<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                           Washington, D. C.  20549
                       ---------------------------------

 
                                   FORM 10-Q


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


For the quarter ended December 31, 1996         Commission File Number  0-26858
 
                                  MIZAR, INC.
            (Exact name of registrant as specified in its charter)

   
         Delaware                                               41-1425902
(State or other jurisdiction of                               (IRS Employer
incorporation or organization)                              Identification No.)
                                                             



    2410 Luna Road                                                     75006
    Carrollton, Texas                                               (Zip Code)
(Address of  principal executive offices)


                                (972) 277-4600
                        (Registrant's telephone number)


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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

                                                                Outstanding at
                  Class                                        February 5,1997
                  -----                                        ---------------


      Common Stock, par value $0.01 per share                     4,949,754
<PAGE>
 
                                  MIZAR, INC.
                                        
                                   Form 10-Q
                    For the Quarter Ended December 31, 1996

                                     INDEX

                                                                  Page No.
                                                                  --------
PART I.     FINANCIAL  INFORMATION
 
Item 1.         Financial Statements
              
                Balance Sheets
                December 31, 1996 and June 30, 1996                    3
                                                                     
                Statements of Income                                 
                for the three months and the six months ended        
                December 31, 1996 and 1995                             4
                                                                     
                Statements of Cash Flows                             
                for the six months ended                             
                December 31, 1996 and 1995                             5
                                                                     
                Notes to Financial Statements                        6-7
                                                                     
Item 2.         Management's Discussion and Analysis of              
                Financial Condition and Results of Operations        8-9
                                                                   
PART II.    OTHER INFORMATION                                      
                                                                   
Item 4.         Submission of Matters to a Vote of Security Holders   10
                                                                     
Item 6.         Exhibits and Reports on Form 8-K                      10
                                                                   
                                                                   
SIGNATURE                                                             11



 



 
 

                                       2
<PAGE>
                                            Mizar, Inc.

                                           Balance Sheets
                              (in thousands, except number of shares)
<TABLE>
<CAPTION>
                                                                                                    December 31,    June 30,
                                                                                                        1996          1996
                                                                                                    ------------   ----------    
<S>                                                                                                 <C>            <C>
                                               ASSETS
                                               ------
Current assets:
    Cash and cash equivalents                                                                        $    1,890    $    1,550
    Marketable securities, at fair value                                                                 10,074        10,286
    Accounts receivable, net of allowances of $83 and $123, respectively                                  2,133         1,319
    Inventories, net                                                                                      1,615         1,456
    Prepaids and other                                                                                      127           131
    Deferred tax asset                                                                                      804           826
                                                                                                     ----------    ----------  
                         Total current assets                                                            16,643        15,568
                                                                                                     ----------    ----------     

Certificate of deposit                                                                                       -            100
Plant and equipment:
     Machinery and equipment                                                                              1,736         1,376
     Furniture and fixtures                                                                                 313           175
                                                                                                     ----------    ----------     
                                                                                                          2,049         1,551
     Less accumulated depreciation                                                                       (1,356)       (1,170)
                                                                                                     ----------    ----------     
                         Plant and equipment, net                                                           693           381
                                                                                                     ----------    ----------     
Other assets                                                                                                 41            46
                                                                                                     ----------    ----------     
                         Total assets                                                                $   17,377    $   16,095
                                                                                                     ==========    ==========     

                                LIABILITIES AND STOCKHOLDERS' EQUITY
                                ------------------------------------
Current liabilities:
     Accounts payable                                                                                $      843    $      584
     Accrued compensation                                                                                   269           191
     Other current liabilities                                                                              493           636
     Current maturities of capital lease obligations                                                          7            13
                                                                                                     ----------    ----------     
                         Total current liabilities                                                        1,612         1,424
                                                                                                     ----------    ----------     

Capital lease obligations                                                                                    -              2
                                                                                                     ----------    ----------     
                         Total liabilities                                                                1,612         1,426
                                                                                                     ----------    ----------     

Stockholders' equity:
     Preferred stock, $.01 par value; 1,000,000 shares authorized; no shares issued
           and outstanding at December 31 and June 30, 1996, respectively                                    -             -
     Common stock, $.01 par value; 25,000,000 shares authorized; 5,472,242 and 5,468,063
           issued at December 31 and June 30, 1996, respectively, and 4,965,692 and
           4,968,009 shares outstanding at December 31 and June 30, 1996, respectively                       55            55
     Additional paid-in capital                                                                          13,932        13,656
     Net unrealized loss on marketable securities                                                           (26)          (66)
     Retained earnings                                                                                    2,393         1,610
                                                                                                     ----------    ----------     
                                                                                                         16,354        15,255
                                                                                                     ----------    ----------     
     Less -- treasury stock, at cost                                                                       (589)         (586)
                                                                                                     ----------    ----------     
                         Total stockholders' equity                                                      15,765        14,669
                                                                                                     ----------    ----------     
                         Total liabilities and stockholders' equity                                  $   17,377    $   16,095
                                                                                                     ==========    ==========     

</TABLE>

      The accompanying notes are an integral part of these financial statements.

                                       3
<PAGE>
                                  Mizar, Inc.

                             Statements of Income
                   (in thousands, except per share amounts)
<TABLE>
<CAPTION>
    Three Months Ended                                                                            Six Months Ended
       December 31,                                                                                  December 31,
    1996        1995                                                                              1996        1995
 ----------  ----------                                                                        -----------  ----------
 <C>         <C>             <S>                                                               <C>          <C>
 $    3,389  $    3,952      Net sales                                                         $     6,414  $    8,410
      1,764       1,926      Cost of sales                                                           3,144       3,802
 ----------  ----------                                                                        -----------  ---------- 
      1,625       2,026                          Gross margin                                        3,270       4,608

                             Operating expenses:
        448         618           Sales and marketing                                                  912       1,282
        659         452           Product development and engineering                                1,133         846
        283         256           General and administrative                                           634         489
 ----------  ----------                                                                        -----------  ----------
      1,390       1,326                          Total operating expenses                            2,679       2,617

        235         700      Operating income                                                          591       1,991
 ----------  ----------                                                                        -----------  ----------
                             Other income (expense):
        149         135           Interest income                                                      284         191
        -            (2)          Interest expense and other                                           -           (83)
 ----------  ----------                                                                        -----------  ----------
        149         133                          Total other income                                    284         108

        384         833      Income before provision (benefit) for income taxes                        875       2,099
 ----------  ----------                                                                        -----------  ----------
         40        (696)     Provision (benefit) for income taxes                                       92        (563)

 $      344  $    1,529      Net income                                                        $       783  $    2,662
 ==========  ==========                                                                        ===========  ==========
 $     0.06  $     0.27      Primary net income per share                                      $      0.14  $     0.53
 ==========  ==========                                                                        ===========  ==========
 $     0.06  $     0.27      Fully diluted net income per share                                $      0.14  $     0.49
 ==========  ==========                                                                        ===========  ==========
                             Weighted average common shares outstanding:
      5,588       5,723           Primary                                                            5,575       5,060
 ==========  ==========                                                                        ===========  ==========
      5,589       5,723           Fully diluted                                                      5,579       5,491
 ==========  ==========                                                                        ===========  ==========

</TABLE> 

The accompanying notes are an integral part of these financial statements.




                                       4








<PAGE>


                                            Mizar, Inc.

                                      Statements of Cash Flows
                                           (in thousands)
<TABLE>
<CAPTION>
                                                                                                  Six Months Ended
                                                                                                    December 31,
                                                                                                1996             1995
                                                                                            ------------     ------------      
<S>                                                                                         <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:                                                      
     Net income                                                                              $       783      $     2,662
     Adjustments to reconcile net income to net cash                                       
        provided by operating activities -                                                 
            Depreciation                                                                             186              128
            Amortization of deferred loan costs                                                      -                  3
            Prepaid rent                                                                              (8)              (8)
            Deferred tax asset                                                                       -               (790)
     Changes in assets and liabilities -                                                   
            Accounts receivable, net                                                                (814)            (791)
            Inventories, net                                                                        (159)            (365)
            Prepaid expenses                                                                           4              (43)
            Other assets                                                                              13               24
            Accounts payable                                                                         259              458
            Accrued liabilities                                                                      (65)             178
                                                                                             -----------      -----------      
                         Net cash provided by operating activities                                   199            1,456
                                                                                             -----------      -----------
CASH FLOWS FROM INVESTING ACTIVITIES:                                                      
           Purchases of machinery and equipment                                                     (498)            (159)
           Proceeds from dispositions of machinery and equipment                                     -                -
           Net sales (purchases) of marketable securities                                            374           (9,971)
                                                                                             -----------      -----------      
                                                                                                 
                         Net cash used in investing activities                                      (124)         (10,130)
                                                                                             -----------      -----------
CASH FLOWS FROM FINANCING ACTIVITIES:                                                      
            Sale of common stock (net)                                                               -              6,834
            Exercise of stock warrants and options (net of employee loans and              
               applicable tax effect)                                                                276              185
            Purchase of treasury stock                                                                (3)            (485)
            Net payments on long-term debt, capital lease obligations, and                 
               subordinated debentures                                                                (8)            (869)
                                                                                             -----------      -----------
                         Net cash provided by financing activities                                   265            5,665
                                                                                             -----------      -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                                 340           (3,009)
CASH AND CASH EQUIVALENTS, beginning of period                                                     1,550            3,710
                                                                                             -----------      -----------
CASH AND CASH EQUIVALENTS, end of period                                                     $     1,890      $       701
                                                                                             ===========      ===========      
                                                                                           
SUPPLEMENTAL CASH FLOW DISCLOSURES:                                                        
          Cash paid for interest                                                             $         1      $        71
          Cash paid for income taxes                                                                  16               57
          Common stock issued in conversion of convertible debentures                                  -            1,048


</TABLE>
        
   The accompanying notes are an integral part of these financial statements.

                                       5


<PAGE>
 
                                  MIZAR, INC.

                     Notes to Interim Financial Statements

1.  Basis of Presentation

    While the accompanying interim financial statements are unaudited, they have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of the Company, all material
adjustments and disclosures necessary to fairly present the results of such
periods have been made. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. These financial
statements should be read in conjunction with the financial statements and notes
thereto for the year ended June 30, 1996, as included in the Form 10-K,
previously filed. Certain previously reported amounts have been reclassified to
conform with the current year presentation. The results of operations for the
period ended December 31, 1996, are not necessarily indicative of results to be
expected for the year ending June 30, 1997.

2.  Marketable Securities

    The Company has invested a portion of its available cash balances in
marketable securities.  In accordance with SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, the Company has determined that all
marketable securities should be classified as available for sale securities.
Accordingly, these securities are reported at their respective market values and
are classified as current assets.  The Company's results from operations will
include earnings from such securities as calculated on a yield-to-maturity
basis.  Unrealized gains and losses from the changes in fair value are excluded
from income and are reported as an adjustment to stockholders' equity, net of
the deferred tax effect.  The Company's marketable securities consist of direct
and implied obligations of the U. S. Government, commercial paper, certificates
of deposit, and corporate bonds.

3.    Inventories

      Net inventories at December 31, 1996 and June 30, 1996, consisted of the
      following (in thousands):
<TABLE>
<CAPTION>
 
                                          December 31, 1996   June 30, 1996
                                          ------------------  --------------
<S>                                       <C>                 <C>
Raw materials                                        $1,147          $  749
Work-in-process                                         555             688
Finished goods                                          230             278
                                                     ------          ------
                                                      1,932           1,715
Less--allowance for excess and obsolete                (317)           (259)
 inventory                                           ------          ------
Net inventory                                        $1,615          $1,456
                                                     ======          ======
</TABLE>

4.  Income Taxes

    The Company's effective income tax rate as reflected in the accompanying
income statement for the three months and the six months ended December 31,
1996, has been significantly impacted by the utilization of net operating loss
carryforwards.  During the three months and six months ended December 31, 1996,
the impact of accounting for net operating loss carryforwards yielded an
effective tax rate of approximately 11%.  During the second quarter of fiscal
year 1996, the Company's accounting for income taxes was further impacted by the
recognition of a deferred tax asset of $790,000.  The Company believes that it
is more likely than not that it will be able to realize this asset, which
relates to the estimated value to be derived from utilizing net operating loss
carryforwards in future accounting periods.  In accordance with SFAS No. 109,
Accounting for Income Taxes, a valuation allowance associated with the net
operating loss carryforward was reduced and the $790,000 asset was recognized.

                                       6
<PAGE>
 
                                 MIZAR,  INC.

                     Notes to Interim Financial Statements

5.  Income Per Share

    Primary and fully diluted income per share were computed by dividing net
income, as adjusted in the fiscal year 1996 fully diluted calculation for
interest expense on the subordinated debentures, by the weighted average number
of shares of common stock and common stock equivalents outstanding during the
periods presented.  Common stock equivalents included in both primary and fully
diluted income per share are stock options using the treasury stock method.  For
both the quarter and the six months ended December 31, 1996, primary income per
share was computed using the average fair market price, and fully diluted income
per share was computed using the ending market price, which was higher than the
average fair market price.  For the quarter and the six months ended December
31, 1995, both primary and fully diluted income per share were computed using
the average market price, which was higher than the ending market price.  Shares
used in primary and fully diluted income per share calculations are presented
below (in thousands):

<TABLE>
<CAPTION>

                                        Primary            Fully Diluted
                                        -------            --------------
                                  Three Months Ended     Three Months Ended
                                     December 31,           December 31,
                                    1996      1995         1996      1995
                                    ----      ----         ----      ----
<S>                                 <C>      <C>           <C>       <C>
Weighted average common
 stock outstanding during the       
  period                            4,966    4,925         4,966     4,925
Common stock equivalents                                           
 of employee stock programs           622      798           623       798
                                    -----    -----         -----     -----
Shares used in net income           
 per share calculation              5,588    5,723         5,589     5,723 
                                    =====    =====         =====     =====
                                      
                                        Primary           Fully Diluted
                                        -------           -------------
                                    Six Months Ended     Six Months Ended
                                       December 31,        December 31,
                                       1996   1995         1996   1995
                                       ----   ----         ----   ----
Weighted average common
 stock outstanding during the
  period                              4,966  4,143        4,966  4,143
Common stock equivalents
 of employee stock programs             609    917          613    917
Common stock equivalents                N/A    N/A          N/A    431
 of convertible debt                  -----  -----        -----  -----
Shares used in net income             
 per share calculation                5,575  5,060        5,579  5,491
                                      =====  ======       =====  =====
</TABLE>

6.    Recently Adopted Accounting Pronouncements

      Recently, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of. The adoption of this
standard is required for financial statements for fiscal years beginning after
December 15, 1995. The Company has adopted this standard for fiscal 1997, and
the impact of the adoption is not material.

      Recently, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation.
This standard, which establishes a fair value 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 disclosure of pro forma net income and net income per share under SFAS No.
123.  SFAS No. 123 is effective for years beginning after December 15, 1995.
The Company has elected to continue to follow the requirements of APB Opinion
No. 25, with the pro forma disclosure requirements promulgated by SFAS No. 123
for fiscal year 1997.  The impact of the adoption is not material.

                                       7
<PAGE>
 
                                  MIZAR,  INC.

          Management's Discussion and Analysis of Financial Condition
                           and Results of Operations

Results of Operations
---------------------

     For the three months ended December 31, 1996, the Company reported net
sales of $3,389,000, as compared to $3,952,000 in the same period of the prior
year. DSP-based sales were $2,677,000, or 79% of total sales during the quarter.
On a comparative basis, sales from DSP-based products were $2,696,000, or 68% of
total revenues during the same quarter in the prior year. Sales from non-DSP
products declined to $712,000 as compared to $1,256,000 during the same period
in the prior year and generally will continue to decline. The Company has
reported two consecutive sequential increases in revenues since the fourth
quarter of fiscal 1996 due to increased shipments of DSP-based products. The
timing of customer order flow for DSP-based products can be irregular and is
significantly impacted by federal funding decisions. Further impacting customer
order flow are customer development and product deployment delays. Delivery
schedules explicit in recent customer orders suggest that overall revenue growth
may continue to be irregular. For the six months ended December 31, 1996, the
Company reported net sales of $6,414,000, as compared to $8,410,000 in the same
period of the prior year. This decline on a comparative basis can be attributed
to the same factors described above especially as it relates to federal funding
decisions.

      Gross margin percent for the quarter ended December 31, 1996, was 48%, as
compared to 51% for the same period in the prior year.  This decline can be
generally attributed to provisions made for obsolete inventory, warranty and
production related scrap.  Gross margin percent for the six months ended
December 31, 1996, was 51%, as compared to 55% for the same period in the prior
year.  The Company's historical gross margin percentage has varied by quarter in
both a positive and negative fashion due to volume related efficiencies and
changes in customer and specific product mix.  Such changes in customer and
specific product mix may continue to impact gross margin percentages in a
similar fashion during future reporting periods as DSP products comprise a
larger percentage of sales. 

      During the three months ended December 31, 1996, operating expenses were
$1,390,000, or 41% of net sales, as compared to $1,326,000, or 34% of net sales,
during the same period in the prior year.  During the six months ended December
31, 1996, operating expenses were $2,679,000, or 42% of net sales, as compared
to $2,617,000, or 31% of net sales, during the same period in the prior year.
For both the quarter and the six months ended December 31, 1996, expressed in
absolute dollars, total operating expenses increased slightly when compared to
the prior year. Absolute spending levels for sales and marketing decreased on a
comparative basis due to a number of factors including reduced levels of
discretionary marketing expenditures and reduced sales commissions. Engineering
and product development related expenses increased on a comparative basis as did
general and administrative expenses due primarily to personnel additions.

      Interest income for the quarter ended December 31, 1996, was $149,000, as
compared to $135,000 for the same period in the prior year.  Interest income for
the six months ended December 31, 1996, was $284,000, as compared to $191,000
for the same period in the prior year.  The increase in interest income is
primarily the result of earnings from marketable securities purchased with the
net proceeds of the Company's IPO.

      The Company reported net income of $344,000 for the quarter ended December
31, 1996, as compared to $1,529,000 during the same period in the prior year.
Net income for the six months ended December 31, 1996, was $783,000, as compared
to $2,662,000 during the same period in the prior year. The decrease in net
income for both the quarter and the six months ended December 31, 1996, as
compared to the same periods in the prior year, is due to the recognition of a
$790,000 deferred tax asset and a decrease in net sales. Net income per share
for both the quarter and the six months ended December 31, 1995, is positively
impacted by approximately $0.14 per share due to the recognition of the $790,000
tax asset.

                                       8
<PAGE>
 
                                  MIZAR, INC.

          Management's Discussion and Analysis of Financial Condition
                           and Results of Operations
                                        

Liquidity and Capital Resources
-------------------------------

      Net working capital at December 31, 1996, was $15,031,000, an increase of
$887,000 from June 30, 1996.  Total cash, cash equivalents and marketable
securities were $11,964,000 as of December 31, 1996.

      The Company believes that its near-term liquidity requirements will be met
with cash flow from operations and existing cash and short-term investments.



Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995:

      Certain matters discussed or incorporated by reference in this Form 10-Q
are forward-looking statements that involve risks and uncertainties. These risk
factors include, but are not limited to, technological change, defense industry
and federal government customer concentration, relationship with Texas
Instruments Defense Systems and Electronics Group, commercial market
uncertainties, dependence upon suppliers and subcontractors, dependence on key
personnel, competition, quarterly fluctuations, and other risks indicated in
filings with the Securities and Exchange Commission. These risk factors could
materially affect the Company's operations and cause actual results to differ
materially from those contained in forward-looking statements. For a more
complete explanation of risk factors, please see Mizar's Form 10-K for the
fiscal year ended June 30, 1996.

                                       9
<PAGE>
 
                                  MIZAR, INC.

                        Part II.     Other Information

Item 4. Submission of Matters to a Vote of Security Holders

     The Company's Annual Meeting of Stockholders was held on November 14, 1996.
The only action taken was the election of the Board of Directors. The five
directors that were currently serving as directors on the date of the
stockholders' meeting were re-elected at the Annual Meeting. The directors are
David H. Irwin, Douglas E. Johnson, John L. Rynearson, Robert G. Smith, and
Samuel K. Smith, and the applicable vote tabulations for each are as follows:
<TABLE>
<CAPTION>
                               Shares       Shares        Shares
                                 For        Against     Abstaining
                              ---------     -------     ----------
<S>                           <C>           <C>         <C>
     David H. Irwin           4,281,442      1,970        14,650
     Douglas E. Johnson       4,282,342      1,070        14,650
     John L. Rynearson        4,282,342      1,070        14,650
     Robert G. Smith          4,281,942      1,470        14,650
     Samuel K. Smith          4,281,842      1,570        14,650
 
</TABLE>

Item 6. Exhibits and Reports on Form 8-K

(a)   Exhibits (exhibit reference numbers refer to Item 601 of Regulation S-K)

      11(a)  Computation of Per Share Income for the three months ended 
             December 31, 1996 and 1995.

      11(b)  Computation of Per Share Income for the six months ended
             December 31, 1996 and 1995.

      27     Financial Data Schedule (filed electronically only)

(b)   Reports on Form 8-K

      No reports on Form 8-K were filed during the period.

 

                                       10
<PAGE>
 
                                  MIZAR, INC.

                                  Signatures


Pursuant to the requirements 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.


                                  Mizar, Inc.

 
Date:  February 14, 1997          By    /s/  Charles D. Brockenbush
                                  ----------------------------------
                                       Charles D. Brockenbush
                                       Vice President, Finance and
                                       Chief Financial Officer
                                       (Principal Financial and
                                         Accounting Officer)

                                       11
<PAGE>
 
                                 EXHIBIT INDEX

EXHIBIT
  NO.               DESCRIPTION
--------   ----------------------------   
11 (a)     Computation of Per Share Income for the three months ended December 
           31, 1996 and 1995.

11 (b)     Computation of Per Share Income for the six months ended December 31,
           1996 and 1995.

27         Financial Data Schedule (filed electronically only).