Solutions continue to demonstrate
its competitive position in the marketplace with many strategic contract wins.
In the fourth quarter, China's largest refiner, Sinopec, placed an order for 75
Profit Controller-TM- and Uniformance-TM- system licenses. Since the acquisition
of Measurex, Honeywell is the undisputed leader in the pulp and paper automation
market, and Sensing and Control's growth prospects were enhanced
 
                                       22
<PAGE>
with the acquisition of Data Instruments Inc., a $50 million per year
manufacturer of precision sensing devices.
 
    Alliances and strategic partnerships are providing advanced control
technology, solutions, optimization software and training to industries around
the world. Honeywell was chosen by a number of industrial customers for
strategic alliances in 1998, including Mobil, CITGO, Exxon, Phillips and
Petrofina.
 
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 United States.
 
    THREE-YEAR SALES OVERVIEW
 
    In 1998, Space and Aviation Control sales were $2.339 billion, compared with
$1.957 billion in 1997 and $1.640 billion in 1996. The 20 percent increase in
sales was driven by strong growth in commercial avionics and solid performance
from the military business. The growth in commercial avionics is the result of a
continued increase in air transport deliveries, collision avoidance systems,
satellite landing systems and business and commuter avionics shipments.
 
    In 1997, strong commercial avionics and business and commuter jet markets
drove 19 percent sales growth from the prior year. Sales in 1996 increased 7
percent from the prior year led by increased commercial aviation OEM business
and our strategies to expand our GPS-based guidance products and systems, pursue
retrofit opportunities and extend our Boeing 777 technology to additional
markets of interest.
 
    THREE-YEAR OPERATING PROFIT OVERVIEW
 
    Space and Aviation Control's 1998 operating profit was $334 million compared
to $256 million in 1997 and $163 million in 1996. Excluding the planned impact
of software capitalization of $12 million, special charges and gains (see Note
19 to the Financial Statements on page 55), operating profits increased 26
percent, driven by the mix of higher margin commercial aviation business and
leverage from higher sales volumes.
 
    Operating profit in 1997 and 1996 increased due to improved margins in
commercial aviation systems, lower development expenses and productivity
improvements.
 
    BUSINESS STRATEGIES
 
    Space and Aviation Control continued to make progress on its growth
initiatives: communication, navigation, surveillance (CNS)/air traffic
management (ATM); aviation services; airport systems; commercial space; tactical
guidance; surface vehicles electronics; and railway electronics. These
initiatives are expected to mitigate many of the cyclical characteristics of the
OEM aerospace business and provide new avenues for business growth. These growth
initiatives leverage Space and Aviation Control's core technologies in
navigation, control displays, flight management and communications. Already, we
are seeing the benefits of our key acquisitions -- Hughey and Phillips and DASA
Airports Systems -- with our first contracts integrating Honeywell's Satellite
Landing System and airfield lighting products. Our aviation services offerings
for business jets have been expanded with the introduction of OneLink-TM-
worldwide satellite communications services, and the OneView-TM- airborne
information system, which provides live video and internet service.
 
                                       23
<PAGE>
                               FINANCIAL POSITION
 
FINANCIAL CONDITION
 
    At year-end 1998, Honeywell's capital structure was comprised of $179
million of short-term debt, $1.299 billion of long-term debt and $2.786 billion
of shareowners' equity. The ratio of debt-to-total capital was 35 percent,
compared with 36 percent in 1997 and 31 percent at year-end 1996. Total debt
increased $155 million during 1998, to fund general operations.
 
    Shareowners' equity increased $396 million in 1998 driven by net income of
$572 million, stock option exercises and employee stock plan issuances of $122
million and accumulated foreign currency translation of $15 million. The gross
increase of $709 million was offset by $143 million of dividends, $160 million
of treasury stock purchases, and a $10 million change in the pension liability
adjustment.
 
CASH GENERATION AND DEPLOYMENT
 
    In 1998, $779 million of cash was generated from operating activities,
compared with $645 million in 1997, and $494 million in 1996. The increase in
1998 was largely due to additional net income. In 1998, cash generated from
investing and financing activities included $252 million from the issuance of
debt, $29 million of proceeds from the sale of a business, $68 million of
proceeds from the sale of other assets and $60 million of proceeds from the
exercise of stock options. In 1998, Free Cash Flow, which is cash generated from
operating and investing activities excluding acquisitions and the proceeds from
the sales of businesses, improved to $495 million. In 1998, these funds were
used to support $258 million of acquisitions, net of cash acquired and escrowed,
$143 million of dividend payments and $160 million of payments for share
repurchases. Cash balances increased $172 million in 1998.
 
CONTROLLED WORKING CAPITAL
 
    Controlled working capital, which consists of trade and long-term
receivables and inventories, offset by accounts payable and customer advances,
consumed $6 million of cash in 1998, compared with a usage of $45 million in
1997. Average working capital as a percentage of sales improved 70 basis points
to 24.0 percent in 1998 compared with 24.7 percent in 1997 and 24.6 percent in
1996. The decrease in controlled working capital as a percent of sales in 1998
was primarily driven by additional customer advances and a decrease in
receivables.
 
INVESTMENT
 
    Honeywell continues to invest in its businesses at levels it believes to be
necessary to enhance its technological leadership position. Capital expenditures
for property, plant, equipment and software were $353 million in 1998, compared
with $298 million in 1997 and $296 million in 1996, while depreciation charges
were $250 million in 1998. The increase in 1998 capital expenditures was
primarily driven by the adoption of SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which resulted in $52
million of capitalized software costs as described on page 19. During 1998,
Honeywell invested an additional $281 million in complementary business
acquisitions (see Note 2 to the Financial Statements on page 40). In addition,
Honeywell invested $482 million in research and development activities in 1998,
compared with $447 million in 1997 and $353 million in 1996.
 
SHARE REPURCHASE PROGRAMS
 
    In October 1997, the Board of Directors authorized a program to repurchase
$350 million of Honeywell shares of which $160 million was used during 1998 and
$116 million in 1997. In October of 1998, the Board of Directors authorized a
new program to repurchase $400 million of Honeywell shares, of which none has
been used. The purpose of the repurchase program is to acquire shares to be
 
                                       24
<PAGE>
issued as part of Honeywell's Stock and Incentive Plans and other issuances as
described in Note 17 to the Financial Statements on page 51. Honeywell
repurchased a total of $160 million of shares in 1998, $154 million in 1997 and
$163 million in 1996.
 
    At year-end 1998, Honeywell had issued 188 million shares, of which 126
million were outstanding. On December 31, 1998, there were 30,533 shareowners of
record. At year-end 1997, Honeywell had 188 million shares issued, 126 million
shares outstanding and 30,821 shareowners of record.
 
DIVIDENDS
 
    Honeywell has paid a quarterly dividend since 1932 and has increased the
annual payout per share in each of the last 23 years. In October 1997, the Board
of Directors approved an additional 4 percent increase in the dividend to $1.12
per share effective in the fourth quarter 1997. In October of 1998, the Board of
Directors approved an additional 4 percent increase in the dividend to $1.16 per
share effective in the fourth quarter of 1998. Honeywell paid $1.13 per share in
dividends in 1998, compared with $1.09 per share in 1997 and $1.06 in 1996.
 
EMPLOYEE STOCK PROGRAMS
 
    In 1998, Honeywell contributed 555,746 shares of Honeywell common stock to
U.S. employees under the Honeywell Savings and Stock Ownership Plan. The number
of shares contributed under this program is based on employee savings levels and
company performance. Additionally in 1998, new stock purchase programs were
initiated in the U.S., Canada, and several European countries to increase
employee ownership of Honeywell Stock. Under these programs, employees who are
participants in the program can buy stock at a discount from market prices.
Employees purchased 290,959 shares of stock pursuant to the U.S. and
International Employee Stock Purchase Plans established in 1998. For more
information on these plans, see Note 17 to the Financial Statements on page 51.
 
STOCK PERFORMANCE
 
    The market price of Honeywell stock ranged from $58 5/8 to $96 3/8 in 1998,
and was $75 5/16 at year-end. Book value per common share at year-end was $22.09
in 1998, $18.80 in 1997 and $17.44 in 1996.
 
PENSION CONTRIBUTIONS
 
    Cash contributions to Honeywell's pension and retirement plans were $155
million in 1998, $215 million in 1997 and $201 million in 1996.
 
TAXES
 
    In 1998, Honeywell paid $277 million in taxes compared to $204 million in
1997. The amount Honeywell accrued for income taxes and related interest
decreased $10 million from 1997.
 
LIQUIDITY
 
    Short-term debt at year-end 1998 was $179 million, consisting of no
commercial paper, $53 million of notes payable and $126 million of current
maturities of long-term debt. Short-term debt at year-end 1997 totaled $146
million, consisting of $43 million of commercial paper, $39 million of notes
payable and $64 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 best-efforts basis. The interest rates
for Honeywell's material lines of credit are indexed to a rate, such as Prime,
LIBOR, or Commercial Paper. Available general-purpose lines of credit at
year-end 1998 were $1.771 billion. This consisted of $1.325 billion of committed
credit lines to meet Honeywell's financing
 
                                       25
<PAGE>
requirements, including support of commercial paper and bank note borrowings,
and $446 million of uncommitted credit lines available to certain foreign
subsidiaries. This compared with $1.683 billion of available credit lines at
year-end 1997, consisting of $1.325 billion of committed credit lines and $358
million of uncommitted credit lines. In August 1997, Honeywell and its
wholly-owned subsidiaries, Honeywell Canada Limited and Honeywell Finance B.V.,
filed a shelf registration statement which provides for the issuance of up to
$500 million, in the aggregate, of debt securities by Honeywell or such
subsidiaries, with the guarantee of Honeywell. On June 15, 1998, Honeywell
issued $250 million in debentures with a coupon rate of 6 5/8 percent maturing
on June 15, 2028. At December 31, 1998, $250 million remained available for
issuance under the shelf registration. Long-term debt maturities consist of $126
million in 1999, $78 million in 2000 and $117 million in 2001. In addition,
Honeywell has an agreement with a major financial institution whereby it may
convert designated pools of trade accounts receivable to cash up to $50 million
Canadian dollars on an ongoing basis for cash (see Note 8 to the Financial
Statements on page 45).
 
    Cash and short-term investments totaled $313 million at year-end 1998 and
$159 million at year-end 1997. Honeywell believes its available cash, committed
credit lines, receivables program and access to the public debt markets, through
its debt securities and commercial paper programs, provide adequate short-term
and long-term liquidity.
 
CREDIT RATINGS
 
    As of December 31, 1998, Honeywell's credit ratings for long-term and
short-term debt, respectively, were A/A-1 by Standard and Poor's Corporation,
A2/P1 by Moody's Investors Service, Inc. and A/D-1 by Duff and Phelps
Corporation.
 
RISK MANAGEMENT
 
    Honeywell is exposed to market risk from changes in interest rates and
foreign currency exchange rates. To mitigate the risk from these exposures,
Honeywell enters into various hedging transactions through derivative financial
instruments that have been authorized pursuant to its corporate policy.
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.
 
    FOREIGN EXCHANGE
 
    Honeywell primarily uses foreign exchange forwards and purchased options to
hedge exposures to adverse changes in foreign exchange rates (see Notes 6 and 15
to the Financial Statements on pages 44 and 49, respectively). Such exposures
have resulted from cross-border transactions principally in Belgian francs,
Deutsche marks and Great Britain pounds. Foreign exchange contracts reduce
Honeywell's overall exposure to exchange rate movements, since gains and losses
on these contracts offset losses and gains on the underlying exposures.
Transactions that are hedged include foreign currency net asset and net
liability exposures on the balance sheet, anticipated transactions, firm
purchase orders and firm sales commitments. At year-end 1998, the notional
amount of outstanding foreign exchange contracts were $1.072 billion.
 
    INTEREST RATES
 
    Honeywell manages its exposure to interest rate movements and the cost of
borrowing through the use of interest rate swaps by maintaining a proportionate
relationship of fixed rate debt to total debt between a minimum and maximum
percentage as set by management. 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 principle
amount (see Notes 14 and 15 to the Financial
 
                                       26
<PAGE>
Statements on pages 47 and 49, respectively). At year-end 1998, the notional
amount of outstanding interest rate swaps was $1.000 billion.
 
    VALUE AT RISK:
 
    To estimate the maximum potential loss in the fair market value of financial
instruments that may arise from adverse market movements in foreign exchange
rates and interest rates. Honeywell uses a "value at risk" statistical model.
The value at risk estimation utilizes weighted historical foreign exchange rates
and interest rates to estimate the volatility and correlation of these rates in
the future. The calculated volatility is used to estimate the potential loss in
the fair market value of financial instruments at a specified probability level.
The value at risk methodology used by Honeywell uses variance-covariance
statistical modeling and includes debt, interest rate swaps and foreign exchange
hedges. The estimated value at risk amounts represent the maximum potential loss
in the fair market value of Honeywell's financial instruments from adverse
changes in foreign exchange rates and interest rates based on a five-day time
horizon and a 95 percent confidence level on December 31, 1998.
 
    The value at risk for the combined portfolio was $11.8 million at December
31, 1998. This amount includes the diversification benefit of analyzing the
value at risk, including the interest rates and foreign exchange on a combined
basis as compared to individually, as changes in market conditions affect
interest rates and foreign exchange differently. The average value at risk
represents the simple average of the quarterly amounts for the past year. The
value at risk for the combined portfolio and the individual components are as
follows:
 
                                 VALUE AT RISK
                                 (IN MILLIONS)
 
<TABLE>
<CAPTION>
                                                                        AVERAGE        DECEMBER 31
                                                                      -----------  --------------------
                                                                         1998        1998       1997
                                                                      -----------  ---------  ---------
<S>                                                                   <C>          <C>        <C>
Combined Portfolio..................................................   $     9.5   $    11.8  $     6.8
  Foreign Exchange..................................................   $     4.4   $     3.6  $     6.1
  Interest Rates....................................................   $     6.8   $    10.4  $     2.3
</TABLE>
 
    The increase in the value at risk associated with interest rates is
primarily due to the extended duration of Honeywell's debt portfolio from the
issuance of a 30-year bond in 1998. Value at risk measures the potential
decrease in the fair market value of financial instruments given estimated
changes in foreign exchange rates and interest rates. Long-term financial
instruments, which are price sensitive to interest rates, will result in a
higher calculation of value at risk. However, changes in value of debt
instruments used for financing operations do not affect the cash flows of
Honeywell. Consequently, the increase in the value at risk associated with
interest rates is not considered to be a material risk to the company.
 
    The value at risk amounts presented above for foreign exchange and interest
rates do not consider the potential effect of favorable movements in market
factors nor does the value at risk model include all of the underlying exposures
that the hedges are designed to cover. Anticipated transactions, firm
commitments and accounts receivable and accounts payable denominated in foreign
currencies, which certain of these instruments are intended to hedge, were
excluded from the model due to model limitations. Since Honeywell utilized
foreign exchange contracts to hedge foreign currency transactions, a loss in
fair value for these instruments is generally offset by increases in the value
of the underlying transaction. The quantitative information generated by the
value at risk model is limited by the parameters built into the model that rely
on historical results, which may not be representative of future events.
Consequently, Honeywell relies on the experience and expertise of management's
regular review of its financial instruments and the current market environment
to manage its exposure to foreign exchange rates and interest rates.
 
                                       27
<PAGE>
YEAR 2000 READINESS DISCLOSURES
 
    BACKGROUND
 
    Computer programs which were written using two digits (rather than four) to
define the applicable year may recognize a date using "00" as the year 1900
rather than the year 2000. This is generally referred to as the "year 2000
issue," which may affect the performance of computer programs, hardware,
software and other products with embedded computer technology that is date
sensitive. Unless corrective action is taken to ensure that such items are "year
2000 ready," which means that they will be able to process dates and times in
such a manner that their technical and functional requirements will continue to
be met without interruption for the year 2000, they may generate erroneous data
or cause systems, equipment or other products to fail.
 
    HONEYWELL'S YEAR 2000 PROGRAM
 
    In the fourth quarter of 1995, Honeywell initiated a program to determine
whether or not its business systems, operations and products are year 2000
ready. This program addresses the company's information technology systems and
other systems with embedded computer technology; products provided to customers;
products purchased from suppliers; and most recently, the year 2000 readiness of
its significant customers.
 
    PRODUCT READINESS
 
    Substantially all of Honeywell's current products have been tested
internally to ascertain if they are year 2000 ready. Approximately 99 percent of
these products are year 2000 ready and the remainder is expected to be so by the
end of first quarter 1999. The company expects to complete its tests by the end
of first quarter 1999. In some areas of its businesses, Honeywell is conducting
external integration tests of year 2000 ready products in existing customer
systems to verify that they are compatible with such systems.
 
    Certain older products that are still in use by Honeywell customers and
subject to warranties or service contracts, may not be year 2000 ready.
Honeywell is formally communicating with distributors and direct customers to
make them aware of any potential problems that may result from the use of such
products and encouraging them to modify or replace same, or providing warranty
or contract service as appropriate. The process is complete except for some of
the security products, and communication related to these products is expected
to be completed during first quarter 1999. For older products which are not year
2000 ready, and were sold through distributors or are no longer under warranty
or service contracts, various means are being employed to raise the awareness of
any potential year 2000 problems, including advertising and contracting with
external service providers to help identify current owners.
 
    Honeywell realizes that new year 2000 issues may arise, and if so, will
notify customers as appropriate.
 
    SUPPLIER READINESS
 
    Honeywell has sent questionnaires to substantially all suppliers who furnish
products or services to the company, to ascertain whether products or services
supplied are year 2000 ready, as well as the effect the year 2000 issue may have
on their ability to continue supplying same. At least 300 suppliers have been
identified by the company as critical to its business and the various business
units are investigating a greater number to verify that critical supplier
products or services will be year 2000 ready. Various methods are being used to
validate supplier readiness, including symposiums, site visits and telephone
interviews. The verification process is expected to be completed during the
third
 
                                       28
<PAGE>
quarter of 1999 and contingency plans will be implemented for critical suppliers
identified to be at risk.
 
    INTERNAL SYSTEMS READINESS
 
    In 1993, prior to the commencement of the Honeywell year 2000 program, the
company implemented a program to upgrade most of its key information technology
(IT) systems to common applications software packages, with completion scheduled
prior to the year 2000. Recent revisions of these packages are marketed as year
2000 ready; however, Honeywell has decided it is necessary to validate this is
true in our environment. While Honeywell expects its critical internal business
systems to be year 2000 ready by third quarter 1999, integration testing of the
software packages may extend beyond that date. Critical business systems of
Honeywell Measurex Corporation, a company acquired in March 1997, are planned to
be year 2000 ready by the end of the third quarter of 1999. The remainder of
Honeywell's business systems which are considered to have a financial or
operational impact on its businesses, are expected to be year 2000 ready by the
end of 1999.
 
    The company is still assessing the status of its non-IT systems and making
repairs or upgrades to such systems as necessary. It expects to conclude this
effort during the third quarter of 1999 for critical non-IT systems, and by the
end of 1999 for other non-IT systems which are considered to have a financial or
operational impact on its businesses. Honeywell does not expect the costs
associated with the remediation of non-IT systems to be material, and such costs
are included in the amounts forecasted for contingencies in 1999 as discussed
below under the caption "Costs."
 
    CUSTOMER READINESS
 
    Honeywell recently expanded its year 2000 program to evaluate the readiness
of its significant customers to deal with the year 2000 issue and the effect, if
any, that it may have on their requirements for Honeywell's products and
services. Though Honeywell does not foresee any significant problems in this
area, the information collected to date as part of this effort is not sufficient
to form a basis for any conclusions regarding customer readiness and its effect,
if any, on customer demand for the company's products and services. Honeywell
expects to complete its assessment of the readiness of significant customers by
July 1999, though no assurance can be given that all customers will respond to
its inquiries or that all responses will be accurate.
 
    RISKS/CONTINGENCY PLANS
 
    Honeywell's products are used in a wide variety of control applications
including, but not limited to, industrial processing control systems, home and
building products and automation control systems, and space and aviation control
systems. In a most likely worst case scenario, if Honeywell's products are not
year 2000 ready, a control application could be disrupted, which could affect
the ability of the system in which it is installed to function properly,
depending on other safeguards. Similarly, if customers are unable to conduct
adequate integration testing of Honeywell's year 2000 ready products within
their equipment or systems, they could experience temporary equipment or systems
failure if compatibility problems arise. While the company does not expect any
worst case scenario to occur, it is working closely with customers of critical
systems to advise them of potential problems and the need to complete systems
integration testing.
 
    If a critical supplier cannot supply products or services to Honeywell that
are year 2000 ready, or if the supplier is adversely affected by the year 2000
issue, that source of supply could be interrupted. This could affect the ability
of Honeywell to supply other products or services, or disrupt a business
operation which is dependent thereon. Furthermore, if a year 2000 issue
affecting a component is not detected by a supplier, it could affect the
performance of the product or system of which it becomes a part and possibly
cause one or more of the scenarios discussed above to occur. To reduce the risk
of
 
                                       29
<PAGE>
such occurrences, Honeywell is taking steps to verify the year 2000 readiness of
all critical suppliers as discussed above under the caption "Supplier
Readiness." In addition, each of Honeywell's business units is developing
contingency plans to identify substitute materials, services and alternate
suppliers.
 
    Honeywell expects that all of its internal applications systems will be year
2000 ready by the end of 1999. However, if its strategies to replace its order
management systems in some European countries is not completely executed prior
to the year 2000, there may be difficulty in processing customer orders in such
countries. Contingency plans have been developed to mitigate such risks and will
be implemented if necessary.
 
    Honeywell acquires other companies from time to time as part of its business
development strategy, and it anticipates that acquisitions will continue through
the year 2000. In the course of conducting due diligence investigations of
acquisition candidates, Honeywell endeavors to ascertain whether or not their
products or services, or those of their critical suppliers, are year 2000 ready,
and whether or not such suppliers and key customers, if any, will be adversely
affected by the year 2000 issue. While acquisition candidates may provide
certain information or make representations and warranties regarding year 2000
readiness, in some cases, Honeywell may be unable to verify same until the
acquisition is completed and the steps outlined herein as part of Honeywell's
year 2000 program are undertaken.
 
    COSTS
 
    Honeywell estimates that historical and future costs associated with its
year 2000 program will not exceed $60 million for fiscal years 1995 through
1999. Approximately $20 million in costs have been incurred in fiscal year 1998,
and $30 million has been forecasted for the 1999 fiscal year to cover additional
costs and contingencies. Funding for the 1998 and 1999 costs was previously
forecasted as part of Honeywell's operating expenditures and included in the
company's budgets. Management believes that such costs will not have a material
impact on the operations, cash flows or financial condition of Honeywell and its
subsidiaries, taken as a whole, in future periods.
 
    The preceding "Year 2000 Readiness Disclosures" contain forward-looking
statements of Honeywell's expectations regarding the ability of its products and
systems to be year 2000 ready, as well as its ability to assess the readiness of
its suppliers and customers, and related risks. These statements relate to
future events, the outcome of which is uncertain, and should be read in
conjunction with the cautionary factors listed in Exhibit 99(i) to this report.
 
EURO CURRENCY
 
    In January 1999, the European Monetary Union (EMU) entered into a three-year
transition phase during which a common currency called the Euro was introduced
in participating countries. Initially, this new currency is being used for
financial transactions, and progressively, it will replace the old national
currencies that will be withdrawn by July 2002. The transition to the Euro
currency will involve changing budgetary, accounting and fiscal systems in
companies and public administrations, as well as the simultaneous handling of
parallel currencies and conversion of legacy data.
 
    UNCERTAINTIES RELATED TO THE EURO CONVERSION
 
    In 1996, Honeywell began studying the ongoing process of European
integration, focussing on issues and opportunities created by the EMU. Task
teams were established to develop Honeywell's Euro strategies and policies. The
findings of these teams have been integrated into our strategic and operational
plans. At this time, there are no significant remaining uncertainties related to
the Euro conversion and no material impact has been identified.
 
                                       30
<PAGE>
    COMPETITIVE IMPLICATIONS
 
    Making a broader European market requires product lines to become more
international and less local. In 1993, Honeywell restructured and its market
focus was changed from a country basis to a European line-of-business approach.
Today, our pricing strategies are largely European, except in those instances
where technical or cultural market characteristics warrant price
differentiation. The expectations of our customers, with respect to the currency
to be used in the transition period have been reflected in our changeover
strategies, resulting in a pro-active dual currency capability since January 1,
1999. The same approach with our suppliers will allow us to benefit from the
increased price transparency on the cost side. Plans are in place, including
shared service centers and consolidation of operations, to pursue the economies
of scale offered by the single European market. We believe converting to the
Euro has no material impact on Honeywell's competitive position.
 
    INFORMATION TECHNOLOGY AND OTHER SYSTEMS
 
    Compliance with European Commission regulations concerning conversion,
triangulation and rounding rules related to the Euro introduction, have been
addressed in detailed action plans involving all information systems in all
Honeywell units, both for in-house and purchased systems. The cost of
modification is insignificant, as the action plan builds on new systems
implementation required for shared services and Year 2000 readiness. Timelines
for implementation have been established, adequate resources are available and
contingency plans are in place. We believe converting the information technology
and other systems to the Euro has no material impact on Honeywell.
 
    CURRENCY RISK
 
    With the convergence of short-term interest rates in the EMU countries,
observed during the last two years, the foreign exchange exposure between the
currencies of these countries has diminished considerably. Our foreign exchange
exposure management has systematically been adapted to this evolution, thereby
benefiting from reduced hedging cost. The definitive fixing of the exchange
rates will only make this benefit permanent without creating any other issue or
opportunity other than eliminating the spread on the spot exchange. All balance
sheet exposures between EMU currencies and non-EMU currencies are systematically
hedged from month to month. The functional currency will not change to Euro in
1999 in any of the Honeywell units concerned. Current plans call for functional
currency conversion by year-end 2001. We do not anticipate this change will have
a material impact on Honeywell. We believe converting to the Euro has no
material impact on Honeywell's currency exchange cost and/or risk exposure.
 
    DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS, CONTINUITY OF CONTRACT AND
     TAXATION
 
    We believe converting to the Euro has no material impact on outstanding
derivatives, other financial instruments, continuity of contract or taxation.
 
LITIGATION
 
    On March 13, 1990, Litton Systems, Inc. filed a legal action against
Honeywell in U.S. District Court, Central District of California, Los Angeles,
with claims that were subsequently split into two separate cases. One alleges
patent infringement under federal law for using an ion-beam process to coat
mirrors incorporated in Honeywell's ring laser gyroscopes, and tortious
interference under state law for interfering with Litton's prospective advantage
with customers and contractual relationships with an inventor and his company,
Ojai Research, Inc. The other case alleges monopolization and attempted
monopolization under federal antitrust laws by Honeywell in the sale of inertial
reference systems containing ring laser gyroscopes into the commercial aircraft
market. Honeywell generally denied Litton's allegations in both cases. In the
patent/tort case, Honeywell also contested the validity
 
                                       31
<PAGE>
as well as the infringement of the patent, alleging, among other things, that
the patent had been obtained by Litton's inequitable conduct before the United
States Patent and Trademark Office.
 
    In 1993 and 1995, trials were held in each case and juries initially awarded
Litton significant monetary damages. However, those verdicts were set aside by
the trial court judge who ordered at minimum, new trials on the issue of damages
in each case.
 
    Following cross-appeals by the parties of various issues to the Federal
Circuit and the U.S. Supreme Court in the patent/tort case, it has been remanded
to the trial court for further legal and perhaps factual review with respect to
both liability and damages. This review was held in abeyance during a retrial of
the anti-trust damages in 1998 and its procedures remain to be defined and
scheduled by the trial court.
 
    The retrial of damages in the antitrust case commenced October 29, 1998 and
on December 9, 1998, a jury returned a verdict against Honeywell for actual
damages in the amount of $250 million. On January 27, 1999, trial court entered
a treble damages judgment in the total amount of $750 million for actual and
attempted monopolization. Honeywell believes that there is no factual or legal
basis for the magnitude of the jury's award and believes that it should be
overturned. Honeywell intends to file appropriate post-judgment motions with the
trial court and Litton will move to add substantial attorneys fees and costs to
the judgment. Honeywell also believes it has very strong arguments that the
liability portion of the jury verdict in the first antitrust trial was
erroneous. Once the trial court rules on those motions, the parties will have
the right to appeal the eventual judgment, as to both liability and damages, to
the U.S. Court of Appeals for the Ninth Circuit.
 
    For a detailed discussion of this litigation, see Note 20 to the Financial
Statements on page 58.
 
                                       32
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
                          INDEPENDENT AUDITORS' REPORT
 
To the Shareowners of Honeywell Inc.:
 
    We have audited the statement of financial position of Honeywell Inc. and
subsidiaries as of December 31, 1998 and 1997, and the related statements of
income, shareowners' equity and cash flows for each of the three years in the
period ended December 31, 1998. Our audits also included the financial statement
schedule listed at Part IV, Item 14(a). These financial statements and financial
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statements and financial statement
schedule based on our audits.
 
    We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
    In our opinion, such financial statements present fairly, in all material
respects, the financial position of Honeywell Inc. and subsidiaries at December
31, 1998 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, 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 10, 1999
 
                                       33
<PAGE>
                                INCOME STATEMENT
 
                        HONEYWELL INC. AND SUBSIDIARIES
 
           (DOLLARS AND SHARES IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                                     YEARS ENDED DECEMBER 31
                                                                                ---------------------------------
<S>                                                                             <C>        <C>         <C>
                                                                                  1998        1997        1996
                                                                                ---------  ----------  ----------
Sales.........................................................................  $ 8,426.7  $  8,027.5  $  7,311.6
Costs and Expenses
  Cost of sales...............................................................    5,677.0     5,425.1     4,975.4
  Research and development....................................................      481.9       446.6       353.3
  Selling, general and administrative.........................................    1,317.9     1,359.4     1,313.1
  Gain on sale of businesses..................................................                  (77.1)
  Litigation settlements......................................................      (23.6)
  Special charges.............................................................       53.7        90.7
                                                                                ---------  ----------  ----------
Total Costs and Expenses......................................................    7,506.9     7,244.7     6,641.8
                                                                                ---------  ----------  ----------
Interest
  Interest expense............................................................      113.0       101.9        81.4
  Interest income.............................................................       10.8         9.4         8.5
                                                                                ---------  ----------  ----------
Net Interest..................................................................      102.2        92.5        72.9
                                                                                ---------  ----------  ----------
Equity Income.................................................................       11.7        12.9        13.3
                                                                                ---------  ----------  ----------
Income before Income Taxes....................................................      829.3       703.2       610.2
Provision for Income Taxes....................................................      257.3       232.2       207.5
                                                                                ---------  ----------  ----------
Net Income....................................................................  $   572.0  $    471.0  $    402.7
                                                                                ---------  ----------  ----------
                                                                                ---------  ----------  ----------
Basic Earnings Per Common Share...............................................  $    4.54  $     3.71  $     3.18
                                                                                ---------  ----------  ----------
                                                                                ---------  ----------  ----------
Average Number of Basic Common Shares Outstanding.............................      126.1       127.1       126.6
                                                                                ---------  ----------  ----------
                                                                                ---------  ----------  ----------
Diluted Earnings Per Common Share.............................................  $    4.48  $     3.65  $     3.11
                                                                                ---------  ----------  ----------
                                                                                ---------  ----------  ----------
Average Number of Diluted Common Shares Outstanding...........................      127.8       129.2       129.5
                                                                                ---------  ----------  ----------
                                                                                ---------  ----------  ----------
</TABLE>
 
                See accompanying Notes to Financial Statements.
 
                                       34
<PAGE>
                        STATEMENT OF FINANCIAL POSITION
 
                        HONEYWELL INC. AND SUBSIDIARIES
 
                             (DOLLARS IN MILLIONS)
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                                                    DECEMBER 31
                                                                                                --------------------
<S>                                                                                             <C>        <C>
                                                                                                  1998       1997
                                                                                                ---------  ---------
Current Assets
  Cash and cash equivalents...................................................................  $   306.0  $   134.3
  Short-term investments......................................................................        7.2       24.9
  Receivables.................................................................................    1,906.7    1,837.8
  Inventories.................................................................................    1,116.0    1,028.0
  Deferred income taxes.......................................................................      285.9      233.2
                                                                                                ---------  ---------
    Total Current Assets......................................................................    3,621.8    3,258.2
 
Investments and Advances......................................................................      269.9      243.8
Property, Plant and Equipment
  Property, plant and equipment...............................................................    3,355.8    3,045.0
  Less accumulated depreciation...............................................................   (2,097.4)   1,916.3
                                                                                                ---------  ---------
    Net Property, Plant and Equipment.........................................................    1,258.4    1,128.7
 
Other Assets
  Long-term receivables.......................................................................       34.0       39.2
  Goodwill....................................................................................      952.2      786.0
  Intangibles.................................................................................      343.0      376.0
  Deferred income taxes.......................................................................       18.9       41.7
  Other.......................................................................................      672.2      537.8
                                                                                                ---------  ---------
    Total Assets..............................................................................  $ 7,170.4  $ 6,411.4
                                                                                                ---------  ---------
                                                                                                ---------  ---------
                                        LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities
  Short-term debt.............................................................................  $   178.9  $   146.4
  Accounts payable............................................................................      676.6      634.2
  Customer advances...........................................................................      340.2      269.7
  Accrued compensation and benefit costs......................................................      280.0      271.2
  Accrued income taxes........................................................................      334.4      344.2
  Deferred income taxes.......................................................................       18.0       11.3
  Other accrued liabilities...................................................................      624.6      641.9
                                                                                                ---------  ---------
    Total Current Liabilities.................................................................    2,452.7    2,318.9
 
Long-Term Debt................................................................................    1,299.3    1,176.8
Other Liabilities
  Accrued benefit costs.......................................................................      457.3      435.9
  Deferred income taxes.......................................................................       66.2       51.4
  Other.......................................................................................      109.4       39.2
                                                                                                ---------  ---------
    Total Liabilities.........................................................................    4,384.9    4,022.2
 
Shareowners' Equity
  Common stock -- $1.50 par value
  Authorized -- 250,000,000 shares
  Issued -- 1998 -- 187,536,597 shares........................................................      281.3
           1997 -- 187,633,023 shares.........................................................                 281.5
  Additional paid-in capital..................................................................      697.6      608.4
  Retained earnings...........................................................................    3,835.9    3,407.0
  Treasury Stock -- 1998 -- 61,206,715 shares.................................................   (2,005.5)
                  1997 -- 61,433,075 shares...................................................              (1,879.3)
  Other comprehensive income..................................................................      (23.8)     (28.4)
                                                                                                ---------  ---------
  Total Shareowners' Equity...................................................................    2,785.5    2,389.2
                                                                                                ---------  ---------
  Total Liabilities and Shareowners' Equity...................................................  $ 7,170.4  $ 6,411.4
                                                                                                ---------  ---------
                                                                                                ---------  ---------
</TABLE>
 
                See accompanying Notes to Financial Statements.
 
                                       35
<PAGE>
                            STATEMENT OF CASH FLOWS
 
                        HONEYWELL INC. AND SUBSIDIARIES
 
                             (DOLLARS IN MILLIONS)
 
<TABLE>
<CAPTION>
                                                                                          YEARS ENDED DECEMBER 31
                                                                                      -------------------------------
                                                                                        1998       1997       1996
                                                                                      ---------  ---------  ---------
<S>                                                                                   <C>        <C>        <C>
Cash Flows from Operating Activities
  Net income........................................................................  $   572.0  $   471.0  $   402.7
  Adjustments to reconcile net income to net cash flows from operating activities:
    Depreciation....................................................................      249.6      246.0      236.1
    Amortization of intangibles.....................................................       78.3       73.6       51.4
    Deferred income taxes...........................................................       (2.6)     (19.5)      38.5
    Equity income, net of dividends received........................................       (9.6)     (10.3)     (10.8)
    Gain on sale of businesses......................................................                 (77.1)
    Gain on sale of assets..........................................................       (9.1)      (7.3)     (12.0)
    Contributions to employee stock plans...........................................       59.9       48.9       38.2
    Increase in receivables.........................................................      (10.8)     (60.7)    (203.0)
    Increase in inventories.........................................................      (38.5)     (67.1)     (89.9)
    Increase (decrease) in accounts payable.........................................       (1.6)      38.3       51.8
    Increase in customer advances...................................................       45.1       45.0       45.9
    Increase in accrued income taxes and interest...................................        3.9       49.7       57.4
    Increase (decrease) in accrued liabilities......................................      (72.0)     113.2       35.5
    Other noncurrent items -- net...................................................      (85.3)    (199.1)    (148.0)
                                                                                      ---------  ---------  ---------
Net Cash Flows from Operating Activities............................................      779.3      644.6      493.8
                                                                                      ---------  ---------  ---------
Cash Flows from Investing Activities
  Proceeds from sale of assets......................................................       68.0       77.2       90.3
  Proceeds from sale of business....................................................       29.0      100.6
  Capital expenditures..............................................................     (353.0)    (298.3)    (296.5)
  Investment in acquisitions........................................................     (258.2)    (598.4)    (376.2)
  (Increase) decrease in short-term investments.....................................        1.0        0.4       (0.2)
  Other -- net......................................................................       (0.7)       5.6        0.4
                                                                                      ---------  ---------  ---------
Net Cash Flows from Investing Activities............................................     (513.9)    (712.9)    (582.2)
                                                                                      ---------  ---------  ---------
Cash Flows from Financing Activities
  Net increase (decrease) in short-term debt........................................      (32.1)     (73.4)      18.8
  Proceeds from issuance of long-term debt..........................................      252.2      597.7      340.4
  Repayment of long-term debt.......................................................      (70.7)    (182.3)    (188.8)
  Purchase of treasury stock........................................................     (159.6)    (154.3)    (163.2)
  Proceeds from exercise of stock options...........................................       60.2       44.7       57.3
  Dividends paid....................................................................     (143.2)    (140.1)    (133.5)
                                                                                      ---------  ---------  ---------
Net Cash Flows from Financing Activities............................................      (93.2)      92.3      (69.0)
                                                                                      ---------  ---------  ---------
Effect of Exchange Rate Changes on Cash.............................................       (0.5)     (16.8)      (7.1)
                                                                                      ---------  ---------  ---------
Increase (Decrease) in Cash and Cash Equivalents....................................      171.7        7.2     (164.5)
Cash and Cash Equivalents at Beginning of Year......................................      134.3      127.1      291.6
                                                                                      ---------  ---------  ---------
Cash and Cash Equivalents at End of Year............................................  $   306.0  $   134.3  $   127.1
                                                                                      ---------  ---------  ---------
                                                                                      ---------  ---------  ---------
</TABLE>
 
                See accompanying Notes to Financial Statements.
 
                                       36
<PAGE>
                        STATEMENT OF SHAREOWNERS' EQUITY
 
                        HONEYWELL INC. AND SUBSIDIARIES
 
                             (DOLLARS IN MILLIONS)
 
<TABLE>
<CAPTION>
                                                                         ACCUMULATED
                                                           RETAINED         OTHER
                                                           EARNINGS     COMPREHENSIVE     COMMON     TREASURY     PAID-IN
                                                 TOTAL        (2)        INCOME (1)        STOCK       STOCK      CAPITAL
                                               ---------  -----------  ---------------  -----------  ---------  -----------
<S>                                            <C>        <C>          <C>              <C>          <C>        <C>
Beginning Balance 1/1/96.....................  $ 2,040.1   $ 2,805.8      $   121.0      $   282.2   $(1,650.2)  $   481.3
Comprehensive Income
  Net income.................................      402.7       402.7
  Other comprehensive income (1)
    Currency translation adjustments.........      (52.7)                     (52.7)
    Pension liability adjustment (1).........       14.9                       14.9
                                               ---------  -----------       -------     -----------  ---------  -----------
  Other comprehensive income.................      (37.8)                     (37.8)
                                               ---------  -----------       -------     -----------  ---------  -----------
Comprehensive Income.........................      364.9
Common Stock Issued..........................       96.9                                      (0.5)       49.9        47.5
Treasury Stock Acquired......................     (163.2)                                               (163.2)
Dividends Declared on Common Stock...........     (133.8)     (133.8)
                                               ---------  -----------       -------     -----------  ---------  -----------
Ending Balance 12/31/96......................  $ 2,204.9   $ 3,074.7      $    83.2      $   281.7   $(1,763.5)  $   528.8
                                               ---------  -----------       -------     -----------  ---------  -----------
                                               ---------  -----------       -------     -----------  ---------  -----------
Comprehensive Income
  Net income.................................      471.0       471.0
  Other comprehensive income (1)
    Currency translation adjustments.........     (109.6)                    (109.6)
    Pension liability adjustment (1).........       (2.0)                      (2.0)
                                               ---------  -----------       -------     -----------  ---------  -----------
  Other comprehensive income.................     (111.6)                    (111.6)
                                               ---------  -----------       -------     -----------  ---------  -----------
Comprehensive Income.........................      359.4
Common Stock Issued..........................      117.9                                      (0.2)       38.5        79.6
Treasury Stock Acquired......................     (154.3)                                               (154.3)
Dividends Declared on Common Stock...........     (138.7)     (138.7)
                                               ---------  -----------       -------     -----------  ---------  -----------
Ending Balance 12/31/97......................  $ 2,389.2   $ 3,407.0      $   (28.4)     $   281.5   $(1,879.3)  $   608.4
                                               ---------  -----------       -------     -----------  ---------  -----------
                                               ---------  -----------       -------     -----------  ---------  -----------
Comprehensive Income
  Net income.................................      572.0       572.0
  Other comprehensive income (1)
    Currency translation adjustments.........       14.5                       14.5
    Pension liability adjustment (1).........       (9.9)                      (9.9)
                                               ---------  -----------       -------     -----------  ---------  -----------
  Other comprehensive income.................        4.6                        4.6
                                               ---------  -----------       -------     -----------  ---------  -----------
Comprehensive Income.........................      576.6
Common Stock Issued..........................      122.4                                      (0.2)       33.4        89.2
Treasury Stock Acquired......................     (159.6)                                               (159.6)
Dividends Declared on Common Stock...........     (143.1)     (143.1)
                                               ---------  -----------       -------     -----------  ---------  -----------
Ending Balance 12/31/98......................  $ 2,785.5   $ 3,835.9      $   (23.8)     $   281.3   $(2,005.5)  $   697.6
                                               ---------  -----------       -------     -----------  ---------  -----------
                                               ---------  -----------       -------     -----------  ---------  -----------
</TABLE>
 
------------------------------
 
(1) All items included in other comprehensive income are shown net of income
    taxes. The tax effect for the pension liability adjustment was $(6.2),
    $(1.3) and $9.4 for 1998, 1997 and 1996, respectively.
 
(2) Included in retained earnings are undistributed earnings of companies 20 to
    50 percent owned, amounting to $175.1, $165.5, and $155.2 at December 31,
    1998, 1997 and 1996, respectively.
 
(3) Accumulated other comprehensive income is comprised of accumulated currency
    translation of $(6.9), $(21.4) and $88.2; and pension liability adjustment
    of $(16.9), $(7.0) and $(5.0) at December 31, 1998, 1997 and 1996,
    respectively.
 
                See accompanying Notes to Financial Statements.
 
                                       37
<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 could differ from these 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
 
    Basic Earnings Per Share (EPS) is calculated using income available to
common shareowners divided by the weighted average of common shares outstanding
during the year. Diluted EPS is similar to Basic EPS except that the weighted
average of common shares outstanding is increased to include the number of
additional common shares that would have been outstanding if the dilutive
potential common shares, such as options, had been issued. The treasury stock
method is used to calculate dilutive shares, which reduces the gross number of
dilutive shares by the number of shares purchasable from the proceeds of the
options assumed to be exercised. See Note 4 on page 42 for more information
regarding the earnings per share calculations.
 
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 that are not considered cash
equivalents are classified as cash flows from investing activities.
 
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.
 
                                       38
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                        HONEYWELL INC. AND SUBSIDIARIES
 
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
NOTE 1 -- ACCOUNTING POLICIES (CONTINUED)
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, up to 5 years for software and 3 to 15 years for machinery and
equipment.
 
    In 1998, Honeywell adopted Statement of Position (SOP) 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use," and
began to capitalize the costs of developing software for internal use. Honeywell
previously only capitalized purchased software when costs exceeded $250
thousand. The amount of software capitalized in 1998 was $52.2.
 
INTANGIBLES
 
    Intangibles are carried at cost and amortized using the straight-line method
over their estimated useful lives of 15 to 40 years for goodwill, 4 to 17 years
for patents, licenses and trademarks and 3 to 24 years for 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. Derivatives used
for hedging purposes must be designated as, and effective as, a hedge of an
identified risk exposure at the inception of the contract. Accordingly, changes
in the fair market value of the derivative contract must be highly correlated
with the changes in the fair market value of the underlying hedged item both at
the inception of the hedge and over the life of the hedge contract.
 
    Foreign exchange contracts are accounted for as hedges to the extent they
are designated as, and are effective as, hedges of firm or anticipated foreign
currency commitments. Any foreign exchange contracts designated but no longer
effective as a hedge are marked to market and the related gains and losses are
recognized in earnings.
 
    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. Cash
flows from such terminations are classified according to the underlying
financial instrument the contract was designated to hedge. Open interest rate
contracts are reviewed regularly to ensure that they remain effective as hedges
of interest rate exposure.
 
    In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which is effective for Honeywell on January
1, 2000. SFAS 133 requires companies to record derivatives on the balance sheet
as assets or liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the
 
                                       39
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                        HONEYWELL INC. AND SUBSIDIARIES
 
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
NOTE 1 -- ACCOUNTING POLICIES (CONTINUED)
derivative and whether it qualifies for hedge accounting. Honeywell is currently
reviewing the standard and its effect on the financial statements.
 
FOREIGN CURRENCY
 
    Foreign currency assets and liabilities are translated into U. S. dollars
using the exchange rates in effect at the statement of financial position date.
Results of operations are translated generally 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/(decreased) shareowners' equity: $14.5 in 1998, $(109.6) in 1997 and
$(52.7) in 1996.
 
LONG-LIVED ASSETS
 
    Honeywell evaluates the recoverability of long-lived assets using discounted
cash flows when events and circumstances warrant such a review.
 
STOCK-BASED COMPENSATION
 
    Honeywell uses the recognition and measurement principles of Accounting
Principles Board (APB) No. 25 to record 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 recording stock-based
awards had been applied can be found in Note 17 to the Financial Statements on
page 51.
 
BASIS OF PRESENTATION
 
    Certain prior year amounts have been reclassified to conform with the
current year presentation.
 
NOTE 2 -- ACQUISITIONS AND SALE OF ASSETS
 
    Honeywell acquired 14 companies in 1998, 7 companies in 1997 and 17
companies in 1996 for $281.4, $650.2 and $411.2, 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. Cash acquired through acquisitions was $7.0,
$51.7 and $35.0 in 1998, 1997 and 1996, respectively. The excess of purchase
price over the estimated fair values of the net assets acquired, in the amount
of $213.3 in 1998, $323.7 in 1997 and $294.7 in 1996, has been recorded as
goodwill and is amortized over estimated useful lives.
 
    The largest acquisition in 1997, consisting of approximately $600 in cash,
was Measurex Corporation. The allocation of the purchase price for Measurex
resulted in goodwill of $305.9 and intangibles, including patents/developed
technology, work force value and customer lists of $202.5, which will be
amortized over an average of approximately 26 years.
 
    The pro forma results for 1998, 1997 and 1996, assuming these acquisitions
had been made at the beginning of the year, would not be materially different
from reported results.
 
                                       40
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                        HONEYWELL INC. AND SUBSIDIARIES
 
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
NOTE 2 -- ACQUISITIONS AND SALE OF ASSETS (CONTINUED)
    On July 5, 1998, Honeywell sold Honeywell-Measurex Data Measurement
Corporation located in Gaithersburg, MD, to Metrika Systems Corporation for
$29.0 in cash. The gain on the sale of this business and the impact on the
financial statements and results of operations are immaterial. In 1997,
Honeywell sold the net assets of Industrial Control's solenoid valve business
for approximately $102 in cash, resulting in a gain of $64.3. Additionally in
1997, Honeywell sold the control valve business of the Industrial Control
business segment and a small security monitoring business related to Home and
Building Control for approximately $24 in cash and receivables for a gain of
$12.8.
 
    Proceeds from the sale of other assets amounted to $68.0 in 1998, $77.2 in
1997 and $90.3 in 1996. In June 1998, Honeywell entered into a sale/leaseback
agreement on a facility in Cupertino, CA, which generated cash proceeds of
$50.4. A gain of $5.6 was recognized in the second quarter of 1998. The
remaining gain was deferred and is being recognized over the term of the lease.
The annual impact of the deferred gain on the results of operations will be
immaterial. Gains and losses from other asset sales were not material in any
year and are included in selling, general and administrative expenses on the
income statement.
 
NOTE 3 -- SPECIAL CHARGES
 
    In 1998, Honeywell's management, with the approval of the board of
directors, committed itself to a plan of action and recorded special charges of
$53.7. Honeywell remains committed to efforts to reduce operating costs and
improve margins. Special charges include costs for work force reductions,
worldwide facilities consolidations, organizational changes, and other cost
reductions. The Home and Building Control business segment recorded special
charges of $25.8 as a result of a rapidly changing marketplace by consolidating
field office locations. Industrial Control recorded $25.8 to rationalize product
lines, restructure the organization, and complete other activities associated
with the integration of Measurex. Space and Aviation Control recorded special
charges of $1.4 to strengthen the competitive position of it's cost structure
through workforce reductions and field office consolidations. A total of $0.7
was recorded at the corporate level, which is related to work force reductions
in administration. As of December 31, 1998, Honeywell had a total of $48.2 of
remaining reserves related to the 1998 special charges.
 
    Work force reduction costs primarily include severance costs related to
involuntary termination programs instituted to improve efficiency and reduce
costs. These costs amounted to $45.5 in 1998, and approximately 1,200 employees,
consisting largely of sales, marketing, factory and other administrative
personnel who have been or will be terminated. Facility consolidation costs are
primarily associated with combining field office locations and rationalizing
product lines to streamline Honeywell's operations, and amounted to $6.0 in
1998. Other cost accruals totaling $2.2 in 1998 include costs associated with
the integration of product lines. The charges are included as special charges on
the income statement. The remaining expenditures, to be paid in cash, for
special charges in 1999 will be $40.1 for workforce reductions, $5.1 for
facilities and $1.1 for other expenses.
 
    In 1997, Honeywell's management committed itself to a cost reduction plan
and recorded special charges of $90.7. Costs amounted to $74.2 for workforce
reductions, $8.3 for facility consolidations and $8.2 for other costs
reductions. As of December 31, 1998, Honeywell had a total of $18.6 of reserves
remaining related to the 1997 special charges. The balances of the 1997 special
charges are primarily related to terminated employees who continue to receive
pay.
 
                                       41
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                        HONEYWELL INC. AND SUBSIDIARIES
 
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
NOTE 3 -- SPECIAL CHARGES (CONTINUED)
    Adjustments to the estimated plan's costs have not been material and the
remaining reserves will be funded with cash generated from operations.
 
NOTE 4 -- EARNINGS PER SHARE
 
<TABLE>
<CAPTION>
                                                           1998             1997              1996
                                                      --------------  ----------------  ----------------
<S>                                                   <C>             <C>               <C>
BASIC EARNINGS PER SHARE:
Income:
  Income available to common shareowners............  $        572.0  $          471.0  $          402.7
Shares:
  Weighted average shares outstanding...............     126,086,121       127,051,613       126,632,082
Basic Earnings per Share............................  $         4.54  $           3.71  $           3.18
DILUTED EARNINGS PER SHARE:
Income:
  Income available to common shareowners............  $        572.0  $          471.0  $          402.7
Shares:
  Weighted average shares outstanding...............     126,086,121       127,051,613       126,632,082
Dilutive shares issuable in connection with stock
 plans..............................................       4,828,865         4,767,393         6,286,392
Less: Shares purchasable with proceeds..............      (3,116,255)       (2,626,784)       (3,437,695)
                                                      --------------  ----------------  ----------------
    Total Shares....................................     127,798,731       129,192,222       129,480,779
                                                      --------------  ----------------  ----------------
                                                      --------------  ----------------  ----------------
Diluted Earnings per Share..........................  $         4.48  $           3.65  $           3.11
</TABLE>
 
    Options to purchase 1.2 million shares of common stock ranging from $67.13
to $94.47 were outstanding during 1998 but were not included in the computation
of the Diluted Earnings Per Share (EPS) because the options' exercise prices
were greater than the average market price of the common shares. Options to
purchase 1.4 million shares ranging from $69.43 to $78.91 were outstanding
during 1997 but were not included in the computation of 1997 Diluted EPS. In
1996, an immaterial amount of options was excluded from the Diluted EPS
calculation since most of the option prices were less than the average market
price for the period.
 
NOTE 5 -- INCOME TAXES
 
    The components of income before income taxes consist of the following:
 
<TABLE>
<CAPTION>
                                                                              1998       1997       1996
                                                                            ---------  ---------  ---------
<S>                                                                         <C>        <C>        <C>
Domestic..................................................................  $   485.1  $   377.3  $   349.4
Foreign...................................................................      344.2      325.9      260.8
                                                                            ---------  ---------  ---------
                                                                            $   829.3  $   703.2  $   610.2
</TABLE>
 
                                       42
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                        HONEYWELL INC. AND SUBSIDIARIES
 
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
NOTE 5 -- INCOME TAXES (CONTINUED)
    The provision for income taxes on that income is as follows:
 
<TABLE>
<CAPTION>
                                                                              1998       1997       1996
                                                                            ---------  ---------  ---------
<S>                                                                         <C>        <C>        <C>
Current tax expense
  United States...........................................................  $   125.5  $   124.9  $    60.8
  Foreign.................................................................      110.5      101.6       84.7
  State and local.........................................................       33.3       27.1       27.2
                                                                            ---------  ---------  ---------
  Total current...........................................................      269.3      253.6      172.7
                                                                            ---------  ---------  ---------
Deferred tax expense
  United States...........................................................      (18.8)     (13.9)      27.4
  Foreign.................................................................        8.9       (5.6)       4.0
  State and local.........................................................       (2.1)      (1.9)       3.4
                                                                            ---------  ---------  ---------
  Total deferred..........................................................      (12.0)     (21.4)      34.8
                                                                            ---------  ---------  ---------
Provision for income taxes................................................  $   257.3  $   232.2  $   207.5
</TABLE>
 
    A reconciliation of the provision for income taxes to the amount computed
using U.S. federal statutory rates is as follows:
 
<TABLE>
<CAPTION>
                                                                              1998       1997       1996
                                                                            ---------  ---------  ---------
<S>                                                                         <C>        <C>        <C>
Taxes on income at U.S. federal statutory rates...........................  $   290.3  $   246.1  $   213.6
Tax effects of foreign income.............................................       (1.3)     (17.6)     (15.9)
State taxes...............................................................       19.4       15.7       21.1
Goodwill..................................................................       11.3       10.6        4.3
Tax effect of settlements.................................................      (26.5)      (6.8)       0.0
Other.....................................................................      (35.9)     (15.8)     (15.6)
                                                                            ---------  ---------  ---------
Provision for income taxes................................................  $   257.3  $   232.2  $   207.5
</TABLE>
 
    Interest costs related to prior years' tax issues are included in the
provision for income taxes. Taxes paid were $258.9 in 1998, $203.7 in 1997 and
$113.1 in 1996.
 
                                       43
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                        HONEYWELL INC. AND SUBSIDIARIES
 
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
NOTE 5 -- INCOME TAXES (CONTINUED)
    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 on
the statement of financial position are:
 
<TABLE>
<CAPTION>
                                                                                        1998       1997
                                                                                      ---------  ---------
<S>                                                                                   <C>        <C>
Employee benefits...................................................................  $    30.8  $    54.7
Miscellaneous accruals..............................................................      132.5      107.0
Asset valuation reserves............................................................       52.3       44.0
Long-term contracts.................................................................       12.3       12.0
State taxes.........................................................................       27.1       24.9
Pension liability adjustment........................................................       10.6        4.4
Other...............................................................................      (45.0)     (34.8)
                                                                                      ---------  ---------
                                                                                      $   220.6  $   212.2
</TABLE>
 
    The components of net deferred taxes shown in the statement of financial
position are:
 
<TABLE>
<CAPTION>
                                                                                        1998       1997
                                                                                      ---------  ---------
<S>                                                                                   <C>        <C>
Deferred tax assets.................................................................  $   642.3  $   506.8
Deferred tax liabilities............................................................      421.7      294.6
</TABLE>
 
    Provision has not been made for U.S. or additional foreign taxes on $882.4
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, 1998, foreign subsidiaries had tax operating loss
carryforwards of $29.2.
 
NOTE 6 -- FOREIGN CURRENCY
 
    Honeywell has entered into various foreign currency exchange contracts
designed to manage its exposure to exchange rate fluctuations on foreign
currency transactions. 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. 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 $1,071.6 and $1,213.7 at December 31, 1998,
and 1997, respectively. At December 31, 1998, these contracts generally have a
term of less than one year and are primarily denominated in Belgian francs
($366.8), Deutsche marks ($253.3), Great Britain pounds ($129.9) and Canadian
dollars ($89.3).
 
                                       44
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                        HONEYWELL INC. AND SUBSIDIARIES
 
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
NOTE 7 -- 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>
                                                                                         1998       1997
                                                                                       ---------  ---------
<S>                                                                                    <C>        <C>
Cash equivalents.....................................................................  $   171.1  $    27.7
Short-term investments...............................................................        7.2        8.0
Investments and advances.............................................................        3.5        5.7
                                                                                       ---------  ---------
                                                                                       $   181.8  $    41.4
</TABLE>
 
    Held-to-maturity securities generally mature within one year and include the
following:
 
<TABLE>
<CAPTION>
                                                                                         1998       1997
                                                                                       ---------  ---------
<S>                                                                                    <C>        <C>
Time deposits with financial institutions............................................  $    13.8  $    34.8
Commercial paper.....................................................................      157.2        0.1
Other................................................................................       10.8        6.5
                                                                                       ---------  ---------
                                                                                       $   181.8  $    41.4
</TABLE>
 
    Honeywell's purchases of held-to-maturity securities, consisting primarily
of commercial paper, amounted to $2,212.0 and $1,809.0 in 1998 and 1997,
respectively. Proceeds from maturities of held-to-maturity securities amounted
to $2,058.4 in 1998 and $1,812.5 in 1997. The majority of the held-to-maturity
securities that were purchased and had matured during the year are considered
cash equivalents since the duration was less than 3 months. 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 8 -- RECEIVABLES
 
    Receivables have been reduced by an allowance for doubtful accounts as
follows:
 
<TABLE>
<CAPTION>
                                                                                           1998       1997
                                                                                         ---------  ---------
<S>                                                                                      <C>        <C>
Receivables, current...................................................................  $    41.1  $    38.5
Long-term receivables..................................................................        1.8        2.7
</TABLE>
 
    Receivables include approximately $24.9 in 1998 and $16.5 in 1997 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 $345.6 and
$331.0 at December 31, 1998, and 1997, 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 $1.3 in 1998 and $1.5 in 1997 to an amount
that approximates realizable value.
 
                                       45
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                        HONEYWELL INC. AND SUBSIDIARIES
 
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
NOTE 8 -- RECEIVABLES (CONTINUED)
    In 1996, Honeywell entered into an asset securitization program with a large
financial institution to sell, with recourse, certain eligible trade receivables
up to a maximum of $50.0 Canadian dollars (approximately $32.3 and $34.8 U.S.
dollars at December 31, 1998 and 1997, respectively). 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 $243.3 in 1998 and $292.6 in 1997. Honeywell retains the right to
repurchase transferred receivables under the program, and therefore, the
transaction does not qualify as a sale under the terms of Statement of Financial
Accounting Standard No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." Included on the statement
of financial position as receivables are at year-end are $18.0 and $27.7 in 1998
and 1997, respectively, of uncollected receivables held in trust.
 
NOTE 9 -- INVENTORIES
 
<TABLE>
<CAPTION>
                                                                                    1998        1997
                                                                                  ---------  ----------
<S>                                                                               <C>        <C>
Finished goods..................................................................  $   373.2  $    379.3
Inventories related to long-term contracts......................................      186.1       151.4
Work in process.................................................................      224.9       211.3
Raw materials and supplies......................................................      331.8       286.0
                                                                                  ---------  ----------
                                                                                  $ 1,116.0  $  1,028.0
</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 $28.7 and $43.5 at December 31, 1998 and 1997, respectively.
 
NOTE 10 -- PROPERTY, PLANT AND EQUIPMENT
 
<TABLE>
<CAPTION>
                                                                                    1998        1997
                                                                                  ---------  ----------
<S>                                                                               <C>        <C>
Land............................................................................  $    71.2  $     68.7
Building and improvements.......................................................      602.9       557.4
Machinery and equipment.........................................................    2,525.1     2,336.4
Construction in progress........................................................      156.6        82.5
                                                                                  ---------  ----------
                                                                                  $ 3,355.8  $  3,045.0
</TABLE>
 
NOTE 11 -- FOREIGN SUBSIDIARIES
 
    The following is a summary of financial data pertaining to foreign
subsidiaries:
 
<TABLE>
<CAPTION>
                                                                                  1998        1997        1996
                                                                                ---------  ----------  ----------
<S>                                                                             <C>        <C>         <C>
Net income....................................................................  $   245.0  $    235.6  $    172.9
Assets........................................................................  $ 2,662.1  $  2,114.8  $  1,847.8
Liabilities...................................................................    1,548.6     1,019.0       838.5
                                                                                ---------  ----------  ----------
Net assets....................................................................  $ 1,113.5  $  1,095.8  $  1,009.3
</TABLE>
 
                                       46
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                        HONEYWELL INC. AND SUBSIDIARIES
 
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
NOTE 11 -- FOREIGN SUBSIDIARIES (CONTINUED)
    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 12 -- 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 Corporation, located
in Japan, of which Honeywell owned 21.7 percent of the outstanding common stock
at December 31, 1998 and 1997. This investment had a market value of $191.1 and
$216.9 at December 31, 1998 and 1997, respectively.
 
<TABLE>
<CAPTION>
                                                                        1998        1997        1996
                                                                      ---------  ----------  ----------
<S>                                                                   <C>        <C>         <C>
Sales...............................................................  $ 1,717.8  $  1,971.5  $  1,949.2
Gross profit........................................................      577.9       662.7       688.8
Net income..........................................................       46.9        58.7        51.8
Equity in net income................................................       11.7        12.9        13.3
Current assets......................................................  $ 1,454.2  $  1,427.8  $  1,576.9
Noncurrent assets...................................................      297.5       332.8       421.1
                                                                      ---------  ----------  ----------
                                                                        1,751.7     1,760.6     1,998.0
                                                                      ---------  ----------  ----------
Current liabilities.................................................      647.7       706.7       853.5
Noncurrent liabilities..............................................      116.7       123.2       181.4
                                                                      ---------  ----------  ----------
                                                                          764.4       829.9     1,034.9
                                                                      ---------  ----------  ----------
Net assets..........................................................  $   987.3  $    930.7  $    963.1
Equity in net assets................................................  $   259.3  $    238.0  $    241.0
</TABLE>
 
NOTE 13 -- INTANGIBLE ASSETS
 
    Intangible assets have been reduced by accumulated amortization as follows:
 
<TABLE>
<CAPTION>
                                                                                        1998       1997
                                                                                      ---------  ---------
<S>                                                                                   <C>        <C>
Goodwill............................................................................  $   163.7  $   134.8
Intangibles.........................................................................      337.2      305.3
</TABLE>
 
NOTE 14 -- DEBT
 
SHORT-TERM DEBT
 
    At December 31, 1998, Honeywell had general-purpose lines of credit
available totaling $1,770.6, which management believes is adequate to meet its
financing requirements, including support of commercial paper and bank note
borrowings. Committed revolving credit lines with 17 banks totaled $1,325.0.
These lines have commitment fee requirements. There were no borrowings on these
lines at December 31, 1998. The remaining credit facilities of $445.6 have been
arranged by non-U.S. subsidiaries in accordance with customary lending practices
in their respective countries of operation. Borrowings against these lines
amounted to $19.8 at December 31, 1998. The interest rates for Honeywell's
material lines of credit are indexed to a rate, such as Prime, LIBOR, or
Commercial
 
                                       47
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                        HONEYWELL INC. AND SUBSIDIARIES
 
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
NOTE 14 -- DEBT (CONTINUED)
Paper. The weighted average interest rates on short-term borrowings outstanding
at December 31, 1998 and 1997, respectively, were as follows: commercial paper,
0.0 percent and 6.8 percent; and notes payable, 5.0 percent and 5.2 percent.
 
    Short-term debt consists of the following:
 
<TABLE>
<CAPTION>
                                                                                        1998       1997
                                                                                      ---------  ---------
<S>                                                                                   <C>        <C>
Commercial paper....................................................................  $  --      $    43.0
Notes payable.......................................................................       52.7       38.9
                                                                                      ---------  ---------
Current maturities of long-term debt................................................      126.2       64.5
                                                                                      $   178.9  $   146.4
</TABLE>
 
LONG-TERM DEBT
 
<TABLE>
<CAPTION>
                                                                                    1998        1997
                                                                                  ---------  ----------
<S>                                                                               <C>        <C>
Honeywell Inc.
  7.15% to 7.71% due 1998.......................................................  $     0.0  $     50.0
  7.36% to 7.46% due 1999.......................................................       70.5        70.5
  7.35% due 2000................................................................       75.0        75.0
  6.60% due 2001................................................................      100.0       100.0
  6.75% due 2002................................................................      200.0       200.0
  8.63% due 2006................................................................      100.0       100.0
  7.00% due 2007................................................................      350.0       350.0
  7.13% due 2008................................................................      200.0       200.0
  7.45% to 9.50% due 2001 to 2010...............................................       27.0        27.0
  6.63% due 2028................................................................      250.0         0.0
  Unamortized premiums and discounts............................................       (6.0)       (2.6)
Subsidiaries
  3.00% to 7.50% due 1999 to 2002, various currencies...........................       59.0        71.4
                                                                                  ---------  ----------
                                                                                    1,425.5     1,241.3
Less amount included in short-term debt.........................................      126.2        64.5
                                                                                  ---------  ----------
                                                                                  $ 1,299.3  $  1,176.8
</TABLE>
 
    Debt in the amount of $50.0 with interest rates ranging from 7.15 percent to
7.71 percent matured between March and May 1998. In August 1997, Honeywell filed
a shelf registration statement, which provides for the issuance of up to $500.0
of debt securities. On June 15, 1998, Honeywell issued $250.0 in debentures, to
fund general operations, with a coupon rate of 6 5/8 percent maturing on June
15, 2028. At December 31, 1998, $250.0 remained available for issuance under the
shelf registration statement.
 
    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-
 
                                       48
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                        HONEYWELL INC. AND SUBSIDIARIES
 
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
NOTE 14 -- DEBT (CONTINUED)
month LIBOR rates. 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-month LIBOR rates. In 1997, Honeywell entered
into swap agreements converting $550.0 of new debt from fixed rate to floating
rate debt based on six-month LIBOR. In addition, $420.0 of debt and previous
swaps were converted to fixed rate debt at an average fixed rate of 6.18
percent. In 1998, $200.0 of interest rate swaps due in 2008 were terminated. The
swap agreements outstanding at December 31, 1998 expire as follows: $100.0 in
1999, $250.0 in 2000, $100.0 in 2001, $200.0 in 2002 and $350.0 in 2007.
 
    Annual sinking-fund and maturity requirements for the next five years on
long-term debt outstanding at December 31, 1998, are as follows:
 
<TABLE>
<CAPTION>
<S>                                                                                 <C>
1999..............................................................................  $    126.2
2000..............................................................................        77.6
2001..............................................................................       116.5
2002..............................................................................       210.3
2003..............................................................................         0.0
2004 and beyond...................................................................       900.9
Unamortized premiums/discounts....................................................        (6.0)
                                                                                    ----------
Total long-term debt..............................................................  $  1,425.5
</TABLE>
 
    Interest paid amounted to $109.2, $95.0 and $77.3 in 1998, 1997 and 1996,
respectively.
 
NOTE 15 -- 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 $1,425.5 and $1,241.3 at December 31, 1998 and 1997,
respectively; and the fair value was $1,510.8 and $1,291.3 at December 31, 1998
and 1997, 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 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.
 
<TABLE>
<CAPTION>
                                                   AT DECEMBER 31, 1998                 AT DECEMBER 31, 1997
                                            -----------------------------------  ----------------------------------
                                            NOTIONAL    CARRYING       FAIR       NOTIONAL    CARRYING      FAIR
                                              VALUE       VALUE        VALUE       VALUE        VALUE       VALUE
                                            ---------  -----------     -----     ----------  -----------  ---------
<S>                                         <C>        <C>          <C>          <C>         <C>          <C>
Interest rate swaps.......................  $ 1,000.0   $     0.0    $     6.0   $  1,340.0   $     0.0   $    38.5
Currency contracts........................    1,071.6         0.0         (4.1)     1,213.7         0.0         6.7
                                            ---------         ---          ---   ----------         ---   ---------
Total.....................................  $ 2,071.6   $     0.0    $     1.9   $  2,553.7   $     0.0   $    45.2
                                            ---------         ---          ---   ----------         ---   ---------
                                            ---------         ---          ---   ----------         ---   ---------
</TABLE>
 
                                       49
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                        HONEYWELL INC. AND SUBSIDIARIES
 
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
NOTE 15 -- FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
    The counterparties to the foreign currency contracts and the interest rate
swaps shown above expose Honeywell to credit risk to the extent of
non-performance. 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 16 -- LEASING ARRANGEMENTS
 
    As lessee, Honeywell has minimum annual lease commitments outstanding at
December 31, 1998, 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>
1999.....................................................................   $   140.1
2000.....................................................................       109.2
2001.....................................................................        80.8
2002.....................................................................        55.9
2003.....................................................................        41.6
2004 and beyond..........................................................       142.1
                                                                           -----------
                                                                            $   569.7
</TABLE>
 
    Rent expense for operating leases was $141.8 in 1998, $141.6 in 1997 and
$153.7 in 1996.
 
    Substantially all leases are for plant, warehouse, office space, personal
computers and automobiles. A number of the leases contain renewal options
ranging from one to 10 years.
 
                                       50
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                        HONEYWELL INC. AND SUBSIDIARIES
 
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
NOTE 17 -- CAPITAL STOCK
 
<TABLE>
<CAPTION>
                                                                         ADDITIONAL
                                                              COMMON       PAID-IN     TREASURY
                                                               STOCK       CAPITAL       STOCK
                                                            -----------  -----------  -----------
<S>                                                         <C>          <C>          <C>
Balance at 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 shares........................................                     55.8          40.7
  317,192 shares canceled.................................        (0.5)       (16.6)
                                                            -----------  -----------  -----------
Balance at December 31, 1996..............................   $   281.7    $   528.8   $  (1,763.5)
Purchase of treasury stock --
  2,250,600 shares........................................                                 (154.3)
Issued for Honeywell Foundation Pledge --
  285,700 treasury shares.................................                      7.9           5.7
Issued for employee stock plans --
  1,892,638 shares........................................                     84.4          32.8
  176,489 shares canceled.................................        (0.2)       (12.7)
                                                            -----------  -----------  -----------
Balance at December 31, 1997..............................   $   281.5    $   608.4   $  (1,879.3)
Purchase of treasury stock --
  2,054,500 shares........................................                                 (159.6)
Issued for Honeywell Foundation Pledge --
  264,300 treasury shares.................................                      7.2           5.3
Issued for employee stock plans --
  2,016,560 shares........................................                     89.8          28.1
  96,426 shares canceled..................................        (0.2)        (7.8)
                                                            -----------  -----------  -----------
Balance at December 31, 1998..............................   $   281.3    $   697.6   $  (2,005.5)
</TABLE>
 
STOCK-BASED COMPENSATION PLANS FOR KEY EMPLOYEES
 
    In 1997, the Board of Directors adopted, and the shareowners approved, the
1997 Honeywell Stock and Incentive Plan. The 1997 plan replaced the 1993
Honeywell Stock and Incentive Plan. Awards currently outstanding under the 1993
plan were not affected. The 1997 plan, which terminates on April 15, 2002,
provides for the award of up to 7,500,000 shares of common stock. The 1997 plan
is intended to facilitate ownership and increase the interest of key employees
in the growth and performance of Honeywell and motivate them to contribute to
the Company's future success.
 
    Also in 1997, the Board of Directors approved the 1997 Honeywell Employee
Stock and Incentive Plan. This plan, which provides for the award of up to
2,000,000 shares of common stock, is primarily intended to retain and recognize
non-executive employees for their contributions to Honeywell's success.
 
                                       51
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                        HONEYWELL INC. AND SUBSIDIARIES
 
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
NOTE 17 -- CAPITAL STOCK (CONTINUED)
    The 1993 Honeywell Stock and Incentive Plan, which expired with the adoption
of the 1997 plan, provided for the award of up to 7,500,000 shares of common
stock. Awards made under any of the above plans may be in the form of stock
options, restricted stock or other stock-based awards. At December 31, 1998,
there were 12,405,731 shares reserved for all employee plans.
 
    In 1996, Honeywell adopted Statement of Financial Accounting Standard (SFAS)
No. 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 38). The compensation cost that has been charged against income for
the restricted stock and other stock-based awards, including directors' stock
compensation, was $16.7, $11.2 and $12.2 in 1998, 1997 and 1996, respectively.
No compensation cost has been recognized for the awards made in the form of
stock options or from the Employee Stock Purchase Plans. 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 SFAS 123, Honeywell's net income and basic earnings per share
would have been reduced to the pro forma amounts indicated below:
 
<TABLE>
<CAPTION>
                                                          1998       1997       1996
                                                        ---------  ---------  ---------
<S>                                     <C>             <C>        <C>        <C>
Net income............................  As reported     $   572.0  $   471.0  $   402.7
                                        Pro forma           551.3      456.2      392.6
 
Basic earnings per share..............  As reported     $    4.54  $    3.71  $    3.18
                                        Pro forma            4.37       3.59       3.10
</TABLE>
 
FIXED STOCK OPTIONS
 
    Stock option grants for executive officers are reviewed and approved by the
Personnel Committee of the Board of Directors and for non-executive officers by
the chief executive officer. Stock options are granted periodically at the fair
market value of Honeywell common stock on the date of the grant and are
typically exercisable one year from the grant date.
 
    In July 1997, Honeywell introduced an international stock purchase plan in
the United Kingdom. This plan allows eligible employees the option to purchase
Honeywell shares in July 2000, at an option price of $54.72. The number of
shares estimated to be issued from this program is 148,000 and has been included
in the fixed options numbers below.
 
                                       52
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                        HONEYWELL INC. AND SUBSIDIARIES
 
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
NOTE 17 -- CAPITAL STOCK (CONTINUED)
    A summary of the status of the fixed stock options as of December 31, 1998,
1997 and 1996, and changes during the years ending on those dates is presented
below:
 
<TABLE>
<CAPTION>
                                                              1998                      1997                      1996
                                                    ------------------------  ------------------------  ------------------------
                                                                 WEIGHTED                  Weighted                  Weighted
                                                                  AVERAGE                   Average                   Average
                                                     SHARES      EXERCISE      Shares      Exercise      Shares      Exercise
                                                      (000)        PRICE        (000)        Price        (000)        Price
                                                    ---------  -------------  ---------  -------------  ---------  -------------
<S>                                                 <C>        <C>            <C>        <C>            <C>        <C>
Fixed Options
  Outstanding at beginning of year................      5,483    $      51        4,507    $      39        5,963    $      35
  Granted.........................................      2,088           54        1,784           73          423           54
  Assumed.........................................                                  671           52
  Exercised.......................................      1,354           52        1,287           37        1,821           31
  Forfeited.......................................        126           64          192           67           58           42
  Outstanding at end of year......................      6,091           60        5,483           51        4,507           39
  Options exercisable at year-end.................      3,801           53        3,820           41        4,088           37
  Weighted average fair value of options granted
   during the year................................  $   16.77                 $   18.91                 $   14.19
</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 1998, 1997 and 1996,
respectively: dividend yield of 1.4, 1.5 and 1.5 percent; expected volatility of
24, 24 and 27 percent; risk-free interest rates of 4.7, 5.6 and 6.3 percent; and
expected life of four years for all options except the international stock
purchase plan which has a three year life. The "Assumed" line identifies the
options Honeywell assumed in the 1997 acquisition of Measurex and converted to
options to purchase Honeywell shares.
 
    The following table summarizes information about fixed stock options
outstanding at December 31, 1998. The fixed options outstanding include options
issued under the 1997 plans as well as the 1993 Honeywell Stock and Incentive
Plan and the previous plans which the 1993 plan replaced.
 
<TABLE>
<CAPTION>
                                       OPTIONS OUTSTANDING                           OPTIONS EXERCISABLE
                       ---------------------------------------------------  --------------------------------------
                       SHARES OUTSTANDING                                   SHARES EXERCISABLE
                         AT DECEMBER 31,     REMAINING                        AT DECEMBER 31,
      RANGE OF                1998          CONTRACTUAL  WEIGHTED AVERAGE          1998          WEIGHTED AVERAGE
   EXERCISE PRICES            (000)            LIFE       EXERCISE PRICE           (000)          EXERCISE PRICE
---------------------  -------------------  -----------  -----------------  -------------------  -----------------
<S>                    <C>                  <C>          <C>                <C>                  <C>
$16-$24                            55        1.2 years       $      22                  55           $      22
$25-$36                           719        3.7 years              32                 719                  32
$37-$54                         1,766        5.2 years              45               1,568                  44
$55-$80                         3,448        7.8 years              74               1,459                  74
$81-$96                           103        8.6 years              87              --                  --
</TABLE>
 
RESTRICTED STOCK AWARDS
 
    Restricted shares of common stock are issued to certain key employees as
compensation and as incentives, some of which are 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
 
                                       53
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                        HONEYWELL INC. AND SUBSIDIARIES
 
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
NOTE 17 -- CAPITAL STOCK (CONTINUED)
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
shareowners, 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 352,625 in 1998, 237,009 in 1997 and 371,917 in 1996. At
December 31, restricted shares outstanding under key employee plans totaled
867,301 in 1998, 913,667 in 1997 and 835,443 in 1996, with a weighted average
grant date fair value of $63, $55 and $46 in 1998, 1997 and 1996, respectively.
 
EMPLOYEE STOCK PURCHASE PLANS
 
    In July 1998, Honeywell introduced an Employee Stock Purchase Plan in the
U.S. and Canada. Employees may contribute from 1 percent to 10 percent of their
eligible pay on an after-tax basis. The plan allows employees to purchase
Honeywell stock quarterly at the end of each purchase period at 85 percent of
the fair market value on the grant date (the first day of the purchase period)
or the exercise date (the last day of the purchase period), whichever is lower.
During 1998, 276,812 shares were issued under this plan. Also in 1998,
International Employee Stock Purchase Plans were introduced in Austria, Belgium,
France, Germany, Italy and Switzerland. These plans allowed employees to
purchase stock at discount. Belgium, Italy and France have quarterly purchase
windows and Austria, Germany and Switzerland have December purchase windows. In
1998, 14,147 shares were issued under the International Employee Stock Purchase
Plans.
 
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 555,746 in 1998, 542,406 in 1997 and 394,534 in 1996 at a cost of
$42.4, $37.9, and $23.4, respectively.
 
STOCK PLEDGE
 
    In 1993, Honeywell pledged to the Honeywell Foundation a five-year option to
purchase 2,000,000 shares of common stock at $33.00 per share. The Honeywell
Foundation exercised all options to purchase the 2,000,000 shares with 264,300
purchased in 1998, 285,700 in 1997, 450,000 in 1996 and 1,000,000 in 1995.
 
PREFERENCE STOCK
 
    Twenty-five million preference shares with a par value of $1.00 have been
authorized. None have been issued at December 31, 1998.
 
                                       54
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                        HONEYWELL INC. AND SUBSIDIARIES
 
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
NOTE 18 -- QUARTERLY DATA (UNAUDITED)
 
<TABLE>
<CAPTION>
1998                                           1ST QTR.    2ND QTR.    3RD QTR.    4TH QTR.
--------------------------------------------  ----------  ----------  ----------  ----------
<S>                                           <C>         <C>         <C>         <C>
Sales.......................................  $  1,923.3  $  2,035.2  $  2,119.5  $  2,348.7
Cost of sales...............................     1,326.8     1,383.0     1,412.0     1,555.2
Special charges.............................      --          --          --            53.7
Litigation settlements......................      --          --          --           (23.6)
Net income..................................        96.3       125.8       145.4       204.5
Basic earnings per share....................        0.76        1.00        1.15        1.63
Diluted earnings per share..................        0.75        0.98        1.14        1.61
</TABLE>
 
<TABLE>
<CAPTION>
1997                                           1st Qtr.    2nd Qtr.    3rd Qtr.    4th Qtr.
--------------------------------------------  ----------  ----------  ----------  ----------
<S>                                           <C>         <C>         <C>         <C>
Sales.......................................  $  1,685.7  $  1,977.3  $  2,038.7  $  2,325.8
Cost of sales...............................     1,149.7     1,359.1     1,390.3     1,526.0
Special charges.............................      --          --            60.4        30.3
Gain on sale of businesses..................      --          --            60.3        16.8
Net income..................................        75.6        98.4       118.9       178.1
Basic earnings per share....................        0.60        0.77        0.93        1.41
Diluted earnings per share..................        0.59        0.76        0.92        1.38
</TABLE>
 
    Shareowners of record on February 1, 1999, totaled 30,571.
 
    The fourth quarter of 1998 includes $53.7 of special charges ($0.27 per
diluted share), $23.6 gain from the settlement of long-standing litigation
claims ($0.11 per diluted share) and $16.7 resulting from the favorable
resolution of certain prior-year research and development tax claims ($0.13 per
diluted share). The fourth quarter of 1997 includes a $16.8 gain from the sale
of businesses ($11.5 after-tax) and special charges of $30.3 ($20.8 after-tax).
 
NOTE 19 -- 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
control products, systems, and services provide solutions worldwide as our
customers look to improve productivity, energy efficiency and environmental
protection, increase safety, and enhance comfort. Honeywell's reportable
segments are strategic business units that offer different products and
services. They are managed separately as each business requires different
products, services and marketing strategies.
 
    Honeywell adopted Statement of Financial Accounting Standards (SFAS) No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
during 1998. Operating segments are defined by SFAS 131 as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker, or decision making
group, in deciding how to allocate resources and in assessing performance (the
"management approach"). Honeywell's chief operating decision making group that
determines the allocation of resources and
 
                                       55
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                        HONEYWELL INC. AND SUBSIDIARIES
 
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
NOTE 19 -- SEGMENT INFORMATION (CONTINUED)
assesses the performance of the operating segments is the Chief Executive
Officer and the Board of Directors.
 
    Honeywell's reportable operating segments include Home and Building Control,
Industrial Control and Space and Aviation Control. The Other segment includes
two research and development operations that promote technology and products to
both external customers and operating units.
 
    The accounting policies of the segments are the same as those described in
Note 1. Honeywell evaluates performance based on profit or loss from operations
before income taxes excluding interest expense, equity income and other indirect
general corporate expenses. Honeywell accounts for intersegment sales and
transfers on negotiated transfer prices and all intersegment profit or loss is
eliminated in consolidation.
 
    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; homebuilders; 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; and fiber-optic components. 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, airport 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; airports;
NASA; prime U.S. defense contractors; and the U.S. Department of Defense.
 
    Following is financial information relating to the industry segments:
 
<TABLE>
<CAPTION>
                                                              1998        1997        1996
                                                            ---------  ----------  ----------
<S>                                                         <C>        <C>         <C>
External sales
  Home and Building Control...............................  $ 3,440.5  $  3,386.6  $  3,327.1
  Industrial Control......................................    2,516.3     2,547.1     2,199.6
  Space and Aviation Control..............................    2,339.1     1,956.9     1,640.0
  Other...................................................      130.8       136.9       144.9
                                                            ---------  ----------  ----------
      Total external sales................................  $ 8,426.7  $  8,027.5  $  7,311.6
</TABLE>
 
                                       56
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                        HONEYWELL INC. AND SUBSIDIARIES
 
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
NOTE 19 -- SEGMENT INFORMATION (CONTINUED)
 
<TABLE>
<CAPTION>
                                                              1998        1997        1996
                                                            ---------  ----------  ----------
<S>                                                         <C>        <C>         <C>
Sales between segments
  Home and Building Control...............................  $    24.8  $     23.6  $     29.8
  Industrial Control......................................       38.1        49.3        32.8
  Space and Aviation Control..............................        2.6         0.8         3.2
  Other...................................................       62.4        57.9        41.1
                                                            ---------  ----------  ----------
      Total sales between segments........................  $   127.9  $    131.6  $    106.9
 
Operating profit
  Home and Building Control...............................  $   348.9  $    290.2  $    345.8
  Industrial Control......................................      314.2       309.2       254.9
  Space and Aviation Control..............................      334.0       255.7       163.3
  Other...................................................       31.2        18.8         6.2
                                                            ---------  ----------  ----------
      Total operating profit..............................  $ 1,028.3  $    873.9  $    770.2
 
Interest expense..........................................     (113.0)     (101.9)      (81.4)
Equity income.............................................       11.7        12.9        13.3
General corporate expense.................................      (97.7)      (81.7)      (91.9)
                                                            ---------  ----------  ----------
Income before income taxes................................  $   829.3  $    703.2  $    610.2
 
Special charges
  Home and Building Control...............................  $    25.8  $     46.9      --
  Industrial Control......................................       25.8        40.8      --
  Space and Aviation Control..............................        1.4      --          --
  Corporate and Other.....................................        0.7         3.0      --
                                                            ---------  ----------  ----------
      Total special charges...............................  $    53.7  $     90.7      --
 
Gain on sale of businesses and litigation settlement
  Home and Building Control...............................  $     4.6  $      5.7      --
  Industrial Control......................................        5.3        71.4      --
  Space and Aviation Control..............................        1.8      --          --
  Corporate and Other.....................................       11.9      --          --
                                                            ---------  ----------  ----------
      Total gains.........................................  $    23.6  $     77.1      --
 
Depreciation and amortization
  Home and Building Control...............................  $   116.8  $    108.0  $     98.4
  Industrial Control......................................       94.5        99.4        72.3
  Space and Aviation Control..............................       84.0        79.2        84.0
  Corporate and Other.....................................       32.6        33.0        32.8
                                                            ---------  ----------  ----------
      Total depreciation and amortization.................  $   327.9  $    319.6  $    287.5
</TABLE>
 
                                       57
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                        HONEYWELL INC. AND SUBSIDIARIES
 
                             (DOLLARS IN MILLIONS)
 
NOTE 19 -- SEGMENT INFORMATION (CONTINUED)
 
    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>
                                                              1998        1997        1996
                                                            ---------  ----------  ----------
<S>                                                         <C>        <C>         <C>
External Sales
  United States...........................................  $ 5,201.6  $  4,843.5  $  4,477.9
  Other areas.............................................    3,225.1     3,184.0     2,833.7
                                                            ---------  ----------  ----------
    Total sales...........................................  $ 8,426.7  $  8,027.5  $  7,311.6
 
Long-lived Assets
  United States...........................................  $ 1,990.4  $  1,830.9  $  1,355.9
  Other areas.............................................      563.2       459.8       469.3
                                                            ---------  ----------  ----------
    Total long-lived assets...............................  $ 2,553.6  $  2,290.7  $  1,825.2
</TABLE>
 
    External sales are attributed to countries based on the location of the
affiliate responsible for the sale. 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. Long-lived assets are
comprised of property, plant and equipment, goodwill and intangible assets. No
customers exceeded 10 percent of total Honeywell sales in 1998, 1997 or 1996.
 
NOTE 20 -- CONTINGENCIES
 
    LITTON LITIGATION
 
    On March 13, 1990, Litton Systems, Inc. filed a legal action against
Honeywell in U.S. District Court, Central District of California, Los Angeles
(the "trial court") with claims that were subsequently split into two separate
cases. One alleges patent infringement under federal law for using an ion-beam
process to coat mirrors incorporated in Honeywell's ring laser gyroscopes, and
tortious interference under state law for interfering with Litton's prospective
advantage with customers and contractual relationships with an inventor and his
company, Ojai Research, Inc. The other case alleges monopolization and attempted
monopolization under federal antitrust laws by Honeywell in the sale of inertial
reference systems containing ring laser gyroscopes into the commercial aircraft
market. Honeywell generally denied Litton's allegations in both cases. In the
patent/tort case, Honeywell also contested the validity as well as the
infringement of the patent, alleging, among other things, that the patent had
been obtained by Litton's inequitable conduct before the United States Patent
and Trademark Office.
 
    PATENT/TORT CASE
 
    U.S. District Court Judge Mariana Pfaelzer presided over a three month
patent infringement and tortious interference trial in 1993. On August 31, 1993
a jury returned a verdict in favor of Litton, awarding damages against Honeywell
in the amount of $1.2 billion on three claims. Honeywell filed post-trial
motions contesting the verdict and damage award. On January 9, 1995, the trial
court set them all aside, ruling, among other things, that the Litton patent was
invalid due to obviousness,
 
                                       58
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                        HONEYWELL INC. AND SUBSIDIARIES
 
                             (DOLLARS IN MILLIONS)
 
NOTE 20 -- CONTINGENCIES (CONTINUED)
unenforceable because of Litton's inequitable conduct before the Patent and
Trademark Office, and in any case, not infringed by Honeywell's current process.
It further ruled that Litton's state tort claims were not supported by
sufficient evidence. The trial court also held that if its rulings concerning
liability were vacated or reversed on appeal, Honeywell should at least be
granted a new trial on the issue of damages because the jury's award was
inconsistent with the clear weight of the evidence and based upon a speculative
damage study.
 
    The trial court's rulings were appealed to the U.S. Court of Appeals for the
Federal Circuit (the "Federal Circuit"), and on July 3, 1996, in a two to one
split decision, a three judge panel of that court reversed the trial court's
rulings of patent invalidity, unenforceability and non-infringement, and also
found Honeywell to have violated California law by intentionally interfering
with Litton's consultant contracts and customer prospects. However, the panel
upheld two trial court rulings favorable to Honeywell, namely that Honeywell was
entitled to a new trial for damages on all claims, and also to a grant of
intervening patent rights which are to be defined and quantified by the trial
court. After unsuccessfully requesting a rehearing of the panel's decision by
the full Federal Circuit appellate court, Honeywell filed a petition with the
U.S. Supreme Court on November 26, 1996, seeking review of the panel's decision.
In the interim, Litton filed a motion and briefs with the trial court seeking
injunctive relief against Honeywell's commercial ring laser gyroscope sales.
After Honeywell and certain aircraft manufacturers filed briefs and made oral
arguments opposing the injunction, the trial court denied Litton's motion on
public interest grounds on December 23, 1996, and then scheduled the patent/tort
damages retrial for May 6, 1997.
 
    On March 17, 1997, the U.S. Supreme Court granted Honeywell's petition for
review and vacated the July 3, 1996, Federal Circuit panel decision. The case
was remanded to the Federal Circuit panel for reconsideration in light of a
recent decision by the U.S. Supreme Court in the WARNER-JENKINSON VS. HILTON
DAVIS case, which refined the law concerning patent infringement under the
doctrine of equivalents. On March 21, 1997, Litton filed a notice of appeal to
the Federal Circuit of the trial court's December 23, 1996 decision to deny
injunctive relief, but the Federal Circuit stayed any briefing or consideration
of that matter until such time as it completed its reconsideration of liability
issues ordered by the U.S. Supreme Court.
 
    The liability issues were argued before the same three judge Federal Circuit
panel on September 30, 1997. On April 7, 1998, the panel issued its decision:
 
    (i) affirming the trial court's ruling that Honeywell's hollow cathode and
        RF ion-beam processes do not literally infringe the asserted claims of
        Litton's "849 reissue patent ("Litton's patent");
 
    (ii) vacating the trial court's ruling that Honeywell's RF ion-beam process
         does not infringe the asserted claims of Litton's patent under the
         doctrine of equivalents, but also vacating the jury's verdict on that
         issue and remanding that issue to the trial court for further
         proceedings in accordance with the WARNER-JENKINSON decision;
 
   (iii) vacating the jury's verdict that Honeywell's hollow cathode process
         infringes the asserted claims of Litton's patent under the doctrine of
         equivalents and remanding that issue to the trial court for further
         proceedings;
 
                                       59
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                        HONEYWELL INC. AND SUBSIDIARIES
 
                             (DOLLARS IN MILLIONS)
 
NOTE 20 -- CONTINGENCIES (CONTINUED)
   (iv) reversing the trial court's ruling with respect to the torts of
        intentional interference with contractual relations and intentional
        interference with prospective economic advantage, but also vacating the
        jury's verdict on that issue, and remanding the issue to the trial court
        for further proceedings in accordance with California state law;
 
    (v) affirming the trial court's grant of a new trial to Honeywell on damages
        for all claims, if necessary;
 
   (vi) affirming the trial court's order granting intervening rights to
        Honeywell in the patent claim;
 
   (vii) reversing the trial court's ruling that the asserted claims of Litton's
         patent were invalid due to obviousness and reinstating the jury's
         verdict on that issue; and
 
  (viii) reversing the trial court's determination that Litton had obtained its
         "849 reissue patent through inequitable conduct.
 
    Litton's request for a rehearing of the panel's decision by the full Federal
Circuit court was denied and its appeal of the denial of an injunction was
dismissed. The case was remanded to the trial court for further legal and
perhaps factual review. A status conference was held on August 17, 1998 and the
review was held in abeyance during a retrial of damages in the antitrust case in
1998. Honeywell intends to file motions with the trial court to dispose of the
remanded issues as matters of law, but the review procedures remain to be
defined and scheduled by the trial court. If some of the remanded issues are not
disposed of by legal motions, a jury trial of the remaining issues may be
necessary.
 
    When preparing for the patent/tort damages retrial that was scheduled for
May 1997, Litton had submitted a revised damage study to the trial court,
seeking damages as high as $1.9 billion. Honeywell believes that its ion-beam
processes do not infringe Litton's patent, and further, that Litton's damage
study remains flawed and speculative for a number of reasons. Based on the U.S.
Supreme Court's decision in the WARNER-JENKINSON VS. HILTON DAVIS case which
refined the law concerning patent infringement under the doctrine of
equivalents, and the Federal Circuit panel's recent decision remanding certain
issues in the patent/tort case to the trial court, Honeywell also believes that
it is reasonably possible that the trial court will conclude that Honeywell did
not infringe Litton's patent or interfere with its contractual relationships,
and that no damages will ultimately be awarded to Litton. Although is not
possible at this time to predict the outcome of the issues remanded to the trial
court or any further appeals in this case, some potential does remain for
adverse judgments which could be material to Honeywell's financial position or
results of operations. Honeywell believes however, that any potential award of
damages for an adverse judgment of infringement or interference should be based
upon a reasonable royalty reflecting the value of the ion-beam coating process,
and further that such an award would not be material to Honeywell's financial
position or results of operations. As a result of the uncertainty regarding the
outcome of this matter, no provision has been made in the financial statements
with respect to this contingent liability.
 
    ANTITRUST CASE
 
    Preparations for, and conduct of, the trial in the antitrust case have
generally followed the completion of comparable proceedings in the patent/tort
case. The antitrust trial did not begin until
 
                                       60
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                        HONEYWELL INC. AND SUBSIDIARIES
 
                             (DOLLARS IN MILLIONS)
 
NOTE 20 -- CONTINGENCIES (CONTINUED)
November 20, 1995. Judge Pfaelzer also presided over the trial, but it was held
before a different jury. At the close of evidence and before jury deliberations
began, the trial court dismissed, for failure of proof, Litton's contentions
that Honeywell had illegally monopolized and attempted to monopolize by:
 
    (i) engaging in below-cost predatory pricing;
 
    (ii) tying and bundling product offerings under packaged pricing;
 
   (iii) misrepresenting its products and disparaging Litton products; and
 
   (iv) acquiring the Sperry Avionics business in 1986.
 
    On February 2, 1996, the case was submitted to the jury on the remaining
allegations that Honeywell had illegally monopolized and attempted to monopolize
by:
 
    (i) entering into certain long-term exclusive dealing and penalty
        arrangements with aircraft manufacturers and airlines to exclude Litton
        from the commercial aircraft market, and
 
    (ii) failing to provide Litton with access to proprietary software used in
         the cockpits of certain business jets.
 
    On February 29, 1996, the jury returned a $234 million single damages
verdict against Honeywell for illegal monopolization, which verdict would have
been automatically trebled. On March 1, 1996, the jury indicated that it was
unable to reach a verdict on damages for the attempt to monopolize claim, and a
mistrial was declared as to that claim.
 
    Honeywell subsequently filed a motion for judgment as a matter of law and a
motion for a new trial, contending, among other things, that the jury's partial
verdict should be overturned because Honeywell was prejudiced at trial, and
Litton failed to prove essential elements of liability or submit competent
evidence to support its speculative, all-or-nothing $298.5 million damage claim.
Litton filed motions for entry of judgment and injunctive relief. On July 24,
1996, the trial court denied Honeywell's alternative motions for judgment as a
matter of law or a complete new trial, but concluded that Litton's damage study
was seriously flawed and granted Honeywell a retrial on damages only. The court
also denied Litton's two motions. At that time, Judge Pfaelzer was expected to
conduct the retrial of antitrust damages sometime following the retrial of
patent/tort damages. However, after the U.S. Supreme Court remanded the
patent/tort case to the Federal Circuit in March 1997, Litton moved to have the
trial court expeditiously schedule the antitrust damages retrial. In September
1997, the trial court rejected that motion, indicating that it wished to know
the outcome of the current patent/ tort appeal before scheduling retrials of any
type.
 
    Following the April 7, 1998 Federal Circuit panel decision in the
patent/tort case, Litton again petitioned the trial court to schedule the
retrial of antitrust damages. The trial court tentatively scheduled the trial to
commence in the fourth quarter of 1998, and reopened limited discovery and other
pretrial preparations. Litton then filed another antitrust damage claim of
nearly $300 million.
 
    The damages only retrial began October 29, 1998, before Judge Pfaelzer, but
a different jury. On December 9, 1998, the jury returned verdicts against
Honeywell totaling $250 million, $220 million of which is in favor of Litton
Systems Inc. and $30 million of which is in favor of its sister corporation LSL,
Canada.
 
                                       61
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                        HONEYWELL INC. AND SUBSIDIARIES
 
                             (DOLLARS IN MILLIONS)
 
NOTE 20 -- CONTINGENCIES (CONTINUED)
    On January 27, 1999, the court vacated its prior mistrial ruling with
respect to the attempt to monopolize claim and entered a treble damages judgment
in the total amount of $750 million for actual and attempted monopolization.
 
    Honeywell believes that there was no factual or legal basis for the
magnitude of the jury's award in the damages retrial and that, as was the case
in the first trial, the jury's award should be overturned. Honeywell also
believes there are serious questions concerning the identity and nature of the
business arrangements and conduct which were found by the first antitrust jury
in 1996 to be anti-competitive and damaging to Litton, and there are very strong
grounds to overturn the verdict of liability as a matter of law. Honeywell is
now filing appropriate post-judgment motions with the trial court and Litton
will soon file motions seeking to add substantial attorney's fees and costs to
the judgment. Once the trial court has ruled on those motions, the parties will
have the right to appeal the eventual judgment, as to both liability and
damages, to the U.S. Court of Appeals for the Ninth Circuit. Execution of the
trial court's judgment will be stayed pending resolution of Honeywell's
post-judgment motions and the disposition of any appeals filed by the parties.
 
    Although it is not possible at this time to predict the outcome of the
motions before the trial court or any eventual appeals in this case, some
potential remains for adverse judgments which could be material to Honeywell's
financial position or results of operations. As a result of the uncertainty
regarding the outcome of this matter, no provision has been made in the
financial statements with respect to this contingent liability. Honeywell also
believes that it would be inappropriate for Litton to obtain recovery of the
same damages, e.g. losses it suffered due to Honeywell's sales of ring laser
gyroscope-based inertial systems to OEMs and airline customers, under multiple
legal theories, claims, and cases, and that eventually any duplicative recovery
would be eliminated from the antitrust and patent/tort cases.
 
    In the fall of 1996, Litton and Honeywell commenced a court ordered
mediation of the patent, tort and antitrust claims. No claim was resolved or
settled, 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 on-site locations (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.
 
    Since Honeywell's first Superfund case in 1980, Honeywell has received
notice regarding 119 Superfund sites and on-sites. Of these sites, 67 have been
settled or Honeywell expects no further involvement.
 
                                       62
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                        HONEYWELL INC. AND SUBSIDIARIES
 
                             (DOLLARS IN MILLIONS)
 
NOTE 20 -- CONTINGENCIES (CONTINUED)
    At most of the Superfund sites where it is named as a PRP, Honeywell is a
de-minimis party or minor player. Honeywell has maintained records of waste
taken to or disposed of at many sites, and most sites have records kept by site
owners or waste haulers. Honeywell's records and site records indicate that most
of its disposals at these sites involve small quantities of materials relative
to other PRPs. Based on Honeywell's experience, the amounts contributed by PRPs
to the settlement or resolution of Superfund matters has been directly
proportionate to the waste attributed to a PRP at a site relative to the waste
attributed to other PRPs. Therefore, this information enables Honeywell to
fairly accurately assess its exposure as a PRP with respect to each site. In
addition, most Superfund site proceedings to which Honeywell is a PRP, are in
the advanced stages of investigation or remediation, and in many cases a "Record
of Decision" has been made by the Federal Environmental Protection Agency
determining the potential aggregate exposure of the PRPs involved.
 
    At on-sites, assessments are conducted by outside environmental consulting
firms hired by Honeywell specifically for such purpose, and involve field
studies of soil samples, water samples and other testing procedures as
appropriate. On-site investigations have proceeded to the point where Honeywell
has determined its exposure and in many cases, implemented remediation.
Honeywell works closely with applicable local, state or federal regulatory
agencies to request or secure approval of its investigatory and remediation
efforts.
 
    Honeywell has assessed its potential exposure with respect to all Superfund
and on-site matters, including, predicted investigation, remediation and
associated costs, Honeywell's expected share of those costs, the financial
viability of other PRPs with which it is involved at these Superfund sites and
the availability of legal defenses, and has determined that there is not a
reasonable possibility that a loss materially exceeding amounts already
recognized will occur. 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, it is the opinion of
Honeywell's management, that such costs have not had and will not have a
material effect on Honeywell's financial position, net income, capital
expenditures or competitive position.
 
    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 $227.9 at December 31, 1998.
 
NOTE 21 -- PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
 
    Honeywell and its subsidiaries sponsor a number of retirement programs
covering its employees throughout the world.
 
    PENSIONS: Noncontributory defined benefit pension plans cover a substantial
majority of Honeywell's U.S. employees. The plan covering U.S. non-union
employees is based on the employee's highest
 
                                       63
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                        HONEYWELL INC. AND SUBSIDIARIES
 
                             (DOLLARS IN MILLIONS)
 
NOTE 21 -- PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (CONTINUED)
five years of earnings during their last 10 years of employment. The plans
covering U.S. union employees provides pension benefits based on a stated amount
for each year of service. 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.
These foreign programs represent about 20 percent of Honeywell's total benefit
obligation.
 
    OTHER POSTRETIREMENT BENEFITS: Substantially all of Honeywell's domestic and
Canadian employees are eligible to receive medical benefits upon retirement
after age 55. The eligibility requirements are 10 years of service for U.S.
employees and 2 years of service for Canadian employees. These medical benefits
are identical to those provided to active employees, and continue to age 65. For
Canadian employees, the medical benefits are limited and coverage can continue
for life as long as the employee shares in the cost. These benefits are funded
on a pay-as-you-go basis.
 
    The cost of these programs are as follows:
 
<TABLE>
<CAPTION>
                                                                                                      Other
                                                                    Pension                      Postretirement
                                                                   Benefits                         Benefits
                                                        -------------------------------  -------------------------------
                                                          1998       1997       1996       1998       1997       1996
                                                        ---------  ---------  ---------  ---------  ---------  ---------
<S>                                                     <C>        <C>        <C>        <C>        <C>        <C>
Net Periodic Cost
Service cost..........................................  $    93.9  $    87.9  $    89.2  $     9.0  $     8.2  $    13.0
Interest cost.........................................      298.7      294.9      284.6       18.4       18.3       22.4
Expected return on assets.............................     (370.6)    (329.9)    (342.0)       0.0        0.0        0.0
Prior service cost amortization.......................       32.7       32.3       31.5        0.8        0.8        0.8
Actuarial (gain)/loss.................................        1.8       (0.7)      28.9       (6.1)      (7.1)       0.1
Transition amount amortization........................       (9.7)     (10.4)     (10.1)       0.0        0.0        0.0
Curtailment gain......................................        0.7        0.0        0.0        0.0       (0.8)       0.0
                                                        ---------  ---------  ---------  ---------  ---------  ---------
Net periodic benefit cost.............................  $    47.5  $    74.1  $    82.1  $    22.1  $    19.4  $    36.3
                                                        ---------  ---------  ---------  ---------  ---------  ---------
                                                        ---------  ---------  ---------  ---------  ---------  ---------
</TABLE>
 
    The plans' funded status is shown below, along with a description of how the
status changed during the past two years. 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 primarily of a diversified portfolio of fixed-income
investments and equity securities. For defined benefit pension plans, the
benefit obligation is the projected benefit obligation -- the actuarial present
value as of a date of all benefits attributed by the pension benefit formula to
employee service rendered prior to that date. For defined benefit postretirement
 
                                       64
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                        HONEYWELL INC. AND SUBSIDIARIES
 
                             (DOLLARS IN MILLIONS)
 
NOTE 21 -- PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (CONTINUED)
plans, the benefit obligation is the accumulated postretirement benefit
obligation -- the actuarial present value of benefits attributed to employee
service rendered to a particular date.
 
<TABLE>
<CAPTION>
                                                                                                    OTHER
                                                                             PENSION            POSTRETIREMENT
                                                                            BENEFITS               BENEFITS
                                                                      ---------------------  --------------------
                                                                        1998        1997       1998       1997
                                                                      ---------  ----------  ---------  ---------
<S>                                                                   <C>        <C>         <C>        <C>
Change in benefit obligation
Benefit obligation, October 1 prior year............................  $ 4,177.4  $  4,010.2  $   246.2  $   287.4
Service cost........................................................       93.9        87.9        9.0        8.2
Interest cost.......................................................      298.7       294.9       18.4       18.3
Participant contributions...........................................        7.5         7.0        3.0        3.0
Plan amendments.....................................................       73.5         0.0        0.0        0.0
Actuarial loss (gain)...............................................      269.1       145.5       34.8      (49.1)
Acquisition.........................................................        0.0         5.0        0.0        0.0
Divestiture.........................................................                                         (0.5)
Foreign currency translation adjustment.............................        2.2         1.0        0.0        0.0
Benefits paid.......................................................     (275.8)     (374.1)     (21.3)     (21.0)
                                                                      ---------  ----------  ---------  ---------
Benefits obligation, September 30...................................  $ 4,646.5  $  4,177.4  $   290.1  $   246.3
                                                                      ---------  ----------  ---------  ---------
                                                                      ---------  ----------  ---------  ---------
Change in plan assets
Fair value of plan assets, October 1 prior year.....................  $ 4,643.6  $  3,963.9  $     0.0  $     0.0
Actual return on plan assets........................................      163.1       848.9        0.0        0.0
Company contributions...............................................      136.8       192.9       18.3       18.0
Participant contributions...........................................        7.5         7.0        3.0        3.0
Acquisition.........................................................        0.0         5.0        0.0        0.0
Benefits paid.......................................................     (275.8)     (374.1)     (21.3)     (21.0)
                                                                      ---------  ----------  ---------  ---------
Fair value of plan assets, September 30.............................  $ 4,675.2  $  4,643.6  $     0.0  $     0.0
                                                                      ---------  ----------  ---------  ---------
                                                                      ---------  ----------  ---------  ---------
Funded status of plan...............................................  $    28.7  $    466.2  $  (290.1) $  (246.3)
Unrecognized actuarial loss.........................................      166.3      (302.3)     (48.4)     (82.4)
Unrecognized prior service cost.....................................      257.6       214.8        3.6        4.3
Unrecognized net transition obligation..............................      (14.6)      (28.9)       0.0        0.0
Fourth quarter contributions........................................        1.1        21.0        4.6        0.0
                                                                      ---------  ----------  ---------  ---------
Recognized amount...................................................  $   439.1  $    370.8  $  (330.3) $  (324.4)
                                                                      ---------  ----------  ---------  ---------
                                                                      ---------  ----------  ---------  ---------
</TABLE>
 
                                       65
<PAGE>
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                        HONEYWELL INC. AND SUBSIDIARIES
 
                             (DOLLARS IN MILLIONS)
 
NOTE 21 -- PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (CONTINUED)
    The amount recognized in the statement of financial position consists of the
following:
 
<TABLE>
<CAPTION>
                                                                                                       OTHER
                                                                                PENSION            POSTRETIREMENT
                                                                                BENEFITS              BENEFITS
                                                                          --------------------  --------------------
                                                                            1998       1997       1998       1997
                                                                          ---------  ---------  ---------  ---------
<S>                                                                       <C>        <C>        <C>        <C>
Prepaid benefit cost....................................................  $   497.1  $   415.9  $     0.0  $     0.0
Accrued benefit liability...............................................      (58.0)     (45.1)    (330.3)    (324.4)
Additional minimum liability............................................      (68.7)     (50.5)       N/A        N/A
Intangible asset........................................................       41.4       39.2        N/A        N/A
Accumulated other comprehensive income..................................       27.3       11.3        N/A        N/A
Recognized amount.......................................................  $   439.1  $   370.8  $  (330.3) $  (324.4)
</TABLE>
 
    The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for pension plans with accumulated benefit obligations in
excess of plan assets were $294.7, $258.7 and $173.4, respectively, as of
December 31, 1998 and $204.3, $182.6 and $118.4, respectively, as of December
31, 1997.
 
<TABLE>
<CAPTION>
                                                                          PENSION                           OTHER
                                                                          BENEFIT                      POSTRETIREMENT
                                                                           PLANS                          BENEFITS
                                                              -------------------------------  -------------------------------
                                                                1998       1997       1996       1998       1997       1996
                                                              ---------  ---------  ---------  ---------  ---------  ---------
<S>                                                           <C>        <C>        <C>        <C>        <C>        <C>
Weighted Average Assumptions as of September 30:
Discount rate...............................................       6.75%      7.50%      7.75%      6.75%      7.50%      7.50%
Expected return on plan assets..............................       9.50%      9.50%      9.50%       N/A        N/A        N/A
Rate of compensation increase...............................       4.00%      4.40%      4.65%       N/A        N/A        N/A
</TABLE>
 
    The Company has assumed a health-care cost trend rate of 5 percent for 1999
and beyond. The health-care trend rate assumption has a significant effect on
the amounts reported. A 1 percentage point change in the health-care trend rate
would have the following effects on 1998 service and interest cost and the
accumulated postretirement benefit obligation at December 31, 1998:
 
<TABLE>
<CAPTION>
                                                                              1 PERCENTAGE POINT
                                                                           ------------------------
<S>                                                                        <C>          <C>
                                                                            INCREASE     DECREASE
                                                                           -----------  -----------
Effect on service and interest components on net periodic cost...........        14.3%       (10.9)%
Effect on accumulated postretirement benefit obligation..................         9.8%        (7.4)%
</TABLE>
 
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.
 
                                       66
<PAGE>
                                    PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
    Pages 9 through 14 of the Honeywell Notice of 1999 Annual Meeting and Proxy
Statement are incorporated herein by reference.
 
ITEM 11. EXECUTIVE COMPENSATION
 
    Pages 18 through 27 of the Honeywell Notice of 1999 Annual Meeting and Proxy
Statement are incorporated herein by reference.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
    Pages 16 through 17 of the Honeywell Notice of 1999 Annual Meeting and Proxy
Statement are incorporated herein by reference.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
    None.
 
                                       67
<PAGE>
                                    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.......................................................         33
  Income Statement...................................................................         34
  Statement of Financial Position....................................................         35
  Statement of Cash Flows............................................................         36
  Statement of Shareowners' Equity...................................................         37
  Notes to Financial Statements......................................................         38
</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....................     28
     Schedules for the Years Ended December 31, 1998,
       1997 and 1996:
           II  --  Valuation Reserves................     72
 
    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.
 
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.
</TABLE>
 
                                       68
<PAGE>
<TABLE>
<S>          <C>
 (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)   Credit Agreement dated as of April 15, 1997 among Honeywell Inc., Morgan
             Guaranty Trust Company of New York, as Documentation Agent, Citicorp USA,
             Inc., Chase Securities Inc. and J.P. Morgan Securities Inc., as
             Co-Arrangers and The Chase Manhattan Bank, as Administrative Agent is
             incorporated by reference to Exhibit 99(ii) to Honeywell's Quarterly Report
             on Form 10-Q for the fiscal quarter ended March 30, 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, 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, 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.*
(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)(i) 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)(j) 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)(k) 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.*
(10)(iii)(l) 1997 Honeywell Stock and 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 December 31, 1997.*
</TABLE>
 
                                       69
<PAGE>
<TABLE>
<S>          <C>
(99)(ii)     Honeywell Notice of 1999 Annual Meeting and Proxy Statement.**
 
Exhibits submitted herewith:
 (3)(ii)     By-laws of Honeywell Inc., as amended through January 19, 1999.
(10)(iii)(f) Honeywell Non-Employee Directors Fee and Stock Unit Plan, as amended
             through July 21, 1998.*
(10)(iii)(h) Honeywell Supplemental Defined Benefit Retirement Plan (1998 Restatement)
(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.
</TABLE>
 
    (B) REPORTS ON FORM 8-K
 
    On December 9, 1998, Honeywell filed a report on Form 8-K regarding recent
developments in the litigation with Litton Systems, Inc. which is described in
Note 20 to the Financial Statements set forth in Item 8 above.
 
------------------------
 
 *Management contract or compensatory plan or arrangement.
 
**Only the portions of Exhibit (99)(ii) specifically incorporated by reference
  are deemed filed with the Commission.
 
                                       70
<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/ KATHLEEN M. GIBSON
                                     -----------------------------------------
                                       Kathleen M. Gibson, VICE PRESIDENT AND
                                                CORPORATE SECRETARY
 
Dated: March 10, 1999
 
    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>
MICHAEL R. BONSIGNORE                       Chairman of the Board and Chief Executive Officer, and
                                              Director
 
LAWRENCE W. STRANGHOENER                    Vice President and Chief Financial Officer
 
PHILIP M. PALAZZARI                         Vice President and Controller, and Principal Accounting
                                              Officer
 
ALBERT J. BACIOCCO, JR.                     Director
 
ELIZABETH E. BAILEY                         Director
 
GIANNANTONIO FERRARI                        Director
 
R. DONALD FULLERTON                         Director
 
JAMES J. HOWARD III                         Director
 
KATHERINE M. HUDSON                         Director
 
BRUCE E. KARATZ                             Director
 
JAIME CHICO PARDO                           Director
 
STEVEN G. ROTHMEIER                         Director
 
MICHAEL W. WRIGHT                           Director
</TABLE>
 
By:    /s/ KATHLEEN M. GIBSON
      -------------------------
         Kathleen M. Gibson,
          ATTORNEY-IN-FACT
           March 10, 1999
 
                                       71
<PAGE>
                                                                     SCHEDULE II
 
                        HONEYWELL INC. AND SUBSIDIARIES
 
                               VALUATION RESERVES
 
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
 
                             (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, 1998....................................   $    38.5   $  14.4 (1)  $   11.8 (2)  $    41.1
Year ended December 31, 1997....................................        33.5      14.1 (1)       9.1 (2)       38.5
Year ended December 31, 1996....................................        34.5      10.5 (1)      11.5 (2)       33.5
 
LONG-TERM RECEIVABLES
Year ended December 31, 1998....................................         2.7            .3           1.2        1.8
Year ended December 31, 1997....................................         0.7           2.0       --             2.7
Year ended December 31, 1996....................................         0.7       --            --             0.7
 
Reserves deducted from assets to which they apply valuation
 reserve:
 
LONG-TERM NOTES RECEIVABLE
Year ended December 31, 1998....................................         1.5      (0.2)(1)       --             1.3
Year ended December 31, 1997....................................         1.7      (0.2)(1)       --             1.5
Year ended December 31, 1996....................................         1.8      (0.1)(1)       --             1.7
 
Establishment and utilization of special charges were:..........
 
SPECIAL CHARGES
Year ended December 31, 1998....................................        72.4          53.7          59.3       66.8
Year ended December 31, 1997....................................      --              90.7          18.3       72.4
Year ended December 31, 1996....................................      --           --            --          --
</TABLE>
 
------------------------
 
Notes:
 
(1) Represents amounts included in selling, general and administrative expense.
 
(2) Represents uncollectible accounts written off, less recoveries, translation
    adjustments, and reserves acquired.
 
                                       72