<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   FORM 10-K

                                 ANNUAL REPORT

                       PURSUANT TO SECTION 13 OR 15(d) OF

                      THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996        Commission file number 1-5881

                      BROWN & SHARPE MANUFACTURING COMPANY
                      ------------------------------------
             (Exact name of Registrant as specified in its charter)


               DELAWARE                           050113140
               --------                           ---------
    (State or other jurisdiction of           (I.R.S. Employer
    incorporation of organization)           Identification No.)

   PRECISION PARK, 200 FRENCHTOWN ROAD, NORTH KINGSTOWN, RHODE ISLAND  02852
   -------------------------------------------------------------------------
             (Address of principal executive offices and zip code)

       Registrant's telephone number, including area code    401-886-2000

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

                                                   Name of each exchange on
        Title of each class                           which registered
        -------------------                           ----------------
CLASS A COMMON STOCK-PAR VALUE $1.00                NEW YORK STOCK EXCHANGE
PREFERRED STOCK PURCHASE RIGHTS                     NEW YORK STOCK EXCHANGE
9 1/4% CONVERTIBLE SUBORDINATED                     NEW YORK STOCK EXCHANGE
DEBENTURES DUE DECEMBER 15, 2005

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

                     CLASS B COMMON STOCK - PAR VALUE $1.00

                                (Title of Class)

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 ((S) 229.405) is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this form 10-K.   [X]

The aggregate market value (as calculated under the rules) of the voting common
stock held by non-affiliates of the Registrant was approximately
$181,000,000 as of March 12, 1997.

There were 12,686,978 Shares of Class A Common Stock and 515,862 Shares of Class
B Common Stock, each having a par value of $1.00 per share, outstanding as of
March 12, 1997.

                      DOCUMENTS INCORPORATED BY REFERENCE

The following documents have been incorporated by reference in the following
parts of the Form 10-K: (1) Definitive Proxy Statement for the April 25, 1997
Annual Meeting incorporated by reference (to the extent specified) in Part III.

                                     Page 1
<PAGE>
 
                      BROWN & SHARPE MANUFACTURING COMPANY

                                     INDEX
<TABLE>
<CAPTION>
                                                                                    Page
                                                                                  -------
      PART I
<S>                                                                              <C>
  Item 1   Business.............................................................   3 - 13
      General...................................................................        3
      Repositioning Initiatives.................................................    3 - 4
      Business Strategy.........................................................    4 - 5
      Metrology Industry........................................................    5 - 6
      MS Group..................................................................        7
      PMI Division..............................................................        7
      CM Division...............................................................    7 - 8
      Sales and Distribution....................................................        8
      Engineering and Product Development.......................................    8 - 9
      Foreign Operations........................................................        9
      Raw Materials and Sources of Supply.......................................        9
      Patents, Licenses, Trademarks, and Proprietary Information................   9 - 10
      Environmental Matters.....................................................       10
      Employees.................................................................  10 - 11
      Competition...............................................................       11
      Backlog...................................................................       11
      Significant Customers.....................................................       12
      Working Capital...........................................................       12
      Segment Information.......................................................       12
  Item 2   Properties...........................................................  12 - 13
  Item 3   Legal Proceedings....................................................  13 - 14
  Item 4   Submission of Matters to a Vote of Security Holders..................       14
  Item 4A  Executive Officers of the Registrant.................................  14 - 15
 
  PART II
 
  Item 5   Market Price of the Registrant's Common Stock and Related Security 
           Holder Matters.......................................................       15
  Item 6   Selected Financial Data..............................................       16
  Item 7   Management's Discussion and Analysis of Financial Condition and 
           Results of Operations................................................  16 - 22
  Item 8   Financial Statements and Supplementary Data..........................  23 - 43
  Item 9   Disagreements With Accountants on Accounting and Financial
           Disclosure...........................................................       44
 
  PART III
 
  Item 10  Directors and Executive Officers of the Registrant...................       44
  Item 11  Management Remuneration and Transactions.............................       44
  Item 12  Security Ownership of Certain Beneficial Owners and Management.......       44
  Item 13  Certain Relationships and Related Transactions.......................       44
 
  PART IV
 
  Item 14  Exhibits, Financial Statement Schedules, and Reports on Form 8-K.....  44 - 45
  Signatures....................................................................       46
  Directors.....................................................................       47
  Officers......................................................................       47
  Investor Information..........................................................  47 - 48
  Financial Statement Schedules.................................................       49
  Exhibit Index.................................................................  50 - 55
</TABLE>

                                     Page 2
<PAGE>
 
                                     PART I
                                     ------

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

  General
  -------

  The Company, which was founded in 1833, is a leading designer, manufacturer
  and marketer of metrology products worldwide under numerous internationally
  recognized brand names.  Metrology is the science of the physical measurement
  of objects using various precision instruments and equipment.  The Company's
  high precision products measure physical dimensions of, and inspect and verify
  conformance to specifications of, components and products and are used in
  manufacturing, quality control and product development operations.  The
  Company's product line ranges from hand tools and instruments to customized
  computer-controlled metrology systems which integrate hardware and software
  and are augmented by service, training and aftermarket support.  The Company
  markets its metrology products and services in North America, Europe, Asia,
  South America and the Middle East.  Important end user markets for the
  Company's products include the automotive, aerospace, industrial machinery,
  electronics and computer industries, and the Company's customers include Ford
  Motor Co., Daimler Benz, Toyota, Chrysler, BMW, Boeing Co., Eastman Kodak Co.
  Inc., International Business Machines Corp., Hewlett-Packard Co., General
  Electric Co., Caterpillar Inc., United Technologies Corp., Motorola Inc.,
  Phillips, Samsung and Xerox Corp.

  The Company's operations are conducted through three management units:
  Measuring Systems, Precision Measuring Instruments and Custom Metrology.

     *  THE MEASURING SYSTEMS GROUP, which accounted for approximately 69% of
        the Company's net sales in 1996, manufactures and markets a wide range
        of manual and computer-controlled, high precision CMMs including "in-
        process" measuring systems under the Brown & Sharpe, DEA, and Leitz,
        brand names.  The Company believes it is the worldwide market leader for
        CMMs as measured by net sales and installed base.  The Company believes
        it has an installed base of over 18,000 CMMs worldwide.

     *  THE PRECISION MEASURING INSTRUMENTS DIVISION, which accounted for
        approximately 28% of the Company's net sales in 1996, manufactures a
        wide range of mechanical and electronic measuring and inspection tools
        (including height gauges, calipers, dial indicators, micrometers and
        gauge blocks) which are marketed under the Brown & Sharpe, Tesa, Etalon,
        Interapid, Standard Gage, Select Gauge, Mauser, Mercer and Roch brand
        names through more than 450 distributors and catalog houses worldwide.

     *  THE CUSTOM METROLOGY DIVISION designs and engineers, under the Tesa
        brand name, specialty products and systems that provide customized
        solutions for unique measurement or inspection problems primarily
        utilizing non-contact technology.  Technologies and custom applications
        developed by the CM Division with customer funding have been directly
        applied to the design of standard products or systems distributed by the
        MS Group or the PMI Division.

  Repositioning Initiatives
  -------------------------

  Over the past several years, the Company has undertaken a series of
  divestitures, acquisitions and other strategic initiatives which have
  repositioned the Company from its historical origins as a machine tool
  manufacturer into a leader in the field of metrology.  These repositioning
  initiatives included:

     *  Divestiture of Non-Core Operations.  The divestiture of non-strategic
        operations, including the machine tool, pump and hydraulics businesses,
        which enabled the Company to focus on its core metrology technologies
        and market distribution strengths.

     *  Strategic Metrology Acquisitions.  Strategic acquisitions which enabled
        the Company to increase greatly the breadth of its metrology product
        offering and the strength of its distribution system.  These

                                     Page 3
<PAGE>
 
        acquisitions included the 1994 acquisitions of DEA, Roch and certain
        intellectual property and assets of Metronic Ltd.

     *  Rationalization and Consolidation of Operations.  Lowering the Company's
        overhead cost structure by reducing duplicative functions and associated
        headcount and by consolidating and rationalizing the Company's
        manufacturing facilities and operations, which enabled the Company to
        increase productivity and efficiency.

  Business Strategy
  -----------------

  The Company is implementing its strategy based on the following elements:

     *  Continue Cost Improvements.  The Company intends to continue to
        implement measures designed to reduce its product costs through: (i)
        standardizing product designs worldwide; (ii) increasing the cost-
        effectiveness of product designs; (iii) outsourcing components and
        products; (iv) increasing supplier partnering; and (v) focusing on core
        manufacturing processes.  The Company also intends to streamline its
        sales, marketing and general and administrative processes in an effort
        to reduce selling, general and administrative expenses as a percentage
        of sales.

     *  Develop New Products and End User Markets.  The Company's goal is to
        increase net sales by expanding penetration of served industrial end
        user markets and by capitalizing on high growth end user markets such as
        the electronics, computer and medical industries where metrology needs
        are growing rapidly.  To expand in these high growth industries, the
        Company intends to focus on development of software and emerging non-
        contact metrology technologies through continued internal development
        and through strategic acquisitions and technical partnerships (such as
        the acquisition of certain intellectual property and assets of Metronic
        Ltd. and the ASI joint venture).  To expand its penetration of served
        industrial end user markets, the Company expects to continue the
        introduction of new metrology systems utilizing both contact and non-
        contact technologies, and to develop sensors and other sophisticated
        products that can be imbedded in a variety of manufacturing processes.
        The Company plans to form technical and commercial alliances with
        manufacturers of process equipment to provide enhanced combined
        manufacturing systems utilizing the Company's sensors and other
        products.

     *  Enhance Existing and Develop New Software.  The Company intends to
        emphasize research and development of software systems and applications
        designed to meet the evolving metrology needs of its end users.  To that
        end, the Company intends to leverage off its software development team
        of software and applications engineers and technicians (including
        engineers of ASI) in the following four areas:  (i) metrology software
        for inspection and verification of piece-part integrity and conformance
        to design specifications; (ii) process control software designed to
        detect and correct drifts in part tolerances before the manufacturing
        process produces scrap or improperly configured components; (iii)
        enhanced management information systems that report statistical and
        quality information from the manufacturing process; and (iv) new
        software that will link the Company's CMMs and, therefore, the
        manufacturing process with computer-aided engineering and manufacturing
        systems that will provide the means for real-time feedback, analysis
        and, ultimately, control of manufacturing to design specifications.  The
        Company believes that its existing library of metrology software,
        together with newly developed software, should enable it to respond to
        the growing demand in manufacturing for on-line inspection and
        verification.  The Company also believes that its experience with CMM
        software and manufacturing processes are critical to the successful
        development of software that is linked with computer aided engineering
        systems.

     *  Leverage Worldwide Distribution Capability.  Through the acquisitions of
        DEA and Roch, Brown & Sharpe has expanded its product lines and
        strengthened its marketing and distribution capabilities in Europe,
        South America, the Middle East, India and China.  The Company plans to
        continue to strengthen and expand its worldwide distribution capability,
        principally by continuing to rationalize its existing distribution
        network and by opening new demonstration centers and adding direct sales
        capacity and distributors where cost effective.  The Company also
        intends to capitalize on the strength of its 

                                     Page 4
<PAGE>
 
        global distribution network by increasing the number of Company-designed
        and third-party sourced products sold through its distribution channels
        in an effort to increase gross profit without a corresponding increase
        in selling, general and administrative expenses.

     *  Increase Aftermarket Sales and Services.  The Company intends to
        increase its focus on higher margin aftermarket sales and services,
        including calibration and rebuilding of CMMs, software upgrades, and
        parts sales.  The Company believes that the worldwide installed base of
        CMMs, estimated at over 60,000 (including 18,000 of the Company's CMMs),
        creates a significant demand for such aftermarket services.

  The Company believes that the level of customer service it provides, as
  measured by third-party surveys of its customers, is superior to that of its
  principal competitors, and expects to further strengthen its customer
  relationships through enhanced aftermarket support and increased partnering
  efforts.  The Company's net sales attributable to aftermarket sales and
  service in 1996 were estimated to be approximately 25% of MS Group net sales
  for the same period.

  Metrology Industry
  ------------------

  GENERAL

  Metrology products and systems range from hand tools for simple measuring
  tasks to complex integrated systems of hardware and software that can measure,
  digitize, inspect and verify manufactured parts and components to exacting
  specifications.  Manufacturers depend upon metrology hardware and software
  products to monitor consistent product conformance to their exacting
  specifications, thereby improving the reliability, fit and finish of their
  products.  In addition to these quality and performance benefits, metrology
  products help manufacturers lower costs by reducing errors, scrap, rework and
  warranty expense, improving the manufacturing process, lowering throughput
  time, increasing capacity and reducing work-in-progress inventories. In recent
  years, manufacturers have accelerated the integration of quality control
  functions directly into the production process by incorporating the use of
  metrology products on the factory floor.  In addition, manufacturers are
  demanding more precise, capable and flexible metrology systems as their
  products become smaller, more complex and/or must meet more stringent quality
  and safety standards.  Their exacting product specifications often require
  measurement to an accuracy of less than one micron (one millionth of a meter
  or approximately 1/100th of the thickness of a human hair) or, in some special
  cases, measurement of nanometers (one billionth of a meter or the unit of
  measurement for the wavelength of light).  Increasingly, metrology systems
  must incorporate a mix of traditional contact and newer non-contact
  technologies because of reduced part sizes and the great diversity of new
  materials used in manufactured products.  Metrology systems are purchased by
  customers regardless of their need for additional production capacity because
  of ever-increasing quality requirements and the need to reduce product costs.

  Metrology products serve a broad range of measurement requirements.  The
  simplest metrology products include devices such as calipers, dial gauges,
  micrometers, surface plates and height gauges.  These are generally
  inexpensive hand-held tools that measure in one dimension to within an
  accuracy of between two (80 millionths of an inch) and 25 microns (1/100th of
  an inch). Fixed gauges are often more expensive devices that inspect and
  verify in one to three dimensions to within an accuracy of between one and 25
  microns and are typically used where manufacturers need to measure a single,
  uniform product at a high rate of speed. Fixed gauges tend to make simple,
  comparative measurements of products in a manufacturing process.  CMMs are
  more sophisticated, complex machines that use a variety of technologies to
  measure in three dimensions to an accuracy of between 0.5 and 100 microns.
  These technologies range from advanced probes that physically "contact" the
  product being measured to highly sophisticated non-contact vision, optical,
  laser and scanning probes that collect precise data without touching the
  product being measured.  While some CMMs are manually operated, most are now
  controlled by software systems that not only compare the product to a
  manufacturer's CAD/CAM models, but also provide the manufacturer with
  dimensions of the product to be converted into the CAD/CAM model.  CMMs are
  highly flexible machines that can measure different products for a
  manufacturer without re-tooling or other significant changes as opposed to
  fixed gauges that may require expensive and time-consuming retooling.  The
  price points of metrology products range from $100 for a caliper to over $1.5
  million for a sophisticated CMM such as those used to measure car and truck
  bodies.

                                     Page 5
<PAGE>
 
  MARKETS

  Participants in the metrology industry generally compete in one or more of six
  broad product areas:  (i) simple and relatively inexpensive tools that measure
  in one dimension, such as calipers, dial gauges, micrometers, surface plates
  and transfer gauges; (ii) digital electronic height gauges of varying
  accuracies and sizes; (iii) sophisticated special purpose metrology systems
  including fixed gauges; (iv) general purpose and application-specific CMMs;
  (v) alternative technologies such as vision tunnels or surface finish and
  geometry measurement; and (vi) customized metrology solutions to specific
  metrology problems.  The Company competes in all of the foregoing product
  areas other than fixed gauges and most of the alternative technologies.

  Sales of simple metrology products and less sophisticated height gauges are
  driven by price, brand, product innovation, ease of purchase and effectiveness
  of distribution.  Products in this category are generally hand-held or
  relatively small devices that permit a manufacturer to make measurements in
  one or occasionally two dimensions.  These products are generally inexpensive,
  providing a cost-effective solution to simple metrology problems where the
  industrial customer does not need the increased capabilities of fixed gauges,
  CMMs or certain other sophisticated metrology systems.  However, simple
  metrology products are generally limited in terms of accuracy, flexibility
  and/or their ability to collect data.  Further, they are dependent upon
  skilled operators.  The market for simple metrology products is fragmented,
  with many regional suppliers.  End user markets for these products include
  most basic industries, including the automotive, construction, industrial
  machinery, appliance and farm equipment industries.

  Sales of fixed gauges have traditionally been driven by manufacturers' needs
  for one, two or three dimensional metrology on the factory floor.  Products in
  this category, typically more expensive than simple metrology products,
  compete directly with CMMs regarding inspection and verification of
  manufactured parts.  Fixed gauge systems are frequently a more expensive
  investment than comparable CMM systems, but for the specific purpose intended,
  may be less expensive over the long run.  Fixed gauges can range from simple
  one dimensional tools to semi- and fully-automatic three dimensional factory
  floor systems that quickly compare production parts to "master parts."
  However, because these gauge systems are "fixed," they are inherently
  inflexible.  The fixed gauge must be reworked or a new gauge designed and
  built every time manufacturers make dimensional changes in the part being
  measured.  The trend of the industry is away from fixed gauges and toward
  flexible gauges because of the need to make costly changes to fixed gauges
  when the part they measure changes.

  Sales of CMMs and more sophisticated height gauges are driven by
  manufacturers' needs for high accuracy, flexibility, speed and information.
  Products in this category, while typically more expensive than simple
  metrology products and some fixed gauges, are generally more versatile
  machines that can measure, digitize, inspect and verify diverse manufactured
  parts.  The accelerating use of more sophisticated software has played an
  important role in the evolution of CMMs in response to the marketplace.
  Improved software and linkage to CAD/CAM and network technologies enable CMMs
  both to compensate automatically for the position of the piece to be measured,
  eliminating the need for the time consuming manual positioning necessary with
  less advanced metrology products, such as surface plate gauges, and also to
  relay information to the manufacturer's CAD/CAM model to facilitate production
  process adjustments.  Although CMM-type software can be added to on-machine
  gauging and a small percentage of fixed gauges, CMMs are easier to use, more
  flexible, and generally provide more analytical information than most products
  using competing technologies.  Presently, CMMs are installed at sites ranging
  from highly controlled laboratory sites to hostile, factory floor industrial
  settings, and can measure objects ranging in size from a semiconductor chip to
  an aircraft exterior, and can provide accuracies with tolerances of 0.5 to 100
  microns.  CMMs can achieve this through contact or non-contact probing
  methods, depending upon the manufacturer's needs.  The market for CMMs is
  dominated by five competitors, including the Company.

  Sales of customized metrology products are driven by specific needs in
  specific industries and, in Brown & Sharpe's case, tend to focus on emerging
  metrology technologies.  Generally, custom metrology challenges arise where
  existing metrology products and systems cannot adequately address a narrow yet
  important manufacturing task.  This product category requires research,
  development and innovation and often includes the development of new
  applications for optical, laser and scanning sensor probes.

                                     Page 6
<PAGE>
 
  MS Group
  ---------

  The MS Group, the largest of Brown & Sharpe's three units, accounted for
  approximately 69% of Brown & Sharpe's net sales in 1996.  The MS Group is
  headquartered in North Kingstown, Rhode Island and manufactures and markets
  CMMs.  MS Group products sold under the Brown & Sharpe name are manufactured
  at the Company's North Kingstown facility, MS Group products sold under the
  DEA name are manufactured in Turin, Italy, and MS Group products sold under
  the Leitz name are manufactured in Wetzlar, Germany.  The primary end user
  markets for the Company's CMM products include the automotive (including
  automotive suppliers), heavy transport, aerospace, electronics, computer,
  industrial machinery and medical industries.

  MS Group products range from small, manually operated CMMs to large, high
  speed, high precision automatic CMMs.  In addition to these standard and
  custom-configured CMMs, Brown & Sharpe also produces and sells high-speed
  process control systems.  The smallest machines can measure in a volume up to
  16x14x12 inches and are priced at approximately $10 thousand, while the
  larger, high speed, high accuracy CMMs with integrated software systems can
  cost over $1.5 million.  The MS Group also provides laser scanning and
  optically based measuring machinery from microscopes to vision systems.

  The Company believes that its "user-friendly" CMM application software gives
  it a competitive advantage in the marketplace for CMMs.  These proprietary
  software products provide the MS Group's customers with an understandable,
  icon-based inspection analysis capability, graphical user interfaces and
  outputs, and the capability to network with manufacturing systems.  The MS
  Group also provides its customers with special software and systems that
  integrate the MS Group's products with the customer's host information and
  communications network. In addition to sales of CMMs, the MS Group provides
  aftermarket sales and service, including calibration and rebuilding of CMMs,
  software upgrades and parts sales, for Brown & Sharpe CMMs and competing CMMs.
  The Company's net sales attributable to aftermarket sales and services in 1996
  were estimated to be approximately 25% of MS Group net sales for the same
  period.

  PMI Division
  ------------

  The principal products of Brown & Sharpe's PMI Division are precision
  measuring tools and related instruments such as micrometers, dial indicators,
  calipers, electronic height gauges and gauge blocks. PMI Division products
  accounted for approximately 28% of Brown & Sharpe's net sales in 1996.  The
  PMI Division's products have broader applications and lower unit list prices
  (with a range of $100 to approximately $13 thousand) than the prices of the MS
  Group's products.  These tools and instruments typically measure in one or two
  dimensions, and are often used in comparative measuring where an unknown part
  or dimension is compared to a previously measured part or dimension.  Some PMI
  Division products also include systems and application software for measuring
  and statistical process control.  The Company believes that the primary end
  user markets for the products of Brown & Sharpe's PMI Division are the
  automotive, aerospace, metal processing and defense industries, although Brown
  & Sharpe's PMI Division products are used in virtually all types of industrial
  settings.  Brown & Sharpe's PMI Division is headquartered in Renens,
  Switzerland, and its products are manufactured at its plants in Rolle and
  Renens, Switzerland; Poughkeepsie, New York; Leicester, St. Albans, and
  Plymouth, England; and Luneville, France.  The Company also purchases
  components and products from third parties located in various countries.

  CM Division
  -----------

  The CM Division is an engineering division headquartered in Telford, England.
  The CM Division designs and engineers specialty products primarily utilizing
  non-contact technologies and systems to provide customized solutions for
  unique customer measurement or inspection problems generally with customer
  funding.  Recent examples of CM Division products include a system for
  measuring the thickness and shape of the metal top of a beverage can and the
  depth and contour of the groove scored around the can's pop-up tab, so that
  the manufacturer could ensure the consistency with which the can could be
  opened without rupture by the end user, and an automatic multi-sensor (laser
  scanning, laser ranging, optical and tactile) system to measure, inspect and
  verify the ceramic substrates on which semiconductors are placed.  The CM
  Division also manufactures laser interferometers, measuring sensors and
  factory networks, contact and optical measuring machines and fixtures 

                                     Page 7
<PAGE>
 
  aimed at specific niche markets. Prices for CM Division products range from
  approximately $20 thousand to $1.0 million.

  The primary end user markets for the custom-designed products of the CM
  Division are package and can manufacturing, oil drilling, standards
  laboratories, semiconductors, aerospace and defense.  Sales of these products
  typically involve a close, highly technical relationship with the customer.
  This direct relationship with the customer is reinforced by strong and
  continuing efforts to provide superior customer service through ongoing
  customer training and technical support.

  The Company believes that the CM Division provides it with cost-effective
  access to emerging applications and technologies as the technologies and
  custom applications developed by the CM Division with customer funding have
  been directly applied to the design of standard products or systems
  distributed by the MS Group or the PMI Division.

  Sales and Distribution
  ----------------------

  The MS Group distributes its products primarily through a 120-person worldwide
  sales force directly to U.S. and European customers, and utilizes a network of
  independent agents and distributors to cover the Pacific Rim, South American
  and African markets.  The typical MS Group sales process involves lengthy,
  technical, one-on-one discussions between the salesperson or the
  distributor/sales agent and customer and is often part of a competitive bid
  process.  As an important part of its marketing and distribution strategy,
  Brown & Sharpe provides in-depth training to its customers at 31 support and
  demonstration centers located throughout the United States, Europe and Asia.
  The Company's direct sales force also provides the Company with important
  opportunities to cross-sell the products of its PMI and CM Divisions.

  In contrast to the MS Group, the PMI Division generally distributes its
  products through international import companies, regional distributors and
  catalog houses throughout the world.  As of December 31, 1996, the PMI
  Division utilized in excess of 450 distributors located in over 60 countries
  to market its products.  The Company believes that the PMI Division's
  established distribution network provides it with a competitive advantage and
  intends to capitalize on this network to increase sales of internally
  developed and third-party products.

  The CM Division primarily designs and manufactures products and services in
  response to specific customer inquiries.  The CM Division maintains a staff of
  approximately 15 sales/project engineers to respond to customer inquiries,
  and, upon receipt of an order, to develop tailored solutions and manage
  projects to completion.  The CM Division typically targets sales to end user
  markets with a small number of participants in which the Company has little or
  no competition.  As a result, the Company believes that the CM Division
  benefits from comparatively lower selling expenses.

  The Company has no single customer which accounts for 10% or more of its
  consolidated net sales; however, several well recognized major automotive
  manufacturers (without regard to their suppliers) account for a significant
  portion of the Company's net sales.  The loss of a few of these major
  manufacturers would have a substantial effect upon the Company.

  Engineering and Product Development
  -----------------------------------

  Brown & Sharpe's commercial success is dependent upon its ability to develop
  products, enhancements, and applications that meet changing customer metrology
  needs and anticipate and respond to technological changes.  Brown & Sharpe
  designs, develops and refines its products internally through engineering
  departments within its product groups and divisions.  Brown & Sharpe employs
  approximately 445 engineers and technicians in its design engineering
  activities.  ASI employs 50 software engineers.  The development activities of
  ASI are devoted to the creation and development of CMM-related metrology
  software solutions.  Together Brown & Sharpe and ASI employ 495 engineers and
  technicians of which 320, or approximately 65%, are directly involved with
  software, firmware, or applications development efforts that are core to Brown
  & Sharpe's strategy.  When it is more cost-effective to do so, Brown & Sharpe
  purchases product designs or portions of product designs from engineering
  subcontractors or acquires rights to such designs through licensing
  arrangements.  Brown & Sharpe also benefits from research and development
  efforts which are subsidized by customer funds and, in certain 

                                     Page 8
<PAGE>
 
  countries, by government research grants. Brown & Sharpe research, development
  and manufacturing engineering activities are conducted in the United States,
  Italy, France, Switzerland, Germany, the United Kingdom and Lithuania.

  Brown & Sharpe derived substantial net sales in 1996 from the sale of products
  that it introduced after 1993.  Brown & Sharpe has introduced at least one
  major new product every year since 1987.  The Company's current design and
  engineering focus is the continued integration of the DEA and Roch
  technologies with Brown & Sharpe's previously existing technologies, software
  development and non-contact metrology products.  In 1996, Brown & Sharpe
  invested $13.9 million, or 4.0% of its net sales during that period in product
  design and manufacturing engineering.  In 1994 and 1995, Brown & Sharpe
  expended $9.2 million and $15.8 million, respectively, for product design,
  development, refinement and manufacturing engineering.  The increase from $9.2
  million in 1994 to $15.8 million in 1995 was due to the inclusion of DEA for
  all of 1995.

  Foreign Operations
  ------------------

  Brown & Sharpe manufactures and sells substantial amounts of its metrology
  products in foreign countries. As of December 31, 1996, approximately 69%
  (based on book values) of the Company's assets, 61% of the Company's net sales
  (based on customer location) and 73% of its employees were located outside the
  United States.  The Company's manufacturing operations are located in Italy,
  Switzerland, Germany, England and France, as well as in the United States, and
  Brown & Sharpe's products are sold in over 60 countries worldwide.  The
  Company's cost of sales for products manufactured and assembled in certain
  foreign locations has been adversely impacted, as compared with some of its
  competitors, by the appreciation of the respective local currencies of such
  locations relative to the U.S. dollar.  Nevertheless, the Company believes
  that the geographic diversity of its end user markets helps to mitigate the
  adverse effects of the cyclicality of the metrology industry, as an economic
  downturn in any of the Company's geographic end user markets may be offset by
  relatively healthy conditions in others.

  Raw Materials and Sources of Supply
  -----------------------------------

  Brown & Sharpe purchases raw materials, supplies and other components from a
  variety of suppliers, and considers its sources of supply to be adequate.  At
  times, the Company depends upon various sole sources of supply for certain
  components used by the Company (generally of items designed by Brown &
  Sharpe), but has not experienced any significant difficulty in meeting
  delivery obligations because of its reliance on such a supplier.  In addition,
  the Company currently purchases substantially all of its externally sourced
  low to medium accuracy electronic touch trigger sensor probes and heads from a
  publicly held United Kingdom company which is the dominant supplier of such
  sensor probes to CMM manufacturers.  No alternative supplier for this class of
  electronic sensor probes, which are a key component of substantially all of
  the Company's lower accuracy CMMs, is currently available and developing an
  alternative source for the probes and heads could take more than a year.
  Brown & Sharpe continues to explore means of lowering production costs through
  selective outsourcing in situations where Brown & Sharpe can achieve its high
  quality standards via subcontractors.  The Company has established a corporate
  function to direct its world-wide efforts to standardize product designs
  throughout its operations and coordinate and direct its outsourcing efforts.

  Patents, Licenses, Trademarks, and Proprietary Information
  ----------------------------------------------------------

  The Company's business is not significantly affected by or dependent upon the
  procurement or maintenance of patents covering the Company's products.
  Nevertheless, the Company pursues, where appropriate, patent protection for
  inventions, developments and improvements relating to its products both in the
  United States and abroad.  In addition, the Company relies on a combination of
  copyrights, trade secret law and contracts to protect its proprietary
  information (principally related to its software and software development).
  Despite these precautions, it may be possible to copy or otherwise obtain and
  use the Company's proprietary information without authorization.  In addition,
  effective copyright and trade secret protection may be unavailable or limited
  in certain foreign countries.

  Brown & Sharpe and its subsidiaries own, or have the right to use, a number of
  trademarks which they believe are valuable in promoting the sale of certain of
  their principal products.  The Company and its subsidiaries have 

                                     Page 9
<PAGE>
 
  registered, or have applied to register, the trademarks owned by them in the
  United States and in some foreign countries. In addition, the Company uses the
  Leitz and Mauser brand names under royalty-free license agreements entered
  into in connection with the Company's acquisition of these product lines.
  These licenses expire in 1997 and 1999, respectively. The Company believes it
  will be able to negotiate satisfactory extensions of these licenses prior to
  their expiration and/or that the failure to renew these licenses would not
  have a material adverse effect on the Company.

  Environmental Matters
  ---------------------

  The Company is not significantly affected by compliance with rules and
  regulations promulgated under environmental laws since its manufacturing
  processes do not produce, as a by-product, material amounts of waste, water
  discharges or air emissions deemed hazardous under such laws.  However, the
  Company is subject from time to time to environmental claims.  See Note 8,
  "Contingencies" of Notes to Consolidated Financial Statements in Item 8 of
  this Annual Report.

  Employees
  ---------

  At December 31, 1996, Brown & Sharpe had 2,383 employees, (as compared with
  2,392 at December 31, 1995), including approximately 1,748 employees located
  outside the United States.  Brown & Sharpe considers its relations with its
  employees to be good, although there can be no assurance that Brown & Sharpe's
  cost-cutting efforts or other factors will not cause a deterioration in these
  relations.

  Approximately 901 of Brown & Sharpe's employees located at sites in the United
  States, Italy, Switzerland, England, Germany, and France are covered by
  collective bargaining agreements which expire at various times between
  December 31, 1997 and June 30, 1998.  Brown & Sharpe expects that these
  collective bargaining agreements will be renegotiated successfully  prior to
  their expiration.  However, there can be no assurance that successor
  collective bargaining agreements will be successfully negotiated, that
  negotiations will not result in work stoppages, or that a work stoppage would
  not materially interfere with Brown & Sharpe's ability to produce the products
  manufactured at the affected location.

  In addition to the collective bargaining agreements that cover workers at
  certain of Brown & Sharpe's foreign subsidiaries, it is customary for these
  employees to be represented by various works or shop councils.  These councils
  are governed by applicable labor laws and are comprised of members who are
  elected or appointed by the work force.  Except for the top level of
  management, these councils represent the entire work force at their location
  in its dealings with senior management on matters affecting the work force or
  arising under the relevant labor contracts in effect at the location.

  A collective bargaining agreement with the International Association of
  Machinists and Aerospace Workers (the "IAM") relating to certain manufacturing
  employees in North Kingstown, Rhode Island expired in October 1981.  Brown &
  Sharpe and the IAM failed to reach agreement on the terms of a successor
  collective bargaining agreement, resulting in a strike by the IAM.  See Item 3
  "Legal Proceedings" in this Report.  No successor collective bargaining
  agreement was entered into, although the IAM remains the representative of the
  bargaining unit.  Brown & Sharpe continues to satisfy its obligation to
  bargain with respect to, proposed changes to the terms and conditions of
  employment, although no collective bargaining has occurred in recent years,
  and although the manufacturing employees represented by the IAM remain
  technically on strike, no work stoppage or picket activity has occurred since
  1985 and management does not anticipate that any such activities will occur in
  the future.  Following the strike in 1981, and the impasse reached in
  negotiations, Brown & Sharpe hired new employees to replace striking
  employees.  Since that time, many of the striking employees have been rehired
  by Brown & Sharpe, but such employees are not working under an IAM contract.
  The continuing strike by the IAM does not have a material adverse effect on
  the operations of Brown & Sharpe.  See Note 8, "Contingencies" of Notes to
  Consolidated Financial Statements in Item 8 of this Annual Report.

                                    Page 10
<PAGE>
 
  The following table sets forth the location of Brown & Sharpe's employees as
  of December 31, 1996:
<TABLE>
<CAPTION>
 
          COUNTRY                              EMPLOYEES (1)
          -------                              -------------
    <S>                                      <C>
          France...........................        216
          Germany..........................        275
          Italy............................        462
          Japan............................         26
          Spain............................         18
          Switzerland......................        331
          United Kingdom...................        420
          United States....................        635
                                                 -----
          TOTAL............................      2,383
                                                 =====
</TABLE>
---------------
  (1)     Part-time employees are included on a full-time equivalent basis.

  Competition
  -----------

  The Company's MS Group currently has four principal direct domestic and
  foreign competitors, some of which are owned by entities that have greater
  financial and other resources than the Company.  The MS Group also faces
  indirect competition from other types of metrology firms such as manufacturers
  of fixed gauging systems.  The primary industries to which the MS Group sells
  its products are characterized by a relatively small number of large
  participants with significant purchasing power.  In addition, the MS Group
  generally sells its products through a competitive bid process in which at
  least one and frequently several of the Company's competitors have submitted
  competing bids.  As a result, the Company experiences severe pricing
  competition in connection with sales by its MS Group which can have an adverse
  impact on the Company's net sales and margins.  During periods when the
  metrology industry suffers from overcapacity, downward pricing pressure
  experienced by the MS Group is likely to be more intense and the Company's
  margins may be more severely impacted. In addition, certain of the Company's
  competitors that have access to greater financial resources may be able to
  withstand such pricing pressure more effectively than the Company.  The MS
  Group competes with Mitutoyo/MTI Corp., a subsidiary of Mitutoyo Solsakusho
  Co. Ltd., a Japan-based company, which is the largest supplier of metrology
  equipment and products worldwide.  In addition to Mitutoyo, the MS Group's
  main competitors are Carl Zeiss, Inc., a subsidiary of Carl Zeiss-Stiftung AG,
  the Sheffield Measurement Division of Giddings & Lewis, Inc., and LK Tool Co.
  Ltd., a subsidiary of TransTech Ltd.

  The market for the PMI Division's products is fragmented and the PMI Division
  competes with a large number of competitors, including the market leader in
  this area, primarily on the basis of the strength of its third party
  distribution network, price and product innovation.  New competitors from
  emerging industrialized countries with lower cost products than the Company's
  represent a significant competitive challenge to the Company.  As a result,
  the PMI Division's continued success and profitability will be dependent on
  its ability to continue to develop cost-effective and innovative products.
  The primary competitors of the PMI Division are Mitutoyo, L.S. Starrett Co.
  and Federal Products Co. (Inc.), a subsidiary of Esterline Technologies
  Corporation.

  To date, the CM Division has sold its custom solutions to markets in which
  there is little or no effective competition in custom metrology systems.
  However, in certain niche markets where the Company does not generally sell,
  Marposs S.p.A., an Italian company, provides custom metrology products.

  Backlog
  -------

  The Company's backlog of product orders was approximately $51 million at year-
  end 1996, compared to approximately $59 million and $61 million at year-end
  1995 and 1994, respectively.

  All of the orders included in the Company's year-end 1996 backlog were
  requested to be filled and completed within one year and are, subject to
  possible customer cancellation, expected to be completed in 1997.

                                    Page 11
<PAGE>
 
  Significant Customers
  ---------------------

  The Company has no single customer which accounts for 10% or more of its
  consolidated net sales; however, several well recognized major automotive
  manufacturers (excluding their suppliers) account for a significant portion of
  the Company's net sales.  The loss of a few of these major manufacturers would
  have a substantial effect upon the Company.

  Working Capital
  ---------------

  A substantial amount of working capital investment in inventory and accounts
  receivable is required to operate the Company's businesses.  Working capital
  was approximately $108 million at year-end 1996 compared to approximately $76
  million at year-end 1995.  See the discussion of working capital in
  "Management's Discussion and Analysis of Financial Condition and Results of
  Operations" in Item 7 of this Annual Report.

  Segment Information
  -------------------
  (Dollars in thousands)

  The Company operates exclusively in the Metrology Business.  See Note 1 for a
  further description of the Company's business.  Sales to unaffiliated
  customers from Europe are defined as sales of products that are primarily
  assembled in a foreign country.
<TABLE>
<CAPTION>
 
                                                1996        1995         1994
                                                ----        ----         ----
<S>                                       <C>            <C>         <C>
 GEOGRAPHIC AREA:
 Sales to Unaffiliated Customers From:
   United States                               $132,956    $128,482     $ 93,061
   Europe                                       211,921     199,549      116,308
                                               --------    --------     --------
                                               $344,877    $328,031     $209,369
                                               ========    ========     ========
 Transfers Between Geographic Areas:
   From United States                          $  8,066    $  3,870     $  3,144
   From Europe                                   34,630      33,713       19,288
                                               --------    --------     --------
                                               $ 42,696    $ 37,583     $ 22,432
                                               ========    ========     ========
 Operating Profit (Loss):
   United States                               $  5,237    $    492     $  1,303
   Europe                                        11,351      10,572       (7,352)
                                               --------    --------     --------
                                               $ 16,588    $ 11,064     $ (6,049)
                                               ========    ========     ========
 Identifiable Assets:
   United States                               $ 78,374    $ 77,726
   Europe                                       215,916     211,412
   Corporate                                     20,158       6,262
                                               --------    --------
                                               $314,448    $295,400
                                               ========    ========
</TABLE> 
 
ITEM 2 - PROPERTIES
---------------------------
 
The following table sets forth certain information concerning Brown & Sharpe's
major operating facilities:
<TABLE> 
<CAPTION> 
 
                                 OWNED/                                                                   APPROXIMATE
   LOCATION                      LEASED              PRINCIPAL USE                                        SQUARE FOOTAGE
   --------                      ------              -------------                                        --------------
<S>                           <C>            <C>                                                     <C>
UNITED STATES
  N. Kingstown, Rhode Island     Owned       Manufacturing, Engineering, Sales, and Administration          343,000 (1)  
  Poughkeepsie, New York         Owned       Manufacturing                                                   58,000
  Wixom, Michigan                Leased      Sales and Administration                                        37,600
 
</TABLE>

                                    Page 12
<PAGE>
 
<TABLE>
<CAPTION>
                                 OWNED/                                                                   APPROXIMATE
   LOCATION                      LEASED              PRINCIPAL USE                                        SQUARE FOOTAGE
   --------                      ------              -------------                                        --------------
<S>                           <C>            <C>                                                     <C>
 
ITALY
  Moncalieri                     Leased      Engineering, Sales, and Administration                         260,000 (2)
  Grugliasco                     Leased      Assembly                                                       105,000 (3)
  Moncalieri                     Leased      Manufacturing                                                   70,000 (3)
 
SWITZERLAND
  Renens                         Owned       Manufacturing, Engineering, Sales, and Administration          139,000
  Rolle                          Owned       Manufacturing                                                   51,000
 
GERMANY
  Wetzlar                        Owned       Manufacturing, Engineering, Sales, and Administration          280,000
  Ludwigsburg                    Leased      Sales                                                           15,000 (3)
 
UNITED KINGDOM
  St. Albans                     Owned       Manufacturing and Sales                                         36,000
  Telford                        Leased      Manufacturing, Engineering, Sales, and Administration           32,000 
  Leicester                      Owned       Manufacturing                                                   14,000
  Swindon                        Leased      Sales                                                            5,200 (3)
  Torpoint                       Leased      Manufacturing, Sales, and Administration                         5,000 (3)
                                                                                                                   
FRANCE                                                                                                             
  Luneville                      Leased      Manufacturing, Engineering, and Sales                           77,100 (3)
  Villebon                       Leased      Sales                                                           18,000 (3)
                                                                                                                   
SPAIN                                                                                                              
  Barcelona                      Leased      Sales                                                           16,000 (3) 
 
</TABLE>
  (1) Excludes approximately 417,000 square feet leased to unrelated parties.
  (2) The Company expects to vacate these premises in the first quarter of 1997
      in connection with the consolidation of its Grugliasco and Moncalieri
      operations, which will include approximately 1,700 square feet of
      additional leased space at Grugliasco.
  (3) The leases in Grugliasco, Moncalieri, Ludwigsburg, Swindon, Torpoint,
      Luneville, Villebon and Barcelona expire on December 31, 2002, December
      31, 1997, September 30, 2003, September 28, 1997, August 18, 2001, March
      23, 2003, October 20, 2001, and January 4, 1998, respectively.

  In addition, Brown & Sharpe leases smaller sales offices located in the United
  States, Europe, and Asia.  In the opinion of management, Brown & Sharpe's
  properties are in good condition and adequate for Brown & Sharpe's business as
  presently conducted.

  ITEM 3 - LEGAL PROCEEDINGS
  --------------------------

  Other Environmental Matters
  ----------------------------

  The nature of the Company's current operations are not significantly affected
  by environmental laws, rules and regulations.  However, because the Company
  and its subsidiaries and predecessors have conducted heavy manufacturing
  operations in the past, sometimes at facilities which have been divested or
  sold and often in locations at which or adjacent to which, other industrial
  operations were conducted, from time to time the Company is subject to
  environmental claims.  As with any such operations that involve the use,
  generation, and management of hazardous materials, it is possible that
  practices, including practices that were deemed acceptable by regulatory
  authorities in the past, may have created conditions which could give rise to
  liability under current or future environmental laws.  Because the law in this
  area is developing rapidly, including in many 

                                    Page 13
<PAGE>
 
  European countries, and such environmental laws are subject to amendment and
  widely varying degrees of enforcement, the Company may be subject to, and
  cannot predict with any certainty the nature and amount of, potential
  environmental liability related to these operations or locations that it may
  face in the future.

  Litigation
  ----------

  Refer to Note 8 "Contingencies" of Notes to Consolidated Financial Statements
  in Item 8 of this Annual Report.

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

  There were no matters submitted to a vote of the security holders during the
  quarter ended December 31, 1996.

  ITEM 4A - EXECUTIVE OFFICERS OF THE REGISTRANT
  ----------------------------------------------

  The following table summarizes information regarding Executive Officers of the
  Company as of March 12, 1997:


  Name                    Age  Positions Held During the Last Five Years
  ----                    ---  -----------------------------------------

  Frank T. Curtin         62   President & Chief Executive Officer and a
                               Director of the Company since May 2, 1995; from
                               1992 to May 1995, Vice President, National Center
                               for Manufacturing Sciences, a research and
                               development organization, Ann Arbor, MI; from
                               1989 to May 1995, President, Curtin & Associates,
                               a software development company, Santa Barbara, CA
                                and Ann Arbor, MI.

  Charles A. Junkunc       54  Vice President & Chief Financial Officer since
                               May 1, 1992; previously self-employed consultant
                               since November 1990.

  Antonio Aparicio         46  Vice President & General Manager - Precision
                               Measuring Instruments since September 1991;
                               previously Marketing Director - Precision
                               Measuring Instruments.

  Marcus Burton            38  Vice President & General Manager - Custom
                               Metrology Division since January 1997; previously
                               Director of Strategic Planning - Brown & Sharpe
                               Manufacturing Co. since July 1995; Managing
                               Director - Thomas Mercer Ltd. (a subsidiary)
                               since June 1992; Special Projects Manager -
                               Thomas Mercer Ltd. since October 1990.

  
  Robert D. Batting        55  Vice President & General Manager - Measuring
                               Systems U.S.A. since October 1995; previously
                               President, Clearing-Niagra Inc. since October
                               1993; Business Consultant - self-employed since
                               September 1991; Group Vice President, Textron
                               Inc. prior to September 1991.

  Sergio Cappa             49  Vice President & General Manager - DEA-Brown &
                               Sharpe - S.p.A. since January 1997; previously
                               Managing Director, DEA, since May 1995. From
                               1992, Mr. Cappa was a general manager with the
                               Hurth Group, and from 1989 to 1992, he was a
                               general manager with the SIV Group, both German
                               industrial companies.

  John Cooke               60  Vice President & Chief Technical Officer since
                               January 1997; previously Vice President & General
                               Manager - Custom Metrology since 1992.

  Edward J. LaGraize       53  Vice President & General Manager - Commercial
                               Operations, Measuring Systems since August 1996;
                               previously President of Linotype-Hell, Co., the
                               U.S. subsidiary of Linotype-Hell AG, a
                               manufacturer of systems for the commercial
                               printing industry, since April 1994. From June
                               1991, he served as executive Vice President of
                               Gerber Scientific Inc., a manufacturer of
                               computer-aided design and manufacturing systems.

                                    Page 14
<PAGE>
 
  Karl J. Lenz             51  Vice President since September 1991; General
                               Manager - Leitz-Brown & Sharpe Messtechnik GmbH
                               since June 1990; previously General Manager -
                               Messtechnik Division of Leica
                               Industrieverwaltung.

  James W. Cooper          51  Vice President - Procurement since August 1996;
                               previously Vice President - Purchasing of Delco
                               Remy America, an automotive supplier, since March
                               1995. From 1981 to March 1995, Mr. Cooper was
                               Vice President - Materials Management of Simpson
                               Industries, an automotive supplier.

  Christopher J. Garcia    40  Vice President - Marketing since November 1996;
                               previously Vice President - Business Development
                               since January 1991; Vice President - Research and
                               Development Valisys Corporation since June 1994;
                               previously Vice President - Marketing Valisys
                               Corporation since June 1990.

  Alfred J. Corso          60  Controller and Principal Accounting Officer since
                               June 1, 1995; previously Partner with Ernst &
                               Young LLP.

  To the best of the knowledge of the Registrant, none of the Executive Officers
  has any family relationships with any of the others.  Each Executive Officer
  holds office until the first meeting of the Board of Directors following the
  next Annual Stockholders' meeting and until his successor is elected or
  appointed and qualified, unless he dies, resigns, is removed or replaced.


                                    PART II
                                    -------

  ITEM 5 - MARKET PRICE OF THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
  ---------------------------------------------------------------------------
           HOLDER MATTERS
           --------------

  The Class A Common Stock is listed on the New York Stock Exchange with a
  symbol "BNS".  At March 12, 1997, the Company had approximately 1,154
  shareowners of record of its Class A Common Stock and 916 shareowners of
  record of its Class B Common Stock.  The quarterly high and low closing prices
  of the Class A Common Stock on the New York Stock Exchange were a high of
  $15.63 and a low of $12.25 in 1997 through March 12 and were reported during
  fiscal 1996 and 1995 as presented below.  The Class B Common Stock is not
  itself traded and is subject to restrictions to transfer.  However, the Class
  B Common Stock is convertible at all times into Class A Common Stock on a
  share-for-share basis.  A stockholder who does not wish to complete the prior
  conversion process may effect a sale by simply delivering the certificate for
  shares of Class B Stock to a broker, properly endorsed and the broker may then
  present the certificate to the Company's Transfer Agent which, if the transfer
  is otherwise in good order, will issue to the purchaser a certificate for the
  number of shares of Class A Common Stock so sold.
<TABLE>
<CAPTION>
 
      Fiscal Year      High    Low
      -----------      ------  ------
<S>                   <C>     <C>
 
      1996
       4th Quarter    $15.38  $11.50
       3rd Quarter     13.63    9.25
       2nd Quarter     10.38    9.50
       1st Quarter     10.13    8.63
 
      1995
       4th Quarter    $11.88  $ 9.25
       3rd Quarter     10.63    6.38
       2nd Quarter      7.25    6.25
       1st Quarter      7.50    5.63
</TABLE>

  No dividends have been paid by the Company since 1990.  Dividend payments have
  been suspended in order to conserve cash.  Also, payment of dividends is
  currently not permitted under an existing loan facility.

                                    Page 15
<PAGE>
 
  ITEM 6 - SELECTED FINANCIAL DATA
  --------------------------------

  The following selected consolidated financial data should be reviewed in
  conjunction with Part II, Item 7 - "Management's Discussion and Analysis of
  Financial Condition and Results of Operations" and the Consolidated Financial
  Statements and Notes thereto in Item 8 of this Annual Report.
<TABLE>
<CAPTION>
 
 (dollars in thousands, except per share data,
     number of shareowners, and employees)         1996       1995      1994       1993       1992
<S>                                              <C>        <C>       <C>        <C>        <C>
 
  CONTINUING OPERATIONS FOR THE YEAR:
  Net sales                                      $344,877   $328,031  $209,369   $159,518   $162,524
  Operating profit (loss)                        $ 16,588   $ 11,064  $ (6,049)  $    604   $ (8,532)
   Percent                                            4.8%       3.4%     (2.9)%      0.4%      (5.2)%
  Net income (loss)                              $  7,805   $  1,926  $(14,335)  $ (2,416)  $ (7,984)
  Average shares outstanding and
   common stock equivalents (thousands)             9,670      8,773     6,057      4,969      4,899
  Per common share:
   Primary                                       $   0.81   $   0.22  $  (2.37)  $  (0.49)  $  (1.63)
   Fully Diluted                                 $   0.78   $   0.22  $  (2.37)  $  (0.49)  $  (1.63)
 
  AT YEAR-END:
  Backlog                                        $ 51,000   $ 59,000  $ 61,000   $ 26,000   $ 30,000
  Assets                                         $314,448   $295,400  $272,274   $165,871   $166,086
  Current ratio                                    1.93:1     1.59:1    1.95:1     1.73:1     1.81:1
  Long-term debt                                 $ 36,725   $ 56,839  $ 70,215   $ 32,696   $ 34,626
  Total notes payable and long-term debt         $ 69,206   $102,068  $ 92,613   $ 64,500   $ 60,700
  Equity                                         $140,400   $ 85,857  $ 78,925   $ 63,520   $ 66,674
   Per share                                     $  10.63   $   9.85  $   9.12   $  12.78   $  13.43
  Debt ratio                                         .330       .543      .540       .504       .477
  Shareowners of record                             2,104      4,400     4,100      4,900      5,400
  Employees                                         2,383      2,373     2,370      1,543      1,768
</TABLE>
  (1) In 1995, the Company changed its accounting period from a fiscal year
      ending on the last Saturday in December to a calendar year ending on the
      last day in December.  All periods presented above contain 52 weeks,
      except 1993, which contains 53 weeks.  See Note 1 to Consolidated
      Financial Statements for more information.

  (2) The consolidated financial data for the periods from 1996 to 1994 include
      the results of operations and year-end data of DEA and Roch acquisitions
      discussed in Note 2 to Consolidated Financial Statements.

  (3) Net income for 1995 includes a $640 adjustment relating to a revaluation
      of a 1994 foreign denominated liability recorded at an incorrect foreign
      exchange rate.  See Note 1 to Consolidated Financial Statements for
      further information.

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

  OVERVIEW

     During 1995 and 1994, the Company undertook a number of divestitures and
  acquisitions in its continuing effort to reposition itself from its historical
  origins as a machine tool manufacturer to a leader in the field of metrology.
  These initiatives included the acquisition in March 1994 of Roch, the
  acquisition in September 1994 of DEA, the acquisition in December 1994 of
  certain intellectual property and other assets of Metronic Ltd. and the
  consolidation in 1994 and 1995 of the operations of DEA and Roch with the MS
  Group and the PMI Division, respectively.

                                    Page 16
<PAGE>
 
     Subsequent to the repositioning initiatives described above, the Company
  commenced the realignment of its structure and culture towards a more focused
  and integrated metrology business, with an emphasis on cost reduction and
  profitability.  Since recruiting its current President and Chief Executive
  Officer in May 1995, the Company has recorded positive net income in each of
  its fiscal quarters.  The Company's ongoing operating strategy is intended to
  further reduce product costs and, as part of this strategy, the Company
  intends to standardize product designs worldwide, undertake more cost-
  effective product designs, outsource components and products, increase
  supplier partnering and focus on core manufacturing processes.  The Company
  also intends to streamline its sales, marketing and general and administrative
  processes in an effort to further reduce selling, general and administrative
  expenses as a percentage of net sales.

     The Company currently operates entirely in the metrology industry through
  three management units: the MS Group, which manufactures and markets manual
  and computer-controlled, high precision CMMs and accounted for approximately
  69% of the Company's net sales in 1996; the PMI Division, which manufactures
  mechanical and electronic measuring and inspection tools and accounted for
  approximately 28% of the Company's net sales in 1996; and the CM Division,
  which designs and engineers specialty metrology products and systems primarily
  utilizing non-contact technologies and accounted for less than 3% of the
  Company's net sales in 1996.  MS Group net sales include revenue from
  aftermarket sales and service for CMMs which the Company estimates, during
  1996, comprised approximately 25% of total MS Group net sales.  Approximately
  61% of the Company's net sales in 1996 were located outside the United States
  (based on customer location).

  FORWARD LOOKING STATEMENTS

     This "Management's Discussion and Analysis of Financial Condition and
  Results of Operations" contains forward looking statements concerning the
  Company's operations, economic performance and financial condition.  Such
  statements are subject to various risks and uncertainties, including those set
  forth in "Risk Factors," and actual performance could differ materially from
  that currently anticipated by the Company. In addition, this "Management's
  Discussion and Analysis of Financial Condition and Results of Operations"
  should be read in conjunction with the Company's Consolidated Financial
  Statements and the Notes thereto included elsewhere in this Annual Report.

     Set forth below are certain results of operations of the Company,
  calculated as a percentage of net sales:
 
RESULTS OF OPERATIONS
<TABLE> 
<CAPTION> 
                                                YEAR ENDED DECEMBER 31,
                                                -----------------------
                                                 1996    1995    1994
                                                -----   -----   -----
<S>                                             <C>     <C>     <C>
Net sales.....................................  100.0%  100.0%  100.0%
Cost of goods sold............................   65.1    64.3    65.5
                                                -----   -----   -----
 Gross profit margin..........................   34.9    35.7    34.5
Research and development......................    3.1     3.3     2.7
Selling, general, and administrative expense..   26.9    28.9    32.7
Restructuring charges.........................      -     0.1     2.0
                                                -----   -----   -----
 Operating profit (loss)......................    4.9     3.4    (2.9)
Interest expense..............................    2.4     2.8     3.1
Other income, net.............................    0.1     0.2     0.3
                                                -----   -----   -----
 Income (Loss) before income taxes............    2.6     0.8    (5.7)
Income tax provision..........................    0.3     0.2     1.1
                                                -----   -----   -----
 Net income (loss)............................    2.3%    0.6%  (6.8)%
                                                =====   =====   =====
</TABLE>
  YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

     Net Sales.  Net sales increased 5.2%, or $16.9 million, to $344.9 million
  in 1996 from $328.0 million in 1995.  Foreign currency exchange rate
  fluctuations caused a decrease in net sales of $4.9 million during 1996 as
  compared to an increase of $12.1 million in 1995.  Excluding these foreign
  currency effects, net sales for 1996 increased 6.6%, or $21.8 million, over
  1995.  The MS Group was responsible for approximately $19.8 million of 

                                    Page 17
<PAGE>
 
  the $21.8 million increase and the PMI and CM Divisions were responsible for
  the remaining $2.0 million of the increase. The increase in MS Group net sales
  was due to increased sales of more fully configured CMMs with higher sales
  price along with an increase in unit volumes of lower priced CMMs. New
  products and service revenue also contributed to the increase. The increase in
  PMI Division net sales was attributable to the U.S. catalog and distribution
  business.

     Gross Profit.  Gross profit increased 2.7%, or $3.2 million, to $120.3
  million in 1996 from $117.1 million in 1995.  The improvement in gross profit
  for the MS Group was due to increased sales volume and product mix.  The PMI
  Division had lower gross profit margins due to less absorption of fixed costs
  as they reduced inventory and production requirements and some start up costs
  for new products.  The CM Division had lower gross margins due to volume
  variances.  As a percentage of net sales, gross profit decreased to 34.9% from
  35.7% due to a decrease in the PMI and CM Divisions' gross profit margins of
  4.5% and 4.1%, respectively, and offset by a slight increase in the MS Group's
  gross profit margin of 0.9%.  The MS Group's gross profit margin increased
  slightly, primarily as a result of increased unit volumes of more fully
  configured higher price CMMs offset only partially by increased unit volumes
  of lower priced CMMs.

     Research and Development Expense.  Research and development expense was
  $10.8 million in 1996 and 1995, respectively.

     Selling, General and Administrative Expense.  SG&A decreased 2.1%, or $2.0
  million, to $92.9 million in 1996 from $94.9 million in 1995, and decreased as
  a percentage of net sales to 27.0% from 28.9%.  Exclusive of foreign currency
  transaction gains or losses, which amounted to a $1.8 million loss in 1996 and
  a $0.6 million gain in 1995, and agent commissions of $8.3 million and $7.7
  million in 1996 and 1995, respectively, SG&A decreased as a percentage of net
  sales to 24.0% from 26.8%.  The decrease in SG&A was primarily attributable to
  reductions in duplicative distribution, management and administrative
  functions in the MS Group and PMI Division.

     Interest Expense.  Interest expense decreased 8.8%, or $0.8 million, to
  $8.3 million in 1996 from $9.1 million in 1995. A decrease in average
  borrowings to $96.2 million in 1996 from approximately $100.0 million in 1995
  resulted in decreased interest expense in 1996.  The decrease in average
  outstanding borrowing balances occurred after the equity offering, which was
  completed in October of 1996.

     Income Tax Expense.  Income taxes were provided at a rate of 11% in 1996
  compared with a rate of 26.5% in 1995.  This decrease in the effective tax
  rate is primarily due to the $4.7 million reduction of a previously recorded
  deferred income tax valuation allowance.  For further information concerning
  the provision for income taxes, as well as information regarding differences
  between the effective tax rates and statutory rates, see Note 4 of the Notes
  to the Consolidated Financial Statements.  It is expected that the 1997
  effective tax rate will exceed 11%.

  YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

     Net Sales.  Net sales increased 56.7%, or $118.6 million, to $328.0 million
  in 1995 from $209.4 million in 1994.  Foreign currency exchange rate
  fluctuations caused an increase in net sales of $12.1 million during 1995 as
  compared to an increase of $3.3 million in 1994.  Excluding these foreign
  currency effects, net sales for 1995 increased $106.5 million over 1994.  The
  MS Group was responsible for approximately $95.4 million of the $106.5 million
  increase and the PMI and CM Divisions were responsible for the remaining $11.1
  million of the increase.  The increase in MS Group net sales was primarily
  attributable to the DEA acquisition ($69.5 million of the increase) and an
  increase in unit volumes of lower priced CMMs.  The increase in PMI Division
  net sales was attributable to the Roch acquisition and the introduction of new
  products and new customers.

     Gross Profit.  Gross profit increased 62.0%, or $44.8 million, to $117.1
  million in 1995 from $72.3 million in 1994.  This increase was primarily a
  result of the full-year sales effect during 1995 of the acquisitions of DEA
  and Roch and their continued integration into the operations of the MS Group
  and the PMI Division, respectively, as well as an improvement in the gross
  profit margin of the PMI Division.  The improvement in gross profit included
  the effect of an inventory writedown of $3.7 million in 1994 primarily due to
  the discontinuance of certain product 

                                    Page 18
<PAGE>
 
  lines as a result of the consolidation of DEA and Roch as compared to a
  positive net inventory adjustment in 1995 of $0.3 million. As a percentage of
  net sales, gross profit increased from 34.5% to 35.7% due to an increase in
  the PMI Division's gross profit margin, offset partially by a slight decrease
  in the MS Group's gross profit margin. Increased gross profit margin at the
  PMI Division resulted from better product mix and the impact of improved
  absorption of fixed costs as a result of increased PMI Division sales and
  production volume. The MS Group's gross profit margin decreased slightly,
  primarily as a result of increased unit volumes of lower priced CMMs offset
  partially by increased unit volumes of more fully configured CMMs.

     Research and Development Expense.  Research and development expense
  increased to $10.8 million from $5.7 million due to the inclusion of DEA for
  the whole year rather than the last quarter of 1994.

     Selling, General and Administrative Expense.  SG&A increased 38.5%, or
  $26.4 million, to $94.9 million in 1995 from $68.5 million in 1994, and
  decreased as a percentage of net sales to 28.9% from 32.7%.  Exclusive of
  foreign currency transaction gains or losses, which amounted to a $0.6 million
  gain in 1995 and a $1.1 million gain in 1994, SG&A decreased as a percentage
  of net sales to 29.1% from 33.2%.  The decrease in SG&A as a percentage of net
  sales was primarily attributable to consolidation savings that were planned
  and achieved as a result of the consolidation of DEA sales and distribution
  operations with those of the MS Group and the consolidation of Roch with the
  PMI Division.  Foreign currency transaction gains in 1995 include a gain of
  $0.9 million due to a revaluation of a 1994 foreign denominated liability that
  was incorrectly recorded at a historical, rather than current, foreign
  exchange rate in the Company's previously issued consolidated financial
  statements.

     Restructuring Charges.  Restructuring charges amounted to $0.3 million in
  1995 and $4.2 million in 1994.  Restructuring charges in 1994 were due
  principally to employee severance costs incurred in connection with sales
  office closings associated with integrating Brown & Sharpe's existing
  operations with those of DEA ($2.4 million) and severance costs ($1.8 million)
  in connection with the consolidation of Roch and a restructuring at TESA-Brown
  & Sharpe S.A. ("TESA").

     Interest Expense.  Interest expense increased 37.9%, or $2.5 million, to
  $9.1 million in 1995 from $6.6 million in 1994. An increase in average
  borrowings to approximately $100.0 million in 1995 from approximately $81.0
  million in 1994 resulted in increased interest expense in 1995.  The increase
  in average outstanding balances occurred after the DEA acquisition in
  September 1994 as a result of additional working capital requirements arising
  from increased sales and the payment of costs associated with restructuring
  and achieving the acquisition consolidation savings.

     Income Tax Expense.  Income taxes were provided at a rate of 26.5% in 1995.
  This compared with a tax provision that was applied to a pretax accounting
  loss in 1994.  This difference in the effective tax rate was attributable to
  income earned in certain jurisdictions during 1995 offset by net operating
  losses and other tax deductions for which no previous tax benefit was
  provided.  The 1994 effective tax rate resulted from taxes in jurisdictions
  which have historically been profitable, losses in jurisdictions that could
  not receive tax benefits and adjustments to prior tax provisions.  For further
  information concerning the provision for income taxes, as well as information
  regarding differences between effective tax rates and statutory rates, see
  Note 4 of the Notes to the Consolidated Financial Statements.

  LIQUIDITY AND CAPITAL RESOURCES

     Over the last several years, prior to the 1996 equity offering, the Company
  has funded its working capital, capital expenditure, research and development
  and other cash needs from operating cash flows, sales proceeds from
  discontinued businesses, borrowings under short-term credit facilities, an
  aggregate of $33.5 million of term and mortgage indebtedness incurred in 1994.
  In October 1996 a $48 million public equity offering of 4.4 million new shares
  of common stock was completed.  At December 31, 1996, the Company's
  outstanding indebtedness was $69.2 million, including $68.5 million of long-
  term indebtedness (including current portion) and $0.7 million of short-term
  borrowings, and the Company's cash and cash equivalents were $20.2 million.
  During 1996, the Company refinanced $10.5 million of outstanding Swiss
  mortgages.  The Company has a domestic secured revolving credit facility ("the
  Facility") which provides for maximum aggregate borrowings of $25.0 million
  and foreign credit facilities which provide for maximum aggregate borrowings
  of $48.3 million.  The Facility is available for working capital and general
  corporate purposes.  Of the foreign credit facilities, $22.7 million is

                                    Page 19
<PAGE>
 
  available for working capital and general corporate purposes to the Company's
  foreign subsidiary in the country where borrowed, $16.2 million is available
  on presentment of certain local and export related eligible invoices and $9.4
  million is available to support letters of credit and performance and bid
  bonds.  Actual availability under the Facility is limited on the basis of
  eligible United States accounts receivable and inventory.  At December 31,
  1996, giving effect to such borrowing base limitations and outstanding
  borrowings, the Company had no outstanding borrowings under the Facility, and
  the Company's maximum available additional borrowings under the Facility were
  $20.1 million and its maximum available additional borrowings and letters of
  credit under its foreign credit facilities were $44.1 million.

     The commitments under the Facility continue until September 1997 and
  automatically renew thereafter for one year periods, subject to the
  termination provisions contained in the Facility.  The Facility is secured by
  substantially all of the Company's domestic assets and 65% of the shares of
  certain foreign subsidiaries and contains a number of covenants, including the
  obligation to maintain certain financial ratios and a prohibition on the
  payment of dividends.  The Company's foreign credit facilities are generally
  due on demand and certain of such facilities are secured by certain of the
  Company's foreign assets.  On March 31, 1996 and June 30, 1996, the Company
  breached the current ratio covenant contained in the Facility.  Such breaches
  were waived.  Since the $48 million public equity offering discussed above,
  the Company has paid all outstanding balances under the Facility and has cash
  balances amounting to $20.2 million.  Therefore, loan covenant violations
  occurring in the ensuing year are unlikely.

     At December 31, 1996, the annual maturities of the Company's long-term debt
  were $31.8 million, $4.7 million, $9.8 million, $4.7 million and $6.3 million
  for 1997, 1998, 1999, 2000 and 2001, respectively.

     Management believes that, the public equity offering and the additional
  borrowing capacity it allows along with the available existing short- and
  long-term borrowings, cash on hand and future cash flow from operations will
  be sufficient to meet foreseeable cash requirements of the Company for the
  next three to four years.  Significant acquisitions or strategic partnerings
  could, however, increase the Company's capital requirements, and in such event
  the Company might seek to raise additional debt or equity.

     Cash Flow.  Net cash provided by operations in 1996 was $7.8 million, as
  compared to net cash used in operations of $0.1 million in 1995.  For the year
  ended December 31, 1996, net income of $7.8 million increased by depreciation
  and other non-cash items of $12.3 million was offset by increases in working
  capital of $12.3 million.  For the year ended December 31, 1995, net income of
  $1.9 million, decreased by an increase in working capital of $15.3 million,
  was offset by depreciation and other non-cash items of $13.3 million.

     Net cash used in investment transactions in 1996 was $13.1 million as
  compared to net cash used in investment transactions during 1995 of $10.4
  million.  During 1996, investment transactions included capital expenditures
  of $11.6 million.  During 1995, investment transactions included capital
  expenditures of $12.1 million.

     Cash provided by financing transactions was $16.1 million during 1996
  compared with $6.9 million for the same period in 1995.  Financing
  transactions during 1996 consisted of $48 million of funds arising from the
  equity offering described above, a $33.1 million decrease in short-term
  borrowings, a $3.8 million increase of long-term debt to finance the new CM
  facility in Telford, England and the repayment of $5.1 million of long-term
  debt.  Financing transactions during 1995 included $10.9 million of short-term
  borrowings offset by $3.4 million of long-term debt payments.

     Working Capital.  Working capital was $108.0 million at December 31, 1996
  compared to $76.2 million at December 31, 1995.  Inventories increased to
  $77.6 million at December 31, 1996, an increase of $0.5 million from the end
  of 1995, and accounts receivable increased $5.1 million from December 31,
  1995.  In addition, total short- and long-term borrowing decreased $32.9
  million to a total of $69.2 million at December 31, 1996 as compared to $102.1
  million at December 31, 1995 primarily due to the repayment of $33 million of
  short-term debt using funds provided by the equity offering completed during
  the fourth quarter of 1996.

                                    Page 20
<PAGE>
 
     Capital Expenditures.  The Company's capital expenditures were
  approximately $11.6 million in 1996, of which $3.7 million was for the new CM
  facility in Telford, England, compared to $12.0 million and $8.9 million for
  the years 1995 and 1994, respectively.

     Product Design and Manufacturing Engineering.  The Company invested $13.9
  million, or 4.0% of net sales, $15.8 million, or 4.8% of net sales, and $9.2
  million, or 4.4% of net sales, in 1996, 1995 and 1994, respectively, for
  product design and manufacturing engineering.

                                  RISK FACTORS

  COMPETITION

     The Company's MS Group currently has four principal direct domestic and
  foreign competitors, some of which are owned by entities that have greater
  financial and other resources than the Company.  The MS Group also faces
  indirect competition from other types of metrology firms such as manufacturers
  of fixed gauging systems.  The primary industries to which the MS Group sells
  its products are characterized by a relatively small number of large
  participants with significant purchasing power.  In addition, the MS Group
  generally sells its products through a competitive bid process in which at
  least one and frequently several of the Company's competitors submit competing
  bids.  As a result, the Company experiences significant pricing competition in
  connection with sales by its MS Group which can have an adverse impact on the
  Company's net sales and margins.  During periods when the metrology industry
  suffers from overcapacity, downward pricing pressure experienced by the MS
  Group is likely to be more intense and the Company's margins may be more
  severely impacted.  In addition, certain of the Company's competitors have
  access to greater financial resources and may be able to withstand such
  pricing pressure more effectively than the Company.  Accordingly, there can be
  no assurance that the MS Group will be able to continue to compete effectively
  against existing competitors or new competitors, especially during periods of
  overcapacity.

     The market for the PMI Division's products is fragmented and the PMI
  Division competes with a large number of competitors, including the market
  leader in this area, primarily on the basis of the strength of its third-party
  distribution network, price and product innovation.  New competitors from
  emerging industrialized countries with lower production costs than the
  Company's represent a significant competitive challenge to the Company.  As a
  result, the PMI Division's continued success and profitability will be
  dependent on its ability to continue to develop cost-effective sourcing and
  innovative products.

  CYCLICALITY OF END USER MARKETS

     The primary end user markets for the Company's products, which include the
  aerospace, heavy transport and automotive (including automotive suppliers)
  industries, experience cyclicality in connection with recessionary periods.

     As a consequence, the price of and margins for the Company's products have
  been and are likely to continue to be adversely impacted by decreases in
  capital spending by such end user markets during recessionary periods.  In
  addition, because the PMI Division sells primarily through distributors, the
  PMI Division is likely to experience significant declines in sales volumes
  during recessionary periods because catalog houses and distributors typically
  reduce purchases of the Company's products at the onset of such recessionary
  periods even more than the decline in their end user markets' demands would
  dictate, in order to reduce their inventories.  There can be no assurance that
  the Company will be able to operate profitably during any recessionary
  downturn.

  FOREIGN OPERATIONS

     As of December 31, 1996, approximately 69% (based on book values) of the
  Company's assets, 61% of the Company's net sales (based on customer location)
  and 73% of its employees were located outside the United States.  Foreign
  operations are subject to special risks that can materially affect the sales,
  profits, cash flows and financial position of the Company, including taxes on
  distributions or deemed distributions to the Company or any 

                                    Page 21
<PAGE>
 
  U.S. subsidiary, currency exchange rate fluctuations, inflation, maintenance
  of minimum capital requirements, import and export controls, exchange controls
  and social (labor) programs.

     In addition, the wide-spread geographic locations of the Company's
  facilities and operations make it more difficult for the Company to coordinate
  its financial and operating reporting and oversee its operations and
  employees.  In response to these difficulties, the Company has taken various
  personnel and procedural actions to improve its reporting and operating
  procedures.  While the Company believes that these actions have resulted in
  satisfactory financial and operational reporting and oversight for its present
  business, additional system revisions may be needed if the Company should
  experience a further increase in the number of foreign facilities.

  DEPENDENCE ON KEY SUPPLIER

     The Company currently purchases the vast majority of its externally sourced
  low to medium accuracy electronic touch trigger sensor probes and heads from a
  publicly held United Kingdom company (the "Supplier") which is the dominant
  supplier of such sensor probes to CMM manufacturers.  No alternative supplier
  for this class of electronic sensor probes, which are a key component of
  substantially all of the Company's lower accuracy CMMs, is currently available
  and developing an alternative source for the probes and heads could take more
  than a year.  Although adequate supplies of such probes and heads for at least
  several months is potentially available from current inventories of the
  Company and its customers, any reductions or interruptions in supply or
  material increases in the price of electronic sensor probes purchased from the
  Supplier could cause the Company to suffer disruptions in the operation of its
  business or incur higher than expected costs, which could have a material
  adverse effect on the Company.

  TECHNOLOGY

     As the size of some components measured by metrology products decreases and
  the required speed and precision of such measurements increases, the Company's
  products may become obsolete unless the Company develops more sophisticated
  software and metrology systems.  Although the Company's strategy is to focus
  research and development in the area of software development and non-contact
  technologies, there can be no assurance that the Company will be successful in
  competing against new technologies or competitors, some of whom may not now
  participate in the metrology industry.

  INDEBTEDNESS

     The Company has completed the equity offering which enabled the Company to
  reduce borrowings significantly.  At December 31, 1996, the Company had total
  outstanding indebtedness and total shareowners' equity of $69.2 million and
  $140.4 million, respectively.

     Nevertheless, the Company's outstanding indebtedness could have important
  consequences to the Company's stockholders, including the following: (i) the
  Company may face difficulties in satisfying its obligations with respect to
  its indebtedness; (ii) the Company's ability to obtain additional financing in
  the future for working capital, capital expenditures, acquisitions or other
  general corporate purposes may be impaired; (iii) certain of the Company's
  debt instruments contain financial and other restrictive covenants which could
  limit the Company's operating and financial flexibility and, if violated,
  would result in an event of default which, if not cured or waived, could
  preclude the Company's access to credit under such borrowing arrangements or
  otherwise have a material adverse effect on the Company; (iv) the Company's
  $25.0 million domestic secured revolving credit facility (the "Facility")
  prohibits the payment of dividends by the Company; and (v) the Facility and
  $25.0 million of additional term indebtedness of the Company (guaranteed by
  Finmeccanica) mature in September 1997, requiring the Company to seek
  refinancing of such debt at that time or before.

  DEPENDENCE ON LIMITED NUMBER OF KEY PERSONNEL

     The success of the Company is dependent to a significant extent upon the
  continuing services of a limited number of key executives of the senior
  management team.  Loss of the services of one or more of these senior
  executives could have a material adverse effect on the Company.

                                    Page 22
<PAGE>
 
  ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  ----------------------------------------------------
<TABLE> 
<CAPTION> 
  Index to Financial Statements                                   Page Number
  -----------------------------                                   -----------
<S>                                                               <C>
  Report of Independent Auditors - Ernst & Young LLP                   24
 
  Report of Independent Accountants - Coopers & Lybrand L.L.P.         25
 
  Consolidated Statements of Operations for the Years Ended
  December 31, 1996, 1995 and 1994                                     26
 
  Consolidated Balance Sheets at December 31, 1996 and 1995            27
 
  Consolidated Statements of Cash Flows for the Years Ended
  December 31, 1996, 1995 and 1994                                     28
 
  Consolidated Statements of Shareowners' Equity for the Years
  Ended December 31, 1996, 1995 and 1994                               29
 
  Notes to Consolidated Financial Statements                      30 - 43
</TABLE>

                                    Page 23
<PAGE>
 
                         REPORT OF INDEPENDENT AUDITORS


  To the Shareholders and Directors
   of Brown & Sharpe Manufacturing Company

  We have audited the accompanying consolidated balance sheets of Brown & Sharpe
  Manufacturing Company as of December 31, 1996 and 1995, and the related
  consolidated statements of operations, shareowners' equity, and cash flows for
  the years then ended.  Our audits also included the financial statement
  schedule listed in the Index at Item 14(a).  These financial statements and
  schedule are the responsibility of the Company's management.  Our
  responsibility is to express an opinion on these financial statements and
  schedule based on our audits.

  We conducted our audits in accordance with generally accepted auditing
  standards.  Those standards require that we plan and perform the 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 1996 and 1995 consolidated financial statements referred
  to above present fairly, in all material respects, the consolidated financial
  position of Brown & Sharpe Manufacturing Company at December 31, 1996 and
  1995, and the consolidated results of its operations and its cash flows for
  the years then ended, in conformity with generally accepted accounting
  principles.  Also, in our opinion, the related financial statement schedule,
  when considered in relation to the basic financial statements taken as a
  whole, presents fairly in all material respects the information set forth
  therein.



                                                ERNST & YOUNG LLP


  Providence, Rhode Island
  February 5, 1997

                                    Page 24
<PAGE>
 
                       REPORT OF INDEPENDENT ACCOUNTANTS


  To the Shareowners and Directors
   of Brown & Sharpe Manufacturing Company:

  We have audited the accompanying consolidated financial statements and
  financial statement schedule of Brown & Sharpe Manufacturing Company for the
  year ended December 31, 1994, listed in Item 14 of this Form 10-K.  These
  financial statements and financial statement schedule are the responsibility
  of the Company's management.  Our responsibility is to express an opinion on
  these financial statements and financial statement schedule based on our
  audit.

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

  In our opinion, the financial statements referred to above present fairly, in
  all material respects, the consolidated financial position of Brown & Sharpe
  Manufacturing Company as of December 31, 1994 and the consolidated results of
  its operations and its cash flows for the year ended December 31, 1994, in
  conformity with generally accepted accounting principles.  In addition, in our
  opinion, the financial statement schedule referred to above, when considered
  in relation to the basic financial statements taken as a whole, presents
  fairly, in all material respects, the information required to be included
  therein.



                                         COOPERS & LYBRAND L.L.P.

  Boston, Massachusetts
  March 29, 1995

                                    Page 25
<PAGE>
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS

             FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
 
                                                   1996      1995      1994
                                                 --------  --------  ---------
<S>                                              <C>       <C>       <C>
  Net sales                                      $344,877  $328,031  $209,369
  Cost of goods sold                              224,542   210,967   137,082
  Research and development expense                 10,818    10,762     5,694
  Selling, general and administrative expense      92,929    94,902    68,473
  Restructuring expense                                 -       336     4,169
                                                 --------  --------  --------
     Operating profit (loss)                       16,588    11,064    (6,049)
  Interest expense                                  8,280     9,129     6,575
  Other income, net                                   462       688       689
                                                 --------  --------  --------
     Income (loss) before income taxes              8,770     2,623   (11,935)
  Income tax provision                                965       697     2,400
                                                 --------  --------  --------
     Net income (loss)                           $  7,805  $  1,926  $(14,335)
                                                 ========  ========  ========
 
  Net income (loss) per common share:
     Primary                                     $   0.81     $0.22  $  (2.37)
                                                 ========  ========  ========
     Fully diluted                               $   0.78     $0.22  $  (2.37)
                                                 ========  ========  ========
 
</TABLE>



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

                                    Page 26
<PAGE>
 
                          CONSOLIDATED BALANCE SHEETS

                           DECEMBER 31, 1996 AND 1995
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
 
                                                                                    1996       1995
                                                                                  ---------  ---------
<S>                                                                               <C>        <C>
                                      ASSETS
Current assets:
 Cash and cash equivalents                                                        $ 20,158   $  6,262
 Accounts receivable, net of allowances for doubtful accounts
  of $3,226 and $3,030                                                             118,685    113,579
 Inventories                                                                        77,572     77,145
 Deferred income taxes                                                               2,217      3,322
 Prepaid expenses and other current assets                                           5,585      5,436
                                                                                  --------   --------
  Total current assets                                                             224,217    205,744
Property, plant and equipment:
 Land                                                                                7,094      7,141
 Buildings and improvements                                                         41,840     37,447
 Machinery and equipment                                                            90,337     95,482
                                                                                  --------   --------
                                                                                   139,271    140,070
Less-accumulated depreciation                                                       84,865     87,183
                                                                                  --------   --------
                                                                                    54,406     52,887
Goodwill, net                                                                       10,806     11,529
Other assets                                                                        25,019     25,240
                                                                                  --------   --------
                                                                                  $314,448   $295,400
                                                                                  ========   ========
                             LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
 Notes payable and current installments of long-term debt                         $ 32,481   $ 45,229
 Accounts payable                                                                   45,507     44,936
 Accrued expenses and income taxes                                                  38,217     39,423
                                                                                  --------   --------
  Total current liabilities                                                        116,205    129,588
Long-term debt                                                                      36,725     56,839
Other long-term liabilities                                                          4,700      6,310
Deferred income taxes                                                                1,420      2,765
Unfunded accrued pension cost                                                        5,801      5,823
Termination indemnities                                                              9,197      8,218
Commitments and Contingencies (Notes 8 and 11)
Shareowners' Equity:
 Preferred stock, $1 par value; authorized 1,000,000 shares; none issued                 -          -
Common stock:
 Class A, par value $1; authorized 15,000,000 shares; issued 12,689,234 shares
  in 1996 and 8,195,795 in 1995                                                     12,689      8,196
 Class B, par value $1; authorized 2,000,000 shares; issued 517,604
  shares in 1996 and 522,575 in 1995                                                   518        523
 Additional paid-in capital                                                        110,737     66,863
 (Deficit) earnings employed in the business                                          (227)    (8,032)
 Cumulative foreign currency translation adjustment                                 17,175     18,926
Treasury stock; 42,592 shares in 1996 and 23,592 shares in 1995, at cost              (455)      (270)
Unearned compensation                                                                  (37)      (349)
                                                                                  --------   --------
  Total shareowners' equity                                                        140,400     85,857
                                                                                  --------   --------
                                                                                  $314,448   $295,400
                                                                                  ========   ========
 
</TABLE>

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

                                    Page 27
<PAGE>
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

             FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
                             (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
 
                                                        1996       1995       1994
                                                      ---------  ---------  ---------
<S>                                                   <C>        <C>        <C>
  CASH PROVIDED BY (USED IN) OPERATIONS:
  Net Income (Loss)                                   $  7,805   $  1,926   $(14,335)
  Adjustment for Noncash Items:
     Depreciation and amortization                       9,957     11,010      6,743
     Pension credits and charges                         1,609      1,369        212
     Deferred income taxes                                (208)       376     (1,900)
     Termination indemnities                               590        331          -
     Deferred compensation                                 312        216        213
  Changes in Working Capital:
     Increase in accounts receivable                    (7,121)    (4,324)   (15,912)
     (Increase) decrease in inventories                 (4,019)    (7,389)     7,103
     (Increase) decrease in prepaid expenses
       and other current assets                           (224)     1,208      1,001
     Increase (decrease) in accounts payable
       and accrued expenses                               (914)    (4,798)     6,693
                                                      --------   --------   --------
     Net Cash Provided by (Used in) Operations           7,787        (75)   (10,182)
                                                      --------   --------   --------
  INVESTMENT TRANSACTIONS:
  Capital expenditures                                 (11,632)   (12,054)    (8,929)
  Proceeds from dispositions                               785      2,096      3,456
  Cash equivalent pledged                                    -          -      6,078
  Other investing activities                            (2,273)      (445)    (1,988)
                                                      --------   --------   --------
       Net Cash (Used in) Investment Transactions      (13,120)   (10,403)    (1,383)
                                                      --------   --------   --------
  FINANCING TRANSACTIONS:
  
  Increase (decrease) in short-term debt               (33,082)    10,915    (16,420)
  Proceeds from issuance of long-term debt               3,811          -     33,500
  Principal payments of long-term debt                  (5,144)    (3,444)    (1,661)
  Issuance of common stock                              47,968          -          -
  Other financing transactions                           2,533       (600)       353
                                                      --------   --------   --------
       Net Cash Provided by Financing Transactions      16,086      6,871     15,772
                                                      --------   --------   --------
  Effect Of Exchange Rate Changes on Cash                3,143      3,193        375
                                                      --------   --------   --------
  CASH AND CASH EQUIVALENTS:
  Increase (decrease) during the year                   13,896       (414)     4,582
  Beginning balance                                      6,262      6,676      2,094
                                                      --------   --------   --------
  Ending balance                                      $ 20,158   $  6,262   $  6,676
                                                      ========   ========   ========
  Supplementary Cash Flow Information:
  Interest paid                                       $  8,222   $  8,004   $  6,223
                                                      ========   ========   ========
  Taxes paid                                          $    579   $  2,598   $  1,496
                                                      ========   ========   ========
 
</TABLE>



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

                                    Page 28
<PAGE>
 
                 CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY

             FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
                             (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
 
                                                         (DEFICIT)  CUMULATIVE
                                   COMMON                EARNINGS     FOREIGN
                                    STOCK   ADDITIONAL   EMPLOYED    CURRENCY
                                   $1 PAR     PAID-IN     IN THE    TRANSLATION    TREASURY      UNEARNED
                                    VALUE     CAPITAL    BUSINESS    ADJUSTMENT      STOCK     COMPENSATION
                                   -------  -----------  ---------  ------------  -----------  -------------
<S>                                <C>      <C>          <C>        <C>           <C>          <C>
  Balance December 25, 1993        $ 4,980    $ 45,710   $  4,377       $ 9,394        $(163)         $(778)
  Net Loss                               -           -    (14,335)            -            -              -
  Acquisitions                       3,625      20,413          -             -            -              -
  Treasury Stock Transactions            -           -          -             -           12              -
  Restricted Stock Transactions         10          (8)         -             -            -            213
  ESOP Contribution                     42         297          -             -            -              -
  Foreign Currency Translation
     Adjustment                          -           -          -         5,136            -              -
                                   -------    --------   --------       -------        -----          -----
  Balance December 31, 1994          8,657      66,412     (9,958)       14,530         (151)          (565)
                                   -------    --------   --------       -------        -----          -----
  Net Income                             -           -      1,926             -            -              -
  Treasury Stock Transactions            -           -          -             -         (119)             -
  Restricted Stock Transactions          -         153          -             -            -            216
  ESOP Contribution                     62         298          -             -            -              -
  Foreign Currency Translation
     Adjustment                          -           -          -         4,396            -              -
                                   -------    --------   --------       -------        -----          -----
  Balance December 31, 1995          8,719      66,863     (8,032)       18,926         (270)          (349)
                                   -------    --------   --------       -------        -----          -----
  Net Income                             -           -      7,805             -            -              -
  Treasury Stock Transactions            -           -          -             -         (185)             -
  Restricted Stock Transactions          -        (187)         -             -            -            312
  ESOP Contribution                     44         385          -             -            -              -
  Stock Options Exercised               20         132          -             -            -              -
  Issuance of Common Stock           4,424      43,544          -             -            -              -
  Foreign Currency Translation
     Adjustment                          -           -          -        (1,751)           -              -
                                   -------    --------   --------       -------        -----          -----
  Balance December 31, 1996        $13,207    $110,737   $   (227)      $17,175        $(455)         $ (37)
                                   =======    ========   ========       =======        =====          =====
 
</TABLE>



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

                                    Page 29
<PAGE>
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

  1. SIGNIFICANT ACCOUNTING POLICIES

  BUSINESS

  Brown & Sharpe Manufacturing Company is a multinational manufacturer of
  metrology products, which include manual and computer-controlled, high
  precision machines; mechanical and electronic measuring and inspection tools;
  and specialty products and systems.  The principal markets for its products
  are North America, Europe, Asia, South America and the Middle East.  The
  primary end user markets for its products are the automotive, aerospace,
  industrial machinery, electronics and computer industries.

  BASIS OF PRESENTATION

  The consolidated financial statements include the accounts of the Company and
  all subsidiaries. Intercompany transactions have been eliminated from the
  consolidated financial statements.  Investments in 20% to 50% part-owned
  affiliates are accounted for on the equity method.

  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 amounts of assets and liabilities and
  disclosure of contingent 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.  The Company's fiscal year ended on the last day of the calendar
  year.  Results for 1996 and 1995 include 52 weeks, while 1994 had 53 weeks.

  INVENTORY VALUATION

  Inventories are stated at the lower of cost or market.  Cost is determined
  principally on a last-in, first-out (LIFO) basis for all domestic inventories
  and principally on a first-in, first-out (FIFO) basis for inventories outside
  the United States.  Provision is made to reduce slow-moving and obsolete
  inventories to net realizable values.  Current FIFO cost exceeds the LIFO
  value of inventories by approximately $11,431 and $12,293 at December 31, 1996
  and 1995, respectively.  Year-end inventories valued under the LIFO method
  were $14,380 in 1996 and $16,081 in 1995.  During 1996 and 1994, quantities
  for certain segments of the LIFO inventories were reduced.  The reductions
  resulted in liquidation of LIFO quantities carried at lower costs prevailing
  in prior years compared with the cost of current purchases, the effect of
  which increased net income in 1996 by $241 ($0.02 per share) and decreased net
  loss in 1994 by $631 ($0.10 per share).

  The composition of inventory at year-end was as follows:
<TABLE>
<CAPTION>
 
                                           1996     1995
                                          -------  -------
<S>                                       <C>      <C>
     Parts, raw materials and supplies    $35,897  $39,857
     Work in progress                      17,116   15,906
     Finished goods                        24,559   21,382
                                          -------  -------
                                          $77,572  $77,145
                                          =======  =======
</TABLE>

  In 1996, certain demonstration equipment amounting to $10,890, which had
  previously been classified in inventory, has been reclassified to other non-
  current assets.  1995 balances amounting to $11,413 were also reclassified to
  be comparable with 1996 amounts.

                                    Page 30
<PAGE>
 
            NOTES TO FINANCIAL CONSOLIDATED STATEMENTS - (CONTINUED)

  PROPERTY, PLANT AND EQUIPMENT

  Property, plant and equipment are carried at cost and are being depreciated
  principally on a straight-line basis over the estimated useful lives of the
  assets which generally range from 20 to 40 years for buildings and
  improvements and from 3 to 12 years for machinery and equipment. Depreciation
  expense was $7,120, $8,980, and $6,442 in 1996, 1995, and 1994, respectively.
  Repair and maintenance costs are charged against income while renewals and
  betterments are capitalized as additions to the related assets. Retirements,
  sales and disposals of assets are recorded by removing the cost and
  accumulated depreciation from the asset and accumulated depreciation accounts
  with any resulting gain or loss reflected in income. At December 31, 1996,
  land and buildings with a net book value of $22,932 were pledged as collateral
  for mortgage loans of $25,982.

  GOODWILL

  Goodwill, which is net of accumulated amortization of $1,407 in 1996 and $771
  in 1995, is being amortized on a straight-line basis over periods ranging from
  7 to 20 years.
<TABLE>
<CAPTION>
 
  OTHER ASSETS
<S>                               <C>      <C>
 
                                     1996      1995
                                  -------   -------
       Prepaid pension            $ 4,835   $ 4,673
       Equity investments           2,562     2,492
       Demonstration equipment     10,890    11,413
       Other                        6,732     6,662
                                  -------   -------
                                  $25,019   $25,240
                                  =======   =======
</TABLE>

  Other assets, which are net of accumulated amortization of $6,088 in 1996 and
  $3,887 in 1995, are being amortized on a straight line basis over periods
  ranging three to eight years.
  
  REVENUE RECOGNITION
  -------------------

  The Company records revenue upon shipment other than for long-term contracts,
  upon rendering of service for installation and training, and ratably over the
  contract period for service contracts. Sales under long-term contracts are
  recorded using the percentage of completion method, wherein costs and
  estimated gross margin are recorded as sales during the period the work is
  being performed. Estimated gross margin is based on the total contract sales
  value and the most recent estimate of total costs. If the current contract
  estimate indicates a loss, a provision is made for the total anticipated loss.

  FOREIGN CURRENCY

  Assets and liabilities of those subsidiaries located outside the United States
  whose cash flows are primarily in local currencies are translated at year-end
  exchange rates, and income and expense items are translated at average monthly
  rates. Translation gains and losses are accounted for in a separate
  shareowners' equity account "cumulative foreign currency translation
  adjustment."

  There were no forward exchange contracts outstanding at December 31, 1996 and
  1995. A transaction loss of $1,801 was recorded in 1996 while transaction
  gains were recorded in 1995 and 1994 of $601 and $1,064, respectively.
  Transaction gains in 1995 include an adjustment, which increased the gain,
  amounting to $640 ($0.07 per share), after taxes, relating to a revaluation of
  a 1994 foreign denominated liability that was incorrectly recorded at
  historical, rather than current, foreign exchange rate in the Company's
  consolidated financial statements issued in prior years. Prior year financial
  statements were not restated due to the immaterial effect on the previously-
  issued financial statements.

                                    Page 31
<PAGE>
 
           NOTES TO FINANCIAL CONSOLIDATED STATEMENTS - (CONTINUED)

  CREDIT RISK

  Financial instruments which potentially subject the Company to concentrations
  of credit risk consist principally of temporary cash investments and trade
  receivables. The Company places its temporary cash investments with high
  credit quality financial institutions which invest primarily in U.S.
  Government instrumentalities, commercial paper of prime quality, certificates
  of deposit, and bankers acceptances guaranteed by banks or savings and loan
  associations which are members of the FDIC. Concentrations of credit risk with
  respect to trade receivables are limited due to the Company's large number of
  customers and their dispersion across many different industries and countries
  worldwide. At December 31, 1996, the Company had no significant concentrations
  of credit risk.

  STOCK INCENTIVE PLANS

  The Company accounts for its stock compensation arrangements under the
  provisions of APB 25, "Accounting for Stock Issued to Employees" (see
  Footnote 9 for further details).

  INCOME TAXES

  The Company provides for income taxes under the provisions of SFAS No. 109
  "Accounting for Income Taxes." SFAS No. 109 requires an asset and liability
  based approach in accounting for income taxes.

  Deferred income tax assets and liabilities are recorded to reflect the tax
  consequences on future years of temporary differences of revenue and expense
  items for financial statement and income tax purposes. Valuation allowances
  are provided against assets which are not likely to be realized. Federal
  income taxes are not provided on the unremitted earnings of foreign
  subsidiaries since it has been the practice and is the intention of the
  Company to continue to reinvest these earnings in the business outside the
  United States.

  NET INCOME (LOSS) PER SHARE

  Net income (loss) per share for 1996 and 1994 is computed on the weighted
  average number of shares of common stock outstanding during the year, and the
  1995 primary computation is based upon the weighted average number of shares
  of common stock and common stock equivalents. The 1996 primary computation did
  not include common stock equivalents due to their immateriality. The 1995
  fully diluted calculation did not use common stock equivalents because the
  effect was not material, and the 1994 fully diluted loss per share did not use
  common stock equivalents because they were antidilutive. Common stock
  equivalents are additional shares which may be issued upon the exercise of
  dilutive stock options using the average market price of the Company's common
  stock during the year for primary earnings per share and market price at the
  end of the year for fully diluted earnings per share. Conversion of the
  convertible subordinated debentures (see Note 6) was not assumed in the
  computation of fully diluted net income (loss) per share because such
  conversion was antidilutive. Shares used to compute primary net income (loss)
  per share were 9,669,923 in 1996, 8,772,748 in 1995, and 6,057,090 in 1994,
  and fully diluted in 1996 were 9,945,998.

  CASH AND CASH EQUIVALENTS

  Cash and cash equivalents are comprised of cash on hand, deposits in banks,
  and short-term marketable securities with a maturity at acquisition of three
  months or less.

  ADVERTISING COST

  The Company expenses advertising costs as incurred. Advertising expense for
  the three years ended December 31, 1996 was $3.6 million, $3.8 million, and
  $4.4 million, respectively.

                                    Page 32
<PAGE>
 
           NOTES TO FINANCIAL CONSOLIDATED STATEMENTS - (CONTINUED)

  RECLASSIFICATIONS

  Prior to 1996, agents' commissions were netted against net sales. Effective
  January 1, 1996, the Company elected to classify agents' commissions as
  selling, general and administrative expense. As a result, net sales and
  selling, general and administrative expense have been reclassified for prior
  periods. The effect of such reclassification was to increase net sales and
  selling, general and administrative expense by $7,685, and $4,809 for the
  years ended December 31, 1995 and 1994, respectively. Also effective January
  1, 1996, miscellaneous income was reclassified from net sales to other income.
  The effect of this reclassification was to decrease net sales and increase
  other income by $553 and $440 for the years ended December 31, 1995 and 1994,
  respectively. Research and development expenses, which had previously been
  included in cost of sales, are now presented separately on the Consolidated
  Statement of Operations. Certain other amounts reported in 1994 and 1995 have
  been reclassified to conform with the 1996 presentation.

  2.  ACQUISITIONS

  DEA

  Brown & Sharpe Manufacturing Company, together with its subsidiary Brown &
  Sharpe International Capital Corporation, acquired on September 28, 1994, the
  stock of DEA S.p.A., an Italian corporation, and its related metrology
  business from Finmeccanica S.p.A., an Italian corporation, for 3,450,000
  shares of Class A Common Stock with a market value amounting to $22,856. The
  acquisition has been accounted for by the purchase method of accounting. The
  Company's consolidated statements of operations and cash flows includes the
  results of operation of DEA S.p.A. and its subsidiaries commencing October 2,
  1994.

  Because DEA was acquired late in 1994 and was a complex worldwide operation
  that required a comprehensive review of asset values and liabilities and a
  significant part of the study had to take into consideration the integration
  of DEA into the Measuring Systems Group, the final assessment of asset values,
  restructuring the manufacturing and marketing organization, and making other
  necessary changes was not completed until the third quarter of 1995. As a
  result of the adjustments to the preliminary 1994 estimates, net income for
  1995 increased approximately $350 ($0.04 per share).

  ROCH

  Brown & Sharpe Manufacturing Company through its subsidiary Brown & Sharpe
  International Capital Corporation purchased, on March 24, 1994, the stock of
  the French company Ets. Pierre Roch S.A. ("Roch") and its German affiliate,
  Mauser Prazisions--Messmittel GmbH ("Mauser"). These operations were
  purchased from Diehl GmbH & Co. of Nuernburg, Germany ("Diehl"). The
  adjusted purchase price was 156,000 shares of Brown & Sharpe Class A Common
  Stock.

  The acquisition has been accounted for by the purchase method of accounting,
  and accordingly, the purchase price has been allocated to assets acquired and
  liabilities assumed based on an estimate of their fair values at the date of
  acquisition.

  An adjustment to the original purchase price was negotiated in 1996 to reflect
  certain unrecognized liabilities that existed at the acquisition date. The
  adjustment was accomplished by a return of 19,000 shares of common stock by
  the seller. The 1996 results of operations includes a gain amounting to $185
  arising from this transaction.

                                    Page 33
<PAGE>
 
           NOTES TO FINANCIAL CONSOLIDATED STATEMENTS - (CONTINUED)


  PRO FORMA COMBINED (UNAUDITED)

  The Company's unaudited Pro Forma combined results of operations for the year
  ended December 31, 1994 assuming the acquisition of DEA and Roch occurred at
  the beginning of 1994, are as follows:
<TABLE>
<CAPTION>
 
                                                                 1994
                                                              ----------
<S>                                                           <C>
       Net sales                                               $277,216
       Net (loss)                                              $(11,441)
       Primary and fully diluted net loss per common share     $  (1.89)
</TABLE>

  3.  RESTRUCTURING CHARGES

  Results of operations for 1995 include restructuring charges of $336 ($0.03
  per share) compared with 1994 which include charges of $4,169 ($0.69 per
  share). These charges consist principally of Brown & Sharpe employee severance
  and Brown & Sharpe sales offices closing costs of $336 and $2,348 for 1994 and
  1995, respectively, associated with integrating Brown & Sharpe's existing
  operations with those of DEA mainly outside the U.S. Other cash costs of
  integrating DEA were incurred but were accounted for as part of the purchase
  price accounting of the acquisition. Also, 1994 costs of $1,821 were recorded
  for severance of 38 employees and property, plant, and equipment and inventory
  write-offs due to a plant closing in Switzerland arising from the acquisition
  of Roch, which is discussed in Note 2. Of these costs, $420 was paid in 1994
  and $3,202 in 1995. The balance $547 represents non-cash costs. At December
  31, 1996, substantially all liabilities for restructuring charges have been
  settled.



  4.  INCOME TAXES

  Income (loss) before income taxes consisted of the following:
<TABLE>
<CAPTION>
                                                   1996      1995      1994
                                                 --------  --------  ---------
<S>                                              <C>       <C>       <C>
       Domestic                                  $(1,323)  $(4,850)  $ (1,338)
       Foreign                                    10,093     7,473    (10,597)
                                                 -------   -------   --------
          Income (loss) before income taxes      $ 8,770   $ 2,623   $(11,935)
                                                 =======   =======   ========
</TABLE>
     The following table reconciles the income tax provision (benefit) at the
     U.S. statutory rate to that in the financial statements:
<TABLE>
<CAPTION>
                                                   1996      1995      1994
                                                 --------   ------    --------
<S>                                              <C>       <C>     <C>
       Taxes computed at 34%                     $ 2,982     $ 892    $(4,058)
       Goodwill amortization                         182       158          -
       Additional tax on foreign income              676       113      1,459
       Alternative minimum and state taxes (net)     104        31        250
       Net operating losses and other losses      (3,143)     (636)     4,749
       Other (net)                                   164       139          -
                                                 -------     -----    -------
          Income tax provision                   $   965     $ 697    $ 2,400
                                                 =======     =====    =======
 
</TABLE>

                                    Page 34
<PAGE>
           NOTES TO FINANCIAL CONSOLIDATED STATEMENTS - (CONTINUED) 

  The income tax provision (benefit) consisted of the following:
<TABLE>
<CAPTION>
                                1996     1995      1994
                               -------  -------  --------
<S>                            <C>      <C>      <C>
       Current:
          Federal              $  686   $ (996)  $ 3,250
          State                   157       31       250
          Foreign                 330    1,286       800
                               ------   ------   -------
                                1,173      321     4,300
       Deferred:
          Federal                (495)     996    (1,000)
          Foreign                 287     (620)     (900)
                               ------   ------   -------
                                 (208)     376    (1,900)
                               ------   ------   -------
       Income tax provision    $  965   $  697   $ 2,400
                               ======   ======   =======
</TABLE>
  Provision has not been made for U.S. taxes on $44,000 of cumulative
  undistributed earnings of foreign subsidiaries as those earnings are intended
  to be permanently reinvested.

  The components of the Company's deferred tax assets and liabilities as of
  December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
 
                                                1996     1995
                                               -------  -------
<S>                                            <C>      <C>
       Deferred tax assets:
          Inventory reserves                   $ 7,656  $ 8,553
          Warranty expense                       1,103      928
          Provision for doubtful accounts          401      226
          Depreciation                             999    1,722
          Tax credit and loss carryforwards     44,531   46,293
          Other                                  4,049    4,827
                                               -------  -------
            Gross deferred assets               58,739   62,549
       Less valuation allowance                 48,925   53,590
                                               -------  -------
            Deferred tax asset                 $ 9,814  $ 8,959
                                               =======  =======
       Deferred tax liabilities:
          Pension expense                      $ 1,673  $ 1,542
          Inventory reserves                     1,276    1,665
          Depreciation                           2,568    2,288
          Other                                  3,500    2,907
                                               -------  -------
            Deferred tax liability             $ 9,017  $ 8,402
                                               =======  =======
</TABLE>

  A valuation allowance has been established due to the uncertainty of realizing
  certain tax credit and loss carryforwards and a portion of the other deferred
  tax assets. The valuation allowance has been decreased by $4,665 during 1996.
  The recognition of any future tax benefits resulting from the reduction of
  $9,436 of the valuation allowance will reduce any goodwill related to the DEA
  acquisition remaining at the time of such reduction.

  For income tax purposes, the Company has operating loss and capital loss
  carryforwards of $1,800 and $3,400, respectively, in the U.K. and net
  operating loss carryforwards of $17,000, $37,800, $5,200, $3,900, and $25,300,
  respectively, in Switzerland, Germany, France, Japan, and Italy. The Swiss,
  French, Japanese, and Italian carryforwards expire between 1997 and 2001.
  There is no time limit for the U.K. and German carryforwards.

  The Company's domestic income tax return for the 1993 and 1994 fiscal years
  are under examination by the Internal Revenue Service. The Company believes it
  has made adequate provision for assessments (if any) which may arise as a
  result of this audit.

                                    Page 35
<PAGE>
 
           NOTES TO FINANCIAL CONSOLIDATED STATEMENTS - (CONTINUED)


5.    SHORT-TERM BORROWINGS

  Outstanding short-term borrowings were $709 at December 31, 1996 and $28,061
  at December 31, 1995. Substantially all domestic assets of the Company are
  pledged as collateral. Certain borrowing agreements contain covenants which,
  among other things, require the Company to maintain certain financial ratios
  and restricts the payment of dividends.

  Amounts outstanding under Brown & Sharpe's lines of credit, excluding a
  renewable secured two-year revolving credit facility from a commercial lender
  ("the Facility"), are generally payable on demand, and certain of the lines
  extended to Brown & Sharpe's foreign subsidiaries are secured by other assets.
  The Facility provides for demand borrowings based on a percentage of eligible
  domestic accounts receivable and finished and certain other inventory and, is
  secured by substantially all domestic assets. At December 31, 1996, Brown &
  Sharpe had borrowings of $709 under all short-term lines of credit compared to
  total availability at that date of $73.3 million under the lines of credit.
  Certain of the domestic and foreign lines of credit provide availability of
  borrowing capacity and funds only to the degree of availability of certain
  kinds of eligible receivables. At December 31, 1996, $16.2 million of the
  total lines of credit were restricted by the availability of certain foreign
  eligible receivables, of which $15.2 million was available for future use.

  A credit line of $3,083 in the U.K. is collateralized by the assets in that
  country, and the Company has also guaranteed borrowings up to $856. The
  weighted average interest rates on short-term borrowings were 10.5% and 7.7%
  during 1996 and 1995, respectively. The weighted average interest rate on
  short-term borrowings at December 31, 1996 was 3.1%. No compensating balances
  were required at December 31, 1996 and 1995.

  6.  LONG-TERM DEBT

  Long-term debt consisted of the following:
<TABLE>
<CAPTION>
                                                                                           1996      1995 
                                                                                          -------  --------
<S>                                                                                       <C>      <C>
  9 1/4% convertible subordinated debentures due December, 2005                          $13,000   $14,000
  Mortgages at rates ranging from 5.00% to 8.75%                                          25,982    26,800
  Notes payable, due September 28, 1997 with quarterly interest of Libor plus 0.60%       25,000    25,000
  Notes payable, due various dates with interest rates ranging from 2.10% to 12.36%        4,515     8,207
                                                                                         -------   -------
                                                                                           68,497    74,007
  Less: current installments                                                               31,772    17,168
                                                                                          -------   -------
       Total long-term debt                                                               $36,725   $56,839
                                                                                          =======   =======
</TABLE>

  The 9 1/4% subordinated debentures are convertible, at the option of the
  holders, into common shares at $26.25 per share subject to antidilution
  provisions. The Company, through a sinking fund, is required to provide for
  retirement of $1,000 in principal amount annually with the final $5,000
  payable at maturity. At December 31, 1996, 495,238 shares of Class A Common
  Stock were reserved for issuance upon conversion of these debentures. Annual
  maturities of long-term debt are as follows: 1997--$31,772; 1998--$4,678; 
  1999--$9,750; 2000--$4,674; 2001--$6,311; and $11,312 thereafter. Interest
  rates on long-term debt average approximately 8.1% in 1996.

  The $25,000 notes payable are guaranteed by Finmeccanica in connection with
  the acquisition of DEA. In return, the Company's reimbursement obligation is
  secured by a guarantee by DEA pursuant to an agreement between DEA and
  Finmeccanica.

  The effect of the Equity offering on a proforma basis at the beginning of 1996
  would have been to increase net income $2.3 million ($0.24 per share).

                                    Page 36
<PAGE>
 
           NOTES TO FINANCIAL CONSOLIDATED STATEMENTS - (CONTINUED)


  7.  FAIR VALUE OF FINANCIAL INSTRUMENTS

  The Company values the financial instruments as required by Statement of
  Financial Accounting Standards No. 107. The carrying amounts of cash and cash
  equivalents, short-term debt, and long-term variable-rate debt approximates
  fair value. The fair value of the Company's 9 1/4% subordinated debentures
  approximates $13,200 based on the quoted market prices (1.015).

  8.  CONTINGENCIES

  LABOR RELATIONS

  The Company is involved in litigation which arose out of a strike by
  production employees represented by the International Association of
  Machinists and Aerospace Workers ("IAM") at the Company's Rhode Island
  operations which began in 1981. After commencement of the strike, the IAM
  filed charges with the National Labor Relations Board ("NLRB") alleging that
  the Company engaged in unfair labor practices which precipitated the strike.
  On August 28, 1990, the NLRB dismissed the IAM's charges. The IAM appealed
  this decision to the U.S. Court of Appeals for the District of Columbia
  Circuit. On November 29, 1991, the Court accepted the legal reasoning advanced
  by the NLRB and the Company in support of the NLRB's 1990 decision, but
  ordered the NLRB to further clarify and support its decision. The NLRB
  reaffirmed its original dismissal of the IAM's charges, and the IAM appealed
  that decision. The Court, on April 7, 1995, vacated the NLRB's earlier
  decision favorable to the Company and remanded the case to the NLRB for a
  decision on whether the charges should be dismissed or a trial on the merits
  should proceed. On August 16, 1996, the NLRB issued a second supplemental
  decision and order finding in favor of the Company and dismissed the IAM
  complaint. The IAM has, following an unsuccessful request for a re-hearing and
  reconsideration of the NLRB's ruling, again appealed the NLRB's decision to
  the U.S. Court of Appeals. The Company will continue to defend this case
  vigorously, and management continues to believe that the possibility of an
  adverse decision in this matter is remote. If the case were ultimately decided
  against the Company and the strike converted to an unfair labor practice, the
  Company could be liable for back wages for those striking employees, subject
  to mitigation for certain statutory offsets, whose strike action is determined
  to be based on the unfair labor practices.

  ENVIRONMENTAL

  The Company is involved in a lawsuit which arose out of an environmental
  proceeding in which the United States Environmental Protection Agency ("EPA")
  identified the Company as a potentially responsible party ("PRP") at a waste
  disposal site (the "Site") in Rhode Island listed on the EPA's National
  Priority List for clean-up and future monitoring remedial action under the
  Superfund legislation. The Company's proportionate share of the total waste
  contributed to the Site was minimal in volume and toxicity, and the Company
  was permitted by the EPA to settle its liability at such Site in exchange for
  releases from the EPA and the State of Rhode Island and for contribution
  protection from claims of any third parties who may have liability at the
  Site. A group of non-settling major PRPs at the Site brought suit in the
  Federal District Court in Rhode Island in 1991 against all of the settling
  parties, including the Company, Avet, Inc. et al v. Amtel, Inc. et al,
                                  ----------------    -----------------
  to recover a portion of their past and anticipated future costs of performing
  the clean-up remedy. The Court entered a summary judgment in favor of the
  Company and other settling parties on October 30, 1992. The non-settling group
  of major PRPs appealed that ruling and subsequently brought suit against the
  EPA seeking to have the settlements of the de minimis settling parties set
  aside. The Company believes that the plaintiffs in that case have reached a
  settlement with the government agency that will ultimately result in a
  dismissal of the appeal of the remaining judgment in favor of the Company.

  On March 1, 1995, the Company received a notice from the State of New York
  asserting a claim against it, along with a group of approximately ten other
  companies, to recover costs incurred by the New York State Department of
  Environmental Conservation to clean up a waste disposal site in Poughkeepsie,
  New York. The State has alleged that the Company's former subsidiary, Standard
  Gage Company, Poughkeepsie, New York, acquired in 1987 and merged with and
  into the Company in 1991, contributed hazardous waste to the site for disposal
  and that the Company is a PRP as the surviving corporation to

                                    Page 37
<PAGE>
 
           NOTES TO FINANCIAL CONSOLIDATED STATEMENTS - (CONTINUED)


  the merger. The total claim asserted by the State against all parties is
  approximately $500, and it has expressed a willingness to settle its claim
  with all PRPs receiving the notice. The Company is continuing efforts to
  settle this claim and estimates that any potential loss it might incur as a
  result of any involvement or settlement at this site would not be material.

  PRODUCT LIABILITY AND OTHER LITIGATION INCIDENTAL TO THE BUSINESS

  The Company is involved in a number of product liability claims and lawsuits
  by plaintiffs seeking monetary damages for personal injury which arose out of
  and were incidental to the sale of products manufactured by the Company in its
  discontinued metal cutting machine tool and hydraulic businesses and certain
  other litigation and claims incidental to the conduct of its business. The
  potential liability of the Company for these claims and suits is adequately
  covered by insurance or reserves established for such contingencies. The
  Company is contesting or defending these claims and suits and management
  believes that the ultimate liability, if any, resulting from these matters
  will not have a material effect on the Company's financial position.

  9.  INCENTIVE AND RETIREMENT PLANS

  STOCK INCENTIVE PLANS

  Under the provisions of the Company's 1989 Equity Incentive Plan (the "'89
  Plan"), as amended on May 3, 1995 to increase by 500,000 the number of shares
  authorized for delivery in connection with awards, a variety of stock and
  stock based incentive awards, including stock options and restricted and
  unrestricted stock, are available to be granted to eligible key employees of
  the Company and its subsidiaries. The '89 Plan permits the granting of stock
  options which qualify as incentive stock options under the Internal Revenue
  Code and non-statutory options which do not so qualify. During 1996 and 1995,
  there were no awards of restricted stock. Since the inception of the '89 Plan,
  102,300 restricted Class A shares have been awarded net of forfeitures. The
  awards of restricted stock vest over a five year period with 25% of the award
  vesting at the end of the 2nd and 3rd years and 50% at the end of the 5th year
  with the unvested shares being subject to forfeiture if the recipient's
  employment is terminated. Unearned compensation in the amount of $37 is being
  amortized to expense over the forfeiture lapsing period for these awards of
  restricted stock. In 1996 and 1995, options were granted to purchase a total
  of 70,000 and 528,000 shares, respectively, for ten year option terms of Class
  A Common Stock granted at exercise prices between $6.75 and $14.13 per share.
  The options granted in 1996 become exerciseable either with respect to 50% of
  the award after 2 years and 25% after 3 and 4 years from the date of the award
  or 33% of the award after years 1 and 2 and 34% after the third year. The
  options granted in 1995 become exerciseable either with respect to 50% of the
  award after 2 years and 25% after 3 and 4 years from the date of the award or
  50% of the award after 1 year and 50% after year 2 from the date of the award.
  The exercise price for shares covered by options awarded under the '89 Plan
  has been 100% of the market value on the date such options are granted. The
  aggregate amount of shares of Class A Common Stock, including options, which
  may be awarded under the '89 Plan is 875,000 shares and the amount of shares
  of Class A Common Stock including forfeitures remaining available for issuance
  under the '89 Plan in connection with future awards is 54,700 shares.

  No further options or other awards may be granted under the Company's Amended
  1973 Stock Option Plan (the "'73 Plan"). The exercise price for shares of
  Class A Common Stock covered by outstanding options under the '73 Plan is 100%
  of the market value on the dates such options were granted. Options granted
  under the '73 Plan became exerciseable one year after the date of grant and
  expire at the end of ten years. On December 31, 1996, options for 16,664
  shares of Class A Common Stock were

                                    Page 38
<PAGE>
 
           NOTES TO FINANCIAL CONSOLIDATED STATEMENTS - (CONTINUED)

  outstanding and exerciseable at prices between $12.94 and $17.86. Option
  activity under both the '89 Plan and '73 Plan during the past three years is
  summarized as follows:
<TABLE>
<CAPTION>
 
                                            1996                      1995                        1994
                                --------------------------  --------------------------  --------------------------
                                Options   Weighted-Average  Options   Weighted-Average  Options   Weighted-Average
                                 (000)   Exercise Price      (000)   Exercise Price      (000)   Exercise Price
<S>                           <C>        <C>               <C>       <C>               <C>       <C>
     Outstanding -
      beginning of year           666       $ 7.40            218        $8.36            124         $12.38
     Granted                       70        12.68            528         7.25            145           6.50
     Exercised                    (21)        7.00              -            -              -              -
     Forfeited or canceled         (1)       13.22            (80)        8.99            (51)         12.85
                                 ----                        ----                        ----         
                                                                                                      
     Outstanding -                                                                                    
      end of year                 714       $ 7.92            666        $7.40            218         $ 8.36
                                 ====                        ====                        ====         
                                                                                                      
     Exerciseable at                                                                                  
      end of year                 166       $ 7.77            138        $7.99            218         $ 8.36
                                                                                     
     Weighted-average                                                                
      fair value of                                                                  
      options granted                                                                
      during the year                       $ 4.62                       $2.90        
</TABLE>
  Exercise prices for options outstanding as of December 31, 1996 ranged from
  $6.50 to $14.125. The weighted-average remaining contractual life of those
  options is 8.17 years.

  The Company has elected to follow Accounting Principles Board Opinion No. 25,
  "Accounting for Stock Issued to Employees" (APB 25) and related
  Interpretations in accounting for its employee stock options because, as
  discussed below, the alternative fair value accounting provided for under FASB
  Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
  valuation models that were not developed for use in valuing employee stock
  options. Under APB 25, because the exercise price of the Company's employee
  stock options equals the market price of the underlying stock on the date of
  grant, no compensation expense is recognized.

  Pro forma information regarding net income and earnings per share is required
  by Statement 123, which also requires that the information be determined as if
  the Company has accounted for its employee stock options granted subsequent to
  December 31, 1994 under the fair value method of that Statement. The fair
  value for these options was estimated at the date of grant using a Black-
  Scholes option pricing model with the following weighted-average assumptions
  for 1996 and 1995, respectively: risk-free interest rates of 6.2% and 6.4%;
  volatility factors of the expected market price of the Company's common stock
  of 33% and 38%; and a weighted-average expected life of the option of 4.25
  years. No dividend yield was utilized due to the fact that the Company does
  not anticipate that it will pay dividends in the foreseeable future.

  The Black-Scholes option valuation model was developed for use in estimating
  the fair value of traded options which have no vesting restrictions and are
  fully transferable. In addition, option valuation models require the input of
  highly subjective assumptions including the expected stock price volatility.
  Because the Company's employee stock options have characteristics
  significantly different from those of traded options, and because changes in
  the subjective input assumptions can materially affect the fair value
  estimate, in management's opinion, the existing models do not necessarily
  provide a reliable single measure of the fair value of its employee stock
  options.

                                    Page 39
<PAGE>
 
           NOTES TO FINANCIAL CONSOLIDATED STATEMENTS - (CONTINUED)

  For purposes of pro forma disclosures, the estimated fair value of the
  options is amortized to expense over the options' vesting period.  The
  Company's pro forma information follows (in thousands except for earnings
  per share information):
<TABLE>
<CAPTION>
 
                                       1996    1995
                                      ------  ------
<S>                                   <C>     <C>
     Pro forma net income             $7,278  $1,723
 
     Pro forma earnings per share:
       Primary and fully diluted      $ 0.75  $ 0.20
</TABLE>

  PROFIT INCENTIVE PLAN

  Under the provisions of the Company's Amended Profit Incentive Plan as
  originally approved in 1979, awards of cash could be made as bonuses to
  certain management employees. Plan awards provisions under the Plan in the
  amounts of $1,682, $1,157 and $310 were made in 1996, 1995, and 1994,
  respectively, based on performance objectives for the respective year.

  LONG-TERM DEFERRED CASH INCENTIVE PLAN

  In February 1996, the Board of Directors approved "The Brown & Sharpe Key
  Employee Long-Term Deferred (unfunded) Cash Incentive Plan" (the "LTDCIP"),
  which was effective for 1995. The LTDCIP provides for deferred cash payments
  upon retirement or termination of employment, subject to vesting three years
  after the end of the year for which it is earned. Annual total plan awards are
  calculated at 6% of adjusted pretax income and shared by the plan participants
  (currently eleven key executives of the Company for 1996) pro rata based on
  annual salary paid. The 1996 and 1995 consolidated financial statements
  contain a provision resulting from this plan amounting to $596 and $200,
  respectively.

  SAVINGS PLANS

  The Company has 401(K) stock bonus and thrift savings plans for U.S.
  employees, which include retirement income features consisting of employer
  contributions and employee tax deferred contributions. Contributions under all
  plans are invested in professionally managed portfolios and Company stock. The
  savings plans' expense for the three years ended December 31, 1996 was $1,335,
  $941, and $793, respectively.

  STOCK OWNERSHIP PLAN

  Under the provisions of the Company's Employee Stock Ownership Plan (ESOP),
  the Company may make contributions of common stock or cash to purchase common
  stock from the Company or otherwise, to be held in trust for employees meeting
  certain eligibility requirements until the employees reach retirement age. The
  ESOP may also borrow funds to purchase common shares, for which the Company
  will contribute amounts as necessary to pay down the indebtedness. ESOP
  expense was $458 in 1996, $433 in 1995, and $360 in 1994. At December 31,
  1996, there were no unallocated shares of Class A Common Stock and Class B
  Common Stock held in the ESOP as all shares were allocated to participants'
  accounts.

  RETIREMENT PLANS

  The Company's subsidiaries have a defined contribution retirement plan
  covering employees in Switzerland and two defined benefit retirement plans
  covering employees in the U.K. and Germany, which includes substantially all
  employees. Retirement plan expense net of pension income for the three years
  ended December 31, 1996 was $1,609, $1,369, and $1,593, respectively.

                                    Page 40
<PAGE>
 
           NOTES TO FINANCIAL CONSOLIDATED STATEMENTS - (CONTINUED)

  The defined benefit plans which cover employees in the U.K. and Germany,
  respectively, provide benefits based on years of service and employee
  compensation. Retirement costs under both plans are compiled based on the
  projected unit credit actuarial method.

  The U.K. plan's actuarial assumptions used settlement rates of 8.0% at the end
  of 1996 and 1995, a long-term return on assets of 9.0% in 1996 and 1995, and
  8.0% in 1994, and annual wage increases of 6.5% and 7.0% at the end of 1996
  and 1995, respectively. Retirement costs accrued are funded.

  The German plan's actuarial assumptions used a settlement rate of 7.5% at the
  end of 1996 and 1995, and an annual wage increase of 4.5% at the end of 1996
  and 1995. Retirement costs accrued are not funded.

  The following items are the components of net periodic pension income for
  the U.K. plan for the years ended December 31, 1996, 1995, and 1994:
<TABLE>
<CAPTION>
                                                           1996      1995      1994
                                                         --------  --------  --------
<S>                                                      <C>       <C>       <C>
       Service cost-benefits earned                      $   921   $   823   $   797
       Interest cost on projected benefit obligations      1,196     1,263       943
       Return on plan assets, net                         (2,387)   (3,049)    1,007
       Net amortization and deferral                         129       909    (2,948)
                                                         -------   -------   -------
          Net periodic pension income                    $  (141)  $   (54)  $  (201)
                                                         =======   =======   =======
</TABLE>

  The plan has assets in excess of the accumulated benefit obligations. Plan
  assets include investments in equity securities, corporate and government debt
  securities, and cash equivalents. The following table presents a
  reconciliation of the funded status of the plan at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
 
                                                      1996       1995
                                                    ---------  ---------
<S>                                                 <C>        <C>
       Vested and accumulated benefit obligation    $(14,152)  $(12,012)
                                                    ========   ========
       Projected benefit obligation                 $(16,339)  $(15,126)
       Plan assets at fair value                      22,510     20,726
                                                    --------   --------
       Funded status                                   6,171      5,600
       Unrecognized portion of net assets             (1,336)      (927)
                                                    --------   --------
       Prepaid pension                              $  4,835   $  4,673
                                                    ========   ========
</TABLE>

  The following items are the components of net periodic pension cost for the
  unfunded German plan for the years ended December 31, 1996, 1995, and 1994:
<TABLE>
<CAPTION>
 
                                                                            1996     1995      1994
                                                                            ----     ----      ---- 
<S>                                                                       <C>      <C>       <C>
       Service cost-benefits earned                                       $   115   $   107   $    97
       Interest cost on projected benefit obligations                         383       372       316
                                                                          -------   -------   -------
       Net periodic pension cost                                          $   498   $   479   $   413
                                                                          =======   =======   =======
       Vested and accumulated benefit obligation                          $ 4,759   $(4,700)  $(3,330)
                                                                          =======   =======   =======
       Projected benefit obligation                                       $(5,472)  $(5,519)  $(4,617)
       Unrecognized net gain                                                 (329)     (304)     (418)
                                                                          -------   -------   -------
       Unfunded accrued pension cost                                      $(5,801)  $(5,823)  $(5,035)
                                                                          =======   =======   =======
 
  10. OTHER INCOME AND EXPENSE
 
  Other income (expense), net includes:
                                                                             1996      1995      1994
                                                                          -------   -------   -------
       Interest income                                                    $   414   $   540   $   468
       Gain (loss) on sale of fixed assets                                     34       (90)     (284)
       Other income                                                            14       238       505
                                                                          -------   -------   -------
                                                                          $   462   $   688   $   689
                                                                          =======   =======   =======
</TABLE>

                                    Page 41
<PAGE>
 
           NOTES TO FINANCIAL CONSOLIDATED STATEMENTS - (CONTINUED)

  11.  RENTAL EXPENSE AND LEASE COMMITMENTS

  At December 31, 1996, the Company was obligated under operating leases
  expiring on various dates. Rental expense for the three years ended December
  31, 1996 was $8,309, $9,767, and $4,157, respectively. Annual rental
  commitments under noncancelable leases pertaining principally to buildings and
  equipment at December 31, 1996 are $7,941, $5,080, $2,716, $2,147, and $1,825
  for the years 1997 through 2001, and aggregate to $5,950 for all years
  subsequent to 2001.

  12.  FINANCIAL INFORMATION BY BUSINESS SEGMENT AND GEOGRAPHIC AREA

  SEGMENT INFORMATION

  Financial information by business segment and geographic area as set forth
  on Page 12 in Item 1 of this Annual Report is an integral part of these
  financial statements.

  13.  COMMON STOCK
  
  Both classes of common stock have equal rights upon liquidation. Class A
  Common Stock may not receive less cash dividends per share than Class B Common
  Stock, nor may such dividends be less frequent. The Class A Common Stock has
  one vote per share. Except as otherwise provided by the Certificate of
  Incorporation and by law, the Class B Common Stock has ten votes per share,
  and the Class B Common Stock is convertible into Class A Common Stock on a 
  one-for-one basis, and can be transferred in Class B form only to specified
  transferees, generally members of a shareowner's family and certain others
  affiliated with a shareowner. During 1996 and 1995, 4,971 shares and 12,246
  shares, respectively, were converted from Class B Common Stock to Class A
  Common Stock.

  During 1996, 19,000 shares were put into the treasury from a reimbursement of
  expenses that resulted from the 1994 acquisition of the Roch business from
  Diehl as provided for in the warranty provision of the Acquisition Agreement
  between the Company and Diehl (see Note 2). In 1995, 16,100 shares were put
  into the treasury from a forfeiture of restricted stock award.

  14. PREFERRED STOCK PURCHASE RIGHTS

  On March 23, 1988, the Company distributed a dividend of one purchase right
  for each outstanding share of common stock. Until the occurrence of specified
  events, the rights are represented by the associated common stock
  certificates. Following the distribution of the Class B Common Stock on June
  10, 1988, and until the occurrence of specified events, each certificate
  representing a share of Class A Common Stock or Class B Common Stock also
  represents three-quarters of a right. Each right entitles the shareowner to
  buy from the Company one-hundredth of a share of Series A Participating
  Preferred Stock at an exercise price of $55 per right. The rights become
  exercisable ten days after a party acquires 20% of the Company's common stock.
  The rights, which are subject to adjustment, may be redeemed by the Company at
  a price of $0.03 per right at any time prior to the fifteenth day after a
  person acquires 20% of the Company's common stock. The rights expire on March
  23, 1998.

  In the event the Company is involved in certain business combination
  transactions with a 20% shareowner, each right will entitle its holder (other
  than a 20% shareowner) to purchase, at the right's then exercise price, an
  equity interest in the acquiring person having a market value of two times the
  exercise price. In the event a 20% shareholder engages in certain other
  transactions with the Company or any person becomes a 20% shareowner, each
  right will entitle its holder (other than a 20% shareowner) to purchase, at
  the right's then exercise price, shares of Class A Common Stock having a
  market value of two times the exercise price.

  Prior to the DEA acquisition and entering into the Shareholders Agreement
  between the Company and Finmeccanica in 1994, the Company amended the Rights
  Agreement between it and the First National Bank of Boston dated March 9, 1988
  pursuant to authority reserved in such agreement to exclude 

                                    Page 42
<PAGE>
 
          NOTES TO FINANCIAL CONSOLIDATED STATEMENTS - (CONTINUED)  

  Finmeccanica from the definition of an "Acquiring Person" under the Rights
  Agreement so long as it does not own shares of Class A Common Stock other than
  those acquired in connection with the DEA acquisition and as provided in the
  Shareholders Agreement.

  15. QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
 
                                                             1996
                                           ---------------------------------------
                                           1st Qtr.   2nd Qtr.  3rd Qtr.  4th Qtr.
                                           ---------  --------  --------  --------
<S>                                        <C>        <C>       <C>       <C>
       Net sales                            $76,278    $89,835   $83,791   $94,973
       Gross profit                          26,988     30,879    28,552    33,916
       Net income                               550      1,854     1,257     4,144
       Earnings per common share            $  0.06    $  0.21   $  0.14   $  0.33
 
                                                             1995
                                           ---------------------------------------
                                           1st Qtr.   2nd Qtr.  3rd Qtr.  4th Qtr.
                                           --------   --------  --------  --------
       Net sales                            $75,868    $82,481   $78,571   $91,111
       Gross profit                          27,535     27,801    27,390    34,338
       Net income (loss)                     (1,455)     1,045       220     2,116
       Earnings (loss) per common share     $ (0.17)   $  0.12   $  0.03   $  0.24
</TABLE>

  In the second quarter of 1995, the Company increased its inventory valuation
  reserves which decreased net income $1,300 ($0.15 per share). In the third
  quarter of 1995, the Company made adjustments to the preliminary 1994
  estimates of fair values of the assets and liabilities of DEA S.p.A. for the
  purpose of purchase price accounting for the DEA acquisition. As a result of
  these adjustments, net income for the third quarter of 1995 increased by
  $1,171 ($0.13 per share). The aggregate effect of 1995 year-end adjustments
  was to increase fourth quarter net income by $940 ($0.11 per share), after
  taxes, which, primarily, resulted from an adjustment to inventory valuation
  allowances that were necessary to record inventory at locations outside the
  United States at FIFO cost. In addition, as discussed in greater detail in
  Note 1, the 1995 fourth quarter also includes an adjustment amounting to $640
  ($0.07 per share), after taxes, relating to a revaluation of 1994 foreign
  denominated liabilities.

                                    Page 43
<PAGE>
 
  ITEM 9 - DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
  -------------------------------------------------------------------
           DISCLOSURE
           ----------

     None.


                                    PART III
                                    --------

  ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
  ------------------------------------------------------------

  Directors
  ---------

  Refer to "INFORMATION WITH RESPECT TO NOMINEES AND OTHER DIRECTORS
  CONTINUING IN OFFICE" in the Company's definitive Proxy Statement for the
  April 25, 1997 Annual Meeting which is incorporated herein by reference.

  Executive Officers
  ------------------

  Refer to Item 4A of this Annual Report on Form 10-K for information
  regarding Executive Officers.

  ITEM 11 - MANAGEMENT REMUNERATION AND TRANSACTIONS
  --------------------------------------------------

  Refer to "EXECUTIVE COMPENSATION" in the Company's definitive Proxy Statement
  for the April 25, 1997 Annual Meeting which is incorporated herein by
  reference.

  ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
  ------------------------------------------------------------------------

  Refer to "Principal Shareholders" and "STOCK OWNERSHIP OF DIRECTORS AND
  OFFICERS" in the Company's definitive Proxy Statement for the April 25,
  1997 Annual Meeting which are incorporated herein by reference.

  ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  --------------------------------------------------------

  Refer to "CERTAIN RELATIONSHIPS" in the Company's definitive Proxy Statement
  for the April 25, 1997 Annual Meeting which is incorporated herein by
  reference.


                                    PART IV
                                    -------

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

  Financial Statements filed in Item 8 of this Annual Report
  ----------------------------------------------------------

  Consolidated Statements of Operations for the Years Ended 
  December 31, 1996, 1995 and 1994

  Consolidated Balance Sheets at 
  December 31, 1996 and 1995

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

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

  Notes to Consolidated Financial Statements

                                    Page 44
<PAGE>
 
  Financial Statement Schedule
  ----------------------------

  Schedule II - Valuation and Qualifying Accounts

  Statements and Schedules Omitted
  --------------------------------

  Individual financial statements of the Registrant's subsidiaries are omitted
  because the Registrant is primarily an operating Company and all subsidiaries
  included in the consolidated financial statements are wholly-owned
  subsidiaries.

  Schedules other than those listed above are omitted because they are not
  required, are not applicable, or the information is included in the financial
  statements.

  Exhibits
  --------

  Exhibits have been filed separately with the Securities and Exchange
  Commission in connection with this Annual Report on Form 10-K or have been
  incorporated into the report by reference.  A list briefly describing such
  Exhibits has been enclosed in this Annual Report.

  Reports on Form 8-K
  -------------------

  No form 8-K was filed during 1996.

                                    Page 45
<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.

                                     BROWN & SHARPE MANUFACTURING COMPANY
                                     (Registrant)


     Date:  March 27, 1997           By:  /s/ Charles A. Junkunc
            --------------                ----------------------
                                          Charles A. Junkunc
                                          Vice President and
                                          Chief Financial Officer

  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.


     /s/ Frank T. Curtin       3/27/97    /s/ Howard K. Fuguet          3/27/97
     ---------------------------------    -------------------------------------
     Frank T. Curtin              Date    Howard K. Fuguet                 Date
     President, Chief Executive Officer   Director
     (Principal Executive Officer),
     Chairman of the Board, and Director


     /s/ J. Robert Held        3/27/97    /s/ John M. Nelson            3/27/97
     ---------------------------------    -------------------------------------
     J. Robert Held               Date    John M. Nelson                   Date
     Director                             Director



     /s/ Paul R. Tregurtha     3/27/97     /s/ Russell A. Boss          3/27/97
     ---------------------------------     ------------------------------------
     Paul R. Tregurtha            Date     Russell A. Boss                 Date
     Director                              Director



     /s/ Henry D. Sharpe, III  3/27/97     /s/ Roger E. Levien          3/27/97
     ---------------------------------     ------------------------------------
     Henry D. Sharpe, III         Date     Roger E. Levien                 Date
     Director                              Director



     /s/ Harry A. Hammerly     3/27/97     /s/ Charles A. Junkunc       3/27/97
     ---------------------------------     ------------------------------------
     Harry A. Hammerly            Date     Charles A. Junkunc              Date
     Director                              Vice President and Chief Financial
                                           Officer (Principal Financial Officer)



     /s/ Alfred J. Corso    3/27/97
     ------------------------------
     Alfred J. Corso          Date
     Controller
     (Principal Accounting Officer)

                                    Page 46
<PAGE>
 
  DIRECTORS
  ---------

  Russell A. Boss, Director and President & Chief Executive Officer, A. T.
  Cross Company

  Frank T. Curtin, President & Chief Executive Officer, Brown & Sharpe
  Manufacturing Company

  Howard K. Fuguet, Partner, in the law firm of Ropes & Gray

  Harry A. Hammerly, Former Executive Vice President, 3M Company

  J. Robert Held, Consultant, Former President and Chief Executive Officer of
  Chipcom Corporation

  Roger E. Levien, Vice President, Strategy and Innovation, Xerox Corporation

  John M. Nelson, Chairman & Chief Executive Officer, Wyman-Gordon Company

  Henry D. Sharpe, III, Co-founder & Technical Director, Design Lab, Inc.

  Paul R. Tregurtha, Chairman of the Board and Chief Executive Officer, Mormac
  Marine Group, Inc.

  OFFICERS
  --------

  Frank T. Curtin, President, Chief Executive Officer, and Chairman of the Board

  Charles A. Junkunc, Vice President  & Chief Financial Officer

  Antonio Aparicio, Vice President & General Manager - Precision Measuring
  Instruments

  Marcus Burton, Vice President & General Manager - Custom Metrology

  Robert D. Batting, Vice President & General Manager, Measuring Systems -
  U.S.A.

  Edward J. LaGraize, Vice President & General Manager - Commercial Operations,
  Measuring Systems

  Sergio Cappa, Vice President & General Manager - DEA-Brown & Sharpe - S.p.A.

  C. John Cooke, Vice President & Chief Technical Officer

  James W. Cooper, Vice President - Procurement

  Christopher J. Garcia, Vice President - Marketing

  Karl J. Lenz, Vice President

  James W. Hayes, III, Secretary & Corporate Counsel

  Alfred J. Corso, Controller

  INVESTOR INFORMATION
  --------------------

  Annual Meeting: The Annual Meeting of Stockholders will be held April 25, 1997
  at 10:00 a.m. at the Corporate Offices

  Corporate Offices: Precision Park, 200 Frenchtown Road, North Kingstown, RI
  02852; Telephone (401) 886-2000

                                    Page 47
<PAGE>
 
  Form 10-K Report: A copy of the Company's Annual Report as filed with the
  Securities and Exchange Commission is available upon request to the Secretary.

  Stock Listing:  New York Stock Exchange; Symbol BNS

  Trustee and Registrar for the 9-1/4% Convertible Subordinated Debentures:
  First Trust New York, 100 Wall Street, Suite 1600, New York, NY 10015

  Transfer Agent and Registrar Common Stock: Bank of Boston, c/o Boston
  EquiServe, L.P., Mail-Stop 45-02-64, P.O. Box 644, Boston, MA 02012-0644. They
  also can be reached on the internet at the following address
  http://www.equiserve.com.

                                    Page 48
<PAGE>
 
                      BROWN & SHARPE MANUFACTURING COMPANY
                      ------------------------------------
                Schedule II - Valuation and Qualifying Accounts
                -----------------------------------------------
                             (dollars in thousands)
<TABLE>
<CAPTION>
 
 
                                         Balance at  Charged to                 Foreign     Balance at
                                         Beginning   Costs and                  Currency      End of
     Year Ended                          of Period    Expenses   Deductions   Translation     Period
     ----------                         ----------  -----------  ------------  ----------   ----------
                                                                     (2)           (1)
<S>                                     <C>         <C>         <C>          <C>           <C>
     December 31, 1996
     -----------------
 
     Allowance for doubtful accounts        $3,030      $  941      $  761         $ 16       $3,226
 
     December 31, 1995
     -----------------

     Allowance for doubtful accounts        $3,103      $2,124      $2,330         $133       $3,030 
     


     December 31, 1994
     -----------------

     Allowance for doubtful accounts        $1,320      $2,833      $1,117         $ 67      $3,103

     (1)  Adjustment resulting from translating allowance for doubtful accounts
          of foreign subsidiaries at year-end exchange rates.

     (2)  Write-offs of uncollectible accounts.

</TABLE> 

                                    Page 49
<PAGE>
 
                                 Exhibit Index
                                 -------------

      Number
      ------

        3.1  Joint Agreement of Merger between Brown & Sharpe Manufacturing
             Company, incorporated in Rhode Island, and Brown & Sharpe
             Manufacturing Company, the surviving corporation incorporated in
             Delaware, filed as the only Exhibit to Form 8-K for the month of
             January, 1969, and such is hereby incorporated by reference.

        3.2  Amendment to Certificate of Incorporation, dated April 27, 1979,
             filed as Exhibit 13 to Form 10-K for the period ending December 29,
             1979, and such is hereby incorporated by reference.

        3.3  Amendment to Certificate of Incorporation, Dated April 25, 1980,
             filed as Exhibit 3.1 to Form 10-Q for the period ending June 28,
             1980, and such is hereby incorporated by reference.
 
        3.4  Amendment to Certificate of Incorporation dated April 24, 1987.
             Exhibit 3.7 was filed as Exhibit 10.4 to Form 10-Q for the period
             ended June 27, 1987, and such is hereby incorporated by reference.

        3.5  Amendment to Certificate of Incorporation dated May 6, 1988 filed
             as Exhibit 1 to Current Report on Form 8-K filed May 9, 1988 and
             such is hereby incorporated by reference.

        3.6  Certificate of Designation filed as Exhibit A to Exhibit 5 of
             Amendment on Form 8 filed on March 6, 1989, and such is hereby
             incorporated by reference.

        3.7  Amendment to Certificate of Incorporation dated May 2, 1989.
             Exhibit 3.7 was filed as Exhibit 3.7 to the Form 10-K for the year
             ended December 30, 1989 and such is hereby incorporated by
             reference.

        3.8  By-laws of Brown & Sharpe Manufacturing Company, as amended through
             July 29, 1994; previously filed as Exhibit 3.1 to the Form 10-Q for
             the quarter ended July 2, 1994 and such is hereby incorporated by
             reference.

        3.9  Amendments to By-laws of Brown & Sharpe Manufacturing Company, as
             of September 28, 1994; previously filed as Exhibit 3 to the Form 
             10-Q for the quarter ended October 1, 1994 and such is hereby
             incorporated by reference.

        4.1  Indenture dated October 1, 1980 (including form of debenture)
             between the Company and Morgan Guaranty Trust Company of New York
             as Trustee relating to 9 1/4% convertible subordinated debentures
             due December 15, 2005, filed as Exhibit 2 to Form 8-A dated October
             8, 1980 and such is hereby incorporated by reference.

             The Registrant hereby agrees to furnish to the Commission upon
             request copies of any long-term debt instruments not filed herewith
             because the securities authorized under any such instrument do not
             exceed ten percent of total assets of the Registrant and its
             Consolidated Subsidiaries.

      +10.1  (Intentionally omitted)

      +10.2  Amended 1973 Stock Option Plan, as amended through March 9, 1988.
             Exhibit 10.2 was filed as Exhibit 10.2 to the Form 10-K for the
             year ended December 31, 1988, and is hereby incorporated herein by
             reference.

                                    Page 50
<PAGE>
 
      +10.3  Amendment dated December 29, 1990 to the Brown & Sharpe Amended
             1973 Stock Option Plan.  Exhibit 10.3 was filed as Exhibit 10.3 to
             the Form 10-K for the year ended December 29, 1990 and such is
             herein incorporated by reference.

      +10.4  Amendment No. 4 of the Restated Brown & Sharpe Employee Stock
             Ownership and Profit Participation Plan and Trust Agreement, as
             amended through December 21, 1990.  Exhibit 10.4 was filed as
             Exhibit 10.4 to the Form 10-K for the year ended December 29, 1990;
             and is hereby incorporated herein by reference.

       10.5  (Intentionally omitted)

       10.6  (Intentionally omitted)

      +10.7  Deferred Stock Equivalent Unit Contract dated December 31, 1982
             between Brown & Sharpe Manufacturing Company and Donald A. Gaudion.
             Exhibit 10.7 was filed as Exhibit 10.24 to Form 10-K for the period
             ended December 25, 1982, and such is hereby incorporated by
             reference.

      +10.8  (Intentionally omitted)

      +10.9  The Brown & Sharpe Savings and Retirement Plan for Management
             Employees dated October 7, 1987.

       10.10 The Brown & Sharpe Savings and Retirement Plan dated October 7,
             1987.

      +10.11 Amendment and Restatement of the Brown & Sharpe Employee Stock
             Ownership and Profit Participation Plan and Trust Agreement dated
             October 7, 1987.

             Exhibits 10.9 through 10.11 were filed as Exhibits 10.2 through
             10.4 respectively, to Form 10-Q for the period ended September 26,
             1987 and such are hereby incorporated by reference.

       10.12 Preferred Stock Rights Agreement dated as of March 9, 1988, between
             the Company and The First National Bank of Boston, as Rights Agent.
             Exhibit 10.12 was filed as Exhibits 1-4 to the Registration
             Statement on Form 8-A filed on April 28, 1988, and is hereby
             incorporated herein by reference.

       10.13 Amendment No. 1, dated as of May 2, 1988, to Preferred Stock Rights
             Agreement. Exhibit 10.13 was filed as Exhibit 5 to Amendment No. 1
             on Form 8, filed on March 6, 1989, to the Registration Statement on
             Form 8-A filed on April 28, 1988, and is hereby incorporated herein
             by reference.

       10.14 Amendment No. 2, dated as of February 24, 1989, to Preferred Stock
             Rights Agreement. Exhibit 10.14 was filed as Exhibit 6 to Amendment
             No. 1 on Form 8, filed on March 6, 1989, to the Registration
             Statement on Form 8-A filed on April 28, 1988, and is hereby
             incorporated herein by reference.

      +10.15 Amendment dated February 23, 1989 to The Brown & Sharpe Savings and
             Retirement Plan for Management Employees.

      +10.16 Amendment No. 2, dated October 19, 1988, to The Brown & Sharpe
             Savings and Retirement Plan for Management Employees.

      +10.17 Amendment No. 3, dated February 23, 1989, to The Brown & Sharpe
             Savings and Retirement Plan for Management Employees.

                                    Page 51
<PAGE>
 
       10.18 Amendment dated February 23, 1989 to The Brown & Sharpe Savings and
             Retirement Plan.

       10.19 Amendment No. 2, dated October 19, 1988, to The Brown & Sharpe
             Savings and Retirement Plan.

       10.20 Amendment No. 3, dated February 23, 1989, to The Brown & Sharpe
             Savings and Retirement Plan.

      +10.21 Amendment dated February 23, 1989, to the Restated Brown & Sharpe
             Employee Stock Ownership and Profit Participation Plan and Trust
             Agreement.

      +10.22 Amendment No. 2, dated October 19, 1988 to the Restated Brown &
             Sharpe Employee Stock Ownership and Profit Participation Plan and
             Trust Agreement.

      +10.23 Amendment No. 3, dated February 23, 1989 to the Restated Brown &
             Sharpe Employee Stock Ownership and Profit Participation Plan and
             Trust Agreement.

             Exhibits 10.15 through 10.23 were filed as Exhibits 10.19 through
             10.27, respectively, to the Form 10-K for the year ended December
             31, 1988, and are hereby incorporated herein by reference.

      +10.24 Amended 1989 Equity Incentive Plan as amended through February 21,
             1992. Exhibit 10.24 was filed as Exhibit 10.24 to the Form 10-K for
             the year ended December 28, 1991 and such is hereby incorporated by
             reference.

      +10.25 Deferred Stock Equivalent Unit Contract dated September 3, 1987
             between Brown & Sharpe Manufacturing Company and Paul R. Tregurtha.
             Exhibit 10.25 was filed as Exhibit 10.24 to the Form 10-K for the
             year ended December 30, 1989 and such is herein incorporated by
             reference.

      +10.26 Form of amendment dated April 30, 1991 to Deferred Stock Equivalent
             Unit Contract dated September 3, 1987 between Brown & Sharpe
             Manufacturing Company and Paul R. Tregurtha. Exhibit 10.26 was
             filed as Exhibit 10.26 to the Form 10-K for the year ended December
             28, 1991 and such is hereby incorporated by reference.

      +10.27 Deferred Stock Equivalent Unit Contract dated November 30, 1989
             between Brown & Sharpe Manufacturing Company and Herbert A. Beyer.
             Exhibit 10.27 was filed as Exhibit 10.25 to the Form 10-K for the
             year ended December 30, 1989 and such is hereby incorporated by
             reference.

      +10.28 Form of amendment dated April 30, 1991 to Deferred Stock Equivalent
             Unit Contract Dated November 30, 1989 between Brown & Sharpe
             Manufacturing Company and Herbert A. Beyer. Exhibit 10.28 was filed
             as Exhibit 10.28 to the Form 10-K for the year ended December 28,
             1991 and such is hereby incorporated by reference.

      +10.29 Amendment No. 4, dated October 20, 1989, to Brown & Sharpe Savings
             and Retirement Plan for Management Employees. Exhibit 10.29 was
             filed as Exhibit 10.26 to the Form 10-K for the year ended December
             30, 1989 and such is hereby incorporated by reference.

       10.30 Amendment No. 4, dated October 30, 1989, to Brown & Sharpe Savings
             and Retirement Plan. Exhibit 10.30 was filed as Exhibit 10.27 to
             the Form 10-K for the year ended December 30, 1989 and such is
             hereby incorporated by reference.

       10.31 Amendment No. 5, dated September 7, 1990, of the Brown & Sharpe
             Savings and Retirement Plan. Exhibit 10.31 was filed as Exhibit
             10.30 to the Form 10-K for the year ended December 29, 1990 and
             such is hereby incorporated by reference.

                                    Page 52
<PAGE>
 
      +10.32 Amendment No. 5, dated September 7, 1990, of the Brown & Sharpe
             Savings and Retirement Plan for Management Employees. Exhibit 10.32
             was filed as Exhibit 10.31 to the Form 10-K for the year ended
             December 29, 1990 and such is hereby incorporated by reference.

       10.33 The acquisition agreement pertaining to the acquisition of Wild
             Leitz Messtechnik GmbH and The Marketing and Sales Assets of the
             IMT Division of LEICA plc by Brown & Sharpe Manufacturing Company,
             dated June 29, 1990, was filed as Exhibit 10.1 to Form 10-Q for the
             period ended June 30, 1990 and is hereby incorporated herein by
             reference.

      +10.34 (Intentionally omitted)

      +10.35 (Intentionally omitted)

      +10.36 Employment/severance agreement dated March 14, 1988 between Brown &
             Sharpe Manufacturing Company and Richard F. Paolino.

      +10.37 (Intentionally omitted)

             Exhibits 10.34 through 10.37 were filed as Exhibits 10.34 through
             10.37, respectively, to the Form 10-K for the year ended December
             28, 1991, and are hereby incorporated by reference.

      +10.38 The sales agreement pertaining to the sale of GageTalker
             Corporation to P. Eric Berg by Brown & Sharpe Manufacturing Company
             dated January, 1992.  Exhibit 10.38 was filed as Exhibit 10.38 to
             the Form 10-K for the year ended December 28, 1991 and is hereby
             incorporated by reference.

      +10.39 (Intentionally omitted)

      +10.40 Amendment No. 5 of the Restated Brown & Sharpe Employee Stock
             Ownership and Profit Participation Plan and Trust Agreement, as
             amended through March 23, 1991.

      +10.41 Employment/Severance Agreement dated April 23, 1992 between Brown &
             Sharpe Manufacturing Company and Charles A. Junkunc.

      +10.42 Amendment dated July 24, 1992 to Employment/Severance Agreement
             dated April 23, 1992 between Brown & Sharpe Manufacturing Company
             and Charles A. Junkunc.

      +10.43 Amendment dated November 11, 1992 to 1989 Equity Incentive Plan as
             amended through November 6, 1992.

             Exhibits 10.38 through 10.43 were filed as Exhibits 10.38 through
             10.43, respectively, to the Form 10-K for the year ended December
             26, 1992, and are hereby incorporated by reference.

       10.44 The Share Purchase and Transfer agreement dated March 24, 1994 by
             and between Diehl GmbH & Co. and Brown & Sharpe Manufacturing
             Company was filed as Exhibit (c) to Form 8-K filed as of May 13,
             1994, and is hereby incorporated by reference.

       10.45 The Acquisition Agreement pertaining to the acquisition of DEA
             dated as of June 10, 1994 between Brown & Sharpe Manufacturing
             Company and Finmeccanica S.p.A.

       10.46 The Form of Shareholders Agreement to be entered into between Brown
             & Sharpe Manufacturing Company and Finmeccanica, S.p.A.

                                    Page 53
<PAGE>
 
       10.47 Amendment No. 3, dated June 16, 1994, to Rights Agreement, dated
             March 9, 1988 between Brown & Sharpe Manufacturing Company and the
             First National Bank of Boston, as Rights Agent.

             Exhibits 10.45 through 10.47 were filed as Exhibits 1 through 3,
             respectively, to the Form 8-K filed as of June 24, 1994, and are
             hereby incorporated by reference.

       10.48 Definitive acquisition Agreement providing for the combination of
             the DEA metrology business of Finmeccanica (the "DEA Group") with
             the Brown & Sharpe Measuring Systems Division dated as of June 10,
             1994 between Brown & Sharpe Manufacturing Company and Finmeccanica
             S.p.A., was filed as Exhibit 1 to Form 8-K dated June 24, 1994, and
             is hereby incorporated by reference.

       10.49 Amendment No. 1 dated July 31, 1994, to Acquisition Agreement,
             amending certain debt provisions of the agreement was filed as
             Exhibit 10.1.1 to Form 10-Q/A for the quarter ended July 2, 1994
             and is hereby incorporated by reference.

       10.50 Letter Agreement of Henry D. Sharpe, Jr. dated September 28, 1994
             entered into pursuant to the DEA Acquisition Agreement (was filed
             as Exhibit No. 3 to Report on Form 8-K as of September 28, 1994),
             filed October 13, 1994 is hereby incorporated by reference.

       10.51 Amendment No. 6, dated November 10, 1994, to Brown & Sharpe Savings
             and Retirement Plan for Management Employees.

       10.52 Amendment No. 6, dated November 10, 1994, to Brown & Sharpe Savings
             and Retirement Plan.

       10.53 Amended Profit Incentive Plan, as amended through February 14,
             1994.

       10.54 Restated Supplemental Executive Retirement Plan dated January 23,
             1995, filed as Exhibit 10.54 to Form 10-Q for the quarter ended
             March 31, 1995, and is hereby incorporated by reference.

       10.55 Amendment to the Equity Incentive Plan as of February 15, 1995,
             filed as Exhibit 10.55 to Form 10-Q for the quarter ended March 31,
             1995, and is hereby incorporated by reference.

       10.56 Amendment No. 1 dated May 31, 1995 to the Brown & Sharpe Savings
             and Retirement Plan for Management Employees. (1994 Restatement)

       10.57 Amendment No. 2 dated May 31, 1995 to the Brown & Sharpe Savings
             and Retirement Plan for Management Employees. (1994 Restatement)

       10.58 Amendment No. 1 dated May 31, 1995 to the Brown & Sharpe Savings
             and Retirement Plan. (1994 Restatement)

       10.59 Severance termination agreement for Fred Stuber dated May 3, 1995.

       10.60 Employment Agreement with Frank T. Curtin dated May 17, 1995.

             Exhibits 10.56 through 10.60 were filed as Exhibits 10.56 through
             10.60, respectively, to the Form 10-Q for the quarter ended June
             30, 1995, and are hereby incorporated by reference.

       10.61 Indemnity Agreement with Frank T. Curtin dated May 3, 1995.

       10.62 Indemnity Agreement with Alfred J. Corso dated May 3, 1995.

                                    Page 54
<PAGE>
 
       10.63 Indemnity Agreement with Enrico Albareto dated October 28, 1994.

       10.64 Indemnity Agreement with Alberto de Benedictis dated October 28,
             1994.

       10.65 Indemnity Agreement with Vincenzo Cannatelli dated October 28,
             1994.

             Exhibits 10.61 through 10.65 were filed as Exhibits 10.61 through
             10.65, respectively, to the Form 10-Q for the quarter ended
             September 30, 1995, and are hereby incorporated by reference.

       10.66 Indemnity Agreement with Robert D. Batting dated October 5, 1995.

       10.67 Letter Agreement with Finmeccanica dated December 18, 1995
             concerning Purchase Price Adjustment.

       10.68 The Brown & Sharpe Key Employee Long-Term Deferred Cash Incentive
             Plans dated February 23, 1996 effective January 1, 1995.

       10.69 Amendment dated July 28, 1995 to Employment/Severance Agreement
             dated March 14, 1988 between Brown & Sharpe Manufacturing Company
             and Richard F. Paolino.

       10.70 (Intentially omitted)

       10.71 Employment Agreement with Robert D. Batting dated September 26,
             1995.

       10.72 Employment Agreement with C. John Cooke dated November 26, 1991.

       10.73 Employment Agreement with Antonio Aparicio dated October 17, 1995.

       10.74 Employment Agreement with Edward J. LaGraize dated August 12, 1996,
             as amended August 13, 1996.

       10.75 Employment Agreement with James W. Cooper dated July 17, 1996, as
             amended July 24, 1996 and August 1, 1996.

       10.76 Amendment to Employment Agreement with Frank T. Curtin dated as of
             January 1, 1996.

             Exhibits 10.69 through 10.76 were filed as Exhibits 10.69 through
             10.76, respectively, to the Form S-1 dated October 9, 1996, and are
             hereby incorporated by reference.

       10.77 Amendment dated September 12, 1996 to Richard F. Paolino's
             Employment Agreement, filed as Exhibit 10.77 to the Form 10-Q for
             the quarter ended September 30, 1996, and is hereby incorporated by
             reference.

      *10.78 Indemnity Agreement with James W. Cooper dated August 19, 1996.

      *10.79 Indemnity Agreement with Harry A. Hammerly dated October 25, 1996.

      *10.80 Indemnity Agreement with John Robert Held dated October 25, 1996.

      *10.81 Indemnity Agreement with Roger E. Levien dated October 25, 1996.

      *10.82 Indemnity Agreement with Christopher J. Garcia dated January 1,
             1997.

      *10.83 Indemnity Agreement with Marcus Burton dated January 1, 1997.

                                    Page 55
<PAGE>
 
      *11.   Computation of Per Share Data for the Three Years Ended December
             31, 1996.

       18.   Letter of Coopers & Lybrand, independent accountants, regarding
             preferability of change in accounting principles to conform
             worldwide use of percent-of-completion basis accounting for long-
             term large machinery construction contracts of the European
             operations, filed as Exhibit 18 to Form 10-Q for the quarter ended
             April 2, 1994, and is hereby incorporated by reference.

      *22.   Subsidiaries of the Registrant.

      *24.1  Consent of Independent Auditors - Ernst & Young LLP.

      *24.2  Consent of Independent Auditors - Coopers & Lybrand L.L.P.


     * To obtain a copy of the Exhibits filed with this Annual Report on Form
       10-K, refer to page 57.

     + This identifies management contracts or compensatory plans.

                                    Page 56
<PAGE>
 
     Shareholders may obtain the following Exhibits filed with the 1996 Annual
     Report on Form 10-K upon request.  Charges will be made according to the
     following schedule and payment should be made by either check or money
     order and should accompany the request.  The charge for all 1996 Exhibits
     is $22.21.  Charges for previously filed Exhibits incorporated by reference
     will be provided upon request.  Requests should be directed to:  Secretary,
     Brown & Sharpe Manufacturing Company, P.O. Box 456, Precision Park, North
     Kingstown, Rhode Island 02852.
<TABLE>
<CAPTION>
 
      Exhibit                                                 Pages    Postage  Total
      -------                                                 ------   -------  ------
<S>                                                           <C>      <C>     <C>
 
       10.78  Indemnity Agreement with
              James W. Cooper dated August 19, 1996.           10       $.78    $3.28
 
       10.79  Indemnity Agreement with
              Harry A. Hammerly dated October 25, 1996.        10       $.78    $3.28
 
       10.80  Indemnity Agreement with
              John Robert Held dated October 25, 1996.         10       $.78    $3.28
 
       10.81  Indemnity Agreement with
              Roger E. Levien dated October 25, 1996.          10       $.78    $3.28
 
       10.82  Indemnity Agreement with
              Christopher J. Garcia dated January 1, 1997.     10       $.78    $3.28
 
       10.83  Indemnity Agreement with
              Marcus Burton dated January 1, 1997.             10       $.78    $3.28
 
       11.    Computation of Per Share Earnings for the                                           
              Three Years Ended December 31, 1996.              1       $.32    $ .57
              
       22.    Subsidiaries of the Registrant.                   2       $.32    $ .82
                                                                                                    
       24.1   Consent of Independent Auditors                                                     
              - Ernst & Young LLP.                              1       $.32    $ .57
                                                                                                    
       24.2   Consent of Independent Auditors                                                     
              - Coopers & Lybrand L.L.P.                        1       $.32    $ .57
 
</TABLE>

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