<PAGE>   1
 
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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                   FORM 10-K
 
(MARK ONE)
[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
      ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 27, 1996
 
[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
      EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM                TO
 
                           COMMISSION FILE NO. 1-7744
 
                           PACIFIC SCIENTIFIC COMPANY
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
<TABLE>
<S>                                           <C>
                  CALIFORNIA                                    94-0744970
(STATE OR OTHER JURISDICTION OF INCORPORATION      (I.R.S. EMPLOYER IDENTIFICATION NO.)
                OR ORGANIZATION)
</TABLE>
 
                      620 NEWPORT CENTER DRIVE, SUITE 700
                        NEWPORT BEACH, CALIFORNIA 92660
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
 
                                 (714) 720-1714
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
 
<TABLE>
<CAPTION>
                                                          NAME OF EACH EXCHANGE
             TITLE OF EACH CLASS                           ON WHICH REGISTERED
--------------------------------------------------------------------------------------------
<S>                                           <C>
   Common Stock, par value $1.00 per share               New York Stock Exchange
       7 3/4% Convertible Subordinated
         Debentures due June 15, 2003                    New York Stock Exchange
</TABLE>
 
     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes [X]  No [ ]
 
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K 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 of the voting stock held by non-affiliates of
the registrant, computed on the basis of $13.625 per share, which was the last
sale price on the New York Stock Exchange on February 28, 1997, was
$166,363,000.
 
     As of February 28, 1997, there were 12,210,129 shares of registrant's
common stock outstanding.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
     Definitive Proxy Statement to be filed pursuant to Regulation 14A relating
to the 1997 Annual Meeting of Stockholders (incorporated by reference in Part
III).
================================================================================
<PAGE>   2
 
                           PACIFIC SCIENTIFIC COMPANY
 
                           ANNUAL REPORT ON FORM 10-K
 
                        FOR YEAR ENDED DECEMBER 27, 1996
 
                                     INDEX
 
<TABLE>
<CAPTION>
                                                                                           PAGE
                                                                                           ----
<S>        <C>                                                                             <C>
Item  1.   Description of Business.......................................................     1
Item  2.   Properties....................................................................     7
Item  3.   Legal Proceedings.............................................................     7
Item  4.   Submission of Matters to a Vote of Security Holders...........................     8
Item  5.   Market for Common Equity and Related Stockholder Matters......................     9
Item  6.   Selected Financial Data.......................................................     9
Item  7.   Management's Discussion and Analysis..........................................    10
Item  8.   Financial Statements and Supplementary Data:
           Independent Auditors' Report..................................................    16
           Consolidated Statements of Operations.........................................    17
           Consolidated Balance Sheets...................................................    18
           Consolidated Statements of Stockholders' Equity...............................    19
           Consolidated Statements of Cash Flows.........................................    20
           Financial Information About Industry Segments.................................    21
           Notes to Consolidated Financial Statements....................................    22
Item  9.   Changes in and Disagreements with Accountants on Accounting and Financial
           Disclosure....................................................................    36
Item 10.   Directors and Executive Officers of the Registrant............................    36
Item 11.   Executive Compensation........................................................    36
Item 12.   Security Ownership of Certain Beneficial Owners and Management................    36
Item 13.   Certain Relationships and Related Transactions................................    36
Item 14.   Exhibits, Financial Statement Schedules and Reports on Form 8-K...............    36
           Exhibit 11.0  Computation of Earnings Per Share...............................    39
           Exhibit 21.0  Subsidiaries....................................................    40
           Schedule II -- Valuation and Qualifying Accounts..............................    41
</TABLE>
<PAGE>   3
 
This Report contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934. Actual results and events could
differ materially from those set forth in or implied in the forward-looking
statements and other related assumptions contained in this Report.
 
                                     PART I
 
ITEM 1.  BUSINESS
 
(A) GENERAL DESCRIPTION OF BUSINESS
 
Pacific Scientific Company ("Registrant" or the "Company") was incorporated in
California in 1937 as successor to a company in business since 1919. It has used
the name Pacific Scientific Company since 1923. Registrant's business is
manufacturing and selling the products of its two segments, Electrical Equipment
and Safety Equipment.
 
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
 
A table setting forth for the amounts of revenue, operating profit or loss and
identifiable assets attributable to each of the Registrant's industry segments
in each of its last three fiscal years is contained in Item 8, captioned
"Industry Segment Information."
 
(C) NARRATIVE DESCRIPTION OF BUSINESS
 
Electrical Equipment
 
(1) Motors and Controls
 
Pacific Scientific produces several types of high-performance rotating
electrical equipment including motors, generators and alternators. In addition,
the Company produces motor drives, controls and systems as described below:
 
Brushless Motors and Controls:  Motors in this product line start at two inches
in diameter and continue up to 25 inches. The power range is up to 400HP.
Pacific Scientific manufactures electronic drives to operate these motors and to
precisely control torque, speed direction, braking and shaft position. These
motors are used mainly in industrial applications.
 
Hybrid Step Motors:  Step motors are produced in three diameters of 2, 3 and 4
inches and each diameter is produced in several stack lengths. Torque for these
motors range from 40 oz-in to 5000 oz-in. Pacific Scientific manufactures
electronic drives to operate these motors and to control speed, direction and
shaft position. These motors are used in industrial, medical and many other
applications.
 
Permanent Magnet DC Motor:  Brush-type permanent magnet DC motors are produced
in 4- and 6-inch diameters in a power range of 1/8 HP to 3 HP. The motors
provide high torque, quiet operation and long brush life. Applications include
factory automation, treadmills, paint sprayers, sporting equipment and a wide
range of other uses.
 
Low-Inertia Permanent Magnet Motors:  Brush-type low-inertia permanent magnet
motors are designed for fast starts and fast stops and provide torque up to 550
oz-in. The motors are used in electronic assembly equipment and for applications
for light-industrial automation.
 
Alternators and Generators:  High speed air-cooled alternators, with output up
to 50 kw, are provided for aircraft and other applications. Some of these
alternators operate up to speeds of 100,000rpm. The Company also manufactures
motor-generators for converting DC to AC current, typically 12 volts DC to 120
volts, 60 cycle AC.
 
Multi-axis Controller:  Multi-axis controllers operate several brushless and
step motors and drives as a single coordinated system. Typical applications are
in packaging equipment and other automated industrial systems.
 
                                        1
<PAGE>   4
 
Turn-Key Systems:  Custom-built turn-key machine control systems, usually
utilizing Pacific Scientific motors and drives, are supplied to end-users or
equipment producers to automate complex manufacturing and packaging processes.
Applications include wire-drawing, film processing, flexible manufacturing jigs,
glass making and other similar types of complex requirements.
 
(2) Instruments
 
Pacific Scientific produces several types of electro-optical instruments to
detect and measure particles in liquids, vacuums, solids and gases. The
particles measured range in size from submicron (about 1/100 of the diameter of
a human hair) to about a millimeter (the thickness of a coin) The four main
markets served are:
 
Semiconductor Manufacturing:  Instruments are supplied to measure and count
particles on a real-time basis in vacuum processing equipment, in chemicals and
water used in processing silicon wafers and in the air in clean rooms.
 
Life Science:  Instruments are supplied to provide particle monitoring of
liquids used in the manufacture of medicine, drugs and medical devices. These
manufacturers are also customers for the Company's instruments to measure
airborne particles. Many of these measurements are required by Food and Drug
Administration to assure good manufacturing practices, product quality and
cleanliness. The use of similar requirements is emerging in the food and
beverage manufacturing industry.
 
Fluid Power:  Instruments are supplied to monitor contamination levels in
hydraulic and lubricating fluids used in power generation, construction
equipment, automation, aircraft control systems, and other similar applications.
 
Drinking Water:  Instruments are supplied to water processing plants to
determine the quality of drinking water and increase the efficiency in recycling
filters.
 
(3) Products for Electric Utilities
 
Outdoor Lighting Controls:  The Company produces over five million photoelectric
controls each year for street, highway, industrial and residential outdoor area
lighting applications. These devices contain a photo cell and a thermal,
electromechanical or electronic control. Each of these versions address a
specific application need.
 
Capacitor Controls:  These electronic devices monitor several parameters to
optimize capacitor switching which reduces line losses and manages voltage
profile on an electric utility's distribution system.
 
Fault Indicators:  These electronic devices are placed at key points on an
electrical utility's distribution system to assist in the rapid restoration of
power by targeting the location of line failures.
 
Metering Devices:  These instruments services are used to test and verify
calibration and integrity of three-phase meters and their installations.
 
(4) Electronic Ballast for Fluorescent Lamps:
 
Since 1994, Pacific Scientific Company has been developing a product line of
electronic ballasts for fluorescent lamps. Since the fall of 1995, the Company
has been supplying a three-way, screw-in compact adapter for table lamps and an
ON/OFF screw-in adapter sold to a major lamp manufacturer. Pacific Scientific's
main objective in entering the electronic ballast business is to supply dimming
ballasts which use existing wiring and are controllable with low-cost
incandescent dimmers. Several versions of these dimmable ballasts were produced
and tested by potential customers. The Company also developed a Sense-A-Volt(TM)
smart ballast which adjusts to line voltages between 110 and 280 volts. In July
1996, the Company announced that its dimming ballast and Sense-A-Volt product
lines would be reengineered and that the applications would be limited to the
compact fluorescent lamps (reference "Restructuring Charge" described in Item 7,
Management's Discussion and Analysis). Three-way and ON/OFF ballasts continued
to be sold. In 1997, the Company is reintroducing its product line of dimming
and Sense-A-Volt ballasts for compact fluorescent
 
                                        2
<PAGE>   5
 
lamps. The Company's success with this reintroduced product line cannot be
projected at this time (reference is made to the risks described at the end of
Item 7, Management's Discussion and Analysis).
 
The various operating divisions and wholly-owned subsidiaries of the Registrant,
under the Electrical Equipment segment, are organized as follows:
 
<TABLE>
<S>                                   <C>
Automation Technology Group           Instruments Group
     Motor Products Division          HIAC/Royco Division
     Motion Technology Division       High Yield Technology, Inc.
     Eduard Bautz GmbH                Met One, Inc.
     Powertec Division                Pacific Scientific GmbH
     Automation Intelligence, Inc.    Pacific Scientific Ltd.
Fisher Pierce Division                Pacific Scientific S.A.R.L.
     Royce Thompson Ltd.              Pacific Scientific Service Inc.
Solium Inc.                           Wermex Corporation
Electro Kinetics Division             Bobinas del Sur, S.A. de C.V.
</TABLE>
 
Safety Equipment
 
Pacific Scientific's Safety Equipment is grouped into four categories, Fire
detection and suppression, and personnel restraints and other flight control
devices, service business and pyrotechnic devices.
 
Fire detection and Suppression:  Fire detection uses a patented thermal couple
wire and/or an optical detector to identify areas of unusual heat, fire or
explosion. The fire detection products are used in aircraft, military vehicles
and recently on city buses which have been converted to clean-burning
alternative fuels. The fire suppression portion of the product line consists of
manufacturing pressure vessels and valves to hold and release the fire
suppression agent. The fire suppression agent is generally Halon. In addition to
pressure vessels for fire suppression, the Company also manufactures other
vessels for high-pressure pneumatic applications.
 
Personnel Restraints and Other Flight Control Devices:  The Company manufactures
personnel restraint equipment (shoulder and lap belts) for aircraft
applications. The major product emphasis is for the flight crew, but the Company
also supplies lap belts for passenger seats. Other flight control products are
mainly mechanical devices such as cable tension regulators and various other
apparatus for adjusting pedals and seats.
 
Service Business:  Both the fire suppression and personnel restraint equipment
manufactured by the Company require routine service. The Company supplies this
service in Los Angeles, California; Miami, Florida; London, England and
Singapore.
 
Pyrotechnic Devices:  The valves on the Company's fire suppression products are
activated by pyrotechnic devices. The Company produces pyrotechnic devices for
its own use and for other military and industrial applications.
 
The various operating divisions and wholly-owned subsidiaries of the Registrant,
under the Safety Equipment segment, are as follows:
 
<TABLE>
<S>                           <C>
HTL/Kin-Tech Division         Energy Dynamics Division
Pacific Scientific Ltd.
</TABLE>
 
Employees
 
The Company and its subsidiaries employ 2,375 persons as of December 27, 1996.
Of these employees, 2,177 are employed in North America, none of which are
subject to collective bargaining agreements and the Registrant has never
experienced a work stoppage. Management believes that its employee relationships
are good.
 
                                        3
<PAGE>   6
 
Research and Development
 
Research and development is conducted by the Registrant at its various United
States divisions for its own account and at some locations for customers on a
contract basis. For its own account, the Registrant spent $15,974,000,
$15,750,000 and $11,793,000 in 1996, 1995 and 1994, respectively, on research
and development.
 
Major Customers
 
No single customer represents in excess of 10% of the Registrant's sales.
Approximately 10% of Registrant's sales in 1996 were attributable to United
States defense contracts, of which 4% were awarded directly to the Registrant by
the United States government and 6% through subcontracting procedures.
 
The Company's net sales under prime contracts to defense agencies of the U.S.
Government were $12,727,000 in 1996, $7,256,000 in 1995 and $8,096,000 in 1994.
Virtually all defense programs are subject to curtailment or cancellation due to
the annual nature of the government appropriations and allocations process. A
material reduction in United States government appropriations for defense
programs may have an adverse effect on the Registrant's business, depending on
the specific defense programs affected by any such reduction. Currently, the
Registrant is not aware of the curtailment or cancellation of any United States
defense program, under which Registrant is performing as either a prime
contractor or subcontractor, that would have a material adverse effect on the
Registrant's business. Government contracts are subject to termination by the
government without cause, but in the event of such termination, the Registrant
would ordinarily be entitled to reasonable compensation for work completed prior
to termination.
 
International Sales
 
International sales represented approximately 28% ($83,226,000) in 1996, 28%
($80,695,000) in 1995 and 21% ($52,652,000) in 1994 of Registrant's total sales.
The Registrant is not aware of any unusual risks attendant to its foreign
operations. All sales made from the U.S. directly to other countries are quoted
and paid in U.S. dollars and, in some cases, the Registrant requires a Letter of
Credit. Most sales made by the Company's foreign subsidiaries are made in local
currency and the Company selectively hedges these currency exposures.
 
Marketing and Sales
 
The responsibility for marketing and sales activity of the Registrant is
assigned to its operating units, groups, divisions and subsidiaries. Generally,
customer-related marketing and sales operations are organized by product lines
or markets. Markets include the semiconductor industry, health sciences or
aircraft industry. Within product lines or markets, sales activities are
generally organized by geographic regions. Selling is through a combination of
the Registrant's own sales personnel, sales representatives and distributors in
the Americas, Europe, Asia and the Pacific. Where appropriate, the Registrant
uses telemarketing and telesales. Advertising, direct mail, catalogs, trade
shows and periodic publications support the marketing and sales effort. A
continued program of technical training is supplied for salespersons,
representatives and distributors.
 
Sources of Raw Material
 
The Registrant's manufacturing operations consist primarily of fabricating and
assembling parts, components and units into finished products and then testing
the products. Raw materials, parts, components and some assemblies are obtained
from independent suppliers. Except as described in the following paragraph, the
Registrant generally has not experienced any serious difficulty in obtaining
adequate supplies of required materials and services, and continues to seek
secondary sources of supply in the few cases where it relies upon a single
supplier.
 
The Registrant has experienced delays in delivery of completed circuit boards
for its motor drive and control businesses. Starting in 1997, the Registrant
will utilize the circuit board capacity within the Company for circuit board
processing, including mounting of components and testing.
 
                                        4
<PAGE>   7
 
Within the Safety Equipment segment, Halon 1301, the fire suppression agent used
in aircraft fire suppression systems, contains chlorofluorocarbons, ozone
depleting chemicals. By international agreement, the production of Halon 1301
was discontinued in 1993 in most parts of the world. The Registrant has been
able to maintain a level of supply of recycled Halon 1301 that management
believes is adequate to meet current demands. Efforts to introduce a replacement
agent have been suspended until such time that recycled Halon 1301 is not
available at reasonable prices. The Registrant has certain rights to market
Triodide, a drop-in replacement for Halon 1301. To date, Triodide has not been
approved by the United States Federal Aviation Authority or Department of
Defense.
 
Effect of Patents, Trademarks, Licenses, etc.
 
The Registrant owns numerous United States and foreign patents expiring at
various dates through 2012. The Registrant also owns a number of trademarks.
Although, in the opinion of the Registrant, these patents and trademarks have
been and are expected to be of value, the loss of any single item or group of
related items would not have a material effect on the conduct of the existing
business.
 
Backlog
 
The backlog of unfilled purchase orders, believed by the Registrant to be firm,
amounted to $97 million on December 27, 1996, compared with a backlog of $98
million and $87 million at the end of 1995 and 1994, respectively. The
Registrant considers an unfilled purchase order to be firm when a specific
delivery date has been established by the parties. Of the backlog, approximately
80% is expected to be shipped in the current fiscal year. The amount of the
Registrant's backlog at any time does not reflect expected revenues for any
fiscal period.
 
Environmental Compliance
 
In the opinion of the Registrant, compliance with existing federal, state and
local provisions which have been enacted or adopted regulating the discharge of
materials into the environment, or otherwise relating to the protection of the
environment, has had no material adverse impact upon the Registrant's financial
position, capital expenditures, operating results, competitive position or
liquidity. The Registrant regularly makes routine capital expenditures for
environmental control facilities. For the fiscal year ended December 27, 1996,
the Registrant has not incurred any material amount of capital expenditures for
environmental control facilities, and for future periods does not expect such
capital expenditures to be material to current operations. For cost of future
clean-up activities, the Company has increased its environmental related accrual
by $1.1 million to $1.6 million during the year ended December 27, 1996.
 
Additional information concerning environmental compliance is included in
"Management's Discussion and Analysis" under Item 7 and in Note 11 to the
financial statements under Item 8 of this submission.
 
  Competition
 
A number of companies, some of which are significantly larger than Registrant,
manufacture products which compete directly with those the Registrant produces.
No single company competes with Registrant across its entire product line. The
Registrant's competitive strategy is to achieve cost and quality advantages,
offer excellent customer service, and broaden the markets in which its core
competencies can be applied. Competition by major product line is as follows:
 
(1)  Electrical Equipment
 
Electric Motors and Generators:  The Registrant's five industrial and commercial
motor lines are primarily sold for industrial applications with some motors
being used in consumer products. The market for permanent magnet brush-type DC
motors is extremely fragmented and none of the three main domestic competitors,
Baldor Electric Co., Magnetek, Inc. and Leeson Electric Corporation, has a
dominant market share. The emerging market for brushless DC servo motors, drives
and controls has many competitors vying for market share in industrial markets,
although the Registrant believes it has one of the largest shares of the U.S.
market
 
                                        5
<PAGE>   8
 
(excluding the machine tool area, in which it does not compete). Major
competitors in the brushless DC motor market area include Reliance Electric Co.,
a part of Rockwell International Corporation, Kollmorgen Corporation, Indramat,
a division of Rexroth Corporation and Yasakawa Electric America, Inc. The
Registrant knows of no competitor that offers a product similar to its Powertec
line of high-horsepower variable-speed brushless DC motors and drives. However,
there are alternative technologies available which meet similar requirements. In
stepper drives and motors, there are many competitors, with the three largest
being Superior Electric Co., a division of Dana Corporation, Oriental Motors USA
Corporation and Compumotor, a division of Parker-Hannifin Corporation. The
Registrant has a major share of the market for low inertia motors used in
applications requiring very fast starting and stopping. The generator product
line, for use mainly in aircraft and missiles, has several significant domestic
competitors making air cooled generators with output of up to 50kw.
 
Motion Controls:  Motion technology products (control products and drives) are
mainly sold in conjunction with Registrant's brushless servo and stepper motor
products and they, therefore, have similar competitors. The major competitor in
multi-axis system control is Allen-Bradley Company, Inc., a subsidiary of
Rockwell International Corporation.
 
Products for Electrical Utilities:  The Registrant and at least four major
competitors account for virtually all of the United States market for outdoor
lighting controls. However, the Registrant has a major share of the United
States and United Kingdom markets for lighting controls used in street and
highway lighting. A major share of the market for capacitor controls is also
held by the Registrant. Lesser shares are held in the markets for fault
indicators and the Registrant's line of metering devices. Other competitors for
fault indicators include Schweitzer, Inc. and the Horstmann GmbH.
 
Particle Monitoring Instruments:  In particle monitoring, the Registrant has a
leading market position for sensing particulate contamination in liquid, air and
vacuum environments. There are at least six direct global competitors for
particle monitoring. The major U.S. competitor is PMS, Inc.
 
Solium Ballast:  The Registrant currently competes only in the compact
fluorescent ballast market. Patents have been applied for its Solium dimming
technology. Using other technology, there are other manufacturers of dimming
ballasts including Motorola, Inc. and Advanced Transformer Co., a subsidiary of
Philips Electronics N.V. and Lutron Electronics Co., Inc. In addition to the
dimming capability, Solium offers Sense-A-Volt ballasts which adapt to input
voltages of 110 to 280.
 
(2)  Safety Equipment
 
Fire Detection, Suppression and Restraints:  The Registrant has a leading
position in the aircraft market for its aircraft fire suppression product line.
There is one significant domestic competitor in the fire suppression product
line, Walter Kidde, Inc., with three other competitors sharing a smaller portion
of the market. There are at least five other competitors for fire detection
equipment sold to the aerospace and military vehicle markets with the leader
being Santa Barbara Dual Spectrum, a division of Williams Holding Ltd. The
Registrant's ballistic and inertia reels, which are used mainly in aircraft for
the safety restraint of the crews, has, at minimum, two known major competitors
in the United States and two in Europe. For passenger lap belts, the
Registrant's major competitor is Am-Safe Inc. There are two principal
competitors for the cable tension regulator, the Registrant's principal flight
control component.
 
Pyrotechnics:  The pyrotechnic product line addresses multiple niches within the
domestic aerospace and commercial oil well marketplace, and the Registrant has
at least two competitors in each segment. Among its largest competitors are OEA,
Inc., Special Devices, Inc. and HiShear Inc.
 
                                        6
<PAGE>   9
 
ITEM 2.  PROPERTIES
 
The following table provides certain information as to the Registrant's
principal general offices and manufacturing facilities:
 
<TABLE>
<CAPTION>
                  OWNED
    ----------------------------------
    <S>                                 <C>                                   <C>
    Oxnard, CA........................  Undeveloped land                        5.7 Acres
    Grants Pass, OR...................  Met One offices/manufacturing           43,913 SF
                                        plant
</TABLE>
 
<TABLE>
<CAPTION>
                  LEASED
    ----------------------------------
    <S>                                 <C>                                   <C>
    Chandler, AZ......................  Energy Dynamics Division                44,600 SF
    Duarte, CA........................  HTL/Kin-Tech Division                   85,000 SF
    Newport Beach, CA.................  Corporate Headquarters                  14,000 SF
    Santa Barbara, CA.................  Electro Kinetics Division               56,000 SF
    Sunnyvale, CA.....................  High Yield Technology, Inc.             30,000 SF
    Yorba Linda, CA...................  HTL/Kin-Tech Division                   60,000 SF
    Broomfield, CO....................  Motor Products Division                 15,000 SF
    Birmingham, England...............  Royce Thompson Ltd.                     26,600 SF
    Miami, FL.........................  HTL/Kin-Tech Division                   10,000 SF
    Duluth, GA........................  Automation Intelligence, Inc.           27,000 SF
    Weiterstadt, Germany..............  Eduard Bautz GmbH                       18,300 SF
    Rockford, IL......................  Motor Products Division                120,000 SF
    Silver Spring, MD.................  HIAC/Royco Division                     35,000 SF
    Randolph, MA......................  Solium, Inc.                            80,000 SF
    Weymouth, MA......................  Fisher Pierce Division                  80,000 SF
    Wilmington, MA....................  Motion Technology Division              65,000 SF
    Juarez, Mexico....................  Bobinas del Sur, S.A. de C.V.           38,000 SF
    Rock Hill, SC.....................  Motor Products Division                 37,000 SF
</TABLE>
 
The Registrant owns substantially all equipment used in its facilities.
 
Management believes all manufacturing facilities and manufacturing equipment are
adequate, with minor changes and additions, for conducting operations as
presently contemplated. To the extent the above referenced leases expire and are
not renewed, Registrant believes it has the ability to acquire adequate space
for conducting its operations.
 
ITEM 3.  LEGAL PROCEEDINGS
 
The Registrant is a co-defendant with certain of its past and present officers
in actions filed in the United States District Court for the Central District of
California. One action was filed by a purchaser of the Company's common stock
and the second action was filed by a purchaser of the Company's convertible
debentures. The Federal Court has combined the complaints and ordered that a
class of stockholders and a class of debenture holders be certified. The
complaint alleges that the Company and certain of its officers made false and
misleading statements regarding the Company and its Solium subsidiary. The
complaint further alleges that the market prices of the common stock and the
debentures were "artificially inflated" in the period of October 3, 1994 through
July 2, 1996, thereby causing damages to the class members.
 
The Registrant is also a co-defendant with certain of its past and present
officers in an action filed in the Superior Court of Orange County, California
by prior stockholders of Met One, Inc. The complaint is similar to the above
class action complaint, alleging that the Company made false and misleading
statements regarding the Company and its Solium subsidiary. Damages and
rescission of the sale are sought based on several causes of actions.
 
The Registrant believes the claims made in both complaints are without merit and
the Company intends to vigorously pursue its defense. The Registrant, at this
time, is not able to determine the eventual disposition of these matters.
 
                                        7
<PAGE>   10
 
In addition, from time to time, as a normal incident of the nature of the
Registrant's business, various claims, charges and litigation are asserted or
commenced against the Company. These claims arise from related contractual
matters, personal injury, patents, environmental matters and product liability.
 
While there can be no assurance that the Company will prevail in any of the
foregoing matters, the Registrant does not believe that these matters will have
a material adverse effect on its consolidated financial position or consolidated
results of operations. However, in all matters of litigation, an unfavorable
outcome could have an adverse effect on the Company's consolidated results of
operations in the quarter in which that matter is resolved.
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
No matter was submitted to a vote of security holders during the fourth quarter
of 1996.
 
EXECUTIVE OFFICERS OF THE COMPANY
 
The following table sets forth (i) the name and age of each present executive
and other officer of the Registrant, (ii) the position(s) presently held by each
person named and (iii) the principal occupation held by each person named over
the past five years.
 
<TABLE>
<CAPTION>
  EXECUTIVE OFFICER     AGE             POSITION                    BUSINESS EXPERIENCE
----------------------  ---   ----------------------------  ------------------------------------
<S>                     <C>   <C>                           <C>
Lester "Buck" Hill....  53    Chairman of the Board,        Chairman, President and CEO since
                              President and CEO             February 1997; 1996-1997 Consultant;
                                                            1992-1995 Executive Vice President,
                                                            Communications Division, General
                                                            Instrument
 
Richard V. Plat.......  67    Executive Vice President,     Executive Vice President since 1994;
                              Chief Financial Officer and   1989-1994 Senior Vice President;
                              Secretary                     1977-1983 Vice President
William T. Fejes......  40    Senior Vice President,        Senior Vice President since 1995;
                              President of the Automation   1994-1995 Vice President; 1981-1994
                              Technology Group              various management positions with
                                                            the Company
 
Steven L. Breitzka....  39    Vice President, President of  Vice President since 1992; 1982-1992
                              Fisher Pierce Division        various management positions within
                                                            the Company
 
Richard G. Knoblock...  56    Vice President, President of  Vice President since 1988
                              the HTL/Kin-Tech and Electro
                              Kinetics Divisions
 
Joseph R. Monkowski...  43    Vice President, President of  Vice President since 1994; 1993-1994
                              the Instruments Group         Vice President, Photon Dynamics,
                                                            Inc.; 1990-1992 Executive Vice
                                                            President, Lam Research Corp.
 
Ronald B. Nelson......  57    Vice President, President of  Vice President since 1990
                              Motor Products Division
 
William H. Amadon.....  43    Controller                    Controller since January 1997;
                                                            1994-1996 Controller, Earth Tech
                                                            Inc.; 1988-1994 Chief Financial
                                                            Officer, NBS/Lowry Inc.
 
Peer A. Swan..........  52    Treasurer                     Treasurer since 1982; Assistant
                                                            Treasurer since 1977
 
Ailen Younanpour......  45    Assistant Secretary           Assistant Secretary since 1996;
                                                            Administrative Specialist since 1988
</TABLE>
 
No officer of the Registrant is related to any other officer of the Registrant.
All officers of the Registrant, except for Mr. Hill, serve at the discretion of
the Board of Directors. No understanding or arrangement exists between any
executive officer and any other person pursuant to which they were chosen as an
officer. Mr. Edgar S. Brower resigned as an officer of the Company on February
19, 1997 and was succeeded by Mr. Hill.
 
                                        8
<PAGE>   11
 
                                    PART II
 
ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
The Registrant's common stock is traded on the New York Stock Exchange under the
symbol PSX. The table below sets forth the high, low and closing prices of the
common stock during the three most recent years.
 
<TABLE>
<CAPTION>
                 STOCK PRICE             Q-1        Q-2        Q-3        Q-4        YEAR
        ------------------------------  ------     ------     ------     ------     ------
        <S>                             <C>        <C>        <C>        <C>        <C>
        1996
          High........................  $24.88     $22.38     $16.50     $13.25     $24.88
          Low.........................   18.75      15.25      11.00      10.25      10.25
          Close.......................   21.13      15.75      13.00      11.00      11.00
 
        1995
          High........................  $24.13     $21.75     $26.50     $27.38     $27.38
          Low.........................   16.50      14.13      17.88      19.50      14.13
          Close.......................   20.50      18.00      24.13      25.00      25.00
 
        1994
          High........................  $13.32     $14.25     $13.94     $23.75     $23.75
          Low.........................   10.69      10.88      11.19      14.00      10.69
          Close.......................   11.19      12.50      13.82      20.25      20.25
</TABLE>
 
As of February 28, 1997, there were 1,428 stockholders of record. The total
number of beneficial holders of Registrant's common stock is estimated at
approximately 7,700. Registrant's common stock is traded on the New York,
Midwest and Pacific Stock Exchanges. Quarterly dividends paid by the Registrant
are shown in Note 3 of the Notes to the Consolidated Financial Statements.
 
See Note 3 of the Registrant's Notes to the Consolidated Financial Statements,
for information concerning restrictions on the aggregate amount of common stock
dividends payable and the repurchase of the Registrant's common stock.
 
ITEM 6.  SELECTED FINANCIAL DATA
 
The Registrant's five-year selected financial data is as follows (in thousands,
except per share amounts):
 
<TABLE>
<CAPTION>
                                       1996        1995(1)      1994(1)      1993(1)      1992(1)
                                     --------      --------     --------     --------     --------
<S>                                  <C>           <C>          <C>          <C>          <C>
Net Sales..........................  $294,779      $284,812     $247,683     $206,609     $183,308
Net Income.........................  $    169(2)   $ 12,750     $ 10,261     $  8,343     $  5,331
Net Income per Share(3)............  $   0.01(2)   $   1.01     $   0.83     $   0.70     $   0.45
Total Assets.......................  $229,490      $225,018     $180,635     $168,588     $141,614
Long-Term Debt.....................  $ 83,108      $ 63,719     $ 42,936     $ 44,840     $ 29,206
Capital Leases.....................        --            --           --           --           --
Cash Dividends per Share...........  $   0.12      $   0.12     $   0.06     $   0.06     $   0.06
</TABLE>
 
---------------
(1) Periods prior to 1996 include the effect of the 1995 merger with Met One,
    Inc., accounted for as a pooling of interest.
 
(2) Includes $4,500,000 restructuring and other charges regarding the Solium
    subsidiary.
 
(3) All data is adjusted for the two-for-one stock split, effective December 16,
    1994.
 
                                        9
<PAGE>   12
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS
 
RESULTS OF OPERATIONS
 
Sales: 1996 vs. 1995
 
The Company reported sales of $294.8 million for 1996, up $10.0 million, or 4%,
from $284.8 million in 1995. The Electrical Equipment segment accounted for 75%
($219.7 million) of these sales, while the Safety Equipment segment accounted
for 25% ($75.1 million). Of the $10.0 million increase in total sales, $8.2
million came from Safety Equipment and $1.8 million came from Electrical
Equipment.
 
Sales of electric motors and controls represent nearly half of the Company's
total sales. Important markets for motors and controls are the manufacturers of
equipment used in semiconductor fabrication, electronic assembly and plastic
molding and extrusion. In 1996, these markets did not grow at their past rates.
The resulting reduction in the Company's sales to these markets could not be
fully offset by growth in other motor and control markets. In total, sales of
motors and controls in 1996 were down 3% from 1995.
 
The Company's Instruments Group manufactures equipment for detecting and
measuring particles in liquids, vacuums, solids and gases. Within this group,
the High Yield Technology (HYT) operation sells mainly to semiconductor
manufacturers. With a leveling of demand for semiconductors in 1996, many of
these customers deferred the purchase of HYT equipment. HYT sales were down 33%
from 1995. This reduction in sales at HYT was greater than the gain in sales
recorded by the HIAC/Royco and Met One operations. In total, the instruments
business was down 1% from the prior year. The decrease in sales of the
instruments business includes the effect of HIAC/Royco divesting its line of
products for monitoring drinking water in early 1996, as required by the U.S.
Department of Justice. The divestiture was required as a condition for the
Company's acquisition of Met One on December 29, 1995.
 
Sales by the Fisher Pierce and Royce Thompson operations, which serve the
electric utility industry, increased 14% in 1996. Most of the improvement came
in sales of outdoor lighting controls. The Company believes this increase is
attributable to customers' recognition that the Company has upgraded its product
offering. Sales of products that improve the efficiency of electric power
distribution also increased.
 
The Solium operation had sales of $2.4 million in 1996 as compared to $0.1
million sales in 1995. In July of 1996, Solium discontinued sales efforts on its
then current versions of wire-in ballasts and continued to sell its line of
screw-in adapters. The reengineered wire-in products were reintroduced to the
market in early 1997. The level of demand for Solium's ballasts is yet to be
determined.
 
Sales by the Safety Equipment segment were up 12% over the prior year. The sales
increase was broadly spread across the product lines, with growth occurring in
commercial, military and space applications. The increased demand for commercial
aircraft and increased profitability in the airline business helped to increase
the sales of the Safety Equipment segment.
 
Sales: 1995 vs. 1994
 
The Company reported sales of $284.8 million for 1995, up $37.1 million, or 15%,
from $247.7 million in 1994. The Electrical Equipment segment accounted for 77%
($217.9) million) of sales, while the Safety Equipment segment accounted for 23%
($66.9 million). Of the $37.1 million increase in 1995 sales, $21.5 million came
from acquisitions which occurred in 1994 and 1995, and which were accounted for
as purchases. Without these acquisitions, sales would have been up 6%. Sales in
the Electrical Equipment segment were up 21% in 1995, and sales in the Safety
Equipment segment were approximately equal to those of the prior year. Combined
and separate results for Pacific Scientific and Met One, during the periods
preceding the merger, are shown in Note 8 to the Notes to the Consolidated
Financial Statements.
 
International Sales
 
In 1996, the Company continued to achieve its objective of realizing significant
sales to customers outside the U.S. The percentage of sales to customers outside
the U.S. was 28% in both 1996 and 1995, as compared to
 
                                       10
<PAGE>   13
 
21% in 1994. Sales under U.S. defense contracts (as either a prime contractor or
a subcontractor) were 10% of total sales in 1996 and 1995, declining from 15% in
1994.
 
Order Backlog
 
The order backlog at the end of 1996 was $97 million as compared to $98 million
and $87 million at the end of 1995 and 1994, respectively. The backlog of orders
for Electrical Equipment products increased between 1995 and 1996. The backlog
for Safety Equipment products declined by approximately $4 million, although
this reduction does not necessarily indicate lower sales in 1997.
 
Gross Margins
 
Gross profit margins, as a percentage of sales, are as follows for the past
three years:
 
<TABLE>
<CAPTION>
                                                                 1996     1995     1994
                                                                 ----     ----     ----
        <S>                                                      <C>      <C>      <C>
        Gross profit margin....................................  31.1%    34.6%    33.4%
</TABLE>
 
The 3.5-point decline in gross margin percentage is primarily attributable to
events within the motor and control area and at Solium. The motor and control
area accounted for about 2 of the 3.5 points decline. The contributing factors
were a decline in sales volume, reorganization of the Powertec product line,
price pressure on electronic drives and a decline in margins at the Bautz
operation. In 1996, the mix of sales at Bautz resulted in a lower gross margin
when compared with the prior year. Manufacturing start-up expenses associated
with the Solium operation reduced gross margins by approximately 1 percentage
point. The rest of the decline in gross margin stemmed from the Instruments
Group and the Safety Equipment segment, where there were small decreases. These
decreases were partially offset by increase in gross margins at the Fisher
Pierce operation.
 
Selling and Marketing Expense
 
Selling and marketing expenses, as a percentage of sales, are as follows for the
past three years:
 
<TABLE>
<CAPTION>
                                                                 1996     1995     1994
                                                                 ----     ----     ----
        <S>                                                      <C>      <C>      <C>
        Selling and marketing expense..........................  11.4%    11.2%    11.0%
</TABLE>
 
The percentage of selling and marketing expenses increased slightly in 1996 over
1995. Considerable marketing expense was associated with the start-up of Solium.
Without Solium, 1996 selling and marketing expense would have been 11.0%.
 
General and Administrative Expense
 
General and administrative expenses, as a percentage of sales, are as follows
for the past three years:
 
<TABLE>
<CAPTION>
                                                                 1996     1995     1994
                                                                 ----     ----     ----
        <S>                                                      <C>      <C>      <C>
        General and administrative expense.....................  10.1%    9.7 %    10.0%
</TABLE>
 
Included in general and administrative expense are the amortization of patents,
trademarks and other intangibles, and the excess of cost over net assets of
acquired businesses. Such amortization amounted to $2.2 million, $2.1 million
and $1.9 million in 1996, 1995 and 1994, respectively. Excluding these noncash
amortization expenses, general and administrative expenses, as a percentage of
sales, would have been 9.4%, 8.9% and 9.2% for 1996, 1995 and 1994,
respectively.
 
Research and Development Expense
 
Research and development expenses, as a percentage of sales, are as follows for
the past three years:
 
<TABLE>
<CAPTION>
                                                                  1996     1995     1994
                                                                  ----     ----     ----
        <S>                                                       <C>      <C>      <C>
        Research and development expense........................  5.4 %    5.5 %    4.8 %
</TABLE>
 
                                       11
<PAGE>   14
 
Research and development expense amounted to 6.3% of sales in the Electrical
Equipment segment and 2.8% of sales in the Safety Equipment segment. The ratio
of R&D expense to sales is believed to be at the high end of the range for this
expense at similar companies for similar product lines. There are no assurances
that the Company's R&D efforts will significantly increase future sales.
Revenues from R&D efforts funded by others are included in net sales in the
accompanying consolidated financial statements, and the related expenses are
included in cost of sales.
 
Restructuring And Other Charges
 
The Company's 1996 results reflect a charge of $7.5 million (after taxes, $4.5
million) relating to Solium restructuring and other related charges. The
restructuring plan was based on the recognition that the Solium subsidiary was
addressing too many different markets and was preparing for high-volume
production too quickly. The objective of the restructuring was to limit the
ballast product line to compact-fluorescent-lamp applications, the
fastest-growing part of the market. All work on ballasts for linear fluorescent
lamps was discontinued. The Company's success with the reintroduced product line
cannot be projected at this time (reference is made to risks described at the
end of Item 7, Management's Discussion and Analysis).
 
Following is a schedule of costs included in the Solium restructuring and other
charges (in millions):
 
<TABLE>
        <S>                                                                     <C>
        Reduction in inventory valuation......................................  $4.0
        Asset write-down......................................................   1.5
        Restructuring expense, including terminations.........................   1.0
        Other expenses........................................................   1.0
                                                                                ----
                  Total restructuring and other charges.......................  $7.5
                                                                                ====
</TABLE>
 
Of the total restructuring and other charges, approximately $1.5 million
resulted in cash payments, during 1996.
 
Interest Expense
 
Net interest expense for the past three years is as follows (in millions):
 
<TABLE>
<CAPTION>
                                                                 1996     1995     1994
                                                                 ----     ----     ----
        <S>                                                      <C>      <C>      <C>
        Net interest expense...................................  $5.1     $4.3     $2.9
</TABLE>
 
Short- and long-term bank borrowings increased $4.6 million in 1996 to $60.5
million. Nonrecurring cash requirements in 1996 included approximately $16.0
million of additional cash investments in Solium and approximately $5.8 million
for the installation of a new management information system. Cash expenditures
have been substantially reduced at Solium and it is planned that cash
expenditure for the Company's new management information system will be reduced
from the prior year. Average rates on bank borrowings at the end of 1996, 1995
and 1994 were 6.0%, 6.1% and 7.2%, respectively.
 
  Income Before Income Taxes
 
Income before income taxes has been as follows for the past three years (in
millions):
 
<TABLE>
<CAPTION>
                                                               1996     1995      1994
                                                               ----     -----     -----
        <S>                                                    <C>      <C>       <C>
        Income before income taxes...........................  $0.3     $20.1     $16.7
</TABLE>
 
                                       12
<PAGE>   15
 
The $19.8 million reduction in income before taxes between 1995 and 1996 can be
accounted for as follows (in millions):
 
<TABLE>
<CAPTION>
                                                           1996       1995      DIFFERENCE
                                                          ------     ------     ----------
        <S>                                               <C>        <C>        <C>
        Solium
          Operating loss................................  $ (7.0)    $ (2.7)      $ (4.3)
          Restructuring and other charges...............    (7.5)        --         (7.5)
                                                          ------      -----       ------
                  Total.................................   (14.5)      (2.7)       (11.8)
        Electrical Equipment............................    17.8       24.6         (6.8)
        Safety Equipment................................     7.5        7.6         (0.1)
        Interest and Other..............................   (10.5)      (9.4)        (1.1)
                                                          ------      -----       ------
                  Total.................................  $  0.3     $ 20.1       $(19.8)
                                                          ======      =====       ======
</TABLE>
 
The $4.3 million increase in Solium operating losses was the result of
addressing too many different florescent ballast markets, preparing for
high-volume production too quickly and not realizing the sales growth expected.
The restructuring charge has been explained previously.
 
The $6.8 million reduction in operating income for the Electrical Equipment
segment was mainly the result of lower earnings in the motor and control
business. Operating income for this business declined to 7.7% of sales in 1996
from 12.8% in 1995. Reduced sales and nonrecurring reorganization expenses in
the Powertec operation (including employee termination pay) lowered Powertec's
operating income by nearly $4 million. Approximately $3.0 million reduction in
operating income occurred at the Bautz operation. However, Bautz remained
solidly profitable, with an operating margin of 12.6%. Finally, reduced sales to
the semiconductor capital goods market, declining prices for electronic
products, and delays in releasing some new motor and electronic products further
reduced operating income of the motor and control business. Operating income of
the Instruments Group was approximately $0.9 million less in 1996 than in 1995
due to reduced sales by the HYT unit. Operating income of the Fisher Pierce
operation improved between 1995 and 1996 by nearly $1.1 million.
 
Operating income in the Safety Equipment segment was approximately equal to the
prior year, despite higher sales volume due to lower gross margins.
 
The effective income tax rate, as a percentage of pretax income, is as follows
for the past three years:
 
<TABLE>
<CAPTION>
                                                                 1996     1995     1994
                                                                 ----     ----     ----
        <S>                                                      <C>      <C>      <C>
        Effective income tax rate..............................  43.7%    36.5%    38.7%
</TABLE>
 
The effective income tax rate increased in 1996 because a larger share of the
Company's total earnings came from its German operation which has a higher
effective tax rate. Amortization expense of other assets, which is not tax
deductible, became more significant due to the lower level of earnings in 1996.
In addition, the 1995 effective income tax rate had been favorably impacted by
the utilization of certain net operating loss carryforwards in Germany.
 
The Internal Revenue Service has completed its examination of the Company's
federal returns for the years 1992, 1993 and 1994. No material adjustments
resulted from this examination. The only open years for IRS examination are now
1995 and 1996. The Company estimates that its effective tax rate in 1997 to be
approximately 39% (reference is made to risks described at the end of Item 7,
Management's Discussion and Analysis).
 
Net Income
 
Net income, as a percentage of sales, is as follows for the past three years:
 
<TABLE>
<CAPTION>
                                                                  1996     1995     1994
                                                                  ----     ----     ----
        <S>                                                       <C>      <C>      <C>
        Net income..............................................  0.1 %    4.5 %    4.1 %
</TABLE>
 
                                       13
<PAGE>   16
 
Equivalent Shares Outstanding
 
For earnings per share calculations, the average common and common-equivalent
shares outstanding for the past three years are as follows:
 
<TABLE>
<CAPTION>
                                                    1996           1995           1994
                                                 -----------    -----------    -----------
        <S>                                      <C>            <C>            <C>
        Primary earnings.......................   12,457,000     12,514,000     12,215,000
        Fully diluted earnings.................   12,457,000     13,501,000     12,419,000
</TABLE>
 
The change in the number of common and common-equivalent shares outstanding is
due to the exercise of stock options and the dilutive effect of stock options
granted but not exercised. The calculation of this number is based on the
average price of the Company's common stock traded on the New York Stock
Exchange throughout each year. The fully diluted earnings per share reflect the
maximum extent of dilution resulting from outstanding stock options, based on
the closing price of the Company's common stock at the end of each year. The
number of fully diluted shares was larger in 1995 than in 1996 and 1994
primarily because of the assumed conversion of the Company's outstanding
convertible debentures. The convertible debentures were dilutive in 1995 but
antidilutive in 1994 and 1996.
 
Employees
 
Pacific Scientific had 2,375 employees at the end of 1996. Over the past three
years, sales per employee (based on the average number of employees, including
part-time employees) have been as follows:
 
<TABLE>
<CAPTION>
                                                       1996         1995         1994
                                                     --------     --------     --------
        <S>                                          <C>          <C>          <C>
        Sales per employee.........................  $125,900     $129,700     $127,800
</TABLE>
 
Contributing to the reduction in sales per employee were the reorganization of
the Powertec operation (including relocation of a product line) and the
unexpected drop in sales at HYT.
 
LIQUIDITY AND CAPITAL RESOURCES
 
The consolidated balance sheet of the Company remained strong at the end of
1996. The current ratio of the Company continues to improve, as shown in the
following table (in millions):
 
<TABLE>
<CAPTION>
                                                             1996       1995      1994
                                                            ------     ------     -----
        <S>                                                 <C>        <C>        <C>
        Current assets....................................  $116.9     $119.4     $94.1
        Current liabilities...............................  $ 33.9     $ 48.0     $40.9
        Working capital...................................  $ 82.9     $ 71.4     $53.2
        Current ratio.....................................   3.4:1      2.5:1     2.3:1
</TABLE>
 
Accounts Receivable
 
The Company's experience in collecting receivables from customers remains
relatively constant. At the end of 1996, average collection of accounts
receivable was 57 days as compared to 63 days in 1995 and 57 days in 1994. The
average days receivable at the end of 1996 are calculated excluding the $3.5
million receivable, recorded in connection with the sale of the property in
Anaheim, California, in December of 1996. This receivable was collected in
January 1997.
 
Inventories
 
Inventories were $52.2 million at the end of 1996 as compared to $53.4 million
and $39.3 million at the end of 1995 and 1994, respectively. Inventory turns per
year were 4.0, 3.4 and 4.7 at the end of 1996, 1995 and 1994, respectively.
Inventory turns at Solium and HYT were well below the Company average due to
lower-than-expected sales.
 
                                       14
<PAGE>   17
 
Environmental Issues
 
The Company is continuing environmental remediation at one of its former plant
sites and is monitoring at two other sites. Additionally, the Company has been
designated as potentially responsible, along with other companies, for future
remediation at five waste disposal sites. The Company establishes reserves for
such costs as are probable and reasonably estimatable, and believes that the
ultimate liability incurred will not have a material adverse effect on the
liquidity, operating results or financial position of the Company. Additional
information concerning contingent liabilities for environmental matters is
disclosed in Note 11 to the Consolidated Financial Statements.
 
Cash and Debt
 
At the end of 1996, the Company had cash of $3.0 million, plus $6.2 million of
restricted cash representing the proceeds of Industrial Revenue Bonds that the
Company issued in 1989 in anticipation of building a new manufacturing facility.
 
Total debt at the end of 1996 -- including both short- and long-term bank debt,
convertible subordinated debt and Industrial Revenue Bonds -- totaled $83.1
million, up from $78.6 million in the prior year. The major cash expenditure in
1996 was for fixed assets and totaled $21.6 million, of which $5.8 million
related to investments in a new management information system. In 1995 and 1994,
expenditures for capital equipment investments totaled $19.3 million and $9.6
million, respectively. Fixed asset expenditures at Solium have totaled $7.7
million in 1995 and 1996.
 
The Company maintains $75,000,000 of unsecured lines of credit, all of which are
long-term committed credit lines and of which $60,509,000 was outstanding with
an additional $5,100,000 committed to back standby letters of credit on December
27, 1996. All $75,000,000 can be borrowed at rates that do not exceed one
percent (1%) over the London Interbank Offered Rate (LIBOR) or at the bank's
prime rate. The average interest rate on borrowed bank funds at the end of 1996
was 6.0%. The long-term credit line expires on July 31, 1998.
 
The ratio of debt (less restricted cash) to capital was 42%, 35% and 28%,
respectively in 1996, 1995 and 1994.
 
At the end of 1996, the Company had unused lines of credit of $9.4 million. The
Company believes that it has the ability to expand its existing lines of credit
and that these lines, together with internally generated funds, will provide the
Company with sufficient capital to finance operations, fund planned capital
expenditures and pay interest and dividends.
 
This Section and this entire Report on Form 10-K contain forward-looking
statements and include assumptions concerning the Company's operations, future
results and prospects. These forward-looking statements are based on current
expectations and are subject to a number of risks, uncertainties and other
factors. In connection with the Private Securities Litigation Reform Act of
1995, the Company provides the following cautionary statements identifying
important factors which, among other things, could cause the actual results and
events to differ materially from those set forth in or implied by the
forward-looking statements and related assumptions contained in this Section and
in this entire Report.
 
Such factors include, but are not limited to: product demand and market
acceptance risks; the effect of economic conditions; the impact of competitive
products and pricing; product development, commercialization and technological
difficulties; capacity and supply constraints or difficulties; availability of
capital resources; general business and economic conditions; and changes in
government laws and regulations, including taxes.
 
                                       15
<PAGE>   18
 
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
                          INDEPENDENT AUDITORS' REPORT
 
To the Board of Directors and
Stockholders of Pacific Scientific Company:
 
We have audited the accompanying consolidated balance sheets of Pacific
Scientific Company and subsidiaries as of December 27, 1996, December 29, 1995
and December 30, 1994, and the related consolidated statements of operations,
cash flows and stockholders' equity for each of the fiscal years then ended. Our
audits also included the financial statement schedule listed in the index at
Item 14. 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 audits.
 
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Pacific Scientific Company and
subsidiaries as of December 27, 1996, December 29, 1995 and December 30, 1994,
and the results of their operations and their cash flows for each of the fiscal
years then ended, in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
 
/s/  Deloitte & Touche LLP
---------------------------------------------------
 
Costa Mesa, California
January 31, 1997
 
                                       16
<PAGE>   19
 
                           PACIFIC SCIENTIFIC COMPANY
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
                 FOR THE FISCAL YEARS ENDED DECEMBER 27, 1996,
                    DECEMBER 29, 1995 AND DECEMBER 30, 1994
 
<TABLE>
<CAPTION>
                                                       1996             1995             1994
                                                   ------------     ------------     ------------
<S>                                                <C>              <C>              <C>
NET SALES......................................    $294,779,000     $284,812,000     $247,683,000
                                                   ------------     ------------     ------------
 
COSTS AND EXPENSES
Cost of sales..................................     203,074,000      186,224,000      164,941,000
Selling and marketing..........................      33,730,000       31,993,000       27,218,000
General and administrative.....................      29,839,000       27,526,000       24,749,000
Research and development.......................      15,974,000       15,750,000       11,793,000
Cost of Solium restructuring and other
  charges......................................       7,500,000               --               --
                                                   ------------     ------------     ------------
          Total costs and expenses.............     290,117,000      261,493,000      228,701,000
                                                   ------------     ------------     ------------
Operating income...............................       4,662,000       23,319,000       18,982,000
                                                   ------------     ------------     ------------
 
OTHER EXPENSE
Interest expense-net...........................      (5,052,000)      (4,281,000)      (2,913,000)
Other income...................................         690,000        1,052,000          673,000
                                                   ------------     ------------     ------------
          Net other expense....................      (4,362,000)      (3,229,000)      (2,240,000)
                                                   ------------     ------------     ------------
Income before income taxes.....................         300,000       20,090,000       16,742,000
Income taxes...................................        (131,000)      (7,340,000)      (6,481,000)
                                                   ------------     ------------     ------------
NET INCOME.....................................    $    169,000     $ 12,750,000     $ 10,261,000
                                                   ============     ============     ============
 
EARNINGS PER SHARE
  Primary earnings per share...................    $       0.01     $       1.02     $       0.84
  Fully diluted earnings per share.............    $       0.01     $       1.01     $       0.83
</TABLE>
 
         (See accompanying notes to consolidated financial statements)
 
                                       17
<PAGE>   20
 
                           PACIFIC SCIENTIFIC COMPANY
 
                          CONSOLIDATED BALANCE SHEETS
 
                   AS OF DECEMBER 27, 1996, DECEMBER 29, 1995
                             AND DECEMBER 30, 1994
 
<TABLE>
<CAPTION>
                                                           1996           1995           1994
                                                       ------------   ------------   ------------
<S>                                                    <C>            <C>            <C>
                                             ASSETS
CURRENT ASSETS
Cash.................................................  $  2,986,000   $  6,123,000   $  1,727,000
Trade receivables -- net.............................    53,591,000     52,253,000     45,864,000
Inventories..........................................    52,193.000     53,447,000     39,337,000
Deferred income taxes................................     7,023,000      4,970,000      4,667,000
Other current assets.................................     1,081,000      2,655,000      2,517,000
                                                       ------------   ------------   ------------
          Total current assets.......................   116,874,000    119,448,000     94,112,000
Net property.........................................    56,553,000     44,613,000     33,610,000
Restricted cash......................................     6,171,000      6,143,000      6,070,000
Note receivable......................................       844,000        844,000        711,000
Property held for sale...............................            --      3,300,000      3,300,000
Other assets -- net..................................    49,048,000     50,670,000     42,832,000
                                                       ------------   ------------   ------------
          Total assets...............................  $229,490,000   $225,018,000   $180,635,000
                                                       ============   ============   ============
 
                              LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings................................            --   $ 14,897,000   $  6,150,000
Accounts payable.....................................  $ 19,369,000     19,659,000     16,543,000
Accrued employee compensation and benefits...........     5,755,000      6,841,000      6,108,000
Other current liabilities............................     8,823,000      6,627,000     12,051,000
                                                       ------------   ------------   ------------
          Total current liabilities..................    33,947,000     48,024,000     40,852,000
                                                       ------------   ------------   ------------
Bank borrowings......................................    60,509,000     41,050,000     20,025,000
7 3/4% convertible subordinated debentures...........    16,974,000     17,044,000     17,286,000
Industrial development bonds.........................     5,625,000      5,625,000      5,625,000
Other long-term liabilities..........................     5,625,000      6,789,000      4,074,000
 
STOCKHOLDERS' EQUITY
Common stock, $1 par value...........................    12,195,000     12,071,000     11,922,000
Additional paid-in capital...........................     4,394,000      3,007,000        610,000
Cumulative translation adjustment....................      (282,000)      (261,000)            --
Note receivable from stockholder.....................            --       (125,000)      (125,000)
Retained earnings....................................    90,503,000     91,794,000     80,366,000
                                                       ------------   ------------   ------------
          Total stockholders' equity.................   106,810,000    106,486,000     92,773,000
                                                       ------------   ------------   ------------
          Total liabilities and stockholders'
          equity.....................................  $229,490,000   $225,018,000   $180,635,000
                                                       ============   ============   ============
</TABLE>
 
         (See accompanying notes to consolidated financial statements)
 
                                       18
<PAGE>   21
 
                           PACIFIC SCIENTIFIC COMPANY
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
                 FOR THE FISCAL YEARS ENDED DECEMBER 27, 1996,
                    DECEMBER 29, 1995 AND DECEMBER 30, 1994
 
<TABLE>
<CAPTION>
                                              ADDITIONAL    CUMULATIVE    STOCKHOLDERS
                                  COMMON        PAID-IN     TRANSLATION       NOTE        RETAINED
                                   STOCK        CAPITAL     ADJUSTMENT     RECEIVABLE     EARNINGS        TOTAL
                                -----------   -----------   -----------   ------------   -----------   ------------
<S>                             <C>           <C>           <C>           <C>            <C>           <C>
STOCKHOLDERS' EQUITY, DECEMBER
  31, 1993....................  $ 5,890,000   $ 5,165,000           --             --    $70,922,000   $ 81,977,000
 
Two-for-One Stock Split.......    5,960,000    (5,960,000)          --             --             --             --
Net Income for the Year.......           --            --           --             --     10,261,000     10,261,000
Common Stock Dividends........           --            --           --             --       (817,000)      (817,000)
Exercise of Stock Options.....       67,000     1,120,000           --             --             --      1,187,000
Conversion of Debentures......        5,000       190,000           --             --             --        195,000
Amortization of Restricted
  Stock Award.................           --        95,000           --             --             --         95,000
Note
  Receivable -- Stockholder...           --            --           --     $ (125,000)            --       (125,000)
                                -----------   -----------    ---------      ---------    -----------   ------------
 
STOCKHOLDERS' EQUITY, DECEMBER
  30, 1994....................   11,922,000       610,000           --       (125,000)    80,366,000     92,773,000
 
Net Income for the Year.......           --            --           --             --     12,750,000     12,750,000
Common Stock Dividends........           --            --           --             --     (1,322,000)    (1,322,000)
Exercise of Stock Options.....      136,000     1,965,000           --             --             --      2,101,000
Conversion of Debentures......       13,000       229,000           --             --             --        242,000
Amortization of Restricted
  Stock Award.................           --        55,000           --             --             --         55,000
Restricted Stock Benefit......           --       148,000           --             --             --        148,000
Cumulative Translation
  Adjustment..................           --            --    $(261,000)            --             --       (261,000)
                                -----------   -----------    ---------      ---------    -----------   ------------
STOCKHOLDERS' EQUITY, DECEMBER
  29, 1995....................   12,071,000     3,007,000     (261,000)      (125,000)    91,794,000    106,486,000
 
Net Income for the Year.......           --            --           --             --        169,000        169,000
Common Stock Dividends........           --            --           --             --     (1,460,000)    (1,460,000)
Exercise of Stock Options.....      120,000     1,321,000           --             --             --      1,441,000
Conversion of Debentures......        4,000        66,000           --             --             --         70,000
Cumulative Translation
  Adjustment..................           --            --      (21,000)            --             --        (21,000)
Payment of Note Receivable....           --            --           --        125,000             --        125,000
                                -----------   -----------    ---------      ---------    -----------   ------------
STOCKHOLDERS' EQUITY, DECEMBER
  27, 1996....................  $12,195,000   $ 4,394,000    $(282,000)            --    $90,503,000   $106,810,000
                                ===========   ===========    =========      =========    ===========   ============
</TABLE>
 
         (See accompanying notes to consolidated financial statements)
 
                                       19
<PAGE>   22
 
                           PACIFIC SCIENTIFIC COMPANY
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                 FOR THE FISCAL YEARS ENDED DECEMBER 27, 1996,
                    DECEMBER 29, 1995 AND DECEMBER 30, 1994
 
<TABLE>
<CAPTION>
                                                       1996             1995             1994
                                                   ------------     ------------     ------------
<S>                                                <C>              <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.......................................  $    169,000     $ 12,750,000     $ 10,261,000
Depreciation and amortization....................    11,216,000       10,448,000       11,949,000
Deferred income taxes............................    (2,143,000)         915,000         (187,000)
Decrease in accrued employee benefit plan
  liabilities....................................    (1,074,000)        (504,000)      (1,308,000)
Loss (gain) on disposal of property..............       134,000         (249,000)          58,000
EFFECT ON CASH OF CHANGES IN OPERATING ASSETS AND
  LIABILITIES, NET OF THE EFFECTS OF BUSINESS
  ACQUISITIONS AND DISPOSITIONS
  Trade receivables..............................     1,962,000       (3,720,000)      (6,090,000)
  Inventories....................................     1,254,000      (10,722,000)      (3,883,000)
  Other current assets...........................     1,574,000          (91,000)        (161,000)
  Accounts payable...............................      (290,000)       1,897,000          223,000
  Accrued employee compensation and benefits.....    (1,086,000)         728,000        1,044,000
  Other current liabilities......................     2,196,000       (5,302,000)       3,274,000
                                                   ------------     ------------     ------------
     Net cash flows from operating activities....    13,912,000        6,150,000       15,180,000
                                                   ------------     ------------     ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property............................   (21,551,000)     (19,302,000)      (9,561,000)
Payments for business acquisitions, net of cash
  acquired.......................................            --      (11,949,000)      (1,461,000)
Proceeds from disposition of property............       297,000          638,000          360,000
Increase in restricted cash and other assets.....      (442,000)      (1,634,000)      (1,994,000)
                                                   ------------     ------------     ------------
     Net cash flows from investing activities....   (21,696,000)     (32,247,000)     (12,656,000)
                                                   ------------     ------------     ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance/repayments of long-term debt............    19,459,000       21,025,000       (1,709,000)
Issuance/repayments of short-term debt...........   (14,897,000)       8,747,000       (1,521,000)
Issuances of common stock........................     1,441,000        2,304,000        1,282,000
Cash dividends on common stock...................    (1,460,000)      (1,322,000)        (817,000)
Note receivable from stockholders................       125,000               --         (125,000)
                                                   ------------     ------------     ------------
     Net cash flows from financing activities....     4,668,000       30,754,000       (2,890,000)
                                                   ------------     ------------     ------------
Effect of exchange rate changes..................       (21,000)        (261,000)              --
                                                   ------------     ------------     ------------
Net increase (decrease) in cash..................    (3,137,000)       4,396,000         (366,000)
Cash, Beginning of Year..........................     6,123,000        1,727,000        2,093,000
                                                   ------------     ------------     ------------
Cash, End of Year................................  $  2,986,000     $  6,123,000     $  1,727,000
                                                   ============     ============     ============
SUPPLEMENTAL INFORMATION
Interest payments................................  $  5,555,000     $  4,918,000     $  3,450,000
Income tax payments..............................     5,541,000        6,144,000        5,412,000
Assets acquired from acquisitions................            --        6,682,000        5,103,000
Liabilities assumed from acquisitions............            --        1,220,000        1,142,000
</TABLE>
 
         (See accompanying notes to consolidated financial statements)
 
                                       20
<PAGE>   23
 
                           PACIFIC SCIENTIFIC COMPANY
 
                 FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
 
                 FOR THE FISCAL YEARS ENDED DECEMBER 27, 1996,
                    DECEMBER 29, 1995 AND DECEMBER 30, 1994
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                        INDUSTRY SEGMENTS
                                                 -------------------------------
                                                                        SAFETY
                                                                       EQUIPMENT
                                                                       ---------
                                                      ELECTRICAL                    CORPORATE
                                                      EQUIPMENT                    EXPENSE NET
                                                 --------------------                OF OTHER       NET
                                  CONSOLIDATED    SOLIUM     OTHERS                   INCOME      INTEREST
                                  ------------   --------   ---------              ------------   -------
<S>                               <C>            <C>        <C>        <C>         <C>            <C>
DECEMBER 27, 1996
Net Sales.......................    $294,779     $  2,416    $217,317   $75,046            --          --
Pretax Income...................         300      (14,541)     17,852     7,470      $ (5,429)    $(5,052)
Depreciation and Amortization...      11,216          701       7,421     2,797           297          --
Capital Spending................      21,551        2,194       9,678     3,118         6,561          --
Identifiable Assets.............     229,490       12,418     145,032    53,056        18,984          --
 
DECEMBER 29, 1995
Net Sales.......................    $284,812     $    149    $217,747   $66,916            --          --
Pretax Income...................      20,090       (2,664)     24,563     7,556      $ (5,084)    $(4,281)
Depreciation and Amortization...      10,448           64       7,342     2,952            90          --
Capital Spending................      19,302        5,542      10,082     2,634         1,044          --
Identifiable Assets.............     225,018       11,412     139,929    51,015        22,662          --
 
DECEMBER 30, 1994
Net Sales.......................    $247,683           --    $180,248   $67,435            --          --
Pretax Income...................      16,742           --      18,263     6,568      $ (5,176)    $(2,913)
Depreciation and Amortization...      11,949           --       8,069     3,751           129          --
Capital Spending(1).............       9,561           --       6,193     3,348            20          --
Identifiable Assets(2)..........     180,635           --     118,219    46,645        15,771          --
</TABLE>
 
---------------
(1) Capital spending is shown exclusive of property purchased in conjunction
    with the acquisition of businesses (Note 6).
 
(2) Identifiable assets are those used by the industry segment involved or an
    allocated portion of assets used jointly by two or more segments.
    Intangibles and other assets arising from acquisitions of businesses are
    allocated to the related segment. General corporate assets primarily consist
    of cash and certain property.
 
                                       21
<PAGE>   24
 
                           PACIFIC SCIENTIFIC COMPANY
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
                 FOR THE FISCAL YEARS ENDED DECEMBER 27, 1996,
                    DECEMBER 29, 1995 AND DECEMBER 30, 1994
 
(1) DESCRIPTION OF BUSINESS
 
Pacific Scientific Company (the Company) was incorporated in California in 1937
as a successor to a company in business since 1919. Reference to the "Company"
includes Pacific Scientific and its subsidiaries. The Company's business is
manufacturing and selling the products of its two segments, Electrical Equipment
and Safety Equipment.
 
The Electrical Equipment segment produces: 1) electric motors and generators and
related motion control devices such as controllers and drivers, 2) electronic
instruments for particle measurement, 3) electro-mechanical and electronic
controls for use mainly by electric utilities including the controls for street
and highway lighting and 4) electronic ballasts for fluorescent lights. The
products are predominately proprietary and once designed, tend to be produced in
quantity and sold based on unique specifications.
 
The Safety Equipment segment produces: 1) fire detection and suppression
equipment, 2) personnel safety restraints, 3) mechanical and electro-mechanical
flight control components, 4) pyrotechnics and 5) provides service for products
already delivered to customers. These products are used mainly in commercial and
military aircraft and vehicles, but are also used in a variety of other
commercial and industrial applications. In most cases, the Company's products
are reconfigured to meet specific customer needs. The Company generally receives
long-term purchase orders but also responds to spot buyers, particularly for
spare parts.
 
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Accounting policies of the Company conform to generally accepted accounting
principles and are summarized below for the convenience of financial statement
readers.
 
Principles of Consolidation
 
The accompanying consolidated financial statements include the accounts of the
Company and all its subsidiaries. All material intercompany balances and
transactions have been eliminated. Most foreign subsidiary accounts are stated
as of November 30 of each year.
 
Foreign Currency Translation
 
The financial position and results of operations of the Company's foreign
subsidiaries are principally measured using local currency as the functional
currency. Assets and liabilities of these subsidiaries are translated at the
exchange rate in effect at each year-end.
 
Income statement accounts are translated at the average rate of exchange
prevailing during the year. Translation adjustments arising from differences in
exchange rates from period to period are included in the cumulative translation
adjustments account in stockholders' equity.
 
Fiscal Year
 
The Company's fiscal year ends on the last Friday in December. References to
1996, 1995 and 1994 in these consolidated financial statements refer to the
fiscal years ended December 27, 1996, December 29, 1995 and December 30, 1994,
respectively.
 
Use of Estimates
 
The preparation of the Company's consolidated financial statements in conformity
with generally accepted accounting principles necessarily requires management to
make estimates and assumptions that affect the
 
                                       22
<PAGE>   25
 
                           PACIFIC SCIENTIFIC COMPANY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the balance sheet dates and the reported amounts of revenue
and expense during the reporting periods. Actual results could differ from these
estimates and assumptions.
 
Revenue Recognition
 
Generally, sales are recorded when products are shipped or services are rendered
with the following exceptions: (1) the unit-of-delivery method is used for
contracts for products substantially reconfigured to the customers' needs and
where many units are delivered over an extended period of time; these types of
contracts generally exist in sales to the Company's aerospace customers, (2) the
percentage of completion method is used for significant contracts for relatively
few deliverable units produced over a period in excess of six months and (3)
revenue for maintenance contracts is deferred and recognized ratably over the
period of the agreement.
 
In the unit-of-delivery method, sales and estimated average cost of the units to
be produced under a contract are recognized as deliveries are made or accepted.
Changes in estimates for sales, cost and profit are recognized in the period in
which they are determined, using the cumulative catch-up method of accounting.
Any anticipated losses on contracts are charged to operations as soon as they
are determinable.
 
In the percentage of completion method, revenue and income are recognized at the
completion of measurable tasks rather than upon delivery of individual units.
 
Progress payments are netted against work-in-process inventory balances and were
$931,000, $1,655,000 and $856,000 at the end of 1996, 1995 and 1994,
respectively.
 
Fair Value of Financial Instruments
 
The recorded amounts of cash, trade receivables, accounts payable and short- and
long-term borrowings approximate their fair values. Fair values are estimated
using quoted market prices based on information available as of year end.
 
At December 27, 1996, all of the Company's investments represent
available-for-sale securities and have been recorded at fair value which
approximates historical cost of the investments. These investments consist
primarily of debt securities of municipalities of the Commonwealth of Puerto
Rico with contractual maturities beginning in 1998 or later, and are included in
other assets in the accompanying consolidated financial statements.
 
Trade Receivables
 
Trade receivables are presented net of the related allowance for doubtful
accounts, which, at year-end, totaled $1,663,000, $1,151,000 and $942,000 in
1996, 1995 and 1994, respectively. Allowances are determined principally on the
basis of past collection experience.
 
                                       23
<PAGE>   26
 
                           PACIFIC SCIENTIFIC COMPANY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
Inventories
 
Inventories are stated at the lower of average cost or market and, at year-end,
consist of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                              1996        1995        1994
                                                            --------    --------    --------
    <S>                                                     <C>         <C>         <C>
    Finished goods........................................    $6,905      $5,102      $4,904
    Work-in-process.......................................    15,524      15,299      12,302
    Raw material and purchased parts......................    29,764      33,046      22,131
                                                             -------     -------     -------
              Net inventories.............................   $52,193     $53,447     $39,337
                                                             =======     =======     =======
</TABLE>
 
The inventory reserve is $5,299,000 at the end of 1996, including a $1,974,000
reserve for revaluation at the Solium subsidiary. The inventory reserve was
$3,445,000 and $3,192,000 at the end of 1995 and 1994, respectively.
 
Property and Depreciation
 
Property is recorded at cost. Additions, major renewals and improvements which
extend the useful life of the property are capitalized. Maintenance, repairs and
minor renewals are expensed.
 
Depreciation of property is computed generally by the straight-line method over
the useful lives of the various classes of assets. Such lives range from 5 to 30
years for buildings and improvements and from 5 to 20 years for machinery and
equipment. When property is retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the appropriate accounts and any gain
or loss is included in the results of current operations.
 
Net property at year-end consists of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                            1996         1995        1994
                                                          --------     --------     -------
    <S>                                                   <C>          <C>          <C>
    Land, building and improvements.....................  $ 18,050     $ 15,905     $15,640
    Machinery and equipment.............................   107,041       89,451      72,338
                                                          --------     --------     -------
              Total.....................................   125,091      105,356      87,978
    Less accumulated depreciation.......................    68,538       60,743      54,368
                                                          --------     --------     -------
              Net property..............................  $ 56,553     $ 44,613     $33,610
                                                          ========     ========     =======
</TABLE>
 
During December of 1996, property held for sale in Anaheim, California was sold
for a purchase price of $3.5 million. A receivable of $3.5 million was recorded
in the accompanying consolidated financial statements in connection with the
sale at December 27, 1996. Amounts receivable from the sale were received in
January of 1997.
 
Other Assets
 
Other assets at year-end consist of the following, net of accumulated
amortization (in thousands):
 
<TABLE>
<CAPTION>
                                                              1996        1995        1994
                                                            --------    --------    --------
    <S>                                                     <C>         <C>         <C>
    Excess of cost over net assets of acquired
      businesses..........................................   $38,354     $39,641     $32,714
    Patents, trademarks, purchased technology and other
      intangibles.........................................     7,073       8,107       6,559
    Notes receivable and other assets.....................     3,621       2,922       3,559
                                                             -------     -------     -------
              Total other assets -- net...................   $49,048     $50,670     $42,832
                                                             =======     =======     =======
</TABLE>
 
                                       24
<PAGE>   27
 
                           PACIFIC SCIENTIFIC COMPANY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
The excess of cost over net assets of acquired businesses is amortized, using
the straight-line method, over periods not exceeding 40 years. Patents,
trademarks, purchased technology and other intangibles are amortized, using the
straight-line method, over estimated useful lives of 5 to 17 years.
 
The Company periodically reviews intangible assets to assure recoverability,
based on undiscounted expected future operating cash flow derived from related
assets, and any impairment in the value of the assets would be recognized in
operating results, if a permanent diminution in value were to occur. Accumulated
amortization of other assets at year-end totaled $14,648,000, $12,613,000 and
$11,815,000 in 1996, 1995 and 1994, respectively.
 
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of
Long-Lived Assets and for Assets to be Disposed of, which requires impairment
losses to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. SFAS No. 121 also
addresses the accounting for long-lived assets that are expected to be disposed
of. The adoption of SFAS No. 121 had no effect on the financial statements of
the Company.
 
Earnings per Share
 
Earnings per common and common equivalent share is computed by dividing net
income by the average weighted number of shares of common stock and dilutive
common stock equivalents (stock options) outstanding during each year, totaling
12,457,000 in 1996, 12,514,000 in 1995 and 12,215,000 in 1994. Fully diluted net
income per share reflects the maximum dilution, based on the closing price of
the Company's common stock as traded on the New York Stock Exchange at the end
of each year. Shares used for calculating fully diluted earnings per share in
1994 totaled 12,419,000. Fully diluted earnings per share in 1995 includes the
assumed conversion of the Company's convertible subordinated debentures. In 1996
and 1994, the assumed conversion of the debentures was not considered a common
stock equivalent and was omitted from the computation of fully diluted earnings
per share as it was anti-dilutive.
 
Stock-Based Compensation
 
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123), encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value at
the time of grant. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. Accordingly, no compensation cost is recognized by the
Company as the terms of the 1995 Stock Option Plan require all grants be made at
or above fair market value on the date of the grant. See Notes 6 and 7,
"Stockholders' Equity" and "Stock Option Compensation" for further information
regarding the 1995 Stock Option Plan and for SFAS 123 disclosure requirements.
 
Reclassifications
 
Certain amounts previously reported for 1995 and 1994 have been reclassified to
conform to the 1996 financial statement presentation.
 
                                       25
<PAGE>   28
 
                           PACIFIC SCIENTIFIC COMPANY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
(3) BORROWINGS
 
Debt at year-end consists of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                             1996        1995        1994
                                                            -------     -------     -------
    <S>                                                     <C>         <C>         <C>
    Bank borrowings:
      Short term..........................................       --     $14,897     $ 6,150
      Long term...........................................  $60,509      41,050      20,025
    7 3/4% Convertible subordinated debentures............   16,974      17,044      17,286
    Industrial development bonds..........................    5,625       5,625       5,625
                                                            -------     -------     -------
              Total debt..................................  $83,108     $78,616     $49,086
                                                            =======     =======     =======
</TABLE>
 
In 1983, the Company issued $30,000,000 of 7 3/4% convertible subordinated
debentures, of which $16,974,000 were outstanding at the end of 1996. The
debentures are convertible into Common Stock at $19 per share at any time.
Convertible subordinated debentures of $70,000, $242,000 and $195,000 were
converted into common stock during 1996, 1995 and 1994, respectively. The
Company is required to commence annual sinking fund payments in 2001, sufficient
to retire $1,974,000 of the debentures by 2002, with all remaining debentures
becoming due on June 15, 2003. Interest is payable semiannually on June 15 and
December 15. The debentures can be redeemed by the Company at par. The
debentures are subordinated to all of the Company's existing and future senior
debt. The indenture agreement places restrictions on the aggregate amount of
common stock dividends payable and the repurchase of the Company's common stock.
At December 27, 1996, over $85,000,000 of retained earnings were unrestricted
under these provisions.
 
The Company maintains $75,000,000 of unsecured lines of credit, all of which are
long-term committed credit lines and of which $60,509,000 was outstanding with
an additional $5,100,000 committed to back standby letters of credit on December
27, 1996. All $75,000,000 can be borrowed at rates that do not exceed one
percent (1%) over the London Interbank Offered Rate (LIBOR) or at the bank's
prime rate. The average interest rate on borrowed bank funds at the end of 1996
was 6.0%. The long-term credit line expires on July 31, 1998.
 
In October 1989, the Company issued $7,500,000 of 30-year industrial development
bonds to finance the construction of an industrial facility in the city of
Oxnard, California, for use by the Company's Electro Kinetics Division. These
bonds have a floating interest rate, adjusted weekly, based on current market
rates for tax-exempt bonds. The Company is obligated to pay the remaining
principal balance of $5,625,000 in 2019. The portion of the bond proceeds not
yet expended for construction costs is held in trust and classified as
restricted cash of $6,171,000 in the accompanying consolidated balance sheet at
December 27, 1996.
 
The bank agreement and industrial development bonds have loan covenants which
require the Company to maintain certain financial statement ratios. The Company
is in compliance with all required ratios at December 27, 1996.
 
Debt at December 27, 1996, matures as follows: 1997, none; 1998, $60,509,000;
1999, none; 2000, none; 2001, none; later years, $22,599,000.
 
(4) EMPLOYEE RETIREMENT BENEFIT PLANS
 
The Company has noncontributory, defined benefit pension plans covering
substantially all of its U.S. employees. Non-U.S. subsidiaries have separate
plans. Benefits are generally determined by a formula based on years of service,
final average salary and estimated social security benefits. Pension expense for
the qualified plan totaled $1,659,000, $1,417,000 and $1,116,000 in 1996, 1995
and 1994, respectively.
 
                                       26
<PAGE>   29
 
                           PACIFIC SCIENTIFIC COMPANY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
Pension expense for qualified plans consists of the following components (in
thousands):
 
<TABLE>
<CAPTION>
                                                             1996        1995        1994
                                                            -------     -------     -------
    <S>                                                     <C>         <C>         <C>
    Benefits earned during the year.......................  $ 2,447     $ 1,866     $ 1,792
    Interest on projected benefit obligation..............    4,258       4,084       3,555
    Gain on plan assets...................................     (657)     (8,793)     (4,132)
    Net amortization and deferral.........................   (4,389)      4,260         (99)
                                                            -------     -------     -------
         Net pension expense..............................  $ 1,659     $ 1,417     $ 1,116
                                                            =======     =======     =======
</TABLE>
 
The reconciliation of the funded status of the qualified plans, includes the
amount included in current and non-current employee benefit plan liabilities in
the accompanying consolidated balance sheets. Pension plan assets consist of
corporate equity and debt securities, unallocated insurance contracts, real
estate and short-term investments. The amounts shown for 1996 are estimates made
by the plans' actuary, while the amounts for 1995 and 1994 have been adjusted to
actuals based on final calculations performed by the plans' actuary.
 
The Registrant's reconciliation of funding status is as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                           1996         1995         1994
                                                         --------     --------     --------
    <S>                                                  <C>          <C>          <C>
    Actuarial present value of accumulated plan
      benefits:
      Vested...........................................  $ 53,577     $ 50,542     $ 43,834
      Non-vested.......................................     1,641        1,548        1,248
                                                         --------     --------     --------
         Total.........................................    55,218       52,090       45,082
    Effect of estimated future salary increase.........     6,667        6,289        4,468
                                                         --------     --------     --------
    Projected benefit obligation.......................    61,885       58,379       49,550
    Plan assets at fair market value...................   (57,746)     (54,352)     (48,559)
                                                         --------     --------     --------
    Projected benefit obligation over plan assets......     4,139        4,027          991
    Unrecognized transition asset......................       126          441          923
    Unrecognized net actuarial experience loss.........    (5,076)      (3,574)        (309)
                                                         --------     --------     --------
         Recorded pension (assets) liabilities.........  $   (811)    $    894     $  1,605
                                                         ========     ========     ========
</TABLE>
 
Significant assumptions used in the determination of pension expense consist of
the following:
 
<TABLE>
<CAPTION>
                                                                    1996      1995      1994
                                                                    ----      ----      ----
    <S>                                                             <C>       <C>       <C>
    Discount rate on projected benefit obligation.................  7.5 %     8.5 %      7.5%
    Long-term rate of return on plan assets.......................  9.0 %     9.0 %     8.75%
    Rate of future salary increases...............................  4.5 %     4.5 %      4.5%
</TABLE>
 
During 1995, the Company increased the expected rate of return on pension assets
from 8.75% to 9.0% which caused 1995 pension expense to decrease by $120,000. At
the end of 1995, the Company changed the discount rate from 8.5% to 7.5% which
caused an increase in 1995 projected benefit obligation of $6,500,000 and an
increase in 1996 pension expense of approximately $500,000.
 
The Company uses the projected unit credit method for determining both pension
expense and the annual contribution to the plans. The Company's funding policy
is to contribute an amount between the minimum and maximum contributions allowed
for federal income tax purposes. The difference between cumulative pension
expense and contributions has been classified in current and non-current
liabilities in the accompanying consolidated balance sheets, based on expected
contribution funding dates.
 
                                       27
<PAGE>   30
 
                           PACIFIC SCIENTIFIC COMPANY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
In addition, the Company also has a non-qualified supplemental defined benefit
plan applicable to certain senior executives and a directors retirement plan
both of which provide unfunded benefits. Pension expense for the nonqualified
plans was $402,000, $346,000 and $347,000 in 1996, 1995 and 1994, respectively.
 
(5) INCOME TAXES
 
The income tax provision consists of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                               1996        1995       1994
                                                              -------     ------     ------
    <S>                                                       <C>         <C>        <C>
    Current
      Federal income taxes..................................  $ 1,093     $3,534     $5,074
      State and foreign income taxes........................    1,181      2,891      1,594
                                                              -------     ------     ------
    Total current tax provision.............................    2,274      6,425      6,668
    Deferred tax provision..................................   (2,143)       915       (187)
                                                              -------     ------     ------
              Total income tax provision....................  $   131     $7,340     $6,481
                                                              =======     ======     ======
</TABLE>
 
The differences between the income tax provision and income taxes computed using
the U.S. Federal statutory income tax rates (35%) consist of the following (in
thousands):
 
<TABLE>
<CAPTION>
                                                                1996       1995       1994
                                                                -----     ------     ------
    <S>                                                         <C>       <C>        <C>
    Tax at U.S. Federal rate..................................  $ 105     $7,032     $5,860
    State income taxes, net of Federal tax benefit............   (532)       474        794
    Amortization of certain other assets......................    330        332        330
    Tax benefit of foreign sales corporation..................   (320)      (257)      (200)
    Effect of foreign operations..............................    633        346        187
    Tax benefit of research and development credits...........   (149)      (261)      (240)
    Nondeductible employee expenses...........................    161        118         94
    Tax exempt interest income................................    (86)      (102)       (29)
    Original issue discount...................................    (15)        (7)        --
    Tax benefit of graduated rates............................     --         --       (100)
    Other.....................................................      4       (335)      (215)
                                                                -----     ------     ------
              Total...........................................  $ 131     $7,340     $6,481
                                                                =====     ======     ======
</TABLE>
 
The Company has available tax net operating losses, subject to certain
limitations, of approximately $1,727,000 which expire at various dates through
2007.
 
                                       28
<PAGE>   31
 
                           PACIFIC SCIENTIFIC COMPANY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
Net deferred taxes of $4,060,000 at December 27, 1996, $1,917,000 at December
29, 1995, and $2,832,000 at December 30, 1994, were related to (in thousands):
 
<TABLE>
<CAPTION>
                                           1996                 1995                 1994
                                     -----------------    -----------------    -----------------
                                                LONG                 LONG                 LONG
                                     CURRENT    TERM      CURRENT    TERM      CURRENT    TERM
                                     ------    -------    ------    -------    ------    -------
    <S>                              <C>       <C>        <C>       <C>        <C>       <C>
    ASSETS
      Inventories.................   $3,791         --    $2,604         --    $2,127         --
      Employee benefits...........       --    $   295        --    $   455        --    $   877
      Accrued liabilities.........    2,354         --     1,257         --     1,376         --
      Net operating losses........      112        465       112        430       344        585
      Warranty liabilities........      428         --       498         --       569         --
      Environmental liabilities...       --        656        --        200        --        301
      Receivables.................      629         --       425         --       345         --
      Investment credits..........       --        572        --         --        --         --
      Other.......................       --         --       124         --       183         --
      Valuation allowance.........       --       (465)      (50)      (430)     (277)      (332)
 
    LIABILITIES
      Property....................       --     (1,981)       --     (1,839)       --     (2,615)
      Patents/trademarks..........       --     (1,511)       --     (1,687)       --       (633)
      Other.......................     (291)      (994)       --       (182)       --        (18)
                                     ------    -------    ------    -------    ------    -------
    Net deferred tax asset
      (liability).................   $7,023    $(2,963)   $4,970    $(3,053)   $4,667    $(1,835)
                                     ======    =======    ======    =======    ======    =======
</TABLE>
 
The valuation allowance was decreased by $15,000 and $129,000 during 1996 and
1995, respectively, and was increased by $287,000 during 1994.
 
During 1996, the Internal Revenue Service completed its examination of the
Company's 1992, 1993 and 1994 federal income tax returns. No material
adjustments resulted from this examination.
 
(6) STOCKHOLDERS' EQUITY
 
The Company has authorized 2,000,000 shares of preferred stock and 30,000,000
shares of common stock, of which 12,195,000 shares of common stock were
outstanding at December 27, 1996.
 
The Company maintains a stock option plan which provides for the granting of
options for the purchase of common stock to the officers and certain other key
employees. During 1995, the stockholders approved a new stock option plan (1995
Plan) to replace three previous stock option plans. The 1995 Plan expires in
2005. Stock options outstanding represent cumulative grants of options from the
1995 Plan and the predecessor plans.
 
The maximum number of shares of common stock that may be granted in any calendar
year for all purposes under the 1995 Plan shall be one percent (1%) of the
shares of common stock outstanding on the first day of such calendar year
provided however that, in the event that fewer than the full aggregate number of
shares of common stock available for issuance in any calendar year are issued in
such year, the shares not issued shall be added to the shares available for
issuance in any subsequent year or years. If any shares of common stock to which
options have been granted cease to be subject to exercise or purchase, such
underlying shares of common stock shall thereafter be available for grants under
the 1995 Plan during any calendar year until
 
                                       29
<PAGE>   32
 
                           PACIFIC SCIENTIFIC COMPANY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
expiration of the 1995 Plan in 2005. Substantially all available options were
granted during 1996. Stock option activity during 1996, 1995 and 1994 consists
of the following:
 
<TABLE>
<CAPTION>
                                            1996                  1995                  1994
                                     -------------------   -------------------   -------------------
                                                WEIGHTED              WEIGHTED              WEIGHTED
                                      ACTUAL    AVERAGE     ACTUAL    AVERAGE     ACTUAL    AVERAGE
                                     --------   --------   --------   --------   --------   --------
<S>                                  <C>        <C>        <C>        <C>        <C>        <C>
Stock options outstanding, beginning
  of year...........................  923,517    $10.34     992,772    $ 9.38     832,312    $ 7.31
Options granted (per share: $11.94
  to $20.88)........................  117,000    $20.88     108,600    $16.75     324,800    $13.34
Options canceled (per share: $6.25
  to $20.88)........................  (53,786)   $14.94     (43,199)   $12.31     (30,750)   $ 6.47
Options exercised (per share: $4.375
  to $13.81)........................ (120,508)   $ 8.02    (134,656)   $ 7.78    (133,590)   $ 6.80
                                     --------    ------    --------    ------    --------    ------
Stock options outstanding, end of
  year..............................  866,223    $11.80     923,517    $10.34     992,772    $ 9.38
                                     ========    ======    ========    ======    ========    ======
Stock options exercisable, end of
  year..............................  505,293               463,387               385,058
                                     ========              ========              ========
Options available for grant, end of
  year..............................  146,278               117,675                 6,214
                                     ========              ========              ========
</TABLE>
 
The following table summarizes information concerning currently outstanding and
exercisable options:
 
<TABLE>
<CAPTION>
                                                  OPTIONS OUTSTANDING
                                          ------------------------------------    OPTIONS EXERCISABLE
                                                         WEIGHTED                ----------------------
                                                          AVERAGE     WEIGHTED                 WEIGHTED
                                                         REMAINING    AVERAGE                  AVERAGE
                                            NUMBER      CONTRACTUAL   EXERCISE     NUMBER      EXERCISE
        RANGE OF EXERCISE PRICES          OUTSTANDING      LIFE        PRICE     EXERCISABLE    PRICE
----------------------------------------  -----------   -----------   --------   -----------   --------
<S>                                       <C>           <C>           <C>        <C>           <C>
 $5.00 -  $8.00.........................    382,923         4.27       $ 7.04      328,117      $ 6.95
 $8.01 - $11.00.........................     42,550            6       $ 9.06       31,913      $ 9.06
$11.01 - $14.00.........................    229,800            7       $13.78      114,900      $13.78
$14.01 - $17.00.........................     91,450            8       $16.75       22,863      $16.75
$17.01 - $21.00.........................    119,500         8.75       $20.45        7,500      $17.50
                                            -------         ----       ------      -------      ------
          Total.........................    866,223                                505,293
                                            =======                                =======
</TABLE>
 
Subsequent to the end of 1996, the Board of Directors awarded to the new
Chairman, President and CEO, options for 250,000 shares of the Company's common
stock. These options were not issued under the 1995 Employee Stock Option Plan.
The exercise price is $12.625 per share, the fair market value on the day of the
grant. The options vest 20% on February 18, 1997 and an additional 20% in each
of the following four years.
 
In November 1988, the Company adopted a Stockholder Protection Plan (the Plan)
and declared a dividend distribution of one Right for each outstanding share of
common stock. Under certain conditions, each Right may be exercised to purchase
one one-hundredth of a share of Series A Junior Participating Preferred Stock at
a purchase price of $45, subject to adjustment. The Rights will become
exercisable 20 days after a person or group has acquired, or obtained the right
to acquire, 20% or more of the outstanding shares of common stock, or following
the commencement of a tender or exchange offer for 35% or more of such
outstanding shares of common stock (except pursuant to an offer which the
independent members of the Company's Board of Directors determine to be fair and
otherwise in the best interests of the Company and its stockholders).
 
Prior to becoming exercisable, the Rights are attached to and trade together
with the common stock. Each share of Series A Junior Participating Preferred
Stock issued under this Plan will entitle its holder to receive
 
                                       30
<PAGE>   33
 
                           PACIFIC SCIENTIFIC COMPANY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
dividends equal to the greater of $4 or 100 times the dividend on common stock,
a liquidation preference of $100, and voting rights approximately 100 times
greater than the voting rights of one share of common stock. The Company will be
entitled to redeem the Rights at $0.01 per Right at any time prior to the
earlier of the expiration of the Rights in November 1998 or the time that the
Rights become exercisable. The Rights do not have voting, liquidation or
dividend rights and, until they become exercisable, have no dilutive effect on
the earnings per share of the Company. The Stockholder Protection Plan expires
in November 1998.
 
(7) STOCK OPTION COMPENSATION
 
As described in Note 2, the Company applies Accounting Principles Board Opinion
No. 25, and related interpretations, in accounting for its stock option plan.
Accordingly, no compensation cost has been recognized for its 1995 Stock Option
Plan. Had the Company chosen to adopt the provisions of Statement of Financial
Accounting Standards No. 123, and recognized compensation cost based upon the
fair value of the options at grant date, the Company's net income (loss) and net
income (loss) per share for the years ended December 27, 1996 and December 29,
1995 would have been reduced to the pro forma amounts indicated below:
 
<TABLE>
<CAPTION>
                       NET INCOME (LOSS) TO
                        COMMON STOCKHOLDERS                    1996           1995
        ---------------------------------------------------  ---------     -----------
        <S>                                                  <C>           <C>
        As reported........................................  $ 169,000     $12,750,000
        Pro forma..........................................  $(266,000)    $12,487,000
</TABLE>
 
<TABLE>
<CAPTION>
                   NET INCOME (LOSS) PER COMMON
                    AND COMMON EQUIVALENT SHARE                1996           1995
        ---------------------------------------------------  ---------     -----------
        <S>                                                  <C>           <C>
        As reported........................................  $    0.01     $      1.01
        Pro forma..........................................  $   (0.02)    $      1.00
</TABLE>
 
The fair value of the options granted under the 1995 Plan were used to calculate
the pro forma net income and net income per common and common equivalent share
above, on the date of grant, using a binomial option-pricing model with the
following weighted average assumptions:
 
<TABLE>
<CAPTION>
                                                                    1996        1995
                                                                   -------     -------
        <S>                                                        <C>         <C>
        Dividend yield...........................................     0.6%        0.7%
        Expected volatility......................................    36.5%       36.3%
        Risk free interest rate..................................     6.0%        6.0%
        Expected life............................................  6 Years     6 Years
        Weighted average fair value of grants....................   $24.60      $19.17
</TABLE>
 
(8) BUSINESS ACQUISITIONS
 
Effective December 30, 1995, the Company acquired Met One, Inc., a
privately-held company, in an exchange of approximately 983,000 shares of the
Company's common stock which had an approximate market value of $27.1 million.
Met One is a supplier of instruments that detect, count and measure contaminant
particles mainly in air. The merger allows the Company to offer its customers a
more comprehensive product line. The merger was accounted for as a pooling of
interests, and accordingly, all prior periods have been restated as if Pacific
Scientific and Met One had always been one company. In the fourth quarter of
1995, the Company recorded a one-time charge of $350,000 to reflect the costs to
combine operations of the two companies.
 
                                       31
<PAGE>   34
 
                           PACIFIC SCIENTIFIC COMPANY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
Combined and separate results of the Company and Met One during the periods
preceding the merger were as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                   1995         1994
                                                                 --------     --------
        <S>                                                      <C>          <C>
        PACIFIC SCIENTIFIC
          Net Sales............................................  $267,306     $234,737
          Net Income...........................................    11,353        9,522
 
        MET ONE
          Net Sales............................................  $ 17,506     $ 12,946
          Net Income...........................................     1,397          739
 
        COMBINED
          Net Sales............................................  $284,812     $247,683
          Net Income...........................................    12,750       10,261
</TABLE>
 
The combined financial results presented above include adjustments to conform
accounting policies of the two companies; such adjustments were not considered
material. Intercompany transactions between the two companies for the periods
presented were not material.
 
On the first day of fiscal year 1995, the Company purchased all the outstanding
shares of Eduard Bautz GmbH, located in Weiterstadt, Germany. Bautz is a German
manufacturer of high performance motors and controls. The acquisition was made
to expand the prospects for all of the Company's electric motors and related
products throughout Europe. The purchase price was approximately $13,500,000 and
resulted in the recognition of excess cost over net assets of acquired
businesses of $7,300,000.
 
Had the acquisition of Bautz occurred as of the beginning of fiscal year 1994,
unaudited pro forma net sales, income from operations before taxes and
cumulative effect of a change in accounting principle, net income and net income
per common and common equivalent share would have been as follows (in thousands,
except per share data):
 
<TABLE>
<CAPTION>
                                                                              1994
                                                                            --------
        <S>                                                                 <C>
        Net sales.........................................................  $262,428
        Income before income taxes........................................    19,106
        Net income........................................................    11,325
        Net income per share..............................................  $   0.93
</TABLE>
 
The pro forma operating results include the results of operations of the
acquired company for the year presented with estimated increased depreciation
and amortization of property and excess cost over net assets acquired along with
other relevant adjustments to reflect the fair value of the acquired assets and
pro forma interest expense on the assumed acquisition borrowings.
 
The results of operations reflected in the pro forma information above are not
necessarily indicative of the results which would have been reported if the
acquisition had been effected at the beginning of fiscal 1994.
 
In April 1994, the Company purchased the business and assets of Royce Thompson
Electric Limited for $1,500,000. The acquisition extends the Company's
participation into the outdoor lighting control market in the United Kingdom.
The purchase price exceeded the fair market value of the net tangible assets
acquired by approximately $400,000.
 
                                       32
<PAGE>   35
 
                           PACIFIC SCIENTIFIC COMPANY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
(9) LITIGATION
 
The Company is a co-defendant with certain of its past and present officers in
actions filed in the United States District Court for the Central District of
California. One action was filed by a purchaser of the Company's common stock
and the second action was filed by a purchaser of the Company's convertible
debenture. The Federal Court has combined the complaints and ordered that a
class of stockholders and a class of debenture holders be certified. The
complaint alleges that the Company and certain of its officers made false and
misleading statements regarding the Company and its Solium subsidiary. The
complaint further alleges that the market prices of the common stock and the
debentures were "artificially inflated" in the period of October 3, 1994 through
July 2, 1996. The complaint seeks damages in an unspecified amount.
 
The Company is also a co-defendant with certain of its past and present officers
in an action filed int he Superior Court of Orange County, California by prior
stockholders of Met One, Inc. The complaint is similar to the above class action
complaint, alleging that the Company made false and misleading statements
regarding the Company and its Solium subsidiary. Damages and rescission of the
sale are sought based on several causes of actions.
 
The Company believes the claims made under the class action and the Met One
matters are without merit and the Company intends to vigorously pursue its
defense. The management, at this time, is not able to determine the eventual
disposition of these matters.
 
In addition, from time to time, as a normal incident of the nature of the
Registrant's business, various claims, charges and litigation are asserted or
commenced against the Company. These claims arise from related contractual
matters, personal injury, patents, environmental matters and product liability.
 
While there can be no assurance that the Company will prevail in any of the
foregoing matters, the Registrant does not believe that these matters will have
a material adverse effect on the its consolidated financial position or
consolidated results of operations. However, in all matters of litigation, an
unfavorable outcome could have an adverse effect on the Company's consolidated
results of operations in the quarter in which that matter is resolved.
 
(10) OPERATING LEASES
 
The Company leases certain facilities and equipment under non-cancelable
operating leases which require the following minimum future rental payments:
1997, $5,605,000; 1998, $4,734,000; 1999, $3,869,000; 2000, $2,708,000; 2001,
$2,555,000; later years, $4,819,000. Rental expense was $6,225,000, $6,706,000
and $5,719,000 in 1996, 1995 and 1994, respectively.
 
(11) PROTECTION OF THE ENVIRONMENT
 
The Company is currently named a potentially responsible party (PRP) under the
Comprehensive Environmental Response, Compensation and Liability Act
("Superfund") at five (5) sites. As a PRP, the Company has voluntarily agreed to
fund, in participation with others, the required investigation and remediation
at each site. The Company has been currently allocated responsibility at these
four sites for between 0.02% and 0.26% of the waste disposed of at these sites.
Although current law seeks to impose joint and several liability on all
responsible parties at any Superfund site, the Company anticipates that any
potential liability or required contribution to the remediation of these sites
will be limited by its small percent contribution to each site. No accrual has
been made under the joint and several liability concept since the Company
believes that the probability that it will have to pay material costs above its
share is remote due to the fact that the other PRPs generally have substantial
assets available to satisfy their obligation and are participating in the
overall clean-up obligation.
 
                                       33
<PAGE>   36
 
                           PACIFIC SCIENTIFIC COMPANY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
The Company is also involved in a remedial response and voluntary environmental
clean-up expenditure at one former facility and monitoring activity at two other
sites; no site is currently subject to any Superfund law proceeding. In
addition, the Company is litigating its responsibility for environmental
remediation of a site never directly operated by the Company. This site was sold
by Sigma Instruments, Inc. prior to the acquisition of Sigma by Pacific
Scientific Company in 1987. The Company believes that it has a number of
defenses to this claim and its current potential exposure is not material.
 
In many cases, future environmental related expenditures cannot be quantified
with a reasonable degree of accuracy. Accordingly, the cost of clean-up for
which the Company remains primarily liable may be in excess of the current
environmental related accrual of $1,563,000 as of December 27, 1996. It is the
Company's policy to accrue environmental clean-up cost if it is probable that a
liability has been incurred and an amount is reasonably estimatable. As
assessment and clean-up proceeds, these liabilities are reviewed and adjusted if
necessary. The Company continues to evaluate possible insurance claims for both
past and future remediation cost.
 
Ongoing environmental compliance cost, including maintenance and monitoring
costs, are expensed as incurred and are not material.
 
While it is not feasible to predict the outcome of all pending suits and claims
involving environmental matters, the Company is of the opinion that the ultimate
disposition of these matters will not have a material adverse effect upon the
consolidated financial position, operating results and liquidity of the Company.
 
(12) FOREIGN EXCHANGE INSTRUMENTS
 
The Company enters into forward exchange and option contracts to hedge foreign
currency transactions on a continuing basis for periods consistent with its
committed exposure. The objective of the hedging is to minimize the impact of
foreign exchange rate movements on the Company's earnings and financial
position. Generally, gains and losses on these contracts offset losses and gains
on the assets and liabilities being hedged. The Company does not engage in
currency speculation.
 
As of December 27, 1996, the Company had approximately $9,220,000 of outstanding
foreign exchange contracts in which foreign currencies could be purchased. There
were no outstanding foreign exchange contracts in which foreign currencies could
be sold at December 27, 1996. At year-end of 1996, all outstanding foreign
exchange contracts served to hedge assets and liabilities.
 
(13) INFORMATION BY INDUSTRY SEGMENT
 
Financial information by industry segment for fiscal years 1996, 1995 and 1994
is summarized on page 22.
 
International sales totaled $83,226,000 in 1996, $80,695,000 in 1995 and
$52,652,000 in 1994.
 
The Company's net sales under prime contacts to defense agencies of the U.S.
Government were $12,727,000 in 1996, $7,256,000 in 1995 and $8,096,000 in 1994.
 
                                       34
<PAGE>   37
 
                           PACIFIC SCIENTIFIC COMPANY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
(14) DIVIDENDS AND QUARTERLY INFORMATION (UNAUDITED)
 
Selected quarterly information for fiscal years 1996, 1995 and 1994 follows (in
thousands, except per share data):
 
<TABLE>
<CAPTION>
                                                Q-1        Q-2        Q-3        Q-4        YEAR
                                              -------    -------    -------    -------    --------
<S>                                           <C>        <C>        <C>        <C>        <C>
1996
  Net sales.................................  $74,694    $72,811    $71,193    $76,081    $294.779
  Gross profit..............................   23,837     23,464     21,936     22,468      91,705
  Net income (loss)(1)......................    1,891     (3,738)       870      1,146         169
  Net income (loss) per common
     share(1)(2)............................  $  0.15    $ (0.30)   $  0.07    $  0.09    $   0.01
  Dividends.................................  $  0.03    $  0.03    $  0.03    $  0.03    $   0.12
 
1995
  Net sales.................................  $68,959    $72,979    $70,455    $72,419    $284,812
  Gross profit..............................   22,234     24,984     24,984     26,422      98,588
  Net income................................    2,946      3,259      3,183      3,362      12,750
  Net income per common share (primary).....  $  0.24    $  0.26    $  0.25    $  0.27    $   1.02
  Net income per common share (fully
     diluted)...............................  $  0.24    $  0.26    $  0.25    $  0.26    $   1.01
  Dividends.................................  $  0.03    $  0.03    $  0.03    $  0.03    $   0.12
 
1994
  Net sales.................................  $54,444    $60,287    $63,160    $69,792    $247,683
  Gross profit..............................   17,588     20,142     21,828     23,184      82,742
  Net income................................    1,728      2,325      2,534      3,674      10,261
  Net income per common share (primary).....  $  0.14    $  0.19    $  0.21    $  0.30    $   0.84
  Net income per common share (fully
     diluted)...............................  $  0.14    $  0.19    $  0.20    $  0.30    $   0.83
  Dividends.................................  $ 0.015    $ 0.015    $ 0.015    $ 0.015    $   0.06
</TABLE>
 
---------------
(1) The net loss for the second quarter of 1996 included restructuring and other
    charges of $4.5 million, net of tax.
 
(2) Fully diluted earnings per share are omitted as it is antidilutive.
 
                                       35
<PAGE>   38
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE
 
The Registrant has not had disagreements with, nor has the Registrant changed,
independent accountants during the past two years.
 
                                    PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
The response to this item is contained in part under the caption "Executive
Officers of the Company" in Part I, Item 4 hereof, and the remainder will be
contained in the Company's Proxy Statement for its 1997 Annual Meeting of
Stockholders (the "1997 Proxy Statement") under the caption "Election of
Directors" and is incorporated herein by reference.
 
ITEM 11.  EXECUTIVE COMPENSATION
 
The response to this item will be contained in the Company's 1997 Proxy
Statement under the captions "Directors' Compensation," "Executive
Compensation," and "Severance and Other Agreements," and is incorporated herein
by reference. Information relating to a delinquent filing of a Form 4 by an
Executive Officer of the Company is contained in the Company's 1997 Proxy
Statement under the caption "Beneficial Ownership Reporting Compliance."
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
The response to this item will be contained in the Company's 1997 Proxy
Statement under the caption "Security Ownership of Certain Beneficial Owners and
Management" and is incorporated herein by reference.
 
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
None.
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
(a)1. FINANCIAL STATEMENTS
 
The following consolidated financial statements are included in Item 8:
 
     - Consolidated Statements of Operations for the years ended December 27,
       1996, December 29, 1995 and December 30, 1994.
 
     - Consolidated Balance Sheets as of December 27, 1996, December 29, 1995
       and December 30, 1994.
 
     - Consolidated Statements of Cash Flows for the years ended 1996, 1995 and
       1994.
 
     - Consolidated Statements of Stockholders' Equity for the years ended 1996,
       1995 and 1994.
 
     - Notes to Consolidated Financial Statements.
 
(a)2. FINANCIAL STATEMENT SCHEDULE
 
The following consolidated financial statement schedule is included in Item
14(d):
 
     - Schedule II -- Valuation and Qualifying Accounts
 
All other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements or the notes thereto.
 
                                       36
<PAGE>   39
 
3. EXHIBITS
 
<TABLE>
<C>      <S>
 3.0     Restated Articles of Incorporation, as amended. Incorporated by reference to
         Registrant's Quarterly Report on Form 10-Q for period ending June 30, 1995 and filed
         on July 28, 1995.
 3.1     Bylaws, as amended.
 4.0     Indenture, dated as of April 25, 1983, for Registrant's 7 3/4% Convertible
         Subordinated Debentures, due 2003. Incorporated by reference to Form S-3
         (Registration Statement No. 2-82947) filed April 8, 1983.
 4.1     Registrant's Shareholders Protection Agreement, dated November 7, 1988. Incorporated
         by reference to Registrant's Form 8-K filed November 22, 1988.
 4.2     Amendment to Registrant's Shareholders Protection Agreement, dated August 22, 1990.
         Incorporated by reference to Registrant's Annual Report on Form 10-K filed March 28,
         1991.
10.0     Indenture, dated as of October 1, 1989, for Registrant's California Statewide
         Communities Development Authority Industrial Development Revenue Bonds, due 2019.
         Incorporated by reference to Registrant's Annual Report on Form 10-K filed March 28,
         1990.
10.1     Judgement of Foreclosure and Order of Sale of property at 1350 South State College
         Blvd., Anaheim, California. Incorporated by reference to Registrant's Annual Report
         on Form 10-K filed March 17, 1995.
10.2     Registrant's 1995 Stock Option Plan*. Incorporated by reference to Registrant's
         Definitive Proxy Statement filed March 16, 1995.
10.3     Directors' Retirement Plan*. Incorporated by reference to Registrant's Annual Report
         on Form 10-K filed March 24, 1988.
10.4     First Amendment to Directors' Retirement Plan, dated December 8, 1994*. Incorporated
         by reference to Registrant's Annual Report on Form 10-K filed March 17, 1995.
10.5     Agreement for the acquisition of certain assets of Royce-Thompson Electric Limited,
         pursuant to an asset purchase agreement dated April 29, 1994. Incorporated by
         reference to Registrant's Annual Report on Form 10-K filed March 17, 1995.
10.6     Agreement for the acquisition of certain assets of Eduard Bautz GmbH, pursuant to an
         asset purchase agreement dated December 31, 1994. Incorporated by reference to
         Registrant's Annual Report on Form 10-K filed March 17, 1995.
10.7     Agreement and Plan of Merger dated December 29, 1995, concerning the acquisition of
         Met One, Inc. Incorporated by reference to Registrant's Form 8-K filed on February
         13, 1996.
10.8     Registration Rights Agreement, dated December 29, 1995. Incorporated by reference to
         Registrant's Form 8-K filed on February 13, 1996.
11.0     Computation of Earnings Per Share.
21.0     Subsidiaries
27.0     Financial Data Schedule. Available in electronic format as filed by the Registrant.
</TABLE>
 
---------------
* Indicates management contract or compensatory plan or arrangement.
 
(b) REPORTS ON FORM 8-K
 
No reports on Form 8-K were filed by Registrant during the fourth quarter of the
fiscal year ended December 27, 1996.
 
                                       37
<PAGE>   40
 
                                   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.
 
                                          PACIFIC SCIENTIFIC COMPANY
 
March 14, 1997                            By /s/       RICHARD V. PLAT
                                            ------------------------------------
                                            Richard V. Plat
                                            Executive Vice President and
                                             Secretary
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
 
<TABLE>
<CAPTION>
                SIGNATURE                               CAPACITY                    DATE
------------------------------------------  ---------------------------------  ---------------
<C>                                         <S>                                <C>
 
             /s/ LESTER HILL                Principal Executive Officer         March 14, 1997
------------------------------------------    and Director
               Lester Hill
 
           /s/ RICHARD V. PLAT              Principal Financial Officer         March 14, 1997
------------------------------------------
             Richard V. Plat
 
          /s/ WILLIAM H. AMADON             Controller                          March 14, 1997
------------------------------------------
            William H. Amadon
 
           /s/ WALTER F. BERAN              Director                            March 14, 1997
------------------------------------------
             Walter F. Beran
 
           /s/ RALPH O. BRISCOE             Director                            March 14, 1997
------------------------------------------
             Ralph O. Briscoe
 
           /s/ RALPH D. KETCHUM             Director                            March 14, 1997
------------------------------------------
             Ralph D. Ketchum
 
          /s/ WILLIAM A. PRESTON            Director                            March 14, 1997
------------------------------------------
            William A. Preston
 
        /s/ MILLARD H. PRYOR, JR.           Director                            March 14, 1997
------------------------------------------
          Millard H. Pryor, Jr.
 
          /s/ THOMAS P. STAFFORD            Director                            March 14, 1997
------------------------------------------
            Thomas P. Stafford
</TABLE>
 
                                       38