<PAGE>
 
================================================================================
               UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549

                                   FORM 10-K
(Mark One)

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934
     [FEE REQUIRED]
     For the fiscal year ended December 1, 1996.

                                       OR

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES 
     EXCHANGE ACT OF 1934
     [NO FEE REQUIRED]
     For the transition period from                   to
                                    -----------------    ----------------  
     Commission File Number 1-8770
 

                     M E A S U R E X  C O R P O R A T I O N
            (Exact name of Registrant as specified in its charter)

 
          DELAWARE                                    94-1658697
(State or other jurisdiction of           (I.R.S. Employer Identification No.)
 incorporation or organization)

                 One Results Way, Cupertino, California 95014
             (Address of principal executive offices and Zip Code)

      Registrant's telephone number, including area code: (408) 255-1500

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

     Title of each class         Name of each exchange on which registered
     -------------------         -----------------------------------------
Common Stock, $0.01 par value   New York Stock Exchange Pacific Stock Exchange

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

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (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 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.  [_]

Aggregate market value of voting stocks held by non-affiliates 
as of January 31, 1997                                               543,325,701

Number of shares of common stock outstanding as of January 31, 1997   16,175,617

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

ITEM 1.  BUSINESS
-----------------

GENERAL DEVELOPMENT OF BUSINESS

Measurex Corporation (the "Company") is engaged worldwide in the design,
manufacture and servicing of computer-integrated measurement, control and
information systems.  The Company's wide range of products is designed to
increase productivity, reduce raw material and energy consumption and improve
quality and uniformity.  Industries served by the Company include paper,
plastics, nonwovens, rubber, steel and non-ferrous metals.  The Company's
customers are served by sales and service subsidiaries located in 50 offices and
34 countries around the world.  More than half of Measurex's 2,840 employees are
dedicated to the sales, support and servicing of the Company's customers.

The Company is a corporation organized under the laws of the State of Delaware
as the successor to a California Corporation organized in 1968.  The Company's
principal executive offices are located at One Results Way, Cupertino,
California 95014-5991 (telephone number: 408-255-1500).

The term "the Company" as used hereinafter means Measurex Corporation or
Measurex Corporation and its subsidiaries, as the context requires.

FORWARD-LOOKING STATEMENTS

With the exception of the actual reported financial results, some of the
statements made in this Form 10-K are forward-looking, reflect the Company's
current expectations and involve certain risks and uncertainties.  There can be
no assurance that the Company's actual future performance will meet the
Company's expectations.  Specific risks are discussed in "Risk Factors" on page
5 of this Form 10-K.

FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.

Financial information about industry segments is set forth in  the Note to the
Consolidated Financial Statements titled "Business Segments" in Part II, Item 8
at page 24.

NARRATIVE DESCRIPTION OF BUSINESS.

The Company is a leading worldwide supplier of computer-integrated measurement,
control and information systems for sheet and continuous manufacturing
processes.  The Company's systems are primarily used to control the
manufacturing processes in those industries in which the manufactured product is
made in a flat sheet; e.g. paper, plastics, nonwovens, aluminum, steel and
rubber.

The Company provides measurement and control systems and services that enhance
the productivity and efficiency of its customers' processes and improve the
quality of its customers' products.  These integrated systems utilize sensors
and scanners to measure product qualities during the manufacturing process such
as weight, coating, color, formation, opacity, strength, thickness and chemical
content.  Software running in computers and workstations uses these measurements
to provide control of the process, computer graphic operator displays and
management information.  Actuators are regulated by the software to provide
precision adjustments to the process in order to maintain product quality.

The Company also provides management information systems which integrate the
manufacturing process with such functions as order entry, inventory control,
product tracking, production scheduling, shipping and invoicing.

The Company's systems use international industry communications and computing
standards which allow connectivity between the Company's systems and other
standards-based measurement and control products.

The following table shows the annual revenues and the percentages of annual
revenues during the last three fiscal years attributable to the sale of
computer-integrated measurement, control and information systems to the paper
and industrial systems industries (plastics, nonwovens, aluminum, steel and
rubber) and the services provided to customers in those industries.

                                       1
<PAGE>
 
<TABLE>
<CAPTION>
 
 
                                                                Year Ended (amounts in millions)
                                                      --------------------------------------------------
Revenue from:                                                1996             1995              1994
                                                      ------------       -------------      ------------
<S>                                                   <C>      <C>       <C>      <C>       <C>      <C>
    System sales - paper industry                     $222.6   54%       $185.4    56%      $133.0   51%
    System sales - industrial systems industries      $ 65.4   15%       $ 34.9    10%      $ 23.3    9%
    Service and other                                 $128.0   31%       $114.9    34%      $103.7   40%
                                                      ------             ------             ------
Total revenues                                        $416.0             $335.2             $254.0
                                                      ======             ======             ======
</TABLE>

PAPER SYSTEMS BUSINESS

In 1996, approximately 54% of the Company's revenues were generated from system
sales to the paper industry. The Company's systems are used to control the
production of practically all kinds of paper and paperboard products including:
fine paper used for stationary and books; xerographic paper for copy machines;
glossy stock for magazines; paperboard and linerboard for boxes; sack grades for
paper bags; newsprint and tissue.

In the paper industry, the Company's MXOpen(R) product line includes:

 .    Integrated Control Systems and Sensors
 .    Cross Direction  (CD) Profile Control Systems and Actuators
 .    Web Inspection Systems
 .    Distributed Control Systems
 .    Total Machine Monitoring Systems
 .    Millwide Production and Information Management Systems

A key component of the Company's measurement and control systems is its
proprietary sensor technology. The Company currently offers a wide variety of
on-line sensors to its customers in the paper industry which measure many
aspects of product quality including basis weight, moisture, caliper, ash
content, coat weight, smoothness, gloss, formation, opacity, strength and color.
These on-line sensors, generally non-contacting, probe the product with
radiation from various parts of the electromagnetic spectrum including infrared,
visible light, beta, x-ray and gamma radiation.

The Company's web-inspection systems use Charged Couple Device (CCD) camera
technology to detect visual defects in paper and other web-produced material.

The Company is a leader in the complex technology of cross-direction (CD)
profile control.  The Company's cross direction profile control systems and
actuators allow precise control of paper characteristics in small segments
across the entire width of the sheet resulting in optimum quality levels,
reduced material and energy use and lower scrappage rates.

The Company's products are sold individually as add-ons or upgrades to existing
measurement and control systems (the Company or competitor systems) or as
complex integrated systems designed for specific applications or processes.  The
Company's systems are primarily sold by the Company's worldwide sales
organization.  In addition, the Company has established certain alliances and
OEM relationships to provide customers with turnkey paper automation projects.
The systems are generally installed at the customer's site by the Company's
worldwide service organization.

INDUSTRIAL SYSTEMS BUSINESS

In 1996, approximately 15% of the Company's revenues were generated from system
sales to customers in the plastics, nonwovens, aluminum, rubber, steel and other
industries.  The Company's systems are used to control the materials used in or
the production of many products including:

 .       Plastics, films and coated products - candy wrap, magnetic media base,
        food and liquid packaging, vinyl products, labels and tapes.
 .       Nonwoven products - diaper liners, wipes, surgical drapes, roofing,
        filters, clothing, floor mats and carpet backing.
 .       Rubber products - tire fabrics, roofing, tank liners and belts.
 .       Aluminum products - beverage and food can stock, foil, siding and heat
        exchangers.
 .       Steel - automobiles, building materials, beverage cans and major
        appliances.
 .       Other - chemical, fiberglass, plastic resin and pharmaceuticals.

                                       2
<PAGE>
 
The Company's product offering to Industrial Systems' customers includes:

 .       Measurement Control Systems (MCS) and Sensors
 .       Distributed Control Systems
 .       Profile Control Systems
 .       Web Inspection Systems

The Company's products include a low-priced PC based system, ConceptOne(R), for
smaller plastics and sheet applications, and also complex integrated systems
(the MXOpen (R) product family) designed for specific applications or processes.

In January 1996, the Company expanded its participation in the metals industry
with the acquisition of Data Measurement Corporation (DMC), a manufacturer of
measurement systems for the steel industry.  In March 1996, the Company acquired
the Measurement Systems Business of Loral Control Systems.  This business was
integrated into DMC.  The Company intends to expand DMC's gauging system into a
full computer-integrated control and information system.  Prior to the
acquisition, the Company did not participate in the steel market.

Industrial Systems products are distributed through the Company's worldwide
sales organization and other distribution channels such as OEMs, distributors
and agents.  The systems are generally installed at the customer's site by the
Company's worldwide service organization.

SERVICE BUSINESS

In 1996, service revenues represented approximately 31% of the Company's total
revenue. The Company's worldwide sales and service organization supports
customers in both the paper and industrial systems businesses.  The Company has
over 5,000 systems installed in 60 countries, primarily located in North
America, South America, Europe and Asia.  The Company's service offering
includes both resident service contracts and on-demand service for spare parts,
preventive and emergency maintenance.  Value added services such as process
optimization and software enhancements are growing parts of this business.
Also, the Company maintains systems of its direct competitors as well as third
party non-competitive products.

RESEARCH AND PRODUCT DEVELOPMENT

The Company's systems are the result of the integration of a number of complex
technologies including electronics, physics, mechanical design and software.
Central to the Company's strategic goals is a commitment to research and
development. The Company strongly believes the continued investment in new
product development is key to its long-term success.

During fiscal years 1996, 1995 and 1994, the Company spent approximately $21.0
million, $19.4 million and $20.0 million, respectively, on research and
development.  Those amounts represented 5%, 6% and 8%, respectively, of total
revenues and 7%, 9% and 13%, respectively,  of system revenue.

BACKLOG

System backlog at December 1, 1996, was $157 million, 10% higher than the
backlog of $143 million at the end of fiscal 1995.  The DMC acquisition
increased the backlog at the beginning of the year by $20 million.
Approximately 95% of the $157 million year-end 1996 backlog is scheduled to be
shipped during fiscal 1997.

PATENTS

The Company follows a policy of filing appropriate patent applications on
inventions it considers significant.  As of December 1, 1996, the Company had 92
United States patents and 220 foreign patents in effect.  Although important to
the business, the Company believes that the invalidity or expiration of any
single such patent would not have a material adverse effect on its operations.

SUPPLY OF MATERIALS AND PURCHASED COMPONENTS

The Company produces most of the application software, sensors, scanners,
digital logic circuits and actuators used in its systems.  Many components, such
as integrated circuits, video monitors, printers, cameras, disks, and
microcomputers are purchased from other manufacturers and integrated into the
systems.

                                       3
<PAGE>
 
The Company currently purchases certain components from single sources of
supply.  In each instance, components performing similar functions are available
from alternative sources, except for radioactive source material which is
available from only two suppliers.  Use of these alternative components might
require a change in the design of certain portions of the system which could
result in production delays, additional expenses and contract cancellations
while changing vendors.  The Company has contracts with certain vendors which
entitle, but do not require, the Company to purchase specific quantities of
components.

COMPETITION

The market for process measurement and control is highly competitive and is
subject to technological change in both hardware and software development.  The
principal competitive factors in this market are product quality and
reliability, product features, customer support, corporate reputation and
relative price/performance.  The Company's competitive strategy is to provide
customers with greater economic results than available from competitors by
focusing on quality and the unique performance characteristics of the customers'
systems.  However, any inability of the Company to match or exceed the
price/performance or other features of the systems offered by its competitors
could adversely affect future operating results.

The Company's principal competition is from distributed control systems
suppliers and packaged system suppliers, as well as factory automation system
suppliers, many of which have substantially greater resources than the Company.
In the paper machine integrated control system market, competition includes Asea
Brown Boveri Process Automation Inc. (ABB); Lippke, a wholly owned subsidiary of
Honeywell Inc.; the Valmet Automation Group, a division of Valmet Oy; and
Yokogawa-YEW in Japan.  Competition in the distributed control system business
area includes Fisher Controls (a division of Emerson Electric Co.), Foxboro (a
subsidiary of Siebe, Inc.), Honeywell Inc., Siemens A.G., and many other
companies.  In the web-inspection products area, the Company faces competition
from ABB and other smaller companies.  Competition for production management and
process analysis and quality management is very fragmented.  In the industrial
systems market, the Company competes with a number of companies, typically
focused on a specific geographic area or customer  type, including ABB,
Eurotherm Gauging Systems and NDC.  The Company's major competitors in the steel
industry include IMS, THI (a division of Thermo Instrument Systems) and Toshiba
in Japan.

EMPLOYEES

As of December 1, 1996, the Company had approximately 2,840 full-time employees.
With the acquisition of DMC in January, 1996, the Company added approximately
340 full-time employees.

NUCLEAR REGULATORY LICENSES

In the United States, the Company and its customers are subject to licensing and
regulation by the United States Nuclear Regulatory Commission (NRC) under the
Atomic Energy Act of 1954 (the Act) with respect of those parts of its products
and systems which utilize nuclear radiation.  The NRC has transferred a portion
of its licensing and regulatory functions to several state governments,
including California, pursuant to Section 274 of the Act.  The Company holds all
such licenses necessary for its current operations.  Licenses are renewed
periodically as required.

The Company also holds all necessary foreign licenses regarding nuclear
radiation for the applicable countries in which it operates.

United States customers possessing the Company's systems containing radioactive
sources hold the radioactive material under a General or Specific License issued
by their state or federal regulatory authority.  Similarly, foreign customers
hold licenses issued by their local authorities for radioactive material in the
Company's systems.

ENVIRONMENT

The operations of the Company involve the use of substances regulated under
various federal, state and international laws governing the environment.  It is
the Company's policy to apply strict standards for environmental protection to
sites inside and outside the U.S., even if not subject to regulations imposed by
local governments.  Liability for environmental remediation is accrued when it
is considered probable and costs can be reasonably estimated.  Environmental
expenditures are presently not material to the Company's operations or financial
position.

FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES

The Company engages in operations in many foreign countries.  A large portion of
the Company's foreign business is in Europe, Canada, Latin America and Asia.

                                       4
<PAGE>
 
Although there are risks attendant to foreign operations, such as potential
nationalization of facilities, currency fluctuation and restrictions on movement
of funds, the Company has taken action to mitigate such risks.

Financial information regarding geographic operations is set forth in  the Note
to the Consolidated Financial Statements titled "Business Segments" in Part II,
Item 8 at page 24.

RISK FACTORS

The Company's future operations are subject to a number of risks and
uncertainties including, but not limited to, the following:

Fluctuations in Quarterly Orders  -  The Company's quarterly orders have
fluctuated in the past and may fluctuate significantly in the future due to a
number of factors, including the timing of orders from its customers, changes in
pricing by the Company or its competitors, discount levels, new product
introductions by the Company or its competitors, foreign currency exchange
rates, and changes in the economic and political environments of the countries
and industries it serves.

Fluctuations in Financial Results  -  The Company's quarterly and annual
financial results have fluctuated in the past and may fluctuate significantly in
the future due to a number of factors, including the scheduling of factory
shipments, changes in pricing and discount levels, utilization levels of the
Company's manufacturing facilities and personnel, amount and growth in operating
expenses, changes in applicable tax rates, changes in product mix of system
revenue, amount of spares shipments, changes in interest rates, changes in
foreign currency exchange rates and the ability of the Company to mitigate the
impact of such changes with foreign currency forward contracts.

Cyclicality of the Paper Industry  -  A substantial portion of the Company's
sales have historically come from the paper industry.  While the Company has
recently expanded its presence in the industrial systems component of its
business through its acquisition of Data Measurement Corporation, the paper
industry will continue to account for most of the Company's revenues.  This
industry has in the past, and will likely in the future, be subject to
substantial cyclicality and economic downturns.  This cyclicality may in turn
materially impact the Company's order rate and results of operations.

Risks Associated with International Operations  -  A majority of the Company's
revenues are typically generated from sales outside of the United States.  The
Company's international orders, revenues and profitability are subject to
inherent risks including timing in obtaining import licenses and letters of
credit, fluctuations in local economies, difficulties in staffing and managing
foreign operations, changes in foreign currency exchange rates, changes in
regulatory requirements, tariffs and other trade barriers, difficulties in
repatriation of earnings, and burdens of complying with a wide variety of
foreign laws.

Risks of Serving Other Cyclical Industries  -  The Company's orders and
operating results are impacted by the capital expenditure cycles in the
plastics, rubber, non-wovens, aluminum and steel industries, all of which are
subject to substantial cyclicality.

Ability to Integrate Acquisitions  -  A key element of the Company's strategy
for growth is the acquisition of products that can be distributed through its
worldwide sales and service organization.  The success of this component of the
Company's strategy is dependent upon the ability of the Company to identify
acquisition candidates that meet its acquisition criteria, acquire the
acquisition target at a fair price, integrate the acquired operations into the
Company and implement its business plan after acquisition.  There can be no
assurance that the Company will be successful in achieving these goals in every
instance.

                                       5
<PAGE>
 
ITEM 2.  PROPERTIES

As of December 1, 1996, the Company owned the major facilities described below:

<TABLE>
<CAPTION>
 
    Location                        Total Sq.Ft.       Use
    --------                        ------------       --------------------
    <S>                             <C>                <C>
 
     Cupertino, California           360,000           The Company's Headquarters, offices, research and
                                                       manufacturing operations.
 
     Cincinnati, Ohio                 43,000           The Company's ofices, research and manufacturing operations for the
                                                       Management Systems Division operations and manufacturing for certain ISD
                                                       offices products.

     Atlanta, Georgia                 32,000           The worldwide Sales and Service Headquarters.
 
     North Vancouver,                 94,000           The Measurex Devron Division's offices, research and 
      British Columbia, Canada                         manufacturing operations.
 
     Waterford, Ireland               60,000           Offices and manufacturing operations.
 
</TABLE> 

The following major facilities were leased as of December 1, 1996:

<TABLE> 
<CAPTION> 
 
     Location                        Total Sq.Ft.       Use
     --------                        ------------       --------------------
     <S>                             <C>                <C>
     Kuopio, Finland                  40,000            Measurex Roibox Oy's offices, research and manufacturing operations.
 
     Gaithersburg, Maryland          100,000            Measurex DMC's offices, research and manufacturing operations.

</TABLE>

The Company also leases office space for sales and service operations throughout
the United States and various countries.

During 1996, the Company was productively utilizing the space in its facilities,
while disposing of space determined to be under-utilized.  The Company believes
current facilities provide adequate production capacity to meet the Company's
planned business activities.


ITEM 3.  LEGAL PROCEEDINGS

There are no material pending legal proceedings to which the Company or any of
its subsidiaries are a party or of which any of their property is the subject,
other than ordinary routine litigation incidental to the business.  Management
believes that the final outcome of such matters will not have a material adverse
effect on the Company's consolidated financial position and results of
operations.

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

Not applicable

                                       6
<PAGE>
 
                                    PART II

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

This information is set forth in the note to the financial statements headed
"Market for the Registrant's Common Stock and Related Security Holder Matters",
in Part II, Item 8 at page 26.


ITEM 6.  SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
 
 
Five years ended December 1, 1996
<S>                                        <C>         <C>         <C>         <C>         <C>
(Dollar amounts in thousands
except per share data)                       1996        1995        1994        1993        1992
                                           --------------------------------------------------------
 
Revenue
Systems                                    $287,968    $220,292    $156,294    $152,839    $148,367
Service and other                           128,007     114,924     103,685     101,158     104,220
                                           --------    --------    --------    --------    --------
Total revenues                              415,975     335,216     259,979     253,997     252,587
                                           --------    --------    --------    --------    --------
 
Gross Margin:
Systems                                    $113,741    $ 89,642    $ 56,217    $ 53,111    $ 49,123
Service and other                            47,458      43,121      38,397      36,657      36,406
                                           --------    --------    --------    --------    --------
Total gross margin                          161,199     132,763      94,614      89,768      85,529
                                           --------    --------    --------    --------    --------
Earnings from operations
  before exit and restructuring costs      $ 54,583    $ 36,687    $ 11,181    $  7,500    $  1,222
Earnings (loss) from operations              54,583      36,687       4,800       7,500      (7,752)
Income before income taxes,
  extraordinary credit and cumulative
  effect of accounting change                55,988      40,828       9,152      12,679       1,678
Net income                                   36,953      26,946       6,107       8,215       1,625
Net income per share                           2.25        1.60         .34         .46         .09
Dividends per share                             .44         .44         .44         .44         .44
System orders                               289,000     270,000     160,000     151,000     156,000
System backlog                              157,000     143,000      92,000      91,000      95,000
                                           --------    --------    --------    --------    --------
Gross margin:
  Systems                                      39.5%       40.7%       36.0%       34.7%       33.1%
  Service and other                            37.1%       37.5%       37.0%       36.2%       34.9%
     Total gross margin                        38.8%       39.6%       36.4%       35.3%       33.9%
Earnings (loss) from operations                13.1%       10.9%        1.8%        3.0%       (3.1%)
Net income                                      8.9%        8.0%        2.3%        3.2%        0.6%
Income tax rate                                34.0%       34.0%       39.0%       35.2%       57.4%
                                           --------    --------    --------    --------    --------
Working capital                            $ 95,247    $ 89,309    $123,536    $137,720    $133,305
Total assets                                337,115     286,705     319,823     318,316     322,884
Total debt                                   24,724      19,806      20,617      21,299         891
Shareholders' equity                        204,229     166,045     217,183     211,864     218,453
                                           --------    --------    --------    --------    --------
Current ratio                                 1.9:1       1.9:1       2.5:1       2.8:1       2.6:1
Return on beginning equity                     22.3%       12.4%        2.9%        3.8%         .7%
Return on beginning assets                     12.9%        8.4%        1.9%        2.5%         .5%
Book value per share                       $  12.67    $  10.57    $  11.98    $  11.87    $  12.12
                                           --------    --------    --------    --------    --------
Total product development costs            $ 25,730    $ 21,242    $ 22,779    $ 22,871    $ 25,248
Capitalized software costs                   (4,694)     (1,874)     (2,787)     (1,725)     (4,636)
                                           --------    --------    --------    --------    --------
Product development expense                $ 21,036    $ 19,368    $ 19,992    $ 21,146    $ 20,612
                                           --------    --------    --------    --------    --------
Capital expenditures                       $ 10,369    $  9,434    $  6,716    $  8,329    $  7,781
Number of employees                           2,843       2,360       2,090       2,250       2,310
Shares outstanding (thousands)               16,114      15,713      18,130      17,844      18,028
                                           --------    --------    --------    --------    --------
</TABLE>

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

RESULTS OF OPERATIONS

System orders for 1996 were $289 million, which represented a 7% increase from
$270 million in 1995 and an 81% increase from $160 million in 1994.  For the
year, total Paper System orders were $216 million, a decrease of 8% from 1995.
Record orders for Paper Systems in Europe, Japan and Latin America were
partially offset by lower orders in the United States, due to the downturn in
the United States paper  industry, and fewer orders in Asia Pacific reflecting a
decline in new paper machine projects in that region.  Total orders for
Industrial Systems more than doubled in 1996 to $73 million.  Excluding orders
from Data Measurement Corporation (DMC), which was acquired in January 1996,
Industrial Systems orders for fiscal year 1996 were $43 million, a 19% increase
over fiscal year 1995.

The industry and geographic breakdown of system orders is as follows:

<TABLE>
<CAPTION>
 
                                                        Year Ended(amounts in millions)
                                                   December 1,     December 3,   November 27,
                                                      1996           1995           1994
                                                   ------------------------------------------
<S>                          <C>                               <C>           <C>
     United States                                    $ 87.0        $105.0         $ 66.0
     Europe                                             91.0          79.0           45.0
     Rest of World                                     111.0          86.0           49.0
                                                      ------        ------         ------
      Total                                           $289.0        $270.0         $160.0
                                                      ------        ------         ------
 
     Paper Systems                                    $216.0        $234.0         $138.0
     Industrial Systems                                 73.0          36.0           22.0
                                                      ------        ------         ------
      Total                                           $289.0        $270.0         $160.0
                                                      ------        ------         ------
</TABLE>

System backlog at the end of 1996 was $157 million, up from $143 million at the
end of 1995 and $92 million at the end of 1994.  Approximately 95% of the 1996
backlog is scheduled to be shipped in 1997.  The ending backlog includes $20
million relating to DMC.

System revenue was $288.0 million in 1996, a 31% increase from $220.3 million in
1995, and an 84% increase from $156.3 million in 1994.  The increase resulted
from the acquisition of DMC, which was responsible for $27.0 million of 1996
revenues, and from increased system shipments from the Company's historic
businesses.

Service and other revenue of $128.0 million increased 11% from $114.9 million in
1995 and 23% from $103.7 million in 1994, due to growth in the installed base of
systems and the acquisition of DMC which accounted for $9.0 million of the
increase.

System margins for 1996 were 39% compared to 41% in 1995 and 36% in 1994. The
decrease in margins from 1995 is primarily due to unfavorable product mix, with
a higher proportion of lower margin smaller systems, and also reflects the
impact of relatively lower margin DMC shipments.

Service and other margins for 1996 were 37%, essentially unchanged from 1995 and
1994.

Product development costs of $21.0 million in 1996 increased 9% and 5% from 1995
and 1994, respectively.  To maintain its competitive position in the industry,
the Company continues its investments in new products.

Selling and administrative expenses of $85.6 million for 1996 increased $8.9
million or 12% from 1995 and $22.1 million or 35% from 1994, although they were
lower as a percentage of revenue than in both previous years.  The increase over
1995 is mainly due to the inclusion of DMC. The increase over 1994 resulted from
incremental sales commissions as a result of the higher order level and
additional sales personnel to provide improved sales coverage, as well as the
inclusion of DMC.

As a result of these changes, earnings from operations for 1996 increased to
$54.6 million from $36.7 million in 1995 and $4.8 million in 1994.  The 1994
earnings from operations included a charge of $6.4 million relating to a
restructuring plan.

                                       8
<PAGE>
 
Interest expense of $2.5 million was essentially unchanged over 1995 and was
higher than the 1994 level of $1.3 million as a result of higher debt levels
during the year.  Interest income of $3.9 million was $3.0 million lower than
1995 and $1.7 million lower than 1994. The decrease is due to lower cash
balances during the year, primarily as a result of the acquisition of DMC,  and
the discounting of certain contracts receivable with a financial institution at
the end of 1995, the proceeds of which were also used to fund the DMC
acquisition.

The effective tax rate for 1996 was 34%, unchanged from 1995 and compared to 39%
in 1994. The lower rate from 1994 resulted from changes in the geographic mix of
earnings and the return to profitability in 1995 and 1996 of several
subsidiaries for which no tax benefit for losses could be taken in 1994.

Net income for 1996 was $37.0 million, a $10.1 million increase from $26.9
million in 1995 and an increase of $30.9 million from $6.1 million in 1994.
Earnings per share for the year were $2.25 per share compared to $1.60 per share
in 1995 and $0.34 per share in 1994.

During March 1995, the Financial Accounting Standards Board issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," (SFAS No. 121), which requires the review for
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.  In certain
situations, an impairment loss would be recognized.  The Company has adopted
SFAS No. 121.

During October 1995, the Financial Accounting Standards Board issued Statement
No. 123(SFAS No.123), "Accounting for Stock-Based Compensation."  This standard,
which establishes a fair value-based method of accounting for stock-based
compensation plans also permits an election to continue following the
requirements of APB Opinion No. 25, "Accounting for Stock Issued to Employees"
with disclosures of pro forma net income and earnings per share under the new
method.  The Company is reviewing the alternatives under SFAS No. 123 but does
not expect there will be any effect on the financial condition and results of
operations of the Company. Disclosure requirements of SFAS No.123 will be
effective for the Company's fiscal year 1997.

During June 1996, the Financial Accounting Standards Board issued Statement No.
125 (SFAS No. 125), "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities."  This standard establishes consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings.  SFAS No. 125 will become effective for
transactions that the Company enters into after December 31, 1996.

LIQUIDITY AND CAPITAL RESOURCES

Measurex continues to maintain a strong financial position with cash and cash
equivalents and short-term investments of $37.7 million as of the 1996 year-end.
In addition, the Company had unsecured revolving bank lines of credit available
of $78.0 million of which $17.6 million was committed to letters of credit.  The
Company believes that its existing cash balances, lines of credit and cash
provided by operations will provide adequate flexibility to fund the Company's
operating needs, capital expenditures and cash dividends through fiscal year
1997.

In the year ended December 1, 1996, the Company generated $20.9 million of cash
from operating activities compared to $50.0 million in 1995 and $11.1 million in
1994.  In 1996, $56.8 million was generated by net income after adjustments for
non-cash items. These cash inflows were offset by increases in working capital
of $35.9 million, including a $30.7 million increase in accounts and contracts
receivable. The increased business level and the acquisition of DMC resulted in
the increased working capital requirements.

The Company continued to scrap obsolete inventory and service parts during the
year.  The amount scrapped in 1996 was $7.4 million compared to $4.1 million in
1995.

Cash used in investing activities was $48.3 million for the fiscal year 1996
compared to $11.2 million received from investing activities in 1995 and usage
of $1.2 million in 1994. On January 10, 1996, the Company acquired DMC for $31.3
million.  On April 24, 1996, the Company acquired the Measurement Systems
Business Unit of Loral Fairchild Corp.'s Loral Control Systems Division for $4.5
million.  With these acquisitions, the Company now supplies measurement and
control systems and services for flat rolled products to the steel industry.
Investments in property, plant and equipment totaled $10.4 million during fiscal
year 1996, up from $9.4 million in 1995 and from $6.7 million in 1994.  The
increase was the result of additional investment in equipment to support the
Company's growth. Investments in capitalized software increased by $2.8 million
from 1995 to approximately $4.7 million in 1996 due to additional product
development expenditures.

Cash generated in financing activities was $0.3 million in fiscal year 1996
compared to cash used of $81.0 million during 1995 and cash used of $4.1 million
in 1994.  During 1995, the Company paid $96.0 million to repurchase
approximately 20% of its own stock from Harnischfeger Industries.

                                       9
<PAGE>
 
The Company's current ratio was approximately 1.9 at fiscal year-end 1996 and at
fiscal year-end 1995.  The debt to capitalization ratio was 11% at year-end
1996 , the same as at year-end 1995.

As a result of the above activities, and excluding exchange rate fluctuations,
the Company's cash and cash equivalents decreased by $25.3 million from $62.9
million at year-end 1995 to $37.6 million at year-end 1996.

On January 27, 1997 the Company announced that it had entered into a definitive
agreement to merge with a wholly-owned subsidiary of Honeywell Inc. in an all-
cash transaction.  Honeywell Inc. has commenced an all-cash tender offer for all
outstanding shares of the Company's stock at a price of $35 per share.

                                       10
<PAGE>
 
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY  DATA

CONSOLIDATED STATEMENTS OF INCOME

Three years ended December 1, 1996
(Dollar amounts in thousands except per share data)
<TABLE>
<CAPTION>
 
                                                      1996        1995        1994
-----------------------------------------          ---------   ---------   ---------
<S>                                                 <C>         <C>         <C>
 
REVENUES
Systems                                             $287,968    $220,292    $156,294
Service and other                                    128,007     114,924     103,685
                                                    --------    --------    --------
   Total revenues                                    415,975     335,216     259,979
                                                    --------    --------    --------
 
 
OPERATING COSTS AND EXPENSES
Systems                                              174,227     130,650     100,077
Service and other                                     80,549      71,803      65,288
Product development                                   21,036      19,368      19,992
Selling and administrative                            85,580      76,708      63,441
Exit costs                                                 -           -       6,381
                                                    --------    --------    --------
   Total operating costs and expenses                361,392     298,529     255,179
                                                    --------    --------    --------
 
Earnings from operations                              54,583      36,687       4,800
                                                    --------    --------    --------
 
OTHER INCOME (EXPENSE)
Interest expense                                      (2,535)     (2,817)     (1,335)
Interest income and other, net                         3,940       6,958       5,687
                                                    --------    --------    --------
   Total other income, net                             1,405       4,141       4,352
                                                    --------    --------    --------
 
Income before income taxes and cumulative
 effect of accounting change                          55,988      40,828       9,152
Provision for income taxes                            19,035      13,882       3,569
                                                    --------    --------    --------
Income before cumulative effect of accounting
 change                                               36,953      26,946       5,583
Cumulative effect of accounting change                     -           -         524
                                                    --------    --------    --------
   Net income                                       $ 36,953    $ 26,946    $  6,107
                                                    ========    ========    ========
 
Net income per share:
Income before cumulative effect of accounting
 change                                                $2.25       $1.60    $    .31
Cumulative effect of accounting change                     -           -         .03
                                                    --------    --------    --------
Net income per share                                   $2.25       $1.60    $    .34
                                                    ========    ========    ========
 
Dividends per share                                     $.44        $.44    $    .44
                                                    ========    ========    ========
 
Average number of common and common equivalent
 shares (thousands)                                   16,444      16,887      18,189
                                                    ========    ========    ========
 
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

                                       11
<PAGE>
 
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

December 1, 1996 and December 3, 1995
(Dollar amounts in thousands except per share data)               1996        1995
                                                                --------    --------
<S>                                                             <C>         <C>
 
ASSETS
 
Current assets:
   Cash and cash equivalents                                    $ 37,607    $ 62,924
   Short-term investments                                            108       1,138
   Accounts receivable                                           111,475      76,702
   Inventories                                                    37,943      33,349
   Prepaid and other                                              14,583      13,574
                                                                --------    --------
     Total current assets                                        201,716     187,687
 
Contracts receivable                                              17,899      16,208
Service parts                                                     14,193      13,773
Property, plant and equipment, net                                50,525      49,752
Goodwill                                                          38,327       9,828
Other assets                                                      14,455       9,457
                                                                --------    --------
     Total assets                                               $337,115    $286,705
                                                                ========    ========
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
Current liabilities:
   Current portion of long-term debt                            $  3,447    $  4,458
   Accounts payable                                               10,572       8,004
   Accrued expenses                                               84,376      77,326
   Income taxes payable                                            8,074       8,590
                                                                --------    --------
     Total current liabilities                                   106,469      98,378
 
Long-term debt                                                    21,277      15,348
Deferred income taxes                                              5,140       6,934
                                                                --------    --------
     Total liabilities                                           132,886     120,660
                                                                --------    --------
 
 
Commitments and contingencies
Shareholders' equity:
   Preferred stock, $.01 par value;
    authorized: 10,000,000 shares;
    issued and outstanding: none
   Common stock, $.01 par value;
    authorized: 50,000,000 shares; outstanding:
    1996 - 18,904,962 shares, 1995 - 18,932,013 shares               189         189
   Additional capital                                             80,335      79,584
   Retained earnings                                             204,612     176,296
   Cumulative translation adjustments                             (2,023)     (1,939)
   Less:  Treasury stock at cost: 1996 - 2,790,533 shares,
    1995 - 3,218,568 shares                                      (78,884)    (88,085)
                                                                --------    --------
     Total shareholders' equity                                  204,229     166,045
                                                                --------    --------
     Total liabilities and shareholders' equity                 $337,115    $286,705
                                                                ========    ========
 
</TABLE>


The accompanying notes are an integral part of the consolidated financial
statements.

                                       12
<PAGE>
 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
   
                                                                                             Cumulative
                                                       Common    Additional     Retained     Translation     Treasury
                                                        Stock      Capital      Earnings     Adjustments      Stock        Total
                                                       -------   -----------   -----------   ------------   ----------   ----------
<S>                                                     <C>       <C>           <C>           <C>            <C>          <C>
 
Three years ended December 1, 1996 (Dollar amounts in
 thousands except per share data)
 
Balance November 28, 1993                               $190       $75,202      $167,211        $(5,707)   $ (25,032)   $ 211,864
 
Proceeds from treasury stock
  issued under employee
  stock purchase and stock
  option plans (303,164 shares)
  including related tax benefits                            -          (87)            -              -        7,375        7,288
Excess of cost of treasury shares
  issued over proceeds received                             -            -        (2,596)             -            -       (2,596)
Foreign currency translation                                -            -             -          2,406            -        2,406
Net income                                                  -            -         6,107              -            -        6,107
Dividends ($.44 per share)                                  -            -        (7,886)             -            -       (7,886)
                                                       ------   ----------      --------    -----------    ---------    ---------
Balance December 27, 1994                                 190       75,115       162,836         (3,301)     (17,657)     217,183
 
Proceeds from treasury stock
  issued under employee
  stock purchase and stock
  option plans (1,456,044 shares)
  including related tax benefits                           (1)       4,469             -              -       29,837       34,305
Excess of cost of treasury shares
  issued over proceeds received                             -            -        (6,487)             -            -       (6,487)
Foreign currency translation                                -            -             -          1,362            -        1,362
Net income                                                  -            -        26,946              -            -       26,946
Dividends ($.44 per share)                                  -            -        (6,999)             -            -       (6,999)
Treasury stock acquired (3,785,050
  shares)                                                   -            -             -              -     (100,265)    (100,265)
                                                       ------    ----------      --------    -----------    ---------    ---------
Balance December 3, 1995                                  189       79,584       176,296         (1,939)     (88,085)     166,045
 
Proceeds from treasury stock
  issued under employee
  stock purchase and stock
  option plans (428,035 shares)
  including related tax benefits                            -          751             -              -        9,201        9,952
Excess of cost of treasury shares
  issued over proceeds received                             -            -        (1,631)             -            -       (1,631)
Foreign currency translation                                -            -             -            (84)           -          (84)
Net income                                                  -            -        36,953              -            -       36,953
Dividends ($.44 per share)                                  -            -       ( 7,006)             -            -       (7,006)
                                                       ------    ----------      --------    -----------    ---------    ---------
Balance December 1, 1996                                 $189       $80,335      $204,612        $(2,023)   $ (78,884)   $ 204,229
                                                       ======    ==========      ========    ===========    =========    =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.

                                       13
<PAGE>
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

Three years ended December 1, 1996 (Dollar amounts in thousands)        1996         1995        1994
                                                                      ---------   ----------   ---------
<S>                                                                   <C>         <C>          <C>
 
CASH FLOWS FROM OPERATING ACTIVITIES
Net income                                                            $ 36,953    $  26,946    $  6,107
Non-cash items included in net income:
     Depreciation and amortization:
       Service parts                                                     3,522        1,835       1,032
       Property, plant and equipment                                     9,372        9,200       9,343
       Capitalized software and goodwill                                 3,647        4,539       4,921
     Deferred income taxes                                               1,681         (772)     (3,883)
     Translation loss                                                      253          392         133
     Inventory reserves                                                  1,358          674       2,216
     Exit costs                                                              -            -       4,662
Net decrease (increase) in:
     Accounts and contracts receivable                                 (30,721)       1,980      (8,795)
     Inventories and service parts                                          26      (12,360)       (374)
     Prepaid and other                                                    (685)        (593)      2,034
Net increase (decrease) in:
     Accounts payable and accrued expenses                              (5,371)      12,626      (4,289)
   Income taxes payable                                                   (201)       4,752      (2,901)
Other, net                                                               1,079          737         846
                                                                      --------    ---------    --------
Net cash provided by operating activities                               20,913       49,956      11,052
                                                                      --------    ---------    --------
 
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of held-to-maturity securities                                      -       (3,475)    (37,009)
Purchase of available-for-sale securities                                    -            -      (3,360)
Sale of available-for-sale securities                                        -       11,255      11,864
Maturities of held-to-maturity securities                                1,030       18,111      36,846
Acquisition of property, plant and equipment                           (10,369)      (9,434)     (6,716)
Business acquisitions, net of cash acquired                            (34,235)      (3,418)          -
Capitalized software                                                    (4,694)      (1,874)     (2,787)
                                                                      --------    ---------    --------
Net cash provided by (used in) investing activities                    (48,268)      11,165      (1,162)
                                                                      --------    ---------    --------
 
CASH FLOWS FROM FINANCING ACTIVITIES
Additions to short-term debt                                                 -            -       4,063
Payment of short-term debt                                                   -       (4,063)          -
Additions to long-term debt                                             66,438       60,095           -
Payment of long-term debt                                              (67,464)     (57,419)     (4,975)
Dividends                                                               (7,006)      (6,999)     (7,886)
Stock issued under employee stock purchase and
   stock option plans                                                    8,321       27,628       4,692
Payment for treasury stock                                                   -     (100,265)          -
                                                                      --------    ---------    --------
Net cash (used in) provided by financing activities                        289      (81,023)     (4,106)
                                                                      --------    ---------    --------
 
Effect of exchange rate fluctuations on cash and
     cash equivalents                                                    1,749          572         430
Net (decrease) increase in cash and cash equivalents                   (25,317)     (19,330)      6,214
Cash and cash equivalents at beginning of year                          62,924       82,254      76,040
                                                                      --------    ---------    --------
Cash and cash equivalents at end of year                              $ 37,607    $  62,924    $ 82,254
                                                                      ========    =========    ========
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
  Interest                                                            $  2,535    $   2,817    $  1,335
  Income taxes                                                        $ 15,280    $   5,514    $  8,167
Note exchanged for intangible assets                                  $      -    $     700    $      -
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

                                       14
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands unless otherwise noted)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

FISCAL YEAR - The Company uses a 52-53 week fiscal year.  References to 1996,
1995 and 1994 are for fiscal years ended December 1, 1996, December 3, 1995 and
November 27, 1994, respectively.  Fiscal year 1996 was a 52 week year, 1995 was
a 53 week year and 1994 was a 52 week year.

CONSOLIDATION - The consolidated financial statements include the accounts of
all subsidiaries after elimination of intercompany balances and transactions.

FOREIGN CURRENCY TRANSLATION - The functional currency of foreign sales and
service operations (except certain operations in hyper-inflationary countries)
is the local currency. For all other operations, the functional currency is the
U.S. dollar.  The effects of translating local functional currency financial
statements are included in shareholders' equity.  The effects of foreign
currency transactions and remeasuring the financial position and results of
operations into the functional currency are included in interest income and
other.

For operations in countries that are considered to have highly inflationary
economies, gains and losses from translation and transactions are determined
using a combination of current and historical rates and are included in net
income.

The Company enters into foreign currency forward contracts to hedge certain non-
U.S. dollar system orders and to reduce its overall exposure to the effects of
currency fluctuations related to the remeasurement of non-functional currency
net asset or liability positions.  Gains and losses on forward contracts, which
are not designated as hedges for accounting purposes, are included in interest
income and other.

REVENUE RECOGNITION - The Company generally recognizes revenue from system sales
at the time of shipment provided any remaining obligations are insignificant and
collection is probable. Revenue on certain software contracts are recognized on
a percentage-of-completion basis.  Service and other revenues are recognized as
the services are provided or ratably over the life of the contracts.

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

PRODUCT DEVELOPMENT EXPENSES - The Company is actively engaged in basic
technology and applied research and development programs which are designed to
develop new or improved products and process applications.  The cost of these
programs is charged to expense as incurred except for certain software
development costs which are capitalized as described in the "Capitalized
Software" policy below.

CAPITALIZED SOFTWARE -  Costs related to the conceptual formulation and design
of software products are expensed as product development. Costs incurred
subsequent to establishing the technological feasibility of software products
are capitalized.

Amortization of capitalized software costs, which begins when products are
available for general release to customers, is computed on a straight-line basis
over the expected product lives, generally estimated to be three years.

INCOME TAXES - The Company accounts for income taxes using the liability method,
which requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns.   The Company provides U.S. and foreign
income taxes on the portion of the accumulated earnings of the Company's foreign
subsidiaries which are intended to be remitted to the parent company within the
foreseeable future.

CASH AND CASH EQUIVALENTS -  Cash and cash equivalents generally consist of cash
and highly liquid short-term investments with original maturities of 90 days or
less.

SHORT-TERM INVESTMENTS - Short-term investments include investments held-to-
maturity and investments available-for-sale.  Investments held-to-maturity are
stated at amortized cost with original maturities between 3 and 12 months.
Investments that are considered available-for-sale are carried at market value.
Unrealized gains and losses are reported net of tax as a separate component of
shareholders' equity until realized.

                                       15
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollar amounts in thousands unless otherwise noted)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (CONTINUED)

INVENTORY VALUATION - Inventories are stated at the lower of standard cost
(which approximates actual cost determined on a first-in, first-out basis) or
market.  Inventory costs include raw materials, direct labor and manufacturing
overhead.

DEPRECIATION - Property, plant and equipment are depreciated on a straight-line
basis over estimated useful lives which range as follows:  buildings and
improvements - 3 to 40 years; machinery and equipment - 3 to 20 years.  Service
parts are depreciated on a 7 year declining balance basis.  When assets are sold
or retired, the cost and related accumulated depreciation are removed from the
accounts and the resulting gains or losses are included in income.

GOODWILL - Goodwill is amortized on a straight-line basis over periods up to 25
years.

NET INCOME PER SHARE - Net income per share is computed based on the weighted
average number of common shares outstanding during the year adjusted to reflect
the assumed exercise of outstanding employee stock options to the extent these
items had a dilutive effect on the computation.

RECLASSIFICATION -  The Company has reclassified the presentation of certain
prior year information to conform with the current year presentation format.
These changes had no effect on the financial condition or results of operations
as previously reported.

RECENT PRONOUNCEMENTS - During March 1995, the Financial Accounting Standards
Board issued Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," (SFAS No. 121), which
requires the review for impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.  In certain situations, an impairment loss would be recognized.
The Company has adopted SFAS No. 121.

During October 1995, the Financial Accounting Standards Board issued Statement
No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation."  This
standard, which establishes a fair value-based method of accounting for stock-
based compensation plans, also permits an election to continue following the
requirements of APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
with disclosures of pro forma net income and earnings per share under the new
method.  The Company is reviewing the alternatives under SFAS No. 123 but does
not expect there will be any effect on the financial condition and results of
operations of the Company.  Disclosure requirements of SFAS No. 123 will be
effective for the Company's fiscal year 1997.

During June 1996, the Financial Accounting Standards Board issued Statement No.
125 (SFAS No. 125), "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities."  This standard establishes consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings.  SFAS No. 125 will become effective for
transactions that the Company enters into after December 31, 1996.

ACCOUNTS RECEIVABLE

Accounts receivable consist of the following:

 
                                             1996        1995
                                           ---------   --------
Accounts receivable                        $106,333    $72,588
Contracts receivable, current portion         9,905      7,332
Less:
  Allowances for noncollection and
   system returns                            (4,763)    (3,218)
                                           --------    -------
                                           $111,475    $76,702
                                           ========    =======
 

                                       16
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollar amounts in thousands unless otherwise noted)

INVENTORIES

Inventories consist of the following:

 
                                           1996                 1995
                                      ---------------       --------------

Purchased parts and components                $19,010              $14,579
Work-in-process                                12,867               12,843
Finished subassemblies and systems              6,066                5,927
                                      ---------------       --------------
                                              $37,943              $33,349
 
CONTRACTS RECEIVABLE
 
Contracts receivable consist of the following:
 
                                            1996                   1995
                                      ---------------       --------------
Contracts receivable                          $32,839              $30,217
Less:
 Unearned financing income                     (3,988)              (4,212)
 Allowance for noncollection
  and system returns                           (1,047)              (2,465)
                                      ---------------       --------------
                                               27,804               23,540
Current portion                                (9,905)              (7,332)
                                      ---------------       --------------
                                              $17,899              $16,208
                                      ===============       ==============
 
The aggregate amount of payments receivable by the Company in fiscal years
subsequent to 1996 is set forth below:
 
           1997 - $10,861          2000 - $3,606
           1998 - $ 8,211          2001 - $2,320
           1999 - $ 4,714    Thereafter - $3,127


During 1996 and 1995, the Company entered into agreements to discount certain
contracts receivable with a financial institution.  As contracts receivable are
discounted, a sale is recorded and gains, the difference between proceeds
received and the net book value of the contracts receivable, are reflected in
interest income and other, net.  Proceeds from discounting contracts receivable
were $3.4 million in 1996 and $22.0 million in 1995.  A portion of discounting
gains is deferred to offset future administration costs and is amortized over
the remaining term of the discounted contracts receivable.

Under the terms of these agreements, the Company is contingently liable for
losses in the event of non-payment by the contract receivable obligor.  The
agreements provide for limited recourse of up to 20% or full recourse at 100% of
discounting proceeds, depending on the credit risk associated with specific
contracts receivable.  At December 1, 1996 the total amount of contracts subject
to recourse was $13.6 million and at December 3, 1995 was $13.1 million. Under
the agreements, the Company has granted a security interest to the financial
institution in the equipment as collateral.  The Company retains ownership of
the equipment and its residual value.

The discounting agreements contain certain termination events which allow the
financial institution to assume administrative control of the lease portfolio
and could prohibit further discounting.

                                       17
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollar amounts in thousands unless otherwise noted)


PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are recorded at cost and consist of the following:

 
                                              1996        1995
                                            ---------   ---------
Land                                        $  5,579    $  5,537
Buildings and improvements                    41,023      39,008
Machinery and equipment                       82,230      75,170
                                            --------    --------
                                             128,832     119,715
Less:
 Accumulated depreciation                    (78,307)    (69,963)
                                            --------    --------
                                            $ 50,525    $ 49,752
                                            ========    ========
 
GOODWILL
 
Goodwill consists of the following:
                                              1996        1995
                                            --------    --------
DMC                                         $ 25,889    $      -
Other                                         18,843      13,808
                                            --------    --------
                                              44,732      13,808
Less:
 Accumulated amortization                     (6,405)     (3,980)
                                            --------    --------
                                            $ 38,327    $  9,828
                                            ========    ========
 
OTHER ASSETS
 
Other assets consist of the following:
 
                                              1996         1995
                                           ---------    --------
Capitalized software                        $  8,152    $  4,681
Other                                          6,303       4,776
                                            --------    --------
                                            $ 14,455    $  9,457
                                            ========    ========

ACQUISITION

On January 10, 1996, the Company acquired Data Measurement Corporation (DMC) for
$31.3 million in cash, net of cash acquired.  DMC, located in Gaithersburg,
Maryland, is a leading manufacturer of measurement systems for the steel
industry.  The acquisition was accounted for using the purchase method.
Accordingly, the cost of the acquisition was allocated to assets acquired and
liabilities assumed based on their estimated fair values.  The net assets and
results of operations of DMC are included in the consolidated financial
statements from the date of acquisition.  The excess of the purchase price over
the estimated fair value of the net assets acquired was approximately $25.9
million, which has been substantially accounted for as goodwill and is being
amortized over 25 years using the straight line method.

The following unaudited pro forma income statement information for the fiscal
year 1995 presents a summary of the consolidated results of operations of the
Company and DMC as though the acquisition of DMC had occurred on November 28,
1994, and includes adjustments to conform revenue recognition and service parts
amortization policies, to adjust goodwill amortization expense, to increase
expense as a result of the additional borrowing required to finance the
transaction, to reduce interest income reflecting the sale of contracts
receivable to fund the acquisition, and to record income tax benefits for these
adjusting transactions.  No pro forma figures are provided for fiscal year 1996
as there would be no significant difference from the results reported in the
Consolidated Statement of Income for 1996.

                                       18
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollar amounts in thousands unless otherwise noted)

 
 
                                             Fiscal year ended
(in thousands, except per share amount)      December 3, 1995
                                             ----------------
                                                  (pro forma)
 
Total revenues                                       $365,438
Net income                                           $ 25,075
Net income per share                                 $   1.48


The pro forma financial information is presented for informational purposes only
and does not necessarily indicate the operating results that would have occurred
had the acquisition of DMC been consummated as of November 28, 1994, nor does it
purport to predict future operating results.
 
ACCRUED EXPENSES

Accrued expenses consist of the following:

 
                                        1996      1995
                                       -------   -------

Accrued payroll and related items      $32,686   $29,272
Accrued labor service                   13,711    11,538
Customer deposits                       15,164    17,767
Other                                   22,815    18,749
                                       -------   -------
                                       $84,376   $77,326
                                       =======   =======

FINANCIAL INSTRUMENTS

On December 1, 1996, the Company had two credit agreements that provide for
unsecured borrowings up to $95 million.  These agreements include a $20 million
revolving credit agreement that provides for variable interest rate borrowings
based on the London Interbank Offer Rate (LIBOR) and a $75 million multi-
currency credit agreement with a group of banks providing borrowings at variable
interest rates including a base rate borrowing, an offshore rate borrowing and
local currency rate borrowing.  The agreements expire July 1997 and February
1998, respectively.  There was $78 million available in connection with these
agreements at December 1, 1996, of which $17.6 million was committed to letters
of credit.

The Company also has a 5.35% five-year unsecured term loan agreement with a
bank.  Interest is payable quarterly, with principal payable in equal quarterly
installments of $1.0 million through June 1998.

These agreements contain certain covenants regarding working capital,
indebtedness and tangible net worth.  The Company was in compliance with all
covenants at December 1, 1996.

 
Debt consists of the following:
                                        1996       1995
                                      --------   --------
Bank credit agreements                $17,378    $ 6,907
Term loan                               6,000     11,000
Other borrowings                        1,346      1,899
                                      -------    -------
                                       24,724     19,806
Less amounts due within one year       (3,447)    (4,458)
                                      -------    -------
                                      $21,277    $15,348
                                      =======    =======


Based on the borrowing rates currently available to the Company for bank loans
with similar terms and average maturities, the difference between the carrying
amount and fair value of the loans is immaterial.

                                       19
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollar amounts in thousands unless otherwise noted)

The aggregate future principal payments of long-term debt are as follows:

 

                  1997 - $ 3,447         2000 -   $100
                  1998 - $20,841         2001 -   $100
                  1999 - $   136   Thereafter -   $100


At December 1, 1996, the Company had various foreign exchange forward contracts
maturing during 1997.  For each closed position, a sale contract of a particular
currency was matched with a purchase contract for the same currency at the same
amount, counterparty and settlement date.  Open positions were valued at fair
value, using estimated foreign exchange rates as of December 1, 1996.  The
foreign currency positions, both open and closed, as of December 1, 1996, by
major currency are:

 
Currency                  Buy Contracts   Sell Contracts
                          at Fair Value   at Fair Value

Japanese Yen              $           -          $13,956
Austrian Schilling                  467            8,982
Canadian Dollar                   7,275            4,459
German Deutsche Mark                976            4,263
French Franc                        371            6,145
All other currencies              4,099           12,707
                                -------          -------
                                $13,188          $50,512
                                =======          =======


Management believes that these forward contracts should not subject the Company
to undue risk due to foreign exchange movements because gains and losses on
these contracts should offset losses and gains on the assets, liabilities and
transactions being hedged.

COMMITMENTS AND CONTINGENCIES

The Company leases various facilities and equipment under noncancelable lease
agreements. Rent expense under all operating leases was approximately $6.1
million, $4.9 million and $4.7 million in 1996, 1995 and 1994, respectively.
Future minimum lease payments under these noncancelable operating leases as of
December 1, 1996 are approximately $6.1 million, $4.9 million, $3.0 million,
$1.6 million and $1.6 million for fiscal years 1997, 1998, 1999, 2000 and 2001,
respectively, and approximately $1.7 million in total for years following 2001.

At December 1, 1996, the Company was contingently liable for approximately $17.6
million relating principally to letters of credit issued to support collections.

The Company is subject to legal proceedings and claims that arise in the normal
course of its business.  In the opinion of management, these proceedings will
not have a material adverse effect on the financial position and results of
operations of the Company.

EXIT COSTS

In the fourth quarter of 1994, the Company recorded a $6.4 million charge for
exit costs relating to a restructuring plan.  This charge included $5.1 million
for employee termination costs, which was fully paid out by the end of fiscal
year 1996.  The charge also included $1.3 million to consolidate certain long-
term leasehold facilities of which $0.4 million was used by the end of fiscal
year 1996.


INTEREST INCOME AND OTHER

Interest income and other consists of the following:

 
                                     1996      1995       1994
                                    -------   -------   --------

Interest income                     $4,193    $7,680    $ 7,040
Loss on short-term investments           -      (330)    (1,220)
Foreign exchange loss                 (253)     (392)      (133)
                                    ------    ------    -------
                                    $3,940    $6,958     $5,687
                                   =======    ======     ======
 

                                       20
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollar amounts in thousands unless otherwise noted)

STOCK OPTION AND STOCK PURCHASE PLANS

Under the Company's Stock Option Plan, 7,110,240 shares of common stock have
been reserved for issuance to officers and key employees.

Options may be granted at prices not lower than the fair market value of the
Company's common stock at the date of grant.  Options generally become
exercisable in four equal annual installments commencing one year from the date
of grant.  Options generally expire, if not exercised, within ten years from the
date of grant.  The Stock Option Plan includes an automatic option grant program
for the Company's non-employee directors.  Such options expire 10 years from the
date of grant.

A summary of transactions relating to options during fiscal years 1994, 1995 and
1996 is set forth below:

<TABLE>
<CAPTION>
 
Options Outstanding
-------------------
<S>                                                    <C>          <C>             <C>
(Amounts in thousands except per share data)
                                                        Shares      Price Per Share   Amount
                                                        ---------   ---------------  --------
 
     November 28, 1993                                    2,660.0    $ 5.63-$31.13   $ 49,157
     Granted                                                622.0     17.88- 21.88     11,705
     Terminated                                             (72.6)    15.63- 31.13     (1,483)
     Exercised                                             (233.7)     7.02- 21.06     (3,926)
                                                         --------    -------------   --------
 
     November 27, 1994                                    2,975.7      5.63- 29.00     55,453
     Granted                                                961.7     25.63- 34.50     21,186
     Terminated                                            (122.0)    15.63- 23.63     (2,603)
     Exercised                                           (1,388.8)     5.63- 23.63    (24,509)
                                                         --------    -------------   --------
 
     December 3, 1995                                     2,426.6      5.63- 34.50     49,527
     Granted                                                891.4     26.13- 28.25     24,934
     Terminated                                             (71.1)    15.63- 34.50     (1,671)
     Exercised                                             (352.8)    23.88- 30.75     (6,083)
                                                         --------    -------------   --------
     December 1, 1996                                     2,894.1    $ 5.63-$34.50   $ 66,707
                                                         ========    =============   ========
</TABLE>

At year-end 1996 and 1995, options to purchase 954,953 shares and 702,234
shares, respectively, were exercisable at prices ranging from $5.63 to $34.50
for both years.  Shares available for option grants at year-end 1996 and 1995
were 2,197,759 and 1,018,074, respectively.

The Company has an Employee Stock Purchase Plan which covers substantially all
employees of the parent company and certain subsidiaries.  Common stock
purchases are paid through periodic payroll deductions of up to 10% of eligible
compensation.  The participant's purchase price is 85% of the lower of the
closing market price on the first trading day or the last trading day of the
quarter in which the stock is purchased by the employee.  The Company has issued
1,113,485 shares of its stock (including 557,132 treasury shares) under this
plan as of December 1, 1996.

The Company has approximately 112,000 shares available for future issuance under
the Employee Stock Purchase Plan.  These shares may be issued from treasury
shares or authorized but unissued common stock.

EMPLOYEE BENEFIT PLANS

The Company has a profit sharing plan in which all eligible U.S. employees
participate.  The Company makes contributions to profit sharing funds based upon
a percentage of consolidated pretax income as defined in the Plan.  In addition,
the Company matches employees pretax contributions to the Plan.

Certain foreign employees are eligible to participate in similar profit sharing
programs or local pension plans.  With respect to these plans, the pension
benefit obligations and plan assets were not material.

The Company contributions to all these plans totaled $6.6 million, $4.8 million
and $3.0 million for 1996, 1995 and 1994, respectively.

                                       21
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollar amounts in thousands unless otherwise noted)


INCOME TAXES

The Company adopted SFAS Statement No. 109, "Accounting for Income Taxes," as of
November 29, 1993, and the cumulative effect of this change in accounting for
income taxes was to increase 1994 net income by $0.5 million.  Prior years'
financial statements were not restated.

Total income tax expense was allocated as follows:
<TABLE>
<CAPTION>
                                                          1996       1995       1994
                                                        --------   --------   --------
<S>                                                     <C>        <C>        <C>
Income from continuing operations                       $19,035    $13,882    $ 3,569
Goodwill, for initial recognition of acquired
 tax benefits                                                 -          -       (829)
Shareholders' equity, for compensation expense
 for tax purposes in excess of amounts recognized
 for financial reporting purposes                         (834)     (4,346)      (286)
                                                        -------    -------    -------
                                                        $18,201    $ 9,536    $ 2,454
                                                        =======    =======    =======
 
</TABLE> 

The provision for income taxes before cumulative effect of the accounting change
was as follows: 
<TABLE> 
<CAPTION> 
                                        1996       1995        1994
                                       -------    -------     -------
<S>                                    <C>       <C>        <C> 
Current income taxes:        
 United States                         $ 4,073    $ 5,251    $   753
 Foreign                                12,293      8,493      6,265
 State                                   1,184        679        434
                                       -------    -------    -------
                                        17,550     14,423      7,452
                                       -------    -------    -------
Deferred income taxes:       
 United States                             425      2,215     (2,682)
 Foreign                                 1,060     (2,756)    (1,201)
                                       -------    -------    -------
                                         1,485       (541)    (3,883)
                                       -------    -------    -------
Provision for income taxes             $19,035    $13,882    $ 3,569
                                       =======    =======    =======
</TABLE>

The foreign provision for income taxes is based on foreign pretax earnings of
approximately $35.8 million, $30.5 million, and $15.5 million in 1996, 1995 and
1994, respectively.

The Company has not provided for United States income taxes on the cumulative
earnings of certain foreign subsidiaries that are considered invested
indefinitely outside the United States in the amount of $63.5 million at
December 1, 1996.

At December 1, 1996, the Company has a capital loss carryforward of $1.7 million
which expires in 2000. The Company also has in various tax jurisdictions net
operating loss carryforwards of approximately $6.3 million and tax credit
carryforwards of approximately $0.8 million at current exchange rates.
Approximately $1.2 million of the net operating loss carryforwards and all the
tax credit carryforwards will expire in varying amounts between 1997 and 2003. A
valuation allowance has been provided for a portion of the deferred tax assets
related to these carryforwards.
 
The principal items accounting for the difference between income taxes computed
at the United States statutory rate and the provision for income taxes are as
follows:
<TABLE>
<CAPTION>
                                                    1996       1995      1994                              
                                                  --------   --------   -------                             
<S>                                               <C>        <C>        <C>                                
United States statutory tax                       $19,596    $14,289    $3,112                             
Effect of:                                                                                                 
 Foreign sales corporation                           (624)      (259)     (354)                             
 Current and prior earnings of foreign                                                                     
  operations taxed at differing rates                (400)     5,957       396                             
 State income taxes                                   769        530       288                             
 Valuation allowance                                 (576)    (7,369)      322                             
 Other items                                          270        734      (195)                             
                                                  -------    -------    ------                             
Provision for income taxes                        $19,035    $13,882    $3,569                             
                                                  =======    =======    ======                              
</TABLE> 

                                       22
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollar amounts in thousands unless otherwise noted)
 
The components of deferred tax assets and liabilities are as follows:

<TABLE> 
<CAPTION> 
 
                                                                                 1996       1995
                                                                               -------    -------
<S>                                                                            <C>        <C> 
Deferred income tax assets:
   Inventory and revenue-related reserves                                      $ 7,124    $ 5,500
   Accrued expenses                                                              8,135      5,939
   Net operating loss and tax credit carryforwards                               3,210      7,784
   Other                                                                           720      1,437
                                                                               -------    -------
Gross deferred tax assets                                                       19,189     20,660
                                                                               -------    -------
 
Deferred income tax liabilities:
   Financial leases                                                              4,583      3,639
   Capitalized software                                                          2,853      2,303
   Depreciation                                                                    815        987
   Undistributed earnings of foreign subsidiaries                                2,425      7,880
   Other                                                                         1,628      1,203
                                                                               -------    -------
Gross deferred tax liabilities                                                  12,304     16,012
                                                                               -------    -------
Valuation allowance for deferred tax assets                                       (649)    (1,225)
                                                                               -------    -------
Net deferred tax assets                                                        $ 6,236    $ 3,423
                                                                               =======    =======
 
The net asset is included on the Balance Sheet in the following captions:
 
                                                                                  1996       1995
                                                                               -------    -------
   Prepaid and other                                                           $11,376    $10,357
   Deferred income taxes                                                        (5,140)    (6,934)
                                                                               -------    -------
                                                                               $ 6,236    $ 3,423
                                                                               =======    =======
</TABLE>

The net change in the total valuation allowance for the year ended December 1,
1996, includes a reduction of approximately $0.6 million in the valuation
allowance established at the beginning of 1994 for certain net operating loss
carryforwards and deferred tax assets  which, due to a change in circumstances,
were either utilized during 1996 or are expected to be utilized.


SUBSEQUENT EVENT

On January 27, 1997 the Company announced that it had entered into a definitive
agreement to merge with a wholly-owned subsidiary of Honeywell Inc. in an all-
cash transaction.  Honeywell Inc. has commenced an all-cash tender offer for all
outstanding shares of the Company's stock at a price of $35 per share.

                                       23
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollar amounts in thousands unless otherwise noted)

BUSINESS SEGMENTS

The Company operates in one principal industry segment: the design, development,
manufacture, sales and service of computer-integrated manufacturing systems.
The Company sells these products to the paper, plastics, metals, rubber and
chemical industries.  Approximately 75% of the Company's system revenue is from
the paper industry in 1996, and approximately 85% in 1995 and 1994.

No single customer accounted for 10% or more of revenues during 1996, 1995 or
1994.

The Company's products are principally distributed and serviced through its own
marketing and service organizations.  Operations are conducted worldwide and are
grouped into three geographic areas:  United States, Europe, and Other
International (primarily Canada, Asia/Pacific and the Latin American countries).

The following table summarizes the geographic operations of the Company:

 
(Dollar amounts in millions)                1996      1995      1994
                                           -------   -------   -------

Revenues from unaffiliated customers:
    United States                          $158.9    $136.4    $112.8
    Europe                                  126.8     104.8      77.7
    Other International                     130.3      94.0      69.5
                                           ------    ------    ------
      Consolidated                         $416.0    $335.2    $260.0
                                           ======    ======    ======
 
Transfers between geographic areas:
    United States                          $ 66.9    $ 52.7    $ 41.5
    Europe                                    7.1       6.7       5.2
    Other International                      34.0      30.2      20.2
                                           ------    ------    ------
      Consolidated                         $108.0    $ 89.6    $ 66.9
                                           ======    ======    ======
 
Earnings (loss) from operations:
    United States                          $ 31.1    $ 19.2    $  3.3
    Europe                                   15.8      13.5       5.5
    Other International                      14.8      10.2       2.3
    Corporate                                (7.1)     (6.2)     (6.3)
                                           ------    ------    ------
      Consolidated                         $ 54.6    $ 36.7    $  4.8
                                           ======    ======    ======
 
Identifiable assets:
    United States                          $153.0    $111.1    $120.6
    Europe                                   76.2      73.7      60.6
    Other International                      79.9      53.3      54.5
    Corporate                                28.0      48.6      84.1
                                           ------    ------    ------
      Consolidated                         $337.1    $286.7    $319.8
                                           ======    ======    ======

Internal selling prices are designed to allocate manufacturing profits to
manufacturing entities and sales and service profits to sales and service
entities.

The United States revenues from unaffiliated overseas customers in 1996 were
$15.3 million.  In 1995 and 1994 they were not significant.

Corporate identifiable assets include short-term cash investments.

                                       24
<PAGE>
 
REPORT OF INDEPENDENT ACCOUNTANTS TO THE SHAREHOLDERS, MEASUREX CORPORATION

We have audited the accompanying consolidated balance sheets of Measurex
Corporation as of December 1, 1996 and December 3, 1995, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three fiscal years in the period ended December 1, 1996.  These financial
statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the aforementioned financial statements present fairly, in all
material respects, the consolidated financial position of Measurex Corporation
as of December 1, 1996 and December 3, 1995, and the consolidated results of its
operations and its cash flows for each of the three fiscal years in the period
ended December 1, 1996, in conformity with generally accepted accounting
principles.


/S/  COOPERS & LYBRAND LLP


San Jose, California
December 17, 1996, except for the note titled "Subsequent Event", as to which
the date is January 27, 1997.

                                       25
<PAGE>
 
SUPPLEMENTAL FINANCIAL DATA

INTERIM FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
 
                                                1996 Quarter Ended
(Dollar amounts in thousands      --------------------------------------------
except per share data)            March 3        June 2     Sept. 1     Dec. 1
                                  -------        ------     -------   --------
<S>                               <C>      <C>             <C>       <C> 
Revenues                          $90,920       $105,291   $99,534   $120,230
Gross margin                       36,224         42,148    39,841     42,986
Income before income taxes         11,926         14,932    13,640     15,490
Net income                          7,871          9,855     9,001     10,226
Net income per share                  .48            .60       .55        .62
Dividends per share                   .11            .11       .11        .11
</TABLE> 
 
<TABLE> 
<CAPTION> 
 
                                           1995 Quarter Ended
(Dollar amounts in thousands      ---------------------------------------
except per share data)            March 5     June 4   Sept. 3    Dec. 3
                                  -------   --------   -------   --------
<S>                               <C>      <C>             <C>       <C> 
Revenues                          $73,435   $ 76,987   $91,643   $ 93,151
Gross margin                       26,191     30,183    36,559     39,830
Income before income taxes          5,195      7,992    12,859     14,782
Net income                          3,481      5,224     8,485      9,756
Net income per share                  .20        .30       .51        .59
Dividends per share                   .11        .11       .11        .11
</TABLE>

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

The Company's common shares are listed on the New York and Pacific Stock
Exchanges.

As of December 1, 1996, there were 1,260 shareholders of record.  Dividends of
$.44 per share were paid in 1996 and 1995.

<TABLE>
<CAPTION>
 
                            1996 Price           1995 Price
                     -----------------------   -----------------
                        High         Low        High       Low
                     ----------   ----------   -------   -------
<S>                  <C>          <C>          <C>       <C>
    1st Quarter         $30 3/4      $25 5/8   $24 1/4   $20 3/8
    2nd Quarter          29 5/8       25 3/4    27 3/4    22 3/8
    3rd Quarter          29 3/4       25 7/8    33 1/8    25 1/2
    4th Quarter          27 5/8       23 3/8    35 3/4    27 1/8
</TABLE>

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

Not applicable.

                                       26
<PAGE>
 
                                   PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information concerning the directors of the Company  may be added by amendment.
The following table and notes thereto identify and set forth information about
the Company's eight executive officers as of January 31, 1997 (ages are as of
December 1, 1996):
 
 
Name                      Positions with the Company
-----                     --------------------------

David A. Bossen (1)       Chairman and Chief Executive Officer

John G. Gingerich (2)     President and Chief Operating Officer

Robert McAdams, Jr.(3)    Executive Vice President and Chief Financial Officer

William J. Weyand (4)     Executive Vice President, Worldwide Sales and Service

Glenn R. Wienkoop (5)     Executive Vice President and Division President,
                          Industrial Systems Division

Lance M. Lissner (6)      Vice President, Corporate Planning and Development

Robert H. Bucher (7)      Senior Vice President, Paper Control Systems
                          Division

Charles Van Orden (8)     Vice President, General Counsel and Secretary

(1)  Mr. Bossen, age 69, has been Chairman and Chief Executive Officer and
     Director since December 1993; President and Chief Executive Officer and
     Director from 1968 to December 1993.

(2)  Mr. Gingerich, age 60, has been President and Chief Operating Officer and
     Director since December 1993; Executive Vice President, Worldwide Sales and
     Service from 1992 to December 1993; President, Americas and Pacific  from
     1991 to 1992.

(3)  Mr. McAdams, age 57, has been Executive Vice President and Chief Financial
     Officer since April 1995; Senior Vice President and Chief Financial Officer
     from September 1994 to April 1995; Senior Vice President Operations and
     Information Services from 1992 to September 1994; Senior Vice President-
     Finance and Administration and Chief Financial Officer from 1985 to 1992.

(4)  Mr. Weyand, age 52, has been Executive Vice President, Worldwide Sales and
     Service since April 1995; Senior Vice President of Worldwide Sales and
     Service from December 1994 to April 1995; President, North and South
     America from February to December 1994; Senior Vice President, U.S. and
     Canada Sales and Service from 1993 to February 1994; Senior Vice President,
     U.S. Sales and Service from 1991 to 1993.

(5)  Mr. Wienkoop, age 49, has been Executive Vice President, President
     Industrial Systems Division since September 1994; Executive Vice President,
     Engineering and Marketing from 1991 to September 1994.

(6)  Mr. Lissner, age 46, has been Vice President, Corporate Planning and
     Development since 1991.

(7)  Mr. Bucher, age 41, has been Senior Vice President, Paper Control Systems
     Division since October 1996; Vice President, General Manager, Measurex
     Devron, Inc. from December 1992 to October 1996; Vice President, Marketing
     from 1991 to December 1992.

(8)  Mr. Van Orden, age 42, has been Vice President, General Counsel and
     Secretary since April 1995; General Counsel and Secretary from 1988 to
     April 1995.

Officers are elected annually but may be removed at any time at the discretion
of the Board of Directors.  There are no family relationships among any of the
above officers.

                                       27
<PAGE>
 
ITEM 11.  EXECUTIVE COMPENSATION

Information may be added by amendment.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information may be added by amendment.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information may be added by amendment.

                                       28
<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>
 
     Consolidated Statements of Income..............................         11
     Consolidated Balance Sheets....................................         12
     Consolidated Statements of Shareholders' Equity................         13
     Consolidated Statements of Cash Flows..........................         14
     Notes to Consolidated Financial Statements.....................      15-24
     Report of Independent Accountants..............................         25
</TABLE>

2.   FINANCIAL STATEMENT SCHEDULES

     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.

                                                                            Page
                                                                            ----

     Report of Independent Accountants..............................         32
     Schedules for the Fiscal Years 1996, 1995 and 1994:      
       II - Valuation Reserves......................................         33

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

2.1    Copy of the Amended and Restated Agreement and Plan of Reorganization 
       dated as of September 16, 1995 among Measurex, Data Measurement
       Corporation and Mx Acquisition Company (incorporated by reference from
       Exhibit 2.1 on Form 8-K reporting on event occurring on January 10,
       1996).

3.1    Certificate of Incorporation of Registrant (incorporated by reference
       from Exhibit 3.1 on page 30 of Report on Form 10-K for the fiscal year
       ended November 29, 1987).

3.2    Bylaws of Registrant, restated and amended as of April 19, 1994
       (incorporated by reference from Exhibit 3.2 on page 21 of Report on Form
       10-K for the fiscal year ended November 27, 1994).

4.1    Copy of Registrant's Rights Agreement dated as of December 14, 1988, as
       amended by Amendment No. 1 thereto dated May 30, 1990, (incorporated by
       reference from Exhibit 4.1 on page 47 of Report on Form 10-K for the
       fiscal year ended December 2, 1990).

10.1   Copy of Registrant's Employee's Stock Option Plan (1993) (incorporated by
       reference from Form S-8 Registration Statement No. 33-65762 filed with
       the SEC on July 8, 1993).

10.2   Copy of Registrant's Management Incentive Plan (incorporated by reference
       from Exhibit 10.2 on Form 10-K for the fiscal year ended December 3,
       1995).

10.3   Copy of Registrant's Employee Stock Purchase Plan, amended and restated
       effective December 14, 1993 (incorporated by reference from Exhibit 10.4
       on page 21 of Report on Form 10-K for fiscal year ended November 27,
       1994).

                                       29
<PAGE>
 
10.4   Copy of Registrant's Affiliation Agreement dated as of May 30, 1990,
       between Measurex Corporation and Harnischfeger Industries, Inc.
       (incorporated by reference from Exhibit 4.1 to Form 8-K filed with the
       SEC on June 12, 1990).

10.5   Copy of Registrant's Repurchase Agreement dated December 29, 1994 (which
       contains certain amendments to the Affiliation Agreement referred to in
       Exhibit 10.4) (incorporated by reference from Exhibit 10.6 on page 21 of
       Report of Form 10-K for fiscal year ended November 27, 1994).

10.6   Copy of Registrant's Joint Marketing, Sales and Development Agreement
       dated May 30, 1990 between Measurex Corporation and Beloit Corporation
       (incorporated by reference from Exhibit 10.1 to Form 8K filed with the
       SEC on June 12, 1990).

10.7   Copy of Registrant's Stock Option Agreement (Special Acceleration Grant)
       dated as of December 14, 1993 (incorporated by reference from Exhibit
       10.10 on page 45 of Report on Form 10-K for the fiscal year ended
       November 25, 1993).

10.8   Copy of Stock Repurchase Agreement and Amendment to Joint Marketing Sales
       and Development Agreement dated June 22, 1995 among Measurex,
       Harnischfeger, HIHC and Beloit Corporation (incorporated by reference
       from Exhibit 2.1 on Form 8-K filed with the SEC on July 6, 1995).

10.9   Copy of Letter Agreement for a special severance benefit program for key
       executives dated May 15, 1995 (incorporated by reference from Exhibit
       10.20 on Form 8-K filed with the SEC on October 10, 1995).

10.10  Copy of Credit Agreement dated as of February 10, 1995 among Measurex
       Corporation, Bank of America National Trust and Savings Association, as
       Agent, and the other financial institutions party hereto (incorporated by
       reference from Exhibit 10.16 on page 22 of Report on Form 10-K for fiscal
       year ended November 27, 1994).

10.11  Copy of First Amendment dated June 21, 1995 to Credit Agreement referred
       to on Exhibit 10.10 (incorporated by reference from Exhibit 10.18 on Form
       10-Q for period ended June 4, 1995).

10.12  Copy of Second Amendment dated October 31, 1995 to Credit Agreement
       referred to on Exhibit 10.10 (incorporated by reference from Exhibit
       10.12 on Form 10-K for the fiscal year ended December 3, 1995).

11.0   Computation of Net Income per Share of Common Stock of the Registrant.

21.0   Subsidiaries of Registrant.

23.0   Consent of Independent Accountants.

24.0   Power of Attorney (included on page 31).

27.0   Financial Data Schedule

Other exhibits have not been filed because conditions requiring filing do not
exist.

 (b) REPORTS ON FORM 8-K.

     None.

                                       30
<PAGE>
 
                                   SIGNATURES

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

                                      MEASUREX CORPORATION
                                      (Registrant)

Date: February 21, 1997               By    /S/ DAVID A. BOSSEN
                                          ---------------------------
                                          David A. Bossen
                                          Chairman, Chief Executive Officer

Know all persons by these presents, that each person whose signature appears
below constitutes and appoints David A. Bossen and Robert McAdams, Jr., jointly
and severally, his attorneys-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any amendments to this Report on Form 10-
K, and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.

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

        Signature                                 Title                       Date
------------------------------       --------------------------------   ------------------
<S>                                  <C>                                <C>

  /S/ DAVID A. BOSSEN                Chairman, Chief Executive          February  21, 1997
------------------------------        Officer and Director
     (David A. Bossen)                (Principal Executive Officer)

  /S/ JOHN C. GINGERICH              President, Chief Operating         February  21, 1997
------------------------------        Officer and Director
     (John C. Gingerich)

  /S/ ROBERT MCADAMS, JR.            Executive Vice President           February  21, 1997
------------------------------        (Principal Financial and
     (Robert McAdams, Jr.)            Accounting Officer)


  /S/ PAUL BANCROFT, III             Director                           February  21, 1997
------------------------------
     (Paul Bancroft, III)

  /S/ DWIGHT C. BAUM                 Director                           February  21, 1997
------------------------------
     (Dwight C. Baum)

  /S/ JEFFERY T. GRADE               Director                           February  21, 1997
------------------------------
     (Jeffery T. Grade)

  /S/ ORION L. HOCH                  Director                           February  21, 1997
------------------------------
     (Orion L. Hoch)

  /S/ JOHN W. LARSON                 Director                           February  21, 1997
------------------------------
     (John W. Larson)

  /S/ J.W. MCKITTRICK                Director                           February  21, 1997
------------------------------
     (John W. McKittrick)

  /S/ GRAHAM TYSON                   Director                           February  21, 1997
------------------------------
     (Graham Tyson)
</TABLE>

                                       31
<PAGE>
 
REPORT OF INDEPENDENT ACCOUNTANTS

TO THE SHAREHOLDERS, MEASUREX CORPORATION


Our report on the consolidated financial statements of Measurex Corporation and
subsidiaries is included on page 25 of this Form 10-K.  In connection with our
audit of such financial statements, we have also audited the related financial
statement schedules listed in the index on page 29 of this Form 10-K.

In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.



/S/  COOPERS & LYBRAND LLP



San Jose, California
December 17, 1996, except for the note titled "Subsequent Event", as to which
the date is January 27, 1997.

                                       32
<PAGE>
 
                                                                     SCHEDULE II

                             MEASUREX CORPORATION
                            VALUATION RESERVES (1)
                       Fiscal years 1996, 1995 and 1994
                            (Amounts in thousands)

<TABLE>
<CAPTION>
 
 
                        Balance at   Additions    Write-offs                  Balance
                        Beginning    Charged to   and                         at End
Description             of  Year     Expenses     Deductions      Other       of Year
---------------------   ----------   ----------   ------------   ----------   ----------
<S>                     <C>          <C>          <C>            <C>          <C>
 
   1996
---------------------
Allowance for
non-collection
and system returns          $5,683       $2,007   $(2,202) (2)  $   322 (7)  $5,810 (6)
                            ======       ======   =======       =======      ======
 
Inventory reserves          $2,602       $1,358   $(2,820) (3)  $ 1,768 (7)  $2,908
                            ======       ======   =======       =======      ======
 
     1995
---------------------
Allowance for
non-collection
and system returns          $8,642       $  544   $(2,248) (2)  $(1,255) (4) $5,683 (6)
                            ======       ======   =======       =======      ====== 
           
Inventory reserves          $3,000       $  674   $(1,072) (3)        -      $2,602
                            ======       ======   =======       =======      ======


     1994
--------------------
Allowance for
non-collection
and system returns          $7,147       $1,659   $  (164) (2)        -      $8,642
                            ======       ======   =======       =======      ======
           

Inventory reserves          $8,896       $1,343   $(3,660) (3)  $(3,579) (5) $3,000
                            ======       ======   =======       =======      ======
</TABLE> 

NOTES:

(1) See the Notes to Consolidated Financial Statements.
(2) Deductions for returns of systems or parts of systems and for write-off of
    non-collectible amounts.
(3) Deductions for write-offs of obsolete and scrapped parts and translation
    adjustments.
(4) Represents the reclassification to accrued liabilities of reserves relating
    to certain leases sold with recourse to a financial institution.
(5) Represents the reclassification of reserves from current inventories to
    service parts.
(6) Includes allowance on contracts receivable.
(7) Relates to DMC acquisition.