1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1997

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

For the transition period from.......... to....................................

Commission file number 1-971

HONEYWELL INC.

(Exact name of registrant as specified in its charter)

DELAWARE 41-0415010
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

HONEYWELL PLAZA, MINNEAPOLIS, MINNESOTA 55408
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code 612-951-1000

Securities registered pursuant to section 12(b) of the act:

Name of each exchange on which
Title of each class registered
- ---------------------------------- ----------------------------------

Common Stock, par value $1.50 per New York Stock Exchange
share

Preferred Stock Purchase Rights New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___.

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]

Based on the closing sales price of $75.625 on February 20, 1998, the
aggregate market value of the voting stock held by nonaffiliates of the
registrant was $9,515,691,983.

As of February 20, 1998, the number of shares outstanding of the
registrant's common stock, par value $1.50 per share, was 126,307,784 shares.

DOCUMENTS INCORPORATED IN PART BY REFERENCE

Incorporated Documents Location in Form 10-K
- -------------------------------------------------------- ---------------------
Honeywell Notice of 1998 Annual Meeting and Proxy Part III
Statement

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

PART I

ITEM 1. BUSINESS

Honeywell Inc., a Delaware corporation incorporated in 1927, is a
Minneapolis-based international controls company that supplies automation and
control systems, components, software, products and services for homes and
buildings, industry, and space and aviation. The purpose of the company is to
develop and supply advanced-technology products, systems and services that
conserve energy and protect the environment, improve productivity, enhance
comfort and increase safety.

INDUSTRY SEGMENT INFORMATION

Honeywell's businesses are classified by management into three primary
industry segments: (i) Home and Building Control, (ii) Industrial Control, and
(iii) Space and Aviation Control. Financial information relating to these
industry segments is set forth in Part II, Item 6 at page 13.

HOME AND BUILDING CONTROL

Honeywell's Home and Building Control segment provides products and services
intended to create efficient, safe, comfortable environments. These products and
services include controls for heating, ventilation, humidification and
air-conditioning equipment; security and fire alarm systems; home automation
systems; energy-efficient lighting controls; building management systems and
services; and home comfort consumer products.

Home and Building Control manufactures, markets and installs mechanical,
pneumatic, electrical and electronic control products and systems for heating,
ventilation and air conditioning in homes, and commercial, industrial and public
buildings. These systems, which may be generic or specifically designed for each
application, may include panels and control systems to centralize mechanical and
electrical functions.

Home and Building Control also produces building management systems for
commercial buildings, and controls for a variety of applications, including:
burner and boiler, lighting, thermostatic radiators, pressure regulators for
water systems, thermostats, actuators, humidistats, relays, contactors,
transformers, air-quality products, and gas valves and ignition controls for
homes and commercial buildings. Sales of these products are made directly to
original equipment manufacturers, including manufacturers of heating and air
conditioning equipment; and through wholesalers, distributors, dealers,
contractors, hardware stores, home-care centers and Honeywell's nationwide sales
and service organization. In addition, Home and Building Control produces
standalone consumer products such as fans, heaters, humidifiers, and air and
water filtration products. These products are sold through retailers such as
hardware stores and home-care centers.

Home and Building Control provides indoor air-quality services, and
central-station burglary and fire protection services for homes and commercial
buildings; video surveillance, and access control and entry management services
for commercial buildings; contract maintenance services for commercial building
mechanical and control systems; automated management of building operations for
building complexes; and energy management and energy retrofit services.

INDUSTRIAL CONTROL

Honeywell's Industrial Control segment serves the automation and control
needs of its worldwide industrial customers by supplying products, systems and
services ranging from sensors to integrated systems designed for specific
applications, to help customers improve productivity and meet increasingly
stringent environmental and safety requirements.

Industrial Control provides process control systems, and associated
application software and services to customers in a broad range of markets,
including process industries such as: refining oil and gas, petrochemical, bulk
and fine chemical, pulp-and-paper; as well as the electric utility, food and
consumer goods, pharmaceutical, metals and transportation industries. Industrial
Control has an extensive customer base worldwide, including most of the leading
oil refiners, pulp and paper manufacturers and chemical companies.

Industrial Control also designs and manufactures process instruments,
process controllers, recorders, programmers, programmable controllers,
transmitters and other field instruments, that may be sold as stand-alone
products or integrated into control systems. These products are generally used
in indicating, recording and automatically controlling process variables in
manufacturing processes.

Under the MICRO SWITCH trademark, Industrial Control manufactures
solid-state sensors (including position, pressure, airflow, temperature and
current sensors), sensor interface devices, manual controls, explosion-proof
switches and precision snap-acting switches, photoelectric and mercury switches,
and lighted/unlighted pushbuttons. These products are used in industrial,
commercial and business equipment, and in consumer, medical, automotive,
aerospace and computer applications.

Other Industrial Control products include optoelectronic devices, and
fiber-optic systems and components, as well as microcircuits, sensors,
transducers, and high-accuracy noncontact measurement and detection products for
factory automation, quality inspection and robotics applications.

Industrial Control also furnishes industrial customers with: product and
component testing services; project management, engineering and installation
services; instrument maintenance, repair and calibration services; various
contract services for industrial control equipment, including third-party
maintenance for CAD/CAM and other industrial control equipment; advanced
control, networking and optimization services; as well as training, customized
products for customer applications and a range of other customer support
services.

Industrial Control services are generally sold directly to users on a
monthly or annual contract basis. Products are customarily sold on a delivered,
supervised or installed basis directly to end users, equipment manufacturers and
contractors, or through third-party channels such as distributors and systems
houses.

SPACE AND AVIATION CONTROL

Honeywell's Space and Aviation Control segment supplies a full-line of
avionics for the commercial, military and space markets. The company designs,
manufactures, services and markets a variety of sophisticated electronic control
systems and components for commercial and business aircraft, military aircraft
and spacecraft.

Products manufactured for aircraft use include: integrated avionics systems,
ring laser gyro-based inertial flight reference systems, navigation and guidance
systems, flight control systems, flight management systems, severe weather
avoidance systems, inertial sensors, air data computers, radar altimeters,
automatic test equipment, cockpit display systems, and other communication and
flight instrumentation.

Space and Aviation Control products and services have been involved in every
major U.S. space mission since the mid-1960s. These products and services
include guidance systems for launch and re-entry vehicles, flight and engine
control systems for manned spacecraft, precision components for strategic
missiles, surveillance and warning systems, and on-board data processing. Other
products include spacecraft attitude and positioning systems, and precision
pointing and isolation systems.

Space and Aviation Control's avionics have been purchased by leading
airframe manufacturers for use in aircraft throughout the world, including: the
Boeing 777, the McDonnell Douglas MD-11 and MD 90, the GulfStream IV and V, the
Cessna Citation X, the Bombardier Global Express; and by international, national
and regional airlines. In the military and space markets, where customers
include NASA, prime U.S. defense contractors and the U.S. Department of Defense,
Space and Aviation Control solutions are found on key platforms, including the
F-15 and the F-16 military jets, and Space Station Alpha.

Space and Aviation Control products are sold through an integrated
international marketing organization, with customer service centers providing
international service for commercial and business aviation users.

OTHER PRODUCTS

In addition to the three segments described above, Honeywell has two
research and development operations that promote technology and products to both
external customers and operating units.

The Honeywell Technology Center provides systems analysis, and applied
research and development on systems and products, including, application
software, sensors and advanced electronics.

Solid State Electronics Center, a semiconductor facility in Minnesota,
designs and manufactures integrated circuits and sensors for Honeywell,
government customers and selected external customers.

Honeywell, through its operations in Germany, develops, markets and sells to
European countries, among other things, military avionics, and electro-optic
devices for flight control and nautical systems, including sonar transducers and
echo sounders.

GENERAL INFORMATION

RAW MATERIALS

Honeywell experienced no significant or unusual problems in the purchase of
raw materials and commodities in 1997. Although it is impossible to predict what
effects shortages or price increases may have in the future, at present
management has no reason to believe a shortage of raw materials will cause any
material adverse impact during 1998.

PATENTS, TRADEMARKS, LICENSES AND DISTRIBUTION RIGHTS

Honeywell owns, or is licensed under, a large number of patents, patent
applications and trademarks acquired over a period of many years, which relate
to many of its products or improvements thereon and are of importance to its
business. From time to time, new patents and trademarks are obtained, and patent
and trademark licenses and rights are acquired from others. In addition,
Honeywell has distribution rights of varying terms in a number of products and
services produced by other companies. In the judgment of management, such rights
are adequate for the conduct of the business being done by Honeywell. See Item 3
at page 8 for information concerning litigation relating to patents in which
Honeywell is involved.

SEASONALITY

Although Honeywell's core businesses are not seasonal in the traditional
sense, revenues and earnings have tended to concentrate to some degree in the
fourth quarter of each calendar year, reflecting the tendency of customers to
increase ordering and spending for capital goods late in the year.

MAJOR CUSTOMER

Honeywell provides products and services to the United States government as
a prime contractor or subcontractor, the majority of which are described under
the heading "Space and Aviation Control" on page 2. Such business is significant
because of its volume and its contribution to Honeywell's technical
capabilities, but Honeywell's dependence upon individual programs is minimized
by the large variety of products and services it provides. Contracts and
subcontracts for all of such sales are subject to standard provisions permitting
the government to terminate for convenience or default.

BACKLOG

The total dollar amount of backlog of Honeywell's orders believed to be firm
was approximately $4,244 million at December 31, 1997, and $3,919 million at
December 31, 1996. All but approximately $902 million of the 1997 backlog is
expected to be delivered within the current fiscal year. Backlog is not a
reliable indicator of Honeywell's future revenues because a substantial portion
of backlog represents the value of orders that can be canceled at the customer's
option.

COMPETITION

Honeywell is subject to active competition in substantially all product and
service areas. Competitors generally are engaged in business on a national or an
international scale. Honeywell is the largest producer of control systems and
products used to regulate and control heating and air conditioning in commercial
buildings, and of systems to control industrial processes worldwide. Honeywell
is also a leading supplier of commercial aviation, space and avionics systems.
Honeywell's automation and control businesses compete worldwide, supported by a
strong distribution network with manufacturing and/or marketing capabilities,
for at least a portion of these businesses, in 95 countries.

Competitive conditions vary widely among the thousands of products and
services provided by Honeywell, and vary as well from country to country.
Markets, customers and competitors are becoming more international in their
outlook. In those areas of environmental and industrial components and controls
where sales are primarily to equipment manufacturers, price/performance is
probably the most significant competitive factor, but customer service and
applied technology are also important. Competition is increasingly being applied
to government procurements to improve price and product performance. In service
businesses, quality, reliability and promptness of service are the most
important competitive factors. Service must be offered from many areas because
of the localized nature of such businesses. In engineering, construction,
consulting and research activities, technological capability and a record of
proven reliability are generally the principal competitive factors. Although in
a small number of highly specialized products and services Honeywell may have
relatively few significant competitors, in most markets there are many
competitors.

RESEARCH AND DEVELOPMENT

During 1997, Honeywell spent approximately $769.1 million on research and
development activities, including $322.5 million in customer-funded research
relating to the development of new products or services, or the improvement of
existing products or services. Honeywell spent $694.7 million in 1996 and $659.8
million in 1995, on research and development activities, including $341.4
million and $336.6 million, respectively, in customer-funded research.

ENVIRONMENTAL PROTECTION

Compliance with current federal, state and local provisions regulating the
discharge of materials into the environment, or otherwise relating to the
protection of the environment, has not had, and in the opinion of management
will not have, a material effect on Honeywell's financial position, net

income, capital expenditures or competitive position. See Item 7 at page 16 for
further information concerning environmental matters.

EMPLOYEES

Honeywell employed approximately 57,500 persons in total operations as of
December 31, 1997.

GEOGRAPHIC AREAS

Honeywell engages in material operations in foreign countries. A large
majority of Honeywell's foreign business is in Western Europe, Canada and the
Asian Pacific Rim.

Although there are risks attendant to foreign operations, such as potential
nationalization of facilities, currency fluctuation and restrictions on movement
of funds, Honeywell has taken action to mitigate such risks.

Financial information related to geographic areas is included in Note 19 to
the financial statements in Part II, Item 8 at page 48.

EXECUTIVE OFFICERS OF THE REGISTRANT

POSITION HELD AGE AT
NAME OFFICE SINCE 3/1/98
- --------------------------- ---------------------------------------------------------------- ------------- -----------

M. R. Bonsignore (1) Chairman of the Board and Chief Executive Officer 1993 56

G. Ferrari (2) President and Chief Operating Officer 1997 58

J. K. Gilligan (3) President, Solutions and Services Business, Home and Building 1997 43
Control

E. D. Grayson (4) Vice President and General Counsel 1992 59

W. M. Hjerpe (5) President, Honeywell Europe 1997 46

P. M. Palazzari (6) Vice President and Controller 1994 50

J. T. Porter (7) Vice President and Chief Administrative Officer 1996 46

D. K. Schwanz (8) President, Space and Aviation Control 1997 53

L. W. Stranghoener (9) Vice President and Chief Financial Officer 1997 43

M. I. Tambakeras (10) President, Industrial Control 1997 46

A. Weiss (11) President, Products Business, Home and Building Control 1997 46

Officers are elected by the Board of Directors to terms of one year and
until their successors are elected and qualified.

- ------------------------

(1) Mr. Bonsignore was elected to this position effective April 20, 1993.

(2) Mr. Ferrari was elected to this position effective April 15, 1997. From
January 1992 to March 1997, he was President, Honeywell Europe S.A.

(3) Mr. Gilligan was elected to this position effective September 16, 1997. From
May 1994 to September 1997, he was Vice President and General Manager of
Honeywell Home and Building Control's North American Region. From October
1992 to May 1994, he was Vice President of the Building Control business in
Europe.

(4) Mr. Grayson was elected to this position effective April 1, 1992.

(5) Mr. Hjerpe was elected to this position effective March 1, 1997. From
October 1994 to January 1997, he was Vice President and Chief Financial
Officer of the company. From February 1992 to October 1994, he was Vice
President and Controller of the company.

(6) Mr. Palazzari was elected to this position effective October 16, 1994. From
May 1993 to October 1994, he was Vice President, Finance, Home and Building
Control.

(7) Mr. Porter was elected to this position effective January 1, 1998. From May
1993 to December 1997, he was Corporate Vice President, Human Resources.

(8) Mr. Schwanz was elected to this position effective January 1, 1997. From
September 1993 to December 1996, he was Vice President and General Manager
of Space and Aviation Control's Air Transport Systems division. From March
1992 to August 1993, he was Vice President of Marketing for Air Transport
Systems.

(9) Mr. Stranghoener was elected to this position effective February 1, 1997.
From March 1996 to January 1997, he was Vice President, Business
Development. From July 1993 to February 1996, he was Vice President,
Finance, Industrial Automation and Control. From April 1992 to June 1993, he
was Director, Corporate Financial Planning and Business Analysis.

(10) Mr. Tambakeras was elected to this position effective February 1, 1997.
From February 1995 to January 1997, he was President, Industrial Automation
and Control. From January 1992 to February 1995, he was President, Honeywell
Asia Pacific.

(11) Mr. Weiss was elected to this position effective September 16, 1997. From
January 1991 to September 1997, he was Vice President, Home and Building
Control Europe.

ITEM 2. PROPERTIES

Honeywell and its subsidiaries operate facilities worldwide comprising
approximately 18,716,800 square feet of space for use as manufacturing, office
and warehouse space, of which approximately 10,644,950 square feet is owned and
approximately 8,071,850 square feet is leased. In the judgment of management,
the facilities used by Honeywell are adequate and suitable for the purposes they
serve.

Facilities allocated for corporate use in the United States, including sales
offices, comprise approximately 1,391,500 square feet of space, of which
approximately 1,342,000 square feet is owned and approximately 49,500 square
feet is leased. These figures include Honeywell's principal executive offices in
Minneapolis, Minnesota which comprise approximately 957,400 square feet, all of
which is owned.

A summary of properties held by each segment of Honeywell is set forth
below, showing major plants, their location, size and type of holding. The
descriptions include approximately 714,500 square feet of space owned or leased
by Honeywell's operations in the United States that has been leased or subleased
to third parties. In addition, approximately 3,632,000 square feet of previously
leased space in the United States is under assignment to third parties
(including 2,009,800 square feet, 435,000 square feet and 60,800 square feet
which is assigned to Alliant Techsystems Inc., Federal Systems Inc. and Bull HN
Information Systems, Inc., respectively, all of which were formerly affiliates
of the company).

HOME AND BUILDING CONTROL

Home and Building Control occupies approximately 3,197,400 square feet of
space for operations in the United States, of which approximately 1,396,300
square feet is owned and approximately 1,801,100 square feet is leased.

Outside the United States, Home and Building Control operations occupy
approximately 3,372,600 square feet, of which approximately 1,029,350 square
feet is owned and approximately 2,343,250 square feet is leased. Principal
facilities operated outside the United States are located in Canada, China,
Germany, The Netherlands, the United Kingdom and Australia.

Facilities in the United States comprising 300,000 square feet or more are
listed below.

APPROXIMATE OWNED OR
LOCATION MAJOR USE OF FACILITY SQUARE FEET LEASED
- ------------------------ ------------------------------------ ------------ ---------

Golden Valley, Minn. Manufacturing 1,185,300 Owned
Memphis, Tenn. Warehouse/Distribution Center 500,000 Leased

INDUSTRIAL CONTROL

Industrial Control occupies approximately 3,422,800 square feet of space for
operations in the United States, of which approximately 2,640,300 square feet is
owned and approximately 782,500 square feet is leased.

Outside the United States, Industrial Control operations occupy
approximately 2,806,650 square feet, of which approximately 1,018,700 square
feet is owned and approximately 1,787,950 square feet

is leased. Principal facilities operated outside the United States are located
in the United Kingdom, Australia, Canada, Switzerland, France, Germany, Belgium
and The Netherlands.

Facilities in the United States comprising 300,000 square feet or more are
listed below.

MAJOR USE OF APPROXIMATE OWNED OR
LOCATION FACILITY SQUARE FEET LEASED
- ----------------- ------------------ ------------ ---------

Cupertino, Ca. Office 360,000 Owned
Freeport, Ill. Manufacturing 365,000 Owned
Freeport, Ill. Office 316,000 Owned
Phoenix, Az. Manufacturing 550,000 Owned

SPACE AND AVIATION CONTROL

Space and Aviation Control occupies approximately 4,419,800 square feet of
space for operations in the United States, of which approximately 3,179,300
square feet is owned and approximately 1,240,500 square feet is leased.

Outside the United States, Space and Aviation Control operations occupy
approximately 106,050 square feet, of which approximately 39,000 square feet is
owned and approximately 67,050 square feet is leased. Principal facilities
operated outside the United States are located in Canada, the United Kingdom,
France and Germany.

Facilities in the United States comprising 300,000 square feet or more are
listed below.

MAJOR USE OF APPROXIMATE OWNED OR
LOCATION FACILITY SQUARE FEET LEASED
- ----------------------- ------------------ ------------ ---------

Albuquerque, N.M. Manufacturing 526,600 Owned
Clearwater, Fla. Manufacturing 914,800 Owned
Minneapolis, Minn. Manufacturing 550,000 Owned
Phoenix, Ariz. Manufacturing 939,000 Owned
St. Petersburg, Fla. Manufacturing 304,000 Leased

ITEM 3. LEGAL PROCEEDINGS

On March 13, 1990, Litton Systems, Inc. filed a legal action against
Honeywell in U.S. District Court, Central District of California, Los Angeles,
(the "trial court") with claims that were subsequently split into two separate
cases. One alleges patent infringement under federal law for using an ion-beam
process to coat mirrors incorporated in Honeywell's ring laser gyroscopes, and
tortious interference under state law for interfering with Litton's prospective
advantage with customers and contractual relationships with an inventor and his
company, Ojai Research, Inc. The other case alleges monopolization and attempted
monopolization under federal antitrust laws by Honeywell in the sale of inertial
reference systems containing ring laser gyroscopes into the commercial aircraft
market. Honeywell generally denied Litton's allegations in both cases. In the
patent/tort case, Honeywell also contested the validity as well as the
infringement of the patent, alleging, among other things, that the patent had
been obtained by Litton's inequitable conduct before the United States Patent
and Trademark Office.

PATENT/TORT CASE

by Honeywell's current process. It further ruled that the state tort claims were
not supported by sufficient evidence. The trial court also held that if its
rulings concerning liability were vacated or reversed on appeal, Honeywell
should be granted a new trial on the issue of damages because the jury's award
was inconsistent with the clear weight of the evidence and based upon a
speculative damage study.

Litton appealed to the U.S. Court of Appeals for the Federal Circuit (the
"Federal Circuit"), and on July 3, 1996, in a two to one split decision, a three
judge panel of that court reversed the trial court's rulings of patent
invalidity, unenforceability and non-infringement, and also found Honeywell to
have violated California law by intentionally interfering with Litton's
consultant contracts and customer prospects. However, the panel upheld two trial
court rulings favorable to Honeywell, namely that Honeywell was entitled to a
new trial for damages on all claims and also to a grant of intervening patent
rights which are to be defined and quantified by the trial court. After
unsuccessfully requesting an "en banc" rehearing of the panel's decision by the
full Federal Circuit appellate court, Honeywell filed a petition for
"certiorari" with the U.S. Supreme Court on November 26, 1996, seeking review of
the panel's decision. In the interim, Litton filed a motion and briefs with the
trial court seeking injunctive relief. After Honeywell and certain aircraft
manufacturers filed briefs and made oral arguments opposing the injunction, the
trial court denied Litton's motion on public interest grounds on December 23,
1996, and then scheduled the patent/tort damages retrial for May 6, 1997.

On March 17, 1997, the U.S. Supreme Court granted Honeywell's petition for
review in the patent/tort case and vacated the July 3, 1996 Federal Circuit
panel decision. The case was then remanded to the Federal Circuit panel for
reconsideration in light of a recent decision by the U.S. Supreme Court in the
WARNER-JENKINSON V. HILTON DAVIS case, which refined the law concerning patent
infringement under the doctrine of equivalents. On March 21, 1997, Litton also
filed a notice of appeal to the Federal Circuit of the trial court's December
23, 1996 decision to deny injunctive relief, but the Federal Circuit stayed any
briefing or consideration of that matter until such time as it completes the
reconsideration of liability issues ordered by the U.S. Supreme Court.

Following the submission of briefs, the parties argued the liability issues
before the same three judge Federal Circuit panel on September 30, 1997, and
that panel has not indicated when it will issue a decision. The panel could
rule, in whole or in part, for Honeywell or in favor of Litton, and any such
ruling could be subject to further appeal by either party. The damages only
retrial for the patent and tort claims, originally scheduled to commence in May
1997, was postponed indefinitely pending the decision of the Federal Circuit on
liability. Before that postponement occurred Litton had submitted a revised
damage study to the trial court, seeking damages as high as $1.9 billion.
Honeywell believes that Litton's damage study remains flawed and speculative for
a number of reasons, and depending upon the outcome of the appeal concerning
liability, it may be necessary for Litton to further revise its study.

It is not possible at this time to predict the outcome of appeals in this
case, or the verdict in any retrial which may occur thereafter, but certain
potential judgments could be material to Honeywell. Honeywell believes, however,
that any award of damages for infringement or interference should be based upon
a reasonable royalty reflecting the value of the ion-beam coating process, and
further that such an award would not be material to Honeywell's financial
position or results of operations. No provision has been made in the financial
statements with respect to this contingent liability.

ANTITRUST CASE

Litton's contentions that Honeywell had illegally monopolized and attempted to
monopolize by engaging in below-cost predatory pricing; tying and bundling
product offerings under packaged pricing; misrepresenting its products and
disparaging Litton products; and acquiring the Sperry Avionics business in 1986.
On February 2, 1996, the case was submitted to the jury on the remaining
allegations that Honeywell had illegally monopolized and attempted to monopolize
by entering into certain long-term exclusive dealing and penalty arrangements
with aircraft manufacturers and airlines to exclude Litton from the commercial
aircraft market, and by failing to provide Litton with access to proprietary
software used in the cockpits of certain business jets. On February 29, 1996,
the jury returned a $234 million single damages verdict against Honeywell for
illegal monopolization which verdict would have been automatically trebled. On
March 1, 1996, the jury indicated that it was unable to reach a verdict on
damages for attempted monopolization, and a mistrial was declared as to that
claim.

Honeywell subsequently filed a motion for judgment as a matter of law and a
motion for a new trial, contending, among other things, that the jury's partial
verdict should be overturned because Honeywell was prejudiced at trial, and
Litton failed to prove essential elements of liability or submit competent
evidence to support its speculative, all-or-nothing $298.5 million damage claim.
Litton filed a motion for entry of judgment and a motion for injunctive relief.
On July 24, 1996, the trial court denied Honeywell's alternative motions for
judgment as a matter of law or a complete new trial, but concluded that Litton's
damage study was seriously flawed and granted Honeywell a retrial on damages
only. The court also denied Litton's two motions. At that time, Judge Pfaelzer
was expected to conduct the retrial of antitrust damages sometime following the
retrial of patent/tort damages. These retrials will be held before two new, and
different, juries. However, after the U.S. Supreme Court remanded the
patent/tort case to the Federal Circuit in March 1997, Litton moved to have the
trial court expeditiously schedule the antitrust damages retrial. In September
1997, the trial court rejected that motion, indicating that it wished to know
the outcome of the current patent/tort appeal before scheduling retrials of any
type.

Honeywell believes there are questions concerning the identity and nature of
the business arrangements and conduct which were found by the antitrust jury in
1996 to be anti-competitive and damaging to Litton, and that consequently any
damages retrial will also require a reappraisal of liability in some respects by
the next antitrust jury. Following this retrial, Honeywell will have the right
to appeal the eventual judgment, as to both liability and damages, to the U.S.
Court of Appeals for the Ninth Circuit. As a result of the uncertainty regarding
the outcome of this matter, no provision has been made in the financial
statements with respect to this contingent liability. Honeywell further believes
that it would be inappropriate for Litton to obtain recovery of the same
damages, e.g. losses it suffered due to Honeywell's sales of ring laser
gyroscope-based inertial systems to OEMs and airline customers, under multiple
legal theories and claims, and that eventually no duplicative recovery will be
permitted in and among the patent/tort and antitrust cases.

In the fall of 1996, Litton and Honeywell commenced a court ordered
mediation of the patent, tort and antitrust claims. No claim was resolved or
settled, and the mediation is currently in recess.

Honeywell is a party to other various claims, legal and governmental
proceedings, including claims relating to previously reported environmental
matters. It is the opinion of management that any losses in connection with
these matters and the resolution of the environmental claims will not have a
material effect on net income, financial position or liquidity.

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

No matters were submitted to a vote of security holders during the fourth
quarter of 1997.

PART II

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

The principal U.S. market for Honeywell's common stock is the New York Stock
Exchange. Dividends are paid by Honeywell on its common stock on a quarterly
basis. The high and low sales prices for Honeywell's common stock, within the
two most recent fiscal years, as reported by the consolidated transaction
reporting system, as well as quarterly dividends paid by Honeywell during such
period, are as follows:

COMMON STOCK PRICE
(NEW YORK STOCK
EXCHANGE COMPOSITE)
----------------------- DIVIDENDS
HIGH LOW PER SHARE
--------- ---------- -----------

1997 First Quarter...................... $ 76 5/8 $ 63 7/8 $ .27
Second Quarter..................... 78 3/4 65 1/2 .27
Third Quarter...................... 80 3/8 66 7/16 .27
Fourth Quarter..................... 76 3/16 64 15/16 .28

1996 First Quarter...................... $ 57 1/2 $ 44 3/8 $ .26
Second Quarter..................... 56 5/8 49 3/8 .26
Third Quarter...................... 65 7/8 48 1/4 .27
Fourth Quarter..................... 69 7/8 59 7/8 .27

Information regarding Honeywell's share repurchase plans is set forth in
Part II, Item 7 at page 23.

Shareowners of record on February 20, 1998 totaled 30,850, excluding
individual participants in security position listings.

ITEM 6. SELECTED FINANCIAL DATA

HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS AND SHARES IN MILLIONS EXCEPT PER SHARE AMOUNTS)

1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- --------

Results of Operations
Sales................................................ $8,027.5 $7,311.6 $6,731.3 $6,057.0 $5,963.0 $6,222.6
Sales growth rate.................................. 9.8% 8.6% 11.1% 1.6% (4.2)% 0.5%
-------- -------- -------- -------- -------- --------
Cost of sales........................................ 5,425.1 4,975.4 4,584.2 4,082.1 4,019.6 4,195.3
Research and development............................. 446.6 353.3 323.2 319.0 337.4 312.6
Selling, general and administrative.................. 1,359.4 1,313.1 1,263.1 1,173.8 1,075.7 1,196.8
Litigation settlements (1)........................... (32.6) (287.9)
Special charges...................................... 90.7 62.7 51.2 128.4
Interest -- net...................................... 92.5 72.9 68.9 60.2 51.0 58.5
Gain on sale of businesses........................... (77.1)
Equity income........................................ (12.9) (13.3) (13.6) (10.5) (17.8) (15.8)
-------- -------- -------- -------- -------- --------
7,324.3 6,701.4 6,225.8 5,687.3 5,484.5 5,587.9
-------- -------- -------- -------- -------- --------
Income from continuing operations before income
taxes............................................... 703.2 610.2 505.5 369.7 478.5 634.7
Provision for income taxes (2)....................... 232.2 207.5 171.9 90.8 156.3 234.8
-------- -------- -------- -------- -------- --------
Income from continuing operations.................... 471.0 402.7 333.6 278.9 322.2 399.9
Extraordinary item (3)............................... (8.6)
Cumulative effect of accounting changes (4).......... (144.5)
-------- -------- -------- -------- -------- --------
Net income........................................... $ 471.0 $ 402.7 $ 333.6 $ 278.9 $ 322.2 $ 246.8
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Net income growth rate............................. 17.0% 20.7% 19.6% (13.4)% 30.6% (25.5)%
Basic Earnings Per Common Share
Continuing operations................................ $ 3.71 $ 3.18 $ 2.62 $ 2.15 $ 2.40 $ 2.88
Extraordinary item (3)............................... (0.06)
Cumulative effect of accounting changes (4).......... (1.04)
-------- -------- -------- -------- -------- --------
Net income........................................... $ 3.71 $ 3.18 $ 2.62 $ 2.15 $ 2.40 $ 1.78
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Basic earnings per share growth rate............... 16.7% 21.4% 21.9% (10.4)% 34.8% (24.3)%
Diluted Earnings Per Common Share.................... $ 3.65 $ 3.11 $ 2.58 $ 2.15 $ 2.38 $ 1.76
Diluted earnings per share growth rate............. 17.4% 20.5% 20.0% (9.7)% 35.2% (24.1)%
Cash Dividends Per Common Share...................... $ 1.09 $ 1.06 $ 1.01 $ 0.97 $ 0.91 $ 0.84
Dividend growth rate............................... 2.8% 5.0% 4.1% 6.6% 8.3% 9.1%
Financial Position
Current assets....................................... $3,258.2 $2,981.2 $2,766.9 $2,649.4 $2,550.2 $2,707.8
Current liabilities.................................. $2,318.9 $2,066.9 $2,022.5 $2,071.8 $1,856.1 $1,969.2
-------- -------- -------- -------- -------- --------
Working capital...................................... $ 939.3 $ 914.3 $ 744.4 $ 577.6 $ 694.1 $ 738.6
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Current ratio........................................ 1.4 1.4 1.4 1.3 1.4 1.4
Short-term debt...................................... $ 146.4 $ 252.4 $ 312.4 $ 360.6 $ 187.9 $ 188.4
Long-term debt....................................... $1,176.8 $ 715.3 $ 481.0 $ 501.5 $ 504.0 $ 512.1
-------- -------- -------- -------- -------- --------
Total debt........................................... $1,323.2 $ 967.7 $ 793.4 $ 862.1 $ 691.9 $ 700.5
Shareowners' equity.................................. $2,389.2 $2,204.9 $2,040.1 $1,854.7 $1,773.0 $1,790.4
-------- -------- -------- -------- -------- --------
Capitalization....................................... $3,712.4 $3,172.6 $2,833.5 $2,716.8 $2,464.9 $2,490.9
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------

- ------------------------------

(1) In 1993, the settlement of the lawsuits against Unisys Corporation and other
parties in connection with Honeywell's 1986 purchase of the Sperry Aerospace
Group resulted in a gain of $22.4. Litigation settlements in 1993 and 1992
in the amounts of $10.2 and $287.9, respectively, are one-time settlements,
after associated expenses, reached with various camera manufacturers for
their use of Honeywell's patented automatic focus camera technology.

(2) Financial Accounting Standard No. 96, "Accounting for Income Taxes," was
adopted in 1988 and had the effect of increasing the Provision for Taxes and
the net loss by approximately $20.0 (0.12 per share).

(3) Extraordinary item resulting from the loss on early redemption of debt.

(4) The cumulative effect of accounting changes is the result of adopting
Statement of Financial Accounting Standards (SFAS) No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," which reduced
net income by $151.3 ($1.09 per share); SFAS No. 109, "Accounting for Income
Taxes," which increased net income by $31.4 ($0.23 per share); and SFAS No.
112, "Employers' Accounting for Postemployment Benefits," which reduced net
income by $24.6 ($0.18 per share).

HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS AND SHARES IN MILLIONS EXCEPT PER SHARE AMOUNTS)

1997 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- ---------

Sales
Home and Building Control....................... $ 3,386.6 $ 3,327.1 $ 3,034.7 $ 2,664.5 $ 2,424.3 $ 2,393.6
Industrial Control.............................. 2,547.1 2,199.6 2,035.9 1,835.3 1,691.5 1,743.9
Space and Aviation Control...................... 1,956.9 1,640.0 1,527.4 1,432.0 1,674.9 1,933.1
Other........................................... 136.9 144.9 133.3 125.2 172.3 152.0
--------- --------- --------- --------- --------- ---------
Total sales..................................... $ 8,027.5 $ 7,311.6 $ 6,731.3 $ 6,057.0 $ 5,963.0 $ 6,222.6
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Operating Profit (1)(2)(3)
Home and Building Control....................... $ 290.2 $ 345.8 $ 308.6 $ 236.5 $ 232.7 $ 193.4
Industrial Control.............................. 309.2 254.9 233.8 206.6 189.7 156.9
Space and Aviation Control...................... 255.7 163.3 127.6 80.9 148.1 175.8
Other........................................... 18.8 6.2 2.8 (1.8) (9.5)
--------- --------- --------- --------- --------- ---------
Total operating profit.......................... 873.9 770.2 672.8 524.0 568.7 516.6
Operating profit as a percent of sales.......... 10.9% 10.5% 10.0% 8.7% 9.5% 8.3%
Interest expense................................ (101.9) (81.4) (83.3) (75.5) (68.0) (89.9)
Litigation settlements.......................... 32.6 287.9
Equity income................................... 12.9 13.3 13.6 10.5 17.8 15.8
General corporate expense....................... (81.7) (91.9) (97.6) (89.3) (72.6) (95.7)
--------- --------- --------- --------- --------- ---------
Income before income taxes...................... $ 703.2 $ 610.2 $ 505.5 $ 369.7 $ 478.5 $ 634.7
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Assets
Home and Building Control....................... $ 2,179.4 $ 2,144.3 $ 1,727.2 $ 1,529.8 $ 1,327.3 $ 1,302.4
Industrial Control.............................. 2,047.2 1,376.1 1,307.2 1,273.3 1,059.8 1,057.5
Space and Aviation Control...................... 1,065.6 1,037.3 971.1 1,174.9 1,219.6 1,403.6
Corporate and Other............................. 1,119.2 935.6 1,054.7 907.9 991.4 1,106.6
--------- --------- --------- --------- --------- ---------
Total assets.................................... $ 6,411.4 $ 5,493.3 $ 5,060.2 $ 4,885.9 $ 4,598.1 $ 4,870.1
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Additional information
Average number of common shares outstanding..... 127.1 126.6 127.1 129.4 134.2 138.5
Return on average shareowners' equity........... 20.8% 19.7% 17.1% 15.6% 18.4% 13.8%
Shareowners' equity per average common share.... $ 18.80 $ 17.44 $ 16.09 $ 14.57 $ 13.48 $ 13.10
Price/Earnings ratio (4)........................ 18.5 20.7 18.6 14.7 14.3 11.5
Percent of debt to total capitalization......... 36% 31% 28% 32% 28% 28%
Research and development
Honeywell-funded.............................. $ 446.6 $ 353.3 $ 323.2 $ 319.0 $ 337.4 $ 312.6
Customer-funded............................... $ 322.5 $ 341.4 $ 336.6 $ 340.5 $ 404.8 $ 390.5
Capital expenditures............................ $ 298.3 $ 296.5 $ 238.1 $ 262.4 $ 232.1 $ 244.1
Depreciation and amortization................... $ 319.6 $ 287.5 $ 292.9 $ 287.4 $ 284.9 $ 292.7
Employees at year-end........................... 57,500 53,000 50,100 50,800 52,300 55,400

- --------------------------

(1) Operating profit in 1997 includes $77.1 gain on sale of businesses as
follows: Home and Building Control, $5.7 and Industrial Control, $71.4.

(2) Operating profit is net of special charges amounting to $90.7, $62.7, $51.2
and $128.4 in 1997, 1994, 1993 and 1992, respectively, as follows: Home and
Building Control, $46.9, $28.7, $9.9 and $42.7; Industrial Control, $40.8,
$14.4, $9.0 and $38.6; Space and Aviation Control, $0.0, $19.6, $7.4 and
$34.9; Other, $3.0, $0.0, $16.4 and $2.6; and General Corporate Expense,
$0.0, $0.0, $8.5 and $9.6.

(3) Operating profit is net of the additional operating expense impact of
adopting SFAS 106 and SFAS 112 amounting to $16.4 and $3.8, respectively, in
1992 as follows: Home and Building Control, $4.3 and $1.0; Industrial
Control, $4.0 and $0.9; Space and Aviation Control, $7.0 and $1.6; Other,
$0.5 and $0.1; and General Corporate Expense, $0.6 and $0.2.

(4) Price/Earnings ratio calculated using earnings from continuing operations.

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

OPERATIONS

SALES

Honeywell's sales increased 10 percent to $8.028 billion in 1997, compared
with $7.312 billion in 1996 and $6.731 billion in 1995. The 1997 sales growth
was negatively affected by three percent due to the strengthening of the U.S.
dollar relative to the currencies in countries where Honeywell does business.
Sales in the United States of $4.844 billion were up eight percent, primarily as
a result of increased volume in Space and Aviation Control and Industrial
Control. International sales of $3.184 billion increased 19 percent in local
currency terms, and 12 percent after consideration of the stronger dollar. U.S.
export sales, including exports to foreign affiliates, were $1.165 billion in
1997, compared with $973 million in 1996 and $839 million in 1995.

In 1997, the deterioration of some Asian economies had a minimal effect on
the results of operations. We expect that a continued Asian economic decline
would reduce the demand for U.S. exports in 1998 resulting in lower growth rates
in Southeast Asia. At this time, the impact of a decline is not quantifiable,
but the effect on sales is not anticipated to be material.

COST OF SALES

Cost of sales was $5.425 billion in 1997, or 67.6 percent of sales, compared
with $4.975 billion (68.0 percent) in 1996 and $4.584 billion (68.1 percent) in
1995. In 1997, cost as a percentage of sales decreased due to a mix of higher
margin products, primarily in the Space and Aviation business. Cost as a
percentage of sales decreased slightly in 1996 compared to 1995 due to improved
gross-margins in the commercial Space and Aviation business.

RESEARCH AND DEVELOPMENT

Honeywell spent $447 million, or 5.6 percent of sales, on research and
development in 1997, compared with $353 million (4.8 percent) in 1996 and $323
million (4.8 percent) in 1995. The additional spending in 1997 was a result of
increased investment in Industrial Control and Space and Aviation Control as we
continue to invest in our market leading technology platforms. Honeywell expects
to maintain or slightly decrease its current rate of R&D spending in 1998.
Honeywell also received $323 million in funds for customer-funded research and
development in 1997, compared with $341 million in 1996 and $337 million in
1995.

OTHER EXPENSES AND INCOME

Selling, general and administrative expenses were $1.359 billion, or 16.9
percent of sales in 1997, compared with $1.313 billion (18.0 percent) in 1996
and $1.263 billion (18.8 percent) in 1995. Selling, general and administrative
expenses have declined almost 200 basis points since 1995 as a result of the
continued emphasis on improving processes, automation and productivity. Net
interest expense was $93 million in 1997, $73 million in 1996 and $69 million in
1995. Interest expense was 7.8 percent of average debt in 1997, compared with
8.3 and 9.5 percent in 1996 and 1995, respectively. Net interest expense
decreased as a percent of average debt in 1997 largely due to lower interest
rates on the $550 million of note issuances and Honeywell's practice of managing
interest rates through its swap portfolio. Information concerning Honeywell's
exposure to, and management of, interest rate risk through the use of derivative
financial instruments is provided on page 24 and in Notes 6, 14 and 15 to
Financial Statements on pages 37, 40 and 42, respectively.

Earnings of companies owned 20 percent to 50 percent (primarily
Yamatake-Honeywell Co., Ltd.), which are accounted for using the equity method,
were $13 million in 1997, $13 million in 1996 and $14 million in 1995.

SPECIAL CHARGES

In the second half of 1997, Honeywell's management, with the approval of the
Board of Directors, committed itself to a plan of action and recorded special
charges of $90.7 million intended to reduce operating costs and improve margins.
The actions to be undertaken include productivity initiatives and the
rationalization of the Honeywell and Measurex product lines. The special charges
were recorded by the Home and Building Control business segment ($46.9 million)
to maintain competitiveness in a rapidly changing marketplace and the Industrial
Control business segment ($40.8 million) to rationalize product lines, R&D
facilities, and the work force to streamline the Industrial Automation and
Control business after the Measurex integration. An additional $3.0 million of
special charges were recorded by an operation included in the Other operating
segment.

Special charges include costs for work force reductions, worldwide
facilities consolidations, organizational changes, and other cost accruals. The
work force reduction costs of $74.2 million primarily include severance costs
related to involuntary termination programs instituted to improve efficiency and
reduce costs. Approximately 1,600 employees have been or will be terminated.
Facility consolidation costs amounting to $8.3 million are primarily associated
with the closing of facilities in California and Germany, and other cost
accruals total $8.2 million. For more information on the special charges, see
Note 3 to the Financial Statements on page 35.

SALE OF BUSINESSES

In September, Honeywell sold the net assets of Industrial Control's solenoid
valve business for approximately $102 million, resulting in a gain of $64.3
million. While this business, with its major facilities in Connecticut and
Switzerland, made contributions to Honeywell's success over the years, it was
not closely aligned with the future strategies and ambitions for the core
business. In the fourth quarter of 1997, Honeywell also sold the control valve
business of the Industrial Control business segment and a small security
monitoring business related to Home and Building Control for approximately $24
million of cash and receivables and a gain of $12.8 million.

INCOME TAXES

The provision for income taxes was $232 million in 1997 or 33 percent,
compared with $208 million in 1996 (34 percent) and $172 million in 1995 (34
percent). The 1997 effective income tax rate was reduced as a result of
favorable settlements with the U.S. tax authorities on previously questioned
items. Further information about income taxes is provided in Note 5 to the
Financial Statements on page 36.

NET INCOME

Honeywell's net income increased 17 percent in 1997, primarily due to
increased sales volume, a mix of higher margin products and lower operating
expenses. Net income was $471 million in 1997, compared with $403 million in
1996 and $334 million in 1995. Honeywell achieved a 17 percent increase in its
Basic Earnings per Share in 1997 despite an after-tax provision for special
charges of $60.8 million ($0.48 per share) and integration expenses associated
with over $650 million of acquisitions. These one-time charges were only
partially offset by the after-tax gains on the sale of various businesses of
$51.7 million ($0.41 per share). Basic and Diluted Earnings per Share were $3.71
and $3.65, respectively, in 1997, compared with $3.18 and $3.11 in 1996 and
$2.62 and $2.58 in 1995.

RETURN MEASUREMENTS

Return on Equity (ROE) was 20.8 percent in 1997, 19.7 percent in 1996 and
17.1 percent in 1995. Return on Investment (ROI) was 14.6 percent in 1997, 15.1
percent in 1996 and 13.5 percent in 1995. Return on Investment declined slightly
in 1997 due to a larger investment base resulting from the acquisition of the
Measurex Corporation.

Economic Value Added (EVA), calculated by subtracting a cost of capital from
operating profits net of tax, increased to $95 million in 1997, compared to $92
million in 1996, and $44 million in 1995. Honeywell increased its EVA in 1997
despite the additional investment and integration expenses associated with the
acquisition of Measurex.

OTHER OPERATING SEGMENTS

The "other" category which generated revenues of $137, $145 and $133 million
in 1997, 1996 and 1995, respectively, is primarily the result of Honeywell's
research operations. Operating profit for the other operations totaled $19
million in 1997, compared to $6 million in 1996 and $3 million in 1995. The
increase in 1997 was driven primarily from improved performance in the research
centers and lower environmental remediation costs associated with discontinued
businesses.

CURRENCY

The U.S. dollar strengthened over 10 percent in 1997 compared with 1996,
based on the weighted-average of profits denominated in the principal foreign
currencies in countries where Honeywell products are sold. A stronger dollar has
a negative effect on international results because foreign-exchange denominated
transactions translate into fewer U.S. dollars. Although the stronger dollar had
a three percent negative impact on total revenues in 1997, Honeywell managed the
exposure to earnings through its hedging strategies. Therefore, the stronger
dollar had a minimal impact on 1997 net income. In 1998, Honeywell anticipates
that a continued strong U.S. dollar may have a negative impact on earnings. This
negative impact is expected to be offset by the 1997 productivity initiatives
including the restructuring activities. Information about Honeywell's exposure
to, and management of, currency risk through the use of derivative financial
instruments is provided on page 24 and in Notes 6, 14 and 15 to Financial
Statements on pages 37, 40 and 42, respectively.

INFLATION

Highly competitive market conditions have minimized inflation's impact on
the selling prices of Honeywell's products and the cost of its purchased
materials. Productivity improvements and cost-reduction programs have largely
offset the effects of inflation on other costs and expenses.

EMPLOYMENT

Honeywell employed 57,500 people worldwide at year-end 1997, compared with
53,000 people in 1996 and 50,100 people in 1995. Approximately 31,800 employees
work in the United States, with 25,700 employed in other regions, primarily in
Europe. Total compensation and benefits in 1997 were $3.0 billion, or 41 percent
of total costs and expenses. Sales per employee were $139,600 in 1997, compared
with $138,500 in 1996 and $132,800 in 1995.

ENVIRONMENTAL MATTERS

Honeywell is committed to protecting the environment, both through its
products and in its manufacturing operations. Honeywell's use and release of
chemicals to the environment continues to decline steadily, and releases of
toxic and ozone-depleting chemicals are being phased out well ahead of
regulatory requirements. Honeywell has increased its commitment to pollution
prevention: reducing,

reusing and recycling to minimize wastes, while decreasing the costs of managing
wastes. For more information on these environmental matters, see Note 22 to the
Financial Statements on page 54.

NEW ACCOUNTING STANDARDS

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (SFAS) No. 128 "Earnings Per Share," which is
effective for financial statements for both interim and annual periods ending
after December 15, 1997. The statement requires the disclosure of Basic and
Diluted Earnings per Share on the face of the income statement. All prior year
Earnings per Share have been restated in accordance with the provisions of SFAS
128. The new calculations of Basic and Diluted Earnings per Share do not differ
materially from the Earnings per Share Honeywell has historically disclosed. For
additional information, see Notes 1 and 4 to the Financial Statements on pages
32 and 35.

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income,"
which will be effective for Honeywell beginning January 1, 1998. SFAS No. 130
requires the disclosure of comprehensive income and its components in the
general-purpose financial statements. Honeywell anticipates the effect of SFAS
No. 130 will result in the disclosure of foreign currency translation
adjustments, unrealized gains in securities, minimum pension liability
adjustments and other comprehensive income on the face of the income statement.

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which will be effective for Honeywell
beginning January 1, 1998. SFAS No. 131 redefines how operating segments are
determined and requires disclosure of certain financial and descriptive
information about a company's operating segments. Honeywell has not yet
completed its analysis of operating segments on which it will report. However, a
preliminary analysis has concluded the current reportable segments are
consistent with the "management approach" methodology outlined in SFAS 131.

In October 1996, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 96-1, "Environmental Remediation
Liabilities." This SOP provides guidance on specific accounting issues that are
present in the recognition, measurement, display and disclosure of environmental
remediation liabilities. The provisions of this SOP were adopted by Honeywell in
1997 and did not have a material effect on the results of operations or
financial position.

In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 97-2, "Software Revenue Recognition." This
SOP provides guidance on specific accounting issues that are present in the
recognition and measurement of software revenue. The provisions of the SOP are
effective for fiscal years beginning after December 15, 1997, and the adoption
by Honeywell in 1998 is not expected to have a material effect on results of
operations or financial position.

SAFE HARBOR CAUTIONARY STATEMENT

Statements in this report regarding Honeywell's outlook for its businesses
and their respective markets, such as projections of future performance,
statements of management's plans and objectives, forecasts of market trends and
other matters, are forward-looking statements, some of which may be identified
by such words or phrases as "will likely result," "are expected to," "will
continue," "outlook," "is anticipated," "estimate," "project" or similar
expressions. No assurance can be given that the results in any forward-looking
statement will be achieved and actual results could be affected by one or more
factors which could cause them to differ materially. For these statements,
Honeywell

claims the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995.

The following is a summary of certain factors, the results of which, if
markedly different from Honeywell's planning assumptions, could cause
Honeywell's future results to differ materially from those expressed in any
forward-looking statements contained in this report:

- foreign currency translations of sales denominated in other currencies;

- economic conditions, including changes in trade and monetary policies, and
customer demand for products and services, in regions throughout the world
in which Honeywell does business;

- risks pertaining to performance and energy retrofit contracts, including
dependence on the performance of third parties;

- various competitive pressures, such as new technologies, industry
consolidation and deregulation of certain industries;

- the availability of intellectual property rights for newly developed
products or key technologies; and

- significant acquisitions or divestitures.

Please refer to Exhibit 99(i) of this report, and subsequent quarterly
reports on Form 10-Q, as filed with the Securities and Exchange Commission, for
a more detailed discussion of these and other factors that could cause
Honeywell's actual results in future periods to differ materially from those
projected in such forward-looking statements.

DISCUSSION AND ANALYSIS BY SEGMENT

HOME AND BUILDING CONTROL

Home and Building Control is a global leader in providing comfortable,
healthy, safe and energy-efficient indoor environments. Customer loyalty to our
brand is based on more than 3,500 products, a broad range of systems and
services, and an unmatched distribution network that supports our customer
solutions worldwide.

THREE-YEAR SALES OVERVIEW

Sales in 1997 were $3.387 billion compared with $3.327 billion in 1996 and
$3.035 billion in 1995. Home and Building Control Products Business experienced
strong sales growth from the international market in 1997, driven by strong
demand in our water products and combustion control businesses, while cooler
weather softened demand in North America.

Our strategic partnerships with Sears and other mass merchandisers enabled
Honeywell to expand its retail market through the "store-within-a-store" concept
across the country, which features Honeywell home environment products. Since
the centers opened, Sears has reported an almost 50 percent increase in sales
for Honeywell air cleaners.

Strategic initiatives, which were focused on growing the energy retrofit
business, resulted in several key contract awards. Honeywell was chosen as the
sole supplier for energy systems at Ft. Bragg and the Army Reserve Centers, as
well as energy savings projects for the U.S. Army facilities around the world.
Valued at approximately $150 to $300 million, this is potentially one of the
largest performance contracts ever received by Honeywell. We were also among the
limited number of vendors selected by the U.S. Department of Energy to upgrade
energy systems in hundreds of federal buildings in the southeast and western
United States. Selected companies will be eligible for up to $750 million of
business over the next few years. Other multi-million dollar contracts with
Boeing, Caterpillar, Sweetheart Cup and NASA represent key wins in the
industrial marketplace.

Honeywell secured its first fan coil unit service contract for guest rooms
at the Pan Pacific Hotel through an excellent track record with service of the
hotel's air handling units. Other faithful customers such as the Sheraton Towers
and Boeing continue to choose Honeywell as their preferred energy services
strategic partner for improved energy and operating efficiency.

We continue to grow through alliances forged with utilities and with
customers.

The European Bank for Reconstruction and Redevelopment signed a
"multi-project facility" contract worth up to $70 million to help Honeywell
establish operating energy service companies to provide retrofits for industrial
buildings and district heating plants in Poland, the Czech Republic, Slovakia
and Hungary.

Honeywell's Centra factory in Schoenaich, Germany, received several major
quality awards in 1997, including the highest rating in the Ludwig Erhard Prize
competition, the German equivalent to the Baldrige award.

In 1996, sales growth resulted from expansion through strategic
acquisitions, new product introductions and customer alliances. Sales in 1995
benefited from acquisitions, trade and retail business, product additions, and
the energy retrofit and service business.

THREE-YEAR OPERATING PROFIT OVERVIEW

Home and Building Control 1997 operating profit was $290 million, including
special charges of $47 million and a gain of $6 million on the sale of a small
international security monitoring business, compared with $346 million in 1996
and $309 million in 1995. Excluding the impact of the gain and special charges,
operating profit declined due to the mix of lower margin products business and
lower than expected volume in building control.

In 1996, profits in the Products Business improved through volume increases
and cost reductions. Profits in the Solutions and Services Business declined due
to a competitive energy retrofit business and investment in programs to enhance
productivity. In 1995, operating profit rose 16 percent, primarily from strong
international volume increases, new products and cost reductions.

BUSINESS STRATEGIES

We are well-positioned for strong sales growth and market penetration as we
capitalize on our strategic acquisitions which include Lincold, a United
Kingdom-based refrigeration services company. In 1997, we announced the intent
to purchase Phoenix Controls, the world's leading producer of laboratory airflow
control solutions. These acquisitions will enhance Honeywell's worldwide
products, solutions and services portfolio.

Late in the third quarter, Honeywell announced a restructuring of the Home
and Building Control business to realign North American operations and improve
financial results. The new structure allows for greater focus and establishes
specific responsibility for each of the businesses.

INDUSTRIAL CONTROL

Industrial Control is a global leader in automation solutions from sensors
to integrated systems. Industrial Automation and Control provides one-stop,
integrated automation solutions including systems, products, and services for
process industries such as hydrocarbon processing, chemicals and pulp and paper.
Sensing and Control manufactures switches and sensors for use in vehicles,
consumer products, data communication and industrial applications, as well as
smart position-sensing devices and systems used in factories and package
distribution systems. The acquisition of the Measurex Corporation in March 1997
transformed Honeywell into the world leader in control systems for the pulp and
paper industry and has provided new opportunities for global growth.

THREE-YEAR SALES OVERVIEW

Industrial Control sales in 1997 were $2.547 billion, compared with $2.200
billion in 1996 and $2.036 billion in 1995. The 1997 sales benefited from the
successful acquisition of Measurex and the introduction of more than 80 new
products, including two new system platforms. Sales reflected strong demand for
the TotalPlant-Registered Trademark- Solution (TPS) system, the first open
Windows NT-based industrial automation system that unifies business and control
information throughout a plant or mill. Services were also strong across the
board.

Industrial Automation and Control introduced the scalable PlantScape-TM-
system to enhance the TotalPlant Solution (TPS) portfolio, putting Honeywell's
industry-leading process control technology in a cost-effective platform
designed specifically for hybrid processes in industries such as
pharmaceuticals, chemicals, food and beverage, mining and semiconductors. The
1997 introduction of Uniformance-TM-, a software suite designed to improve plant
management and performance, satisfies customer needs through the integration of
business and control systems. Another offering, called Plant Reliability
Solutions, helps prevent unexpected incidents that inflict annual losses of $20
billion in U.S. process industries alone.

Sensing and Control sales continued to strengthen, driven by our strategy of
integrating factory floor solutions and intelligent sensors. The Smart
Distributed System and our broad portfolio of industrial safety products have
created new opportunities to meet customers' automation needs. In September
1997, Honeywell sold its solenoid valve business, which had a minimal effect on
sales.

In 1996, sales benefited from the successful introduction of new
measurement, sensing and control products; the acquisition of Leeds & Northrup;
the excellent market reception of our TotalPlant Solution (TPS) system and
continued strong demand for upgrades and services that increase the value of our
installed control systems. In 1995, Industrial Control sales increased by a
strong 11 percent due to worldwide demand for TotalPlant open solutions and
strong international sales of commercial sensors and switches.

THREE-YEAR OPERATING PROFIT OVERVIEW

Industrial Control operating profit in 1997 was $309 million, including
special charges of $41 million and a gain of $71 million, primarily on the sale
of the solenoid valve business. Operating profit was $255 million in 1996 and
$234 million in 1995. Earnings in 1997, excluding one-time charges and gains,
have been positively affected by higher volume as well as improvement in the
industrial distribution business and ongoing productivity initiatives. The
earnings growth was negatively affected by goodwill, intangible amortization and
expected expenses related to the Measurex integration and softness in the global
pulp and paper market.

Operating profits increased in 1996 as a result of continuing strategic
actions to reduce overhead, streamline business operations, improve the mix of
higher-margin field instruments and automate component manufacturing. In 1995,
operating profit increased, spurred by a sharp rise in profitability in Sensing
and Control as switch margins improved in the United States and Europe
experienced favorable volumes and lower product costs.

BUSINESS STRATEGIES

Industrial Control's leading industry position is being further enhanced
with a focus on operational excellence, including cost reductions. Superior
technologies, coupled with a balanced business model of products, systems and
services continue to fuel growth and margin expansion, and drive successful
partnerships with key customers. Served market expansion and leadership in core
markets is bolstered by partnerships and strategic acquisitions like Measurex,
which established Honeywell as the leader in the pulp and paper automation
market.

Alliances and strategic partnerships are providing advanced control
technology, solutions, optimization software and training to industries around
the world. Honeywell was chosen by a number of industrial customers for
strategic alliances in 1997, including British Petroleum Oil, Shell
International and Alcoa World Alumina & Chemicals. The introduction of the
PlantScape system and an attractive distribution agreement with Rockwell
Automation to distribute the system will allow for a quick and profitable volume
ramp-up in the next three years.

SPACE AND AVIATION CONTROL

As a leading supplier of avionics systems and products for the commercial,
military and space markets, our Space and Aviation Control business serves
customers that range from aircraft manufacturers and business aircraft operators
to prime space contractors and the U.S. government. Our systems are on board
virtually every commercial aircraft produced in the Western world, and we have
also been aboard every manned space flight launched in the United States.

THREE-YEAR SALES OVERVIEW

In 1997, Space and Aviation Control sales were $1.957 billion, compared with
$1.640 billion in 1996 and $1.527 billion in 1995. The 19 percent increase in
sales was driven by strong growth in commercial avionics and strengthening of
the military and space businesses. The growth in commercial avionics is the
result of an increase in air transport deliveries which coincided with expected
1997 build rates and a strong increase in the business jet market. Honeywell has
advanced avionics systems on 14 new business and regional aircraft that are
either completing or undergoing certification. The latest wins include the
Fairchild-Dornier 328 regional commuter jet.

In 1997, the Honeywell/Pelorus Satellite Landing System became the first in
the world to receive Type Acceptance certification from the Federal Aviation
Administration (FAA). Continental Airlines will be the first airline to use the
system in revenue service at both Newark and Minneapolis-St. Paul airports in
early 1998. The Satellite Landing System increases airport capacity and safety
while reducing noise around the airport environment. The FAA plans to implement
this technology across the U.S. starting early in the next century. Other
countries are establishing implementation plans as well. The Satellite Landing
System is the first in a series of products focused on the growing airport
market to be offered globally by Honeywell's Airport Control business
initiative.

In 1997, Commercial Aviation Systems-Sensor Products Operation in
Minneapolis received the Minnesota State Quality award, the state's highest
recognition of quality processes, based on the criteria of the Malcolm Baldrige
National Quality Award.

Sales in 1996 increased seven percent from the prior year driven by
increased commercial aviation OEM business and our strategies to expand our
GPS-based guidance products and systems, pursue retrofit opportunities and bring
our Boeing 777 technology to all market segments worldwide. Sensor and Guidance
Products orders were up sharply, driven by guidance and navigation system
retrofits and tactical "smart guidance" munitions programs. Sales in 1995
increased moderately, driven by the recovery in the business jet and commuter
aircraft market, strength in the retrofit and repair business, and increased
sales from the International Space Station program.

THREE-YEAR OPERATING PROFIT OVERVIEW

Space and Aviation Control 1997 operating profit was $256 million compared
to $163 million in 1996 and $128 million in 1995. In 1997, operating profits
increased over 50 percent, driven by the mix of higher margin commercial
aviation business coupled with high profit programs in military avionics.
Operating margins increased to a record 13.1 percent, up 310 basis points from
1996.

Operating profit in 1996 and 1995 increased due to improved margins in
commercial aviation systems, lower development expenses and productivity
improvements.

BUSINESS STRATEGIES

The commercial aircraft industry is poised for strong growth in 1998 and
beyond. Five growth strategies have been identified to mitigate cyclicality in
the commercial aviation industry: communication, navigation, surveillance
(CNS)/air traffic management (ATM); aviation services; airport control;
commercial space; and tactical guidance. Early success with these initiatives is
positioning Honeywell for the future in aviation technology.

FINANCIAL POSITION

FINANCIAL CONDITION

At year-end 1997, Honeywell's capital structure was comprised of $146
million of short-term debt, $1.177 billion of long-term debt and $2.389 billion
of shareowners' equity. The ratio of debt-to-total capital was 36 percent,
compared with 31 percent in 1996 and 28 percent at year-end 1995. Honeywell
demonstrated its financial strength in 1997, by acquiring seven companies worth
over $650 million, increasing the quarterly dividend by four percent, and
lowering the outstanding share count through its share repurchase program, all
while maintaining its preferred debt-to-capital ratio of 30-40 percent.

Shareowners' equity increased $184 million in 1997 driven by net income of
$471 million and stock option exercises and employee stock plan issuances of
$118 million. The gross increase of $589 million was offset by a $110 million
decrease in accumulated foreign currency translation, $139 million of dividends,
$154 million of treasury stock purchases, and a $2 million change in the pension
liability adjustment.

CASH GENERATION AND DEPLOYMENT

In 1997, $645 million of cash was generated from operating activities,
compared with $494 million in 1996, and $573 million in 1995. The increase in
1997 was largely due to working capital. In 1997, cash generated from investing
and financing activities included $598 million from the issuance of debt, $101
million of proceeds from the sale of various businesses, net of taxes paid, $77
million of proceeds from the sale of other assets and $45 million of proceeds
from the exercise of stock options. These funds were used to support $598
million in acquisitions net of cash acquired, $298 million of capital
expenditures, $140 million of dividend payments, $154 million of payments for
share repurchases and $256 million of debt repayments. Cash balances increased
$7 million in 1997.

CONTROLLED WORKING CAPITAL

Cash used for increases in "controlled working capital," which consists of
trade and long-term receivables and inventories, offset by accounts payable and
customer advances, was $45 million in 1997, compared with $195 million in 1996.
Average working capital as a percentage of sales was 24.7 percent in 1997
compared with 24.6 percent in 1996 and 25.2 percent in 1995. The increase in
controlled working capital as a percent of sales in 1997 was primarily driven by
the Measurex acquisition.

INVESTMENT

Honeywell continues to invest in its businesses at levels it believes to be
necessary to maintain its technological leadership position. Capital
expenditures for property, plant and equipment were $298 million in 1997,
compared with $296 million in 1996 and $238 million in 1995, while depreciation

charges were $246 million in 1997. Honeywell invested an additional $650 million
in complementary business acquisitions in 1997. (For more information on these
acquisitions refer to Note 2 to the Financial Statements on page 34). Honeywell
also invested $447 million in research and development activities in 1997
compared with $353 in 1996 and $323 in 1995.

SHARE REPURCHASE PROGRAMS

In July 1995, the Board of Directors authorized an open-ended program to
repurchase $250 million of Honeywell shares which was completed in the fourth
quarter of 1997. In October 1997, the Board of Directors authorized a new
program to repurchase $350 million of Honeywell shares of which $116 million was
used during 1997. The purpose of the repurchase program is to acquire shares to
be issued as part of the 1997 Honeywell Stock and Incentive Plan and other
issuances as described in Note 17 to the Financial Statements on page 44.
Honeywell repurchased a total of $154 million of shares in 1997, $163 million in
1996 and $129 million in 1995.

At year-end 1997, Honeywell had issued 188 million shares, of which 126
million were outstanding. On December 31, 1997, there were 30,821 shareowners of
record. At year-end 1996, Honeywell had 188 million shares issued, 126 million
shares outstanding and 31,734 shareowners of record.

DIVIDENDS

Honeywell has paid a quarterly dividend since 1932 and has increased the
annual payout per share in each of the last 22 years. In July 1996, the Board of
Directors approved a four percent increase in the regular annual dividend to
$1.08 per share effective in the third quarter 1996. In October 1997, the Board
of Directors approved an additional four percent increase in the dividend to
$1.12 per share effective in the fourth quarter 1997. Honeywell paid $1.09 per
share in dividends in 1997, compared with $1.06 per share in 1996 and $1.01 in
1995.

EMPLOYEE STOCK PROGRAM

In 1997, Honeywell contributed 542,406 shares of Honeywell common stock to
U.S. employees under the Honeywell Savings and Stock Ownership Plan. The number
of shares contributed under this program is based on employee savings levels and
company performance.

PENSION CONTRIBUTIONS

Cash contributions to Honeywell's pension and retirement plans amounted to
$215 million in 1997, $201 million in 1996 and $172 million in 1995.

TAXES

In 1997, Honeywell paid $204 million in taxes compared to $113 million in
1996. The amount Honeywell accrued for income taxes and related interest
increased $27 million from 1996.

LIQUIDITY

Short-term debt at year-end 1997 was $146 million, consisting of $43 million
of commercial paper, $39 million of notes payable and $64 million of current
maturities of long-term debt. Short-term debt at year-end 1996 totaled $253
million, consisting of $87 million of commercial paper, $67 million of notes
payable and $99 million of current maturities of long-term debt.

Through its banks, Honeywell has access to various credit facilities,
including committed credit lines for which Honeywell pays commitment fees and
uncommitted lines provided by banks on a non-committed, best-efforts basis.
Available general-purpose lines of credit at year-end 1997 increased to $1.683
billion. This consisted of $1.325 billion of committed credit lines to meet
Honeywell's financing

requirements, including support of commercial paper and bank note borrowings,
and $358 million of uncommitted credit lines available to certain foreign
subsidiaries. This compared with $1.128 billion of available credit lines at
year-end 1996, consisting of $725 million of committed credit lines for general
financing requirements and $403 million of uncommitted credit lines available to
certain foreign subsidiaries.

On March 12, 1997, Honeywell issued $550 million of fixed-rate long-term
debt through an underwritten offering with maturities of five and ten years. In
August 1997, Honeywell and its wholly-owned subsidiaries, Honeywell Canada
Limited and Honeywell Finance B.V., filed a shelf registration statement which
provides for the issuance of up to $500 million, in the aggregate, of debt
securities by Honeywell or such subsidiaries, with the guarantee of Honeywell.
At December 31, 1997, no debt had been issued under this program. Long-term debt
maturities consist of $64 million in 1998, $124 million in 1999, and $77 million
in 2000.

In addition, Honeywell has an agreement with a major financial institution
whereby it may convert designated pools of trade accounts receivable to cash up
to approximately $35 million on an ongoing basis (see Note 8 to the Financial
Statements on page 38).

Cash and short-term investments totaled $159 million at year-end 1997 and
$136 million at year-end 1996. Honeywell believes its available cash, committed
credit lines, receivable program, and access to the public debt markets, through
its debt securities and commercial paper programs, provide adequate short-term
and long-term liquidity.

RISK MANAGEMENT

Honeywell is exposed to market risk from changes in interest rates and
foreign currency exchange rates. To mitigate the risk from these exposures,
Honeywell enters into various hedging transactions through derivative financial
instruments that have been authorized pursuant to its corporate policy.
Honeywell policy prohibits the use of derivative financial instruments for
trading or other speculative purposes, and Honeywell is not a party to leveraged
financial instruments.

FOREIGN EXCHANGE

Honeywell primarily uses foreign exchange forwards and purchased options to
hedge exposures to adverse changes in foreign exchange rates (see Notes 6 and 15
on pages 37 and 42). Such exposures result from cross-border transactions
principally in Belgian francs and Deutsche marks. Foreign exchange contracts
reduce Honeywell's overall exposure to exchange rate movements, since gains and
losses on these contracts offset losses and gains on the underlying exposures.
Transactions that are hedged include foreign currency net asset and net
liability exposures on the balance sheet, firm purchase orders and firm sales
commitments. At year-end 1997, the notional amount of outstanding foreign
exchange contracts was $1.214 billion.

INTEREST RATES

Honeywell manages its exposure to interest rate movements and the cost of
borrowing through the use of interest rate swaps by maintaining a proportionate
relationship of fixed rate debt to total debt between a minimum and maximum
percentage as set by corporate policy. To manage this mix in a cost efficient
manner, Honeywell enters into interest rate swap agreements, in which it agrees
to exchange, at specified intervals, the difference between fixed and variable
interest amounts calculated by reference to an agreed upon notional principle
amount (see Notes 14 and 15 on pages 40 and 42). At year-end 1997, the notional
amount of outstanding interest rate swaps was $1.340 billion.

VALUE AT RISK

To estimate the maximum potential loss that may arise from adverse market
movements in foreign exchange rates and interest rates, Honeywell uses a "value
at risk" statistical model. The value at risk estimation utilizes weighted
historical foreign exchange rates and interest rates to estimate the volatility
of these rates in the future. The calculated volatility is used to estimate the
potential loss in the current value of the instruments at a specified
probability level. The value at risk methodology used by Honeywell uses
variance-covariance statistical modeling and includes debt, interest rate swaps
and foreign exchange hedges. The estimated value at risk amounts represent the
maximum potential loss that Honeywell may incur from adverse changes in foreign
exchange rates and interest rates based on a five-day time horizon and a 95
percent confidence level on December 31, 1997.

The value at risk for the combined portfolio was $6.8 million at December
31, 1997, which includes the diversification benefit of analyzing the value at
risk including the interest rates and foreign exchange on a combined basis as
compared to individually, as changes in market conditions affect interest rates
and foreign exchange differently. The value at risk for the combined portfolio
and the individual components are as follows:

VALUE AT RISK
(IN MILLIONS)

Combined Portfolio................................................... $ 6.8
Foreign Exchange................................................... $ 6.1
Interest Rates..................................................... $ 2.3

The value at risk amounts presented above do not consider the potential
effect of favorable movements in market factors nor does the value at risk model
include all of the underlying exposures that the hedges are designed to cover.
Anticipated transactions, firm commitments and receivables and accounts payable
denominated in foreign currencies, which certain of these instruments are
intended to hedge, were excluded from the model. Since Honeywell utilized
foreign exchange contracts to hedge anticipated foreign currency transactions, a
loss in fair value for these instruments is generally offset by increases in the
value of the underlying anticipated transaction. The quantitative information
generated by the value at risk model is limited by the parameters built into the
model. Consequently, Honeywell relies on the experience and expertise of
management's regular review of its financial instruments and the current market
environment to manage its exposure to foreign exchange rates and interest rates.

YEAR 2000 COMPLIANCE

Computer programs which were written using two digits (rather than four) to
define the applicable year may recognize a date using "00" as the year 1900
rather than the year 2000, a result commonly referred to as the "Year 2000"
problem. This could result in a system failure or miscalculations.

In 1996, Honeywell initiated a program to evaluate whether internally
developed and purchased computer programs that utilize embedded date codes may
experience operational problems when the year 2000 is reached. The scope of this
effort addressed internal computer systems, products sold and supplier
capabilities.

Honeywell is completing an extensive review of each of its businesses to
determine whether or not purchased or internally developed computer programs are
Year 2000 compliant, as well as the remedial action and related costs associated
with required modifications or replacements. A significant amount of information
has been collected and analyzed as part of this review; however, the process
will not be completed until the end of the second quarter of 1998. Honeywell
plans to complete all

remediation efforts for its critical systems prior to the year 2000. Based on
its evaluation to date, management currently believes that, while Honeywell will
incur internal and external costs to address the Year 2000 problem, such costs
will not have a material impact on the operations, cash flows or financial
condition of Honeywell and its subsidiaries, taken as a whole, in future
periods.

EURO CURRENCY

Beginning in January 1999, the European Monetary Union (EMU) will enter into
a three-year transition phase during which a common currency called the EURO
will be introduced in participating countries. Initially, this new currency will
be used for financial transactions, and progressively, it will replace the old
national currencies that will be withdrawn by July 2002. The transition to the
EURO currency will involve changing budgetary, accounting and fiscal systems in
companies and public administrations, as well as the simultaneous handling of
parallel currencies and conversion of legacy data. Uncertainty exists as to the
effects the EURO currency will have on the marketplace. Additionally, all of the
final rules and regulations have not yet been defined and finalized by the
European Commission with regard to the EURO currency. Honeywell has initiated a
program to evaluate whether internally developed and purchased computer programs
will experience operational problems when the Euro is introduced. Further,
Honeywell is monitoring the rules and regulations as they become known in order
to make any changes to its computer programs that Honeywell deems necessary to
comply with such rules and regulations. Although Honeywell believes that it will
be able to accommodate any required EURO currency changes in its computer
programs, there can be no assurance that once the final rules and regulations
are completed that Honeywell's computer programs will contain all of the
necessary changes or meet all of the EURO currency requirements. Based on its
evaluation to date, management currently believes that, while Honeywell will
incur internal and external costs to address the EURO currency issue, such costs
will not have a material impact on the operations, cash flows or financial
condition of Honeywell and its subsidiaries, taken as a whole, in future
periods.

LITIGATION

On March 13, 1990, Litton Systems, Inc. filed a legal action against
Honeywell in U.S. District Court, Central District of California, Los Angeles,
with claims that were subsequently split into two separate cases. One alleges
patent infringement under federal law for using an ion-beam process to coat
mirrors incorporated in Honeywell's ring laser gyroscopes, and tortious
interference under state law for interfering with Litton's prospective advantage
with customers and contractual relationships with an inventor and his company,
Ojai Research, Inc. The other case alleges monopolization and attempted
monopolization under federal antitrust laws by Honeywell in the sale of inertial
reference systems containing ring laser gyroscopes into the commercial aircraft
market. Honeywell generally denied Litton's allegations in both cases. In the
patent/tort case, Honeywell also contested the validity as well as the
infringement of the patent, alleging, among other things, that the patent had
been obtained by Litton's inequitable conduct before the United States Patent
and Trademark Office.

Trials were held for both cases and at the conclusion of each, juries
awarded Litton significant monetary damages. However, the awards were set aside
by the trial court judge and new trials ordered on the issue of damages in each
case. Following appeals by both parties of various issues related to these
cases, the U.S. Supreme Court remanded the patent/tort case to the U.S. Court of
Appeals for the Federal Circuit for further proceedings, and the retrial of
damages in the antitrust case was postponed indefinitely pending the outcome of
the Federal Circuit proceeding. For a detailed discussion of this litigation,
see Note 22 to Financial Statements on page 54.

CREDIT RATINGS

As of December 31, 1997, Honeywell's credit ratings for long-term and
short-term debt, respectively, were A/A-1 by Standard and Poor's Corporation,
A2/P1 by Moody's Investors Service, Inc. and A/Duff by Duff and Phelps
Corporation.

STOCK PERFORMANCE

The market price of Honeywell stock ranged from $63 7/8 to $80 3/8 in 1997,
and was $68 1/2 at year-end. Book value per common share at year-end was $18.80
in 1997, $17.44 in 1996 and $16.09 in 1995.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEPENDENT AUDITORS' REPORT

To the Shareowners of Honeywell Inc.:

We have audited the statement of financial position of Honeywell Inc. and
subsidiaries as of December 31, 1997 and 1996, and the related statements of
income and cash flows for each of the three years in the period ended December
31, 1997. Our audits also included the financial statement schedule listed as
Part IV, Item 14(a). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, such financial statements present fairly, in all material
respects, the financial position of Honeywell Inc. and subsidiaries at December
31, 1997 and 1996, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles. Also, in our opinion, such
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth herein.

Deloitte & Touche LLP
Minneapolis, Minnesota
February 10, 1998

INCOME STATEMENT
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS AND SHARES IN MILLIONS
EXCEPT PER SHARE AMOUNTS)

YEARS ENDED DECEMBER 31
---------------------------------
1997 1996 1995
--------- ---------- ----------

Sales......................................................................... $ 8,027.5 $ 7,311.6 $ 6,731.3
Costs and Expenses
Cost of sales............................................................... 5,425.1 4,975.4 4,584.2
Research and development.................................................... 446.6 353.3 323.2
Selling, general and administrative......................................... 1,359.4 1,313.1 1,263.1
Gain on sale of businesses.................................................. (77.1)
Special charges............................................................. 90.7
--------- ---------- ----------
Total Costs and Expenses...................................................... 7,244.7 6,641.8 6,170.5
--------- ---------- ----------
Interest
Interest expense............................................................ 101.9 81.4 83.3
Interest income............................................................. 9.4 8.5 14.4
--------- ---------- ----------
Net Interest.................................................................. 92.5 72.9 68.9
--------- ---------- ----------
Equity Income................................................................. 12.9 13.3 13.6
--------- ---------- ----------
Income before Income Taxes.................................................... 703.2 610.2 505.5
Provision for Income Taxes.................................................... 232.2 207.5 171.9
--------- ---------- ----------
Net Income.................................................................... $ 471.0 $ 402.7 $ 333.6
--------- ---------- ----------
--------- ---------- ----------
Basic Earnings Per Common Share............................................... $ 3.71 $ 3.18 $ 2.62
--------- ---------- ----------
--------- ---------- ----------
Average Number of Basic Common Shares Outstanding............................. 127.1 126.6 127.1
--------- ---------- ----------
--------- ---------- ----------
Diluted Earnings Per Common Share............................................. $ 3.65 $ 3.11 $ 2.58
--------- ---------- ----------
--------- ---------- ----------
Average Number of Diluted Common Shares Outstanding........................... 129.2 129.5 129.5
--------- ---------- ----------
--------- ---------- ----------

See accompanying Notes to Financial Statements.

STATEMENT OF FINANCIAL POSITION
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS)
ASSETS

DECEMBER 31
-----------------------
1997 1996
---------- -----------

Current Assets
Cash and cash equivalents............................................................. $ 134.3 $ 127.1
Short-term investments................................................................ 24.9 8.6
Receivables........................................................................... 1,837.8 1,714.7
Inventories........................................................................... 1,028.0 937.6
Deferred income taxes................................................................. 233.2 193.2
---------- -----------
Total Current Assets................................................................ 3,258.2 2,981.2
Investments and Advances................................................................ 243.8 247.6
Property, Plant and Equipment
Property, plant and equipment......................................................... 3,045.0 2,973.6
Less accumulated depreciation......................................................... 1,916.3 1,839.4
---------- -----------
Total Property, Plant and Equipment................................................. 1,128.7 1,134.2
Other Assets
Long-term receivables................................................................. 39.2 25.7
Goodwill.............................................................................. 786.0 507.7
Intangibles........................................................................... 376.0 183.2
Deferred income taxes................................................................. 41.7 33.0
Other................................................................................. 537.8 380.7
---------- -----------
Total Assets........................................................................ $ 6,411.4 $ 5,493.3
---------- -----------
---------- -----------
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities
Short-term debt....................................................................... $ 146.4 $ 252.4
Accounts payable...................................................................... 572.9 584.8
Customer advances..................................................................... 269.7 202.0
Accrued compensation and benefit costs................................................ 301.6 287.8
Accrued income taxes.................................................................. 344.2 316.9
Deferred income taxes................................................................. 11.3 21.9
Other accrued liabilities............................................................. 672.8 401.1
---------- -----------
Total Current Liabilities........................................................... 2,318.9 2,066.9
Long-Term Debt.......................................................................... 1,176.8 715.3
Other Liabilities
Accrued benefit costs................................................................. 435.9 412.9
Deferred income taxes................................................................. 51.4 46.0
Other................................................................................. 39.2 47.3
---------- -----------
Total Liabilities................................................................... 4,022.2 3,288.4
Shareowners' Equity
Common stock -- $1.50 par value
Authorized -- 250,000,000 shares
Issued -- 1997 -- 187,633,023 shares.................................................. 281.5
1996 -- 187,809,512 shares................................................... 281.7
Additional paid-in capital............................................................ 608.4 528.8
Retained earnings..................................................................... 3,407.0 3,074.7
Treasury stock -- 1997 -- 61,433,075 shares........................................... (1,879.3)
1996 -- 61,360,813 shares............................................ (1,763.5)
Accumulated foreign currency translation.............................................. (21.4) 88.2
Pension liability adjustment.......................................................... (7.0) (5.0)
---------- -----------
Total Shareowners' Equity........................................................... 2,389.2 2,204.9
---------- -----------
Total Liabilities and Shareowners' Equity........................................... $ 6,411.4 $ 5,493.3
---------- -----------
---------- -----------

See accompanying Notes to Financial Statements.

STATEMENT OF CASH FLOWS
HONEYWELL INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS)

YEARS ENDED DECEMBER 31
-------------------------------
1997 1996 1995
--------- --------- ---------

Cash Flows from Operating Activities
Net income..................................................................... $ 471.0 $ 402.7 $ 333.6
Adjustments to reconcile net income to net cash flows from operating
activities:
Depreciation................................................................. 246.0 236.1 236.1
Amortization of intangibles.................................................. 73.6 51.4 56.8
Deferred income taxes........................................................ (19.5) 38.5 67.2
Equity income, net of dividends received..................................... (10.3) (10.8) (11.0)
Gain on sale of businesses................................................... (77.1)
(Gain) Loss on sale of assets................................................ (7.3) (12.0) 7.2
Contributions to employee stock plans........................................ 48.9 38.2 27.4
Increase in receivables...................................................... (60.7) (203.0) (38.4)
Increase in inventories...................................................... (67.1) (89.9) (27.6)
Increase (decrease) in accounts payable...................................... (20.3) 51.8 50.1
Increase (decrease) in accrued income taxes and interest..................... 49.7 57.4 (35.4)
Other changes in working capital, excluding short-term investments and
short-term debt............................................................. 216.8 81.4 (99.1)
Other noncurrent items -- net................................................ (199.1) (148.0) 5.6
--------- --------- ---------
Net Cash Flows from Operating Activities......................................... 644.6 493.8 572.5
--------- --------- ---------
Cash Flows from Investing Activities
Proceeds from sale of assets................................................... 77.2 90.3 18.7
Proceeds from sale of businesses............................................... 100.6
Capital expenditures........................................................... (298.3) (296.5) (238.1)
Investment in acquisitions..................................................... (598.4) (376.2) (37.7)
(Increase) decrease in short-term investments.................................. 0.4 (0.2) (1.4)
Other -- net................................................................... 5.6 0.4 (5.2)
--------- --------- ---------
Net Cash Flows from Investing Activities......................................... (712.9) (582.2) (263.7)
--------- --------- ---------
Cash Flows from Financing Activities
Net increase (decrease) in short-term debt..................................... (73.4) 18.8 (101.0)
Proceeds from issuance of long-term debt....................................... 597.7 340.4 167.5
Repayment of long-term debt.................................................... (182.3) (188.8) (156.4)
Purchase of treasury stock..................................................... (154.3) (163.2) (137.3)
Proceeds from exercise of stock options........................................ 44.7 57.3 60.4
Dividends paid................................................................. (140.1) (133.5) (127.5)
--------- --------- ---------
Net Cash Flows from Financing Activities......................................... 92.3 (69.0) (294.3)
--------- --------- ---------
Effect of Exchange Rate Changes on Cash.......................................... (16.8) (7.1) 9.7
--------- --------- ---------
Increase (Decrease) in Cash and Cash Equivalents................................. 7.2 (164.5) 24.2
Cash and Cash Equivalents at Beginning of Year................................... 127.1 291.6 267.4
--------- --------- ---------
Cash and Cash Equivalents at End of Year......................................... $ 134.3 $ 127.1 $ 291.6
--------- --------- ---------
--------- --------- ---------

See accompanying Notes to Financial Statements.

NOTES TO FINANCIAL STATEMENTS

HONEYWELL INC. AND SUBSIDIARIES

(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

NOTE 1 -- ACCOUNTING POLICIES

CONSOLIDATION

The consolidated financial statements and accompanying data comprise
Honeywell Inc. and subsidiaries. All material intercompany transactions are
eliminated.

ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires Honeywell to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results can differ from estimates.

SALES

Product sales are recorded when title is passed to the customer, which
usually occurs at the time of delivery or acceptance. Sales under long-term
contracts are recorded on the percentage-of-completion method measured on the
cost-to-cost basis for engineering-type contracts and the units-of-delivery
basis for production-type contracts. Provisions for anticipated losses on
long-term contracts are recorded in full when such losses become evident.

EARNINGS PER COMMON SHARE

In 1997, Honeywell adopted Statement of Financial Accounting Standard No.
128 (SFAS 128), "Earnings Per Share". SFAS 128 requires the disclosure of Basic
and Diluted Earnings Per Share (EPS). Basic EPS is calculated using income
available to common shareowners divided by the weighted average of common shares
outstanding during the year. Diluted EPS is similar to Basic EPS except that the
weighted average of common shares outstanding is increased to include the number
of additional common shares that would have been outstanding if the dilutive
potential common shares, such as options, had been issued. The treasury stock
method is used to calculate dilutive shares which reduces the gross number of
dilutive shares by the number of shares purchaseable from the proceeds of the
options assumed to be exercised. All prior year Earnings per Share have been
restated in accordance with the provisions of SFAS 128. Adoption of SFAS 128 did
not have a material effect on Honeywell's historically disclosed Earnings Per
Share. See Note 4 on page 35 for more information regarding the earnings per
share calculations.

STATEMENT OF CASH FLOWS

Cash equivalents are all highly liquid, temporary cash investments with an
original maturity of three months or less.

Cash flows from purchases and maturities of held-to-maturity securities are
classified as cash flows from investing activities. Cash flows from contracts
used to hedge cash dividend payments from subsidiaries are classified as part of
the effect of exchange rate changes on cash.

INVENTORIES

Inventories are valued at the lower of cost or market. Cost is determined
using the weighted-average method. Market is based on net realizable value.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

HONEYWELL INC. AND SUBSIDIARIES

(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

NOTE 1 -- ACCOUNTING POLICIES (CONTINUED)
Payments received from customers relating to the uncompleted portion of
contracts are deducted from applicable inventories.

INVESTMENTS

Investments in companies owned 20 to 50 percent are accounted for using the
equity method.

PROPERTY

Property is carried at cost and depreciated primarily using the
straight-line method over estimated useful lives of 10 to 40 years for buildings
and improvements, and three to 15 years for machinery and equipment.

INTANGIBLES

Intangibles are carried at cost and amortized using the straight-line method
over their estimated useful lives of 15 to 40 years for goodwill, four to 17
years for patents, licenses and trademarks, and three to 24 years for software
and other intangibles. Intangibles also include the asset resulting from
recognition of the defined benefit pension plan minimum liability, which is
amortized as part of net periodic pension cost.

DERIVATIVES

Derivative financial instruments are used by Honeywell to manage interest
rate and foreign exchange risks. These financial exposures are managed in
accordance with Corporate polices and procedures. Honeywell does not hold or
issue derivative financial instruments for trading purposes.

Foreign exchange contracts are accounted for as hedges to the extent they
are designated as, and are effective as, hedges of firm foreign currency
commitments. Other such foreign exchange contracts are marked-to-market on a
current basis and are included in selling, general and administrative expenses
on the income statement.

Interest rate contracts designated and effective as a hedge of underlying
debt obligations are not marked-to-market, but cash flow from such contracts
results in adjustments to interest expense recognized over the life of the
underlying debt agreement. Gains and losses from terminated contracts are
deferred and amortized over the remaining period of the original contract. Open
interest rate contracts are reviewed regularly to ensure that they remain
effective as hedges of interest rate exposure.

FOREIGN CURRENCY

Foreign currency assets and liabilities are generally translated into U. S.
dollars using the exchange rates in effect at the statement of financial
position date. Results of operations are generally translated using the average
exchange rates throughout the period. The effects of exchange rate fluctuations
on translation of assets, liabilities and hedges of cash dividend payments from
subsidiaries are reported as accumulated foreign currency translation and
increased/(reduced) shareowners' equity: $(109.6) in 1997, $(52.7) in 1996, and
$33.5 in 1995.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

HONEYWELL INC. AND SUBSIDIARIES

(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

NOTE 1 -- ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS

Honeywell evaluates the carrying value of the long-lived assets using
discounted cash flows when events and circumstances warrant such a review.

STOCK BASED COMPENSATION

In 1996, Honeywell adopted Statement of Financial Accounting Standards No.
123 (SFAS 123), "Accounting for Stock-Based Compensation". As permitted under
this standard, Honeywell will continue to apply the recognition and measurement
principles of Accounting Principles Board (APB) No. 25 to its stock options and
other stock-based employee compensation awards. The disclosure of the pro forma
net income and pro forma earnings per share as if the fair value method of SFAS
123 had been applied can be found in Note 17 to the Financial Statements on page
44.

BASIS OF PRESENTATION

Certain prior year amounts have been reclassified to conform with the
current year presentation.

NOTE 2 -- ACQUISITIONS AND SALE OF ASSETS

Honeywell acquired seven companies in 1997, 17 companies in 1996, and nine
companies in 1995 for $650.2, $411.2, and $37.7 in cash, respectively. These
acquisitions were accounted for as purchases, and accordingly, the assets and
liabilities of the acquired entities have been recorded at their estimated fair
values at the dates of acquisition. The excess of purchase price over the
estimated fair values of the net assets acquired, in the amount of $323.7 in
1997, $294.7 in 1996, and $32.4 in 1995, has been recorded as goodwill and is
amortized over estimated useful lives.

The largest acquisition in 1997, consisting of approximately $600 in cash,
was Measurex Corporation, a supplier of computer-integrated measurement, control
and information systems and services. The allocation of the purchase price for
Measurex resulted in goodwill of $305.9 and intangibles, including
patents/developed technology, work force value, and customer lists, of $202.5
which will be amortized over an average of approximately 26 years. Honeywell
assumed approximately 1.8 million options to purchase Measurex common stock and
converted such options to Honeywell options to acquire approximately 671,000
shares of Honeywell stock with an average exercise price of $52.24 and a range
of exercise prices from $34.58 to $72.85. The value of the options assumed is
included in the purchase price and as a component of shareowners equity in the
consolidated financial statements. The options are included in the stock option
discussion and analysis in Note 17 on page 44.

The pro forma results for 1997, 1996, and 1995, assuming these acquisitions
had been made at the beginning of the year, would not be materially different
from reported results.

On September 27, 1997, Honeywell sold the net assets of its solenoid valve
business in the Industrial Control business segment for approximately $102.0 in
cash and a $64.3 gain. This sale had a minimal impact on revenues in 1997. In
the fourth quarter of 1997, Honeywell sold the control valve business of
Industrial Control and an international Home and Building Control security
monitoring business for approximately $24.1 in cash and receivables and a gain
of $12.8. The sum of these gains are included as gain on sale of businesses on
the income statement.

Proceeds from the sale of other assets, including facilities located in the
United Kingdom; San Jose, California; and Denver, Colorado, amounted to $77.2 in
1997. Proceeds from asset sales in 1996

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

HONEYWELL INC. AND SUBSIDIARIES

(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

NOTE 2 -- ACQUISITIONS AND SALE OF ASSETS (CONTINUED)
and 1995 were $90.3 and $18.7, respectively. Gains and losses from asset sales
were not material in any year and are included in selling, general and
administrative expenses on the income statement.

NOTE 3 -- SPECIAL CHARGES

In 1997, Honeywell's management, with the approval of the board of
directors, committed itself to a plan of action and recorded special charges of
$90.7. Honeywell remains committed to efforts to reduce operating costs and
improve margins. Special charges include costs for work force reductions,
worldwide facilities consolidations, organizational changes, and other cost
accruals. The Home and Building Control business segment recorded special
charges of $46.9 to strengthen the Company's competitiveness in a rapidly
changing marketplace. Industrial Control recorded $40.8 to rationalize product
lines, consolidate research and development facilities, restructure the
organization, and complete other activities associated with the integration of
Measurex. A total of $3.0 was recorded in the Other business segment.

Work force reduction costs of $74.2 primarily include severance costs
related to involuntary termination programs instituted to improve efficiency and
reduce costs. Approximately 1,600 employees, consisting largely of sales,
marketing, factory and other administrative personnel, have been or will be
terminated. Facility consolidation costs of $8.3 are primarily associated with
the closing of facilities in California and Germany, and other cost accruals
total $8.2. The charges are included as special charges on the income statement.
Expenditures will be funded with cash generated from operations and were $34.3
for workforce reductions, $0.9 for facilities, and $0.7 for other restructuring
expense in 1997.

NOTE 4 -- EARNINGS PER SHARE

1997 1996 1995
------------- -------------- --------------

BASIC EARNINGS PER SHARE:
Income:
Income available to common shareowners................ $ 471.0 $ 402.7 $ 333.6
Shares:
Weighted Average Shares Outstanding................... 127,051,613 126,632,082 127,138,774
Basic EPS............................................... $ 3.71 $ 3.18 $ 2.62

DILUTED EARNINGS PER SHARE:
Income:
Income available to common shareowners................ $ 471.0 $ 402.7 $ 333.6
Shares:
Weighted Average Shares Outstanding................... 127,051,613 126,632,082 127,138,774
Dilutive shares issuable in connection with stock
plans.................................................. 4,767,393 6,286,392 7,326,033
Less: Shares purchaseable with proceeds................. (2,626,784) (3,437,695) (4,961,681)
------------- -------------- --------------
Total Shares........................................ 129,192,222 129,480,779 129,503,126
------------- -------------- --------------
------------- -------------- --------------
Diluted EPS............................................. $ 3.65 $ 3.11 $ 2.58

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

HONEYWELL INC. AND SUBSIDIARIES

(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

NOTE 4 -- EARNINGS PER SHARE (CONTINUED)
Options to purchase 1.4 million shares of common stock at a range of $69.43
to $78.91 were outstanding during 1997 but were not included in the computation
of the diluted EPS because the options' exercise price was greater than the
average market price of the common shares.

NOTE 5 -- INCOME TAXES

The components of income before income taxes consist of the following:

1997 1996 1995
--------- --------- ---------

Domestic.................................................................. $ 377.3 $ 349.4 $ 285.4
Foreign................................................................... 325.9 260.8 220.1
--------- --------- ---------
$ 703.2 $ 610.2 $ 505.5

The provision for income taxes on that income is as follows:

1997 1996 1995
--------- --------- ---------

Current tax expense
United States........................................................... $ 124.9 $ 60.8 $ 39.8
Foreign................................................................. 101.6 84.7 59.9
State and local......................................................... 27.1 27.2 8.9
--------- --------- ---------
Total current........................................................... 253.6 172.7 108.6
--------- --------- ---------
Deferred tax expense
United States........................................................... (13.9) 27.4 41.7
Foreign................................................................. (5.6) 4.0 17.5
State and local......................................................... (1.9) 3.4 4.1
--------- --------- ---------
Total deferred.......................................................... (21.4) 34.8 63.3
--------- --------- ---------
Provision for income taxes................................................ $ 232.2 $ 207.5 $ 171.9

A reconciliation of the provision for income taxes to the amount computed
using U.S. federal statutory rates is as follows:

1997 1996 1995
--------- --------- ---------

Taxes on income at U.S. federal statutory rates........................... $ 246.1 $ 213.6 $ 176.9
Tax effects of foreign income............................................. (17.6) (15.9) (11.7)
State taxes............................................................... 15.7 21.1 9.9
Goodwill.................................................................. 10.6 4.3 1.7
Other..................................................................... (22.6) (15.6) (4.9)
--------- --------- ---------
Provision for income taxes................................................ $ 232.2 $ 207.5 $ 171.9

Interest costs related to prior years' tax issues are included in the
provision for income taxes. Taxes paid were $203.7 in 1997, $113.1 in 1996 and
$128.3 in 1995.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

HONEYWELL INC. AND SUBSIDIARIES

(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

NOTE 5 -- INCOME TAXES (CONTINUED)
Deferred income taxes are provided for the temporary differences between the
financial reporting basis and the tax basis of Honeywell's assets and
liabilities. Temporary differences comprising the net deferred taxes shown on
the statement of financial position are:

1997 1996
--------- ---------

Employee benefits................................................................... $ 54.7 $ 64.9
Miscellaneous accruals.............................................................. 107.0 85.1
Excess of tax over book depreciation/amortization................................... (3.0) (2.4)
Asset valuation reserves............................................................ 44.0 36.3
Long-term contracts................................................................. 12.0 14.0
State taxes......................................................................... 24.9 20.9
Pension liability adjustment........................................................ 4.4 3.4
Other............................................................................... (31.8) (63.9)
--------- ---------
$ 212.2 $ 158.3

The components of net deferred taxes shown in the statement of financial
position are:

1997 1996
--------- ---------

Deferred tax assets................................................................. $ 506.8 $ 458.8
Deferred tax liabilities............................................................ 294.6 300.5

Provision has not been made for U.S. or additional foreign taxes on $868.4
of undistributed earnings of international subsidiaries, as those earnings are
considered to be permanently reinvested in the operations of those subsidiaries.
It is not practicable to estimate the amount of tax that might be payable on the
eventual remittance of such earnings.

At December 31, 1997, foreign subsidiaries had tax operating loss
carryforwards of $15.2.

NOTE 6 -- FOREIGN CURRENCY

Honeywell has entered into various foreign currency exchange contracts
(primarily Belgian francs, Deutsche marks and Canadian dollars) designed to
manage its exposure to exchange rate fluctuations on foreign currency
transactions. Foreign exchange contracts reduce Honeywell's overall exposure to
exchange rate movements, since the gains and losses on these contracts offset
losses and gains on the assets, liabilities, and transactions being hedged.
Honeywell hedges a significant portion of all known foreign exchange exposures,
including non-functional currency receivables and payables and foreign currency
imports and exports. The notional amount of Honeywell's outstanding foreign
currency contracts, consisting of forwards, purchased options and swaps, was
approximately $1,213.7 and $1,111.2 at December 31, 1997, and 1996,
respectively. These contracts generally have a term of less than one year.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

HONEYWELL INC. AND SUBSIDIARIES

(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

NOTE 7 -- INVESTMENTS IN DEBT AND EQUITY SECURITIES

Honeywell's investments in held-to-maturity securities are reported at
amortized cost in the statement of financial position as follows:

1997 1996
--------- ---------

Cash equivalents....................................................................... $ 27.7 $ 42.9
Short-term investments................................................................. 8.0 8.6
Investments and advances............................................................... 5.7 5.5
--------- ---------
$ 41.4 $ 57.0

Held-to-maturity securities generally mature within one year and include the
following:

1997 1996
--------- ---------

Time deposits with financial institutions.............................................. $ 34.8 $ 40.5
Commercial paper....................................................................... 0.1 0.0
Other.................................................................................. 6.5 16.5
--------- ---------
$ 41.4 $ 57.0

Honeywell's purchases of held-to-maturity securities, consisting primarily
of commercial paper, amounted to $1,809.0 and $4,128.0 in 1997 and 1996,
respectively. Proceeds from maturities of held-to-maturity securities amounted
to $1,812.5 in 1997 and $4,248.5 in 1996. Honeywell has no investments in
trading securities, and available-for-sale securities are not material. The
estimated aggregate fair value of these securities approximates their carrying
amounts in the statement of financial position. Gross unrealized holding gains
and losses were not material in any year.

NOTE 8 -- RECEIVABLES

Receivables have been reduced by an allowance for doubtful accounts as
follows:

1997 1996
--------- ---------

Receivables, current................................................................... $ 38.5 $ 33.5
Long-term receivables.................................................................. 2.7 0.7

Receivables include approximately $16.5 in 1997 and $19.8 in 1996 billed to
customers but not paid pursuant to contract retainage provisions. These balances
are due upon completion of the contracts, generally within one year.

Unbilled receivables related to long-term contracts amount to $331.0 and
$360.5 at December 31, 1997, and 1996, respectively, and are generally billable
and collectible within one year.

Long-term, interest-bearing notes receivable from the sale of assets have
been reduced by valuation reserves of $1.5 in 1997 and $1.7 in 1996 to an amount
that approximates realizable value.

Honeywell entered into an agreement with a large international banking
institution whereby it could sell an undivided interest in a designated pool of
trade accounts receivable up to a maximum of $50.0 on an ongoing basis and
without recourse. As collections reduce accounts receivable sold, Honeywell
could sell an additional undivided interest in new receivables to bring the
amount sold up to the $50.0 maximum. Proceeds received from the sale of
receivables amounted to $238.0 in 1997,

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

HONEYWELL INC. AND SUBSIDIARIES

(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

NOTE 8 -- RECEIVABLES (CONTINUED)
$238.8 in 1996 and $22.4 in 1995. The uncollected balance of receivables sold
amounted to $0.0 and $7.0 at December 31, 1997, and 1996, respectively, and
averaged $19.7 and $23.2 during those respective years. This agreement was
terminated in December 1997.

In 1996, Honeywell entered into an asset securitization program with a large
financial institution to sell, with recourse, certain eligible trade receivables
up to a maximum of $50.0 Canadian dollars (approximately $34.8 and $36.5 U.S.
Dollars at December 31, 1997 and 1996, respectively). As receivables transferred
to the trust are collected, Honeywell may transfer additional receivables up to
the predetermined facility limits. Gross receivables transferred to the trust
amounted to $292.6 in 1997 and $31.5 in 1996. Honeywell retains the right to
repurchase transferred receivables under the program, and included on the
statement of financial position at year end are $27.7 and $31.5 in 1997 and
1996, respectively, of uncollected receivables held in trust.

NOTE 9 -- INVENTORIES

1997 1996
--------- ---------

Finished goods.................................................................... $ 379.3 $ 386.5
Inventories related to long-term contracts........................................ 151.4 122.7
Work in process................................................................... 211.3 185.8
Raw materials and supplies........................................................ 286.0 242.6
--------- ---------
$ 1,028.0 $ 937.6

Inventories related to long-term contracts are net of payments received from
customers relating to the uncompleted portions of such contracts in the amounts
of $43.5 and $60.7 at December 31, 1997, and 1996, respectively.

NOTE 10 -- GROSS PROPERTY, PLANT AND EQUIPMENT

1997 1996
--------- ----------

Land............................................................................ $ 68.7 $ 71.6
Buildings and improvements...................................................... 557.4 600.7
Machinery and equipment......................................................... 2,336.4 2,208.7
Construction in progress........................................................ 82.5 92.6
--------- ----------
$ 3,045.0 $ 2,973.6

NOTE 11 -- FOREIGN SUBSIDIARIES

The following is a summary of financial data pertaining to foreign
subsidiaries:

1997 1996 1995
--------- ---------- ----------

Net income.......................................................... $ 235.6 $ 172.9 $ 142.9
Assets.............................................................. $ 2,114.8 $ 1,847.8 $ 1,849.4
Liabilities......................................................... 1,019.0 838.5 802.8
--------- ---------- ----------
Net assets.......................................................... $ 1,095.8 $ 1,009.3 $ 1,046.6

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

HONEYWELL INC. AND SUBSIDIARIES

(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

NOTE 11 -- FOREIGN SUBSIDIARIES (CONTINUED)
Insofar as can be reasonably determined, there are no foreign-exchange
restrictions that materially affect the financial position or the operating
results of Honeywell and its subsidiaries.

NOTE 12 -- INVESTMENTS IN OTHER COMPANIES

Following is a summary of financial data pertaining to companies 20 to 50
percent owned. The principal company included is Yamatake-Honeywell Co., Ltd.,
located in Japan, of which Honeywell owned 21.7 and 23.3 percent of the
outstanding common stock at December 31, 1997 and 1996, respectively. This
investment had a market value of $216.9 and $329.8 at December 31, 1997, and
1996, respectively.

1997 1996 1995
--------- ---------- ----------

Sales............................................................... $ 1,971.5 $ 1,949.2 $ 2,065.1
Gross profit........................................................ 662.7 688.8 743.5
Net income.......................................................... 58.7 51.8 54.2
Equity in net income................................................ 12.9 13.3 13.6

Current assets...................................................... $ 1,427.8 $ 1,576.9 $ 1,400.6
Noncurrent assets................................................... 332.8 421.1 598.8
--------- ---------- ----------
1,760.6 1,998.0 1,999.4
--------- ---------- ----------
Current liabilities................................................. 706.7 853.5 742.6
Noncurrent liabilities.............................................. 123.2 181.4 327.8
--------- ---------- ----------
829.9 1,034.9 1,070.4
--------- ---------- ----------
Net assets.......................................................... $ 930.7 $ 963.1 $ 929.0
Equity in net assets................................................ $ 238.0 $ 241.0 $ 236.8

NOTE 13 -- INTANGIBLE ASSETS

Intangible assets have been reduced by accumulated amortization as follows:

1997 1996
--------- ---------

Goodwill.................................................................. $ 134.8 $ 74.9
Intangibles............................................................... 305.3 272.5

NOTE 14 -- DEBT

SHORT-TERM DEBT

Honeywell had general purpose lines of credit available totaling $1,683.1 at
December 31, 1997. Committed revolving credit lines with 17 banks total
$1,325.0, which management believes is adequate to meet its financing
requirements, including support of commercial paper and bank note borrowings.
These lines have commitment fee requirements. There were no borrowings on these
lines at December 31, 1997. The remaining credit facilities of $358.1 have been
arranged by non-U.S. subsidiaries in accordance with customary lending practices
in their respective countries of operation. Borrowings against these lines
amounted to $11.3 at December 31, 1997. The weighted-average interest rate on
short-term borrowings outstanding at December 31, 1997, and 1996, respectively,
was

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

HONEYWELL INC. AND SUBSIDIARIES

(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

NOTE 14 -- DEBT (CONTINUED)
as follows: commercial paper, 6.8 percent and 4.2 percent; and notes payable,
5.2 percent and 3.9 percent.

Short-term debt consists of the following:

1997 1996
--------- ---------

Commercial paper........................................................ $ 43.0 $ 86.5
Notes payable........................................................... 38.9 67.2
Current maturities of long-term debt.................................... 64.5 98.7
--------- ---------
$ 146.4 $ 252.4

LONG-TERM DEBT

1997 1996
--------- ---------

Honeywell Inc.
6.25% Deutsche mark bonds due 1997.................................... $ $ 96.6
7.15% to 7.71% due 1998............................................... 50.0 50.0
7.36% to 7.46% due 1999............................................... 70.5 70.5
7.35% due 2000........................................................ 75.0 75.0
6.60% due 2001........................................................ 100.0 100.0
6.75% due 2002........................................................ 200.0
8.63% due 2006........................................................ 100.0 100.0
7.00% due 2007........................................................ 350.0
7.13% due 2008........................................................ 200.0 200.0
7.45% to 10.50% due 2001 to 2010...................................... 24.4 27.1
Subsidiaries
3.0% to 10.0% due 1998 to 2008, various currencies.................... 71.4 94.8
--------- ---------
1,241.3 814.0
Less amount included in short-term debt................................. 64.5 98.7
--------- ---------
$ 1,176.8 $ 715.3

The 6.25 percent Deutsche mark bonds matured in January 1997 and were linked
to a currency exchange agreement that converted principal and interest payments
into fixed U.S. dollar obligations with an interest cost of 8.17 percent.

In May 1996, Honeywell established a $500.0 medium-term note program whereby
it may issue notes with maturities beyond nine months in U.S. dollars or foreign
currencies with fixed or variable interest rates. This facility was fully
utilized in March 1997, as Honeywell issued $550.0 of new debt, primarily to
fund the acquisition of Measurex Corporation. Of this new debt, $200.0 has a
five year maturity and an interest rate of 6.75 percent. The remaining $350.0 is
due 10 years from the issuance with an interest rate of seven percent. In August
1997, Honeywell filed a shelf registration statement which provides for the
issuance of up to $500.0 of debt securities. At December 31, 1997, no debt had
been issued against this facility.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

HONEYWELL INC. AND SUBSIDIARIES

(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

NOTE 14 -- DEBT (CONTINUED)
Honeywell uses interest rate swaps to manage its interest rate exposures and
its mix of fixed and floating interest rates. In 1994, Honeywell entered into
interest rate swap agreements effectively converting $50.0 of the $70.5 of
medium-term notes due in 1999 to floating-rate debt based on three-month LIBOR
rates. In 1995, interest rate swap agreements were initiated to effectively
convert $40.0 of medium-term notes back to fixed-rate debt. In 1996, Honeywell
entered into interest rate swap agreements converting the $100.0 of bonds due in
2001 and $200.0 of bonds due in 2008 to floating-rate debt based on six-month
LIBOR rates. In 1997, Honeywell entered into swap agreements converting the new
$550.0 of debt from fixed-rate to floating-rate debt based on six-month LIBOR.
In addition, $420.0 of debt and previous swaps were converted to fixed-rate
debt. The swap agreements outstanding at December 31, 1997, expire as
follows:$40.0 in 1998, $100.0 in 1999, $100.0 in 2001, $400.0 in 2002, $450.0 in
2007 and $250.0 in 2008.

Annual sinking-fund and maturity requirements for the next five years on
long-term debt outstanding at December 31, 1997, are as follows:

1998...................................................... $ 64.5
1999...................................................... 124.4
2000...................................................... 76.7
2001...................................................... 116.2
2002...................................................... 210.2
2003 and beyond........................................... 649.3
---------
Total long-term debt...................................... $ 1,241.3

Interest paid amounted to $95.0, $77.3 and $86.0 in 1997, 1996 and 1995,
respectively.

NOTE 15 -- FAIR VALUE OF FINANCIAL INSTRUMENTS

All financial instruments are held for purposes other than trading. The
estimated fair values of all nonderivative financial instruments approximate
their carrying amounts in the statement of financial position with the exception
of long-term debt. The estimated fair value of long-term debt is based on quoted
market prices for the same or similar issues or on current rates available to
Honeywell for debt of the same remaining maturities. The carrying amount of
long-term debt was $1,241.3 and $814.0 at December 31, 1997, and 1996,
respectively; and the fair value was $1,291.3 and $833.4 at December 31, 1997,
and 1996, respectively.

The estimated fair value of interest rate swaps, foreign currency contracts,
and option contracts, which is the net unrealized market gain or loss, is based
primarily on quotes obtained from various financial institutions that deal in
these types of instruments. The following table summarizes the

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

HONEYWELL INC. AND SUBSIDIARIES

(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

NOTE 15 -- FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
notional value, carrying value and fair value of Honeywell's derivative
financial instruments on and off the balance sheet.

AT DECEMBER 31, 1997 At December 31, 1996
--------------------------------- ----------------------------------
NOTIONAL CARRYING FAIR Notional Carrying Fair
VALUE VALUE VALUE Value Value Value
--------- ----------- --------- ---------- ----------- ---------

Interest rate swaps............ $ 1,340.0 $ 0.0 $ 38.5 $ 390.0 $ 0.0 $ 7.2
Currency contracts............. 1,213.7 0.0 6.7 1,111.2 17.6 22.9
--------- --- --------- ---------- ----- ---------
Total.......................... $ 2,553.7 $ 0.0 $ 45.2 $ 1,501.2 $ 17.6 $ 30.1
--------- --- --------- ---------- ----- ---------
--------- --- --------- ---------- ----- ---------

Honeywell is exposed to credit risk to the extent of nonperformance by the
counterparties to the foreign currency contracts and the interest rate swaps
shown above. However, the credit ratings of the counterparties, which consist of
a diversified group of financial institutions, are regularly monitored and risk
of default is considered remote.

NOTE 16 -- LEASING ARRANGEMENTS

As lessee, Honeywell has minimum annual lease commitments outstanding at
December 31, 1997, with the majority of the leases having initial periods
ranging from one to 10 years. Following is a summary of operating lease
information.

OPERATING
LEASES
-----------

1998..................................................................... $ 139.5
1999..................................................................... 109.0
2000..................................................................... 77.0
2001..................................................................... 53.7
2002..................................................................... 34.5
2003 and beyond.......................................................... 154.8
-----------
$ 568.5

Rent expense for operating leases was $141.6 in 1997, $153.7 in 1996, and
$143.4 in 1995.

Substantially all leases are for plant, warehouse, office space and
automobiles. A number of the leases contain renewal options ranging from one to
10 years.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

HONEYWELL INC. AND SUBSIDIARIES

(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

NOTE 17 -- CAPITAL STOCK

ADDITIONAL
COMMON PAID-IN TREASURY
STOCK CAPITAL STOCK
----------- ----------- -----------

Balance December 31, 1994................................. $ 282.4 $ 446.9 $ (1,576.5)
Purchase of treasury stock --
3,090,400 shares........................................ (129.3)
Issued for Honeywell Foundation Pledge --
1,000,000 treasury shares............................... 13.4 21.7
Issued for employee stock plans --
1,814,714 shares........................................ 27.6 33.9
159,296 shares canceled................................. (0.2) (6.6)
----------- ----------- -----------
Balance December 31, 1995................................. $ 282.2 $ 481.3 $ (1,650.2)
Purchase of treasury stock --
2,904,000 shares........................................ (163.2)
Issued for Honeywell Foundation Pledge --
450,000 treasury shares................................. 8.3 9.2
Issued for employee stock plans --
2,399,438 shares........................................ 55.8 40.7
317,192 shares canceled................................. (0.5) (16.6)
----------- ----------- -----------
Balance December 31, 1996................................. $ 281.7 $ 528.8 $ (1,763.5)
Purchase of treasury stock --
2,250,600 shares........................................ (154.3)
Issued for Honeywell Foundation Pledge --
285,700 treasury shares................................. 7.9 5.7
Issued for employee stock plans --
1,892,638 shares........................................ 84.4 32.8
176,489 shares canceled................................. (0.2) (12.7)
----------- ----------- -----------
Balance December 31, 1997................................. $ 281.5 $ 608.4 $ (1,879.3)

STOCK-BASED COMPENSATION PLANS FOR KEY EMPLOYEES

In 1997, the Board of Directors adopted, and the shareowners approved, the
1997 Honeywell Stock and Incentive Plan. The 1997 plan replaces the 1993
Honeywell Stock and Incentive Plan. Awards currently outstanding under the 1993
plan were not affected. The 1997 plan which terminates on April 15, 2002,
provides for the award of up to 7,500,000 shares of common stock. The 1997 plan
is intended to facilitate ownership and increase the interest of key employees
in the growth and performance of Honeywell and motivate them to contribute to
the Company's future success, thus enhancing the value of the Company for the
benefit of shareowners.

Also in 1997, the Board of Directors approved the 1997 Honeywell Employee
Stock and Incentive Plan. This plan, which provides for the award of up to
2,000,000 shares of common stock, is primarily intended to retain and recognize
non-executive employees for their contributions to Honeywell's success.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

HONEYWELL INC. AND SUBSIDIARIES

(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

NOTE 17 -- CAPITAL STOCK (CONTINUED)
The 1993 Honeywell Stock and Incentive Plan, which expired with the adoption
of the 1997 plan, provided for the award of up to 7,500,000 shares of common
stock. Awards made under any of the above plans may be in the form of stock
options, restricted stock or other stock-based awards. At December 31, 1997
there were 14,845,277 shares reserved for all employee plans.

In 1996, Honeywell adopted Statement of Financial Accounting Standard No.
123 (SFAS 123), "Accounting for Stock-Based Compensation". As permitted by SFAS
123, Honeywell has elected to continue following the guidance of APB 25 for
measurement and recognition of stock-based transactions with employees (See Note
1 on page 32). The compensation cost that has been charged against income, for
the restricted stock and other stock-based awards, was $11.2, $12.2 and $3.2 in
1997, 1996 and 1995, respectively. No compensation cost has been recognized for
the awards made in the form of stock options. If compensation cost for
Honeywell's stock-based compensation plans had been determined based on the fair
value at the grant dates for awards under those plans, consistent with the
method provided in FAS 123, Honeywell's net income and basic earnings per share
would have been reduced to the pro forma amounts indicated below:

1997 1996 1995
--------- --------- ---------

Net Income............................ As reported $ 471.0 $ 402.7 $ 333.6
Pro forma $ 456.2 $ 392.6 $ 329.7

Basic Earnings Per Share.............. As reported $ 3.71 $ 3.18 $ 2.62
Pro forma $ 3.59 $ 3.10 $ 2.59

FIXED STOCK OPTIONS

Stock option grants are reviewed and approved by the Personnel Committee of
the Board of Directors. Stock options are granted periodically at the fair
market value of Honeywell common stock on the date of the grant and are
typically exercisable one year from the grant date.

In July 1997, Honeywell introduced an international stock purchase plan.
This plan allows eligible employees the option to purchase Honeywell shares in
July 2000, at an option price of $54.72. The number of shares estimated to be
issued from this program are 133,614 and have been included in the fixed options
numbers below.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

HONEYWELL INC. AND SUBSIDIARIES

(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

NOTE 17 -- CAPITAL STOCK (CONTINUED)
A summary of the status of the fixed stock options as of December 31, 1997,
1996 and 1995 and changes during the years ending on those dates is presented
below:

1997 1996 1995
------------------------ ------------------------ ------------------------
WEIGHTED Weighted Weighted
AVERAGE Average Average
SHARES EXERCISE Shares Exercise Shares Exercise
(000) PRICE (000) Price (000) Price
--------- ------------- --------- ------------- --------- -------------

Fixed Options
Outstanding at beginning of year................ 4,507 $ 39 5,963 $ 35 5,346 $ 30
Granted......................................... 1,784 $ 73 423 $ 54 1,891 $ 43
Assumed......................................... 671 $ 52
Exercised....................................... 1,287 $ 37 1,821 $ 31 1,248 $ 28
Forfeited....................................... 192 $ 67 58 $ 42 26 $ 39
Outstanding at end of year...................... 5,483 $ 51 4,507 $ 39 5,963 $ 35
Options exercisable at year-end................. 3,820 $ 41 4,088 $ 37 4,087 $ 31
Weighted average fair value of options granted
during the year................................ $ 18.91 $ 14.19 $ 10.43

The weighted average fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model and represents the
difference between the fair market value on the date of grant and the estimated
market value on the exercise date. The following weighted-average assumptions
are used in the Black Scholes model for grants in 1997, 1996 and 1995,
respectively: dividend yield of two percent for all years; expected volatility
of 24, 27 and 24 percent, risk-free interest rates of 5.6, 6.3 and 6.0 percent,
and expected life of four years for all options except the international stock
purchase plan which has a three year life. The "Assumed" line identifies the
options Honeywell assumed in the acquisition of Measurex and converted to
options to purchase Honeywell shares. For more information of these shares, see
Note 2 on page 34.

The following table summarizes information about fixed stock options
outstanding at December 31, 1997. The fixed options outstanding include options
issued under the new 1997 plans as well as the 1993 Honeywell Stock and
Incentive Plan and the previous plans which the 1993 plan replaced.

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ----------------------------------
SHARES SHARES
OUTSTANDING AT REMAINING EXERCISABLE AT
RANGE OF 12/31/97 CONTRACTUAL WEIGHTED AVERAGE 12/31/97 WEIGHTED AVERAGE
EXERCISE PRICES (000) LIFE EXERCISE PRICE (000) EXERCISE PRICE
- ------------------- --------------- ----------- ----------------- --------------- -----------------

$16-$24 114 1.7 yrs $ 21 114 $ 21
$25-$36 1,061 5.0 yrs $ 32 1,061 $ 32
$37-$54 2,331 7.4 yrs $ 44 2,331 $ 44
$55-$80 1,977 8.6 yrs $ 71 313 $ 60

RESTRICTED STOCK AWARDS

Restricted shares of common stock are issued to certain key employees as
compensation and as incentives tied to Honeywell performance. Restricted shares
issued as compensation are awarded with a fixed restriction period ranging from
three to six years. In 1993, shares were issued and tied to

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

HONEYWELL INC. AND SUBSIDIARIES

(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

NOTE 17 -- CAPITAL STOCK (CONTINUED)
performance goals which restricted the shares until the earlier to occur of: (i)
the achievement of performance goals within a specified measurement period, not
more than three years, or (ii) nine years. The vesting of performance shares
awarded in 1996 to senior executives was established at not more than two years.
Owners of restricted shares have the rights of shareowners, including the right
to receive cash dividends and the right to vote. Restricted shares forfeited
revert to Honeywell at no cost. Restricted shares issued totaled 237,009 in
1997, 371,917 in 1996 and 212,781 in 1995. At December 31, restricted shares
outstanding under key employee plans totaled 913,667 in 1997, 835,443 in 1996
and 665,005 in 1995, with a weighted average grant date fair value of $55 and
$46 in 1997 and 1996, respectively.

EMPLOYEE STOCK MATCH PLANS

In 1990, Honeywell adopted Stock Match and Performance Stock Match plans
under which Honeywell matches, in the form of Honeywell common stock, certain
eligible U.S. employee savings plan contributions. Employees are vested in the
shares after three years of employment. Shares issued under the stock match
plans totaled 542,406 in 1997, 394,534 in 1996 and 571,905 shares in 1995 at a
cost of $37.9, $23.4 and $24.2, respectively. There were 204,889 shares reserved
for employee stock match plans at December 31, 1997.

STOCK PLEDGE

In 1993, Honeywell pledged to the Honeywell Foundation a five-year option to
purchase 2,000,000 shares of common stock at $33 per share. This option is
transferable to charitable organizations and exercisable in whole or in part,
subject to certain conditions, from time to time during its term. Shares
purchased under the option totaled 285,700 in 1997, 450,000 in 1996 and
1,000,000 in 1995.

PREFERENCE STOCK

Twenty-five million preference shares with a par value of $1 have been
authorized. None have been issued at December 31, 1997.

NOTE 18 -- RETAINED EARNINGS

1997 1996 1995
--------- ---------- ----------

Balance January 1......................................... $ 3,074.7 $ 2,805.8 $ 2,600.4
Net income................................................ 471.0 402.7 333.6
Dividends
1997-$1.09 PER SHARE.................................... (138.7)
1996-$1.06 per share.................................... (133.8)
1995-$1.01 per share.................................... (128.2)
--------- ---------- ----------
Balance December 31....................................... $ 3,407.0 $ 3,074.7 $ 2,805.8

Included in retained earnings are undistributed earnings of companies 20 to
50 percent owned, amounting to $165.5 at December 31, 1997.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

HONEYWELL INC. AND SUBSIDIARIES

(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

NOTE 19 -- SEGMENT INFORMATION

Honeywell is a global controls company focused on creating value through
control technology. Honeywell serves customers worldwide through operations
engaged in the design, development, manufacture, marketing and service of
control solutions in three industry segments -- Home and Building Control,
Industrial Control and Space and Aviation Control. Honeywell's broad range of
products, systems, and services provide solutions worldwide as our customers
look to improve productivity, energy efficiency and environmental protection,
increase safety, and enhance comfort.

Home and Building Control provides products and services to create
efficient, safe, comfortable environments by offering controls for heating,
ventilation, humidification and air-conditioning equipment; security and fire
alarm systems; home automation systems; energy-efficient lighting controls;
building management systems and services; and home comfort consumer products.
Customers include building managers and owners; distributors and wholesalers;
heating, ventilation and air conditioning manufacturers; home builders; home
owners; and original equipment manufacturers.

Industrial Control produces systems for the automation and control of
process operations in industries such as oil refining, oil and gas drilling,
pulp and paper manufacturing, food processing, chemical manufacturing and power
generation; solid-state sensors for position, pressure, air flow, temperature
and current; precision electromechanical switches; manual controls; advanced
vision-based sensors; and fiber-optic components. Customers include appliance
manufacturers; automotive companies; food processing companies; oil and gas
producers; refining and petrochemical companies; pharmaceutical companies; paper
companies; and utilities.

Space and Aviation Control is a full-line avionics supplier and systems
integrator for commercial, military and space applications, providing automatic
flight control systems, electronic cockpit displays, flight management systems,
navigation, surveillance and warning systems, severe weather avoidance systems
and flight reference sensors. Customers include airframe manufacturers;
international, national and regional airlines; NASA; prime U.S. defense
contractors; and the U.S. Department of Defense.

In addition to the three industry segments, Honeywell has two research and
development operations that promote technology and products to both external
customers and operating units. The results of these research operations comprise
primarily the "other" category.

Information concerning Honeywell's sales, operating profit and identifiable
assets by industry segment can be found on pages 12 and 13. This information for
1997, 1996 and 1995 is an integral part of these financial statements. Sales
include external sales only. Intersegment sales are not significant. Corporate
and other assets include the assets of the entities in the "other" category and
cash, short-term investments, investments, property and deferred taxes held by
corporate.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

HONEYWELL INC. AND SUBSIDIARIES

(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

NOTE 19 -- SEGMENT INFORMATION (CONTINUED)

Following is additional financial information relating to industry segments:

1997 1996 1995
--------- --------- ---------

Capital expenditures
Home and Building Control..................................... $ 117.8 $ 106.8 $ 87.2
Industrial Control............................................ 76.1 74.8 73.0
Space and Aviation Control.................................... 59.7 55.8 42.9
Corporate and other........................................... 44.7 59.1 35.0
--------- --------- ---------
$ 298.3 $ 296.5 $ 238.1

Depreciation and amortization
Home and Building Control..................................... $ 86.3 $ 98.4 $ 87.4
Industrial Control............................................ 71.6 72.3 69.3
Space and Aviation Control.................................... 55.3 84.0 109.7
Corporate and other........................................... 32.8 32.8 26.5
--------- --------- ---------
$ 246.0 $ 287.5 $ 292.9

Honeywell is a global company and as such engages in material operations in
countries worldwide. Geographic areas of operation include Europe, Canada,
Mexico, Asia, Australia, and South America.

Following is financial information relating to geographic areas:

1997 1996 1995
--------- ---------- ----------

External sales
United States........................................... $ 4,843.5 $ 4,477.9 $ 4,087.5
Europe.................................................. 2,136.1 1,981.7 1,858.9
Other areas............................................. 1,047.9 852.0 784.9
--------- ---------- ----------
$ 8,027.5 $ 7,311.6 $ 6,731.3

Transfers between geographic areas
United States........................................... $ 410.8 $ 364.4 $ 318.6
Europe.................................................. 79.6 73.2 67.1
Other areas............................................. 102.8 77.5 61.5
--------- ---------- ----------
$ 593.2 $ 515.1 $ 447.2

Total sales
United States........................................... $ 5,254.3 $ 4,842.3 $ 4,406.1
Europe.................................................. 2,215.7 2,054.9 1,926.0
Other areas............................................. 1,150.7 929.5 846.4
Eliminations............................................ (593.2) (515.1) (447.2)
--------- ---------- ----------
$ 8,027.5 $ 7,311.6 $ 6,731.3

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

HONEYWELL INC. AND SUBSIDIARIES

(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

NOTE 19 -- SEGMENT INFORMATION (CONTINUED)

1997 1996 1995
--------- ---------- ----------

Operating profit
United States........................................... $ 528.5 $ 484.2 $ 425.4
Europe.................................................. 234.1 203.0 191.7
Other areas............................................. 111.3 83.0 55.7
--------- ---------- ----------
Operating profit........................................ 873.9 770.2 672.8
Interest expense........................................ (101.9) (81.4) (83.3)
Equity income........................................... 12.9 13.3 13.6
General corporate expense............................... (81.7) (91.9) (97.6)
--------- ---------- ----------
Income before income taxes.............................. $ 703.2 $ 610.2 $ 505.5

Identifiable Assets
United States........................................... $ 3,195.6 $ 2,828.3 $ 2,331.1
Europe.................................................. 1,542.8 1,479.9 1,375.0
Other areas............................................. 617.8 444.9 461.4
Corporate............................................... 1,055.2 740.2 892.7
--------- ---------- ----------
$ 6,411.4 $ 5,493.3 $ 5,060.2

Honeywell transfers products from one geographic region for resale in
another. These transfers are priced to provide both areas with an equitable
share of the overall profit.

In 1997, Honeywell committed itself to a plan of action and recorded special
charges of $90.7 to reduce operating costs and improve margins. At December 31,
1997, $35.9 had been paid and was funded by cash flows from operations.
Operating profit is net of provisions for special charges amounting to $90.7 in
1997 as follows: United States, $61.3; Europe, $27.7; other areas, $1.7.

NOTE 20 -- PENSION PLANS

Honeywell and its subsidiaries have noncontributory defined benefit pension
plans that cover a substantial majority of their U.S. employees. The plan
covering non-union employees provides pension benefits based on employee average
earnings during the highest paid 60 consecutive calendar months of employment
during the 10 years prior to retirement. The plan covering union employees
provides pension benefits of stated amounts for each year of credited service.
Funding for these plans is provided solely through contributions from Honeywell
determined by the Board of Directors after consideration of recommendations from
the plans' independent actuary. Such recommendations are based on actuarial
valuations of benefits payable under the plans.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

HONEYWELL INC. AND SUBSIDIARIES

(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

NOTE 20 -- PENSION PLANS (CONTINUED)
The components of net periodic pension cost for U.S. defined benefit pension
plans are as follows:

U.S. Defined 1997 1996 1995
- ------------------------------------------------------------- --------- --------- ---------

Service cost of benefits earned during the period............ $ 54.2 $ 55.6 $ 50.5
Interest cost of projected benefit obligation................ 236.9 226.3 222.8
Actual return on assets...................................... (721.0) (339.1) (400.8)
Net amortization and deferral................................ 489.8 130.6 228.9
--------- --------- ---------
$ 59.9 $ 73.4 $ 101.4

Following is a summary of assumptions used in the accounting for the U.S.
defined benefit plans.

U.S. Defined 1997 1996 1995
- --------------------------------------------------------------------- ---------- ----------- -----------

Discount rate used in determining present values..................... 7.5% 7.8% 7.5%
Annual increase in future compensation levels........................ 4.4% 4.7% 4.4%
Expected long-term rate of return on assets.......................... 9.5% 9.5% 8.5%

Employees in foreign countries who are not U.S. citizens are covered by
various retirement benefit arrangements, some of which are considered to be
defined benefit pension plans for accounting purposes. The net cost of all
foreign pension plans amounted to $15.7 in 1997, $10.9 in 1996, and $(3.6) in
1995.

The components of net periodic pension cost for foreign defined benefit
pension plans governed by Financial Accounting Standard No. 87 are as follows:

Foreign Defined 1997 1996 1995
- -------------------------------------------------------------- --------- --------- ---------

Service cost of benefits earned during the period............. $ 33.7 $ 33.6 $ 31.2
Interest cost of projected benefit obligation................. 58.0 58.3 55.7
Actual return on assets....................................... (127.9) (102.8) (90.6)
Net amortization and deferral................................. 50.4 19.6 (3.2)
--------- --------- ---------
$ 14.2 $ 8.7 $ (6.9)

Assumptions used in the accounting for foreign defined benefit plans were:

Foreign Defined 1997 1996 1995
- -------------------------------------------------------- ---------- ----------- ------------

Discount rate used in determining present values........ 4.5-8.5% 4.5-9.0% 4.5-9.5%
Annual increase in future compensation levels........... 2.0-6.8% 2.0-7.0% 2.0-7.25%
Expected long-term rate of return on assets............. 5.5-9.0% 5.5-9.0% 5.5-9.0%

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

HONEYWELL INC. AND SUBSIDIARIES

(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

NOTE 20 -- PENSION PLANS (CONTINUED)
The plans' funded status as of September 30, adjusted for fourth quarter
contributions, and amounts recognized in Honeywell's statement of financial
position for its pension plans are summarized below.

Plans Whose
Assets Plans Whose
Exceed Accumulated
Accumulated Benefits
1997 (U.S. and Foreign) Benefits Exceed Assets
- ------------------------------------------------------------------------------------- ------------ -------------

Actuarial present value of benefit obligations:
Vested benefit obligation.......................................................... $ (3,318.6) $ (162.3)
Accumulated benefit obligation..................................................... $ (3,610.9) $ (182.6)
Projected benefit obligation....................................................... $ (3,973.1) $ (204.3)
Plan assets at fair value............................................................ 4,525.2 118.4
------------ -------------
Projected benefit obligation (in excess of) less than plan assets.................... 552.1 (85.9)
Remaining unrecognized net transition (asset) obligation............................. (63.0) 34.1
Unrecognized prior service cost...................................................... 206.9 7.9
Unrecognized net (gain) loss......................................................... (332.5) 30.2
Fourth-quarter 1997 contributions to plans........................................... 20.0 1.0
Adjustment to recognize maximum liability............................................ (50.5)
------------ -------------
Overfunded (unfunded) pension asset (liability) recognized in the statement of
financial position.................................................................. $ 383.5 $ (63.2)

Plans Whose Plans Whose
Assets Accumulated
Exceed Benefits
Accumulated Exceed
1996 (U.S. and Foreign) Benefits Assets
- ------------------------------------------------------------------------------------- ------------ ------------

Actuarial present value of benefit obligations:
Vested benefit obligation.......................................................... $ (3,193.1) $ (163.0)
Accumulated benefit obligation..................................................... $ (3,462.2) $ (192.5)
Projected benefit obligation....................................................... $ (3,798.9) $ (211.3)
Plan assets at fair value............................................................ 3,845.0 118.9
------------ ------------
Projected benefit obligation (in excess of) less than plan assets.................... 46.1 (92.4)
Remaining unrecognized net transition (asset) obligation............................. (81.1) 41.4
Unrecognized prior service cost...................................................... 233.2 9.0
Unrecognized net loss................................................................ 40.5 25.0
Other................................................................................ 0.1 (1.3)
Fourth-quarter 1996 contributions to plans........................................... 20.3 0.6
Adjustment to recognize minimum liability............................................ (17.8)
------------ ------------
Overfunded (unfunded) pension asset (liability) recognized in the statement of
financial position.................................................................. $ 259.1 $ (35.5)

Adjustments recorded to recognize the minimum liability required for defined
benefit pension plans whose accumulated benefits exceed assets amounted to $50.5
in 1997 and $17.8 in 1996.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

HONEYWELL INC. AND SUBSIDIARIES

(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

NOTE 20 -- PENSION PLANS (CONTINUED)
A corresponding amount was recognized as an intangible asset to the extent of
unrecognized prior service cost and unrecognized transition obligation. At
December 31, 1997, $11.3 of excess minimum liability resulted in a reduction in
shareowners' equity, net of income taxes, of $6.9. At December 31, 1996, $8.0 of
excess minimum liability resulted in a reduction in shareowners' equity, net of
income taxes, of $4.9.

Plan assets are held by trust funds devoted to servicing pension benefits
and are not available to Honeywell until all covered benefits are satisfied
after a plan is terminated. The assets held by the trust funds consist primarily
of a diversified portfolio of fixed-income investments and equity securities.

NOTE 21 -- POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

Substantially all of Honeywell's domestic and Canadian employees who retire
from Honeywell between the ages of 55 and 65 with 10 or more years of service
are eligible to receive medical benefits, until age 65, identical to those
available to active employees. Honeywell funds postretirement benefits on a
pay-as-you-go basis.

The components of net periodic postretirement benefit cost are as follows:

1997 1996 1995
--------- --------- ---------

Service cost of benefits earned during the period................... $ 8.2 $ 13.0 $ 11.5
Interest cost on accumulated postretirement benefit obligation...... 18.3 22.4 23.1
Net amortization.................................................... (7.1) 0.9 1.1
--------- --------- ---------
$ 19.4 $ 36.3 $ 35.7

Unrecognized net gains or losses in excess of 10 percent of the accumulated
postretirement benefit obligation are amortized over ten years.

The amounts recognized in Honeywell's statement of financial position are as
follows:

1997 1996
--------- ---------

Accumulated postretirement benefit obligation:
Retirees................................................................ $ 72.9 $ 78.9
Fully eligible active plan participants................................. 46.4 60.2
Other active plan participants.......................................... 127.0 148.3
--------- ---------
Subtotal................................................................ 246.3 287.4
Unrecognized prior service cost......................................... (4.3) (6.0)
Unrecognized net gain................................................... 82.4 41.0
--------- ---------
Accrued postretirement benefit cost....................................... $ 324.4 $ 322.4

The discount rate used in determining the APBO was 7.5 percent in 1997 and
1996. The assumed health-care cost trend rate used in measuring the APBO was 5.0
percent in 1997 and 1996. The health-care cost trend rate assumption has a
significant effect on the amounts reported. For example, a one percent increase
in the health-care trend rate would increase the APBO by 9.2 percent at
September 30, 1997, and the service and interest cost components of the net
periodic benefit cost by 12.0 percent for 1997.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

HONEYWELL INC. AND SUBSIDIARIES

(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

NOTE 22 -- CONTINGENCIES

LITTON LITIGATION

PATENT/TORT CASE

U.S. District Court Judge Mariana Pfaelzer presided over the patent
infringement and tortious interference trial and on August 31, 1993, a jury
returned a verdict in favor of Litton, awarding damages against Honeywell in the
amount of $1.2 billion. Honeywell filed post-trial motions contesting the
verdict and damage award. On January 9, 1995, the trial court set them aside,
ruling, among other things, that the Litton patent was invalid due to
obviousness, unenforceable because of Litton's inequitable conduct before the
Patent and Trademark Office, and in any case, not infringed by Honeywell's
current process. It further ruled that the state tort claims were not supported
by sufficient evidence. The trial court also held that if its rulings concerning
liability were vacated or reversed on appeal, Honeywell should be granted a new
trial on the issue of damages because the jury's award was inconsistent with the
clear weight of the evidence and based upon a speculative damage study.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

HONEYWELL INC. AND SUBSIDIARIES

(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

NOTE 22 -- CONTINGENCIES (CONTINUED)
Supreme Court in the WARNER-JENKINSON V. HILTON DAVIS case, which refined the
law concerning patent infringement under the doctrine of equivalents. On March
21, 1997, Litton also filed a notice of appeal to the Federal Circuit of the
trial court's December 23, 1996 decision to deny injunctive relief, but the
Federal Circuit stayed any briefing or consideration of that matter until such
time as it completes the reconsideration of liability issues ordered by the U.S.
Supreme Court.

ANTITRUST CASE

Preparations for, and conduct of, the antitrust case have generally followed
the completion of comparable proceedings in the patent/tort case. Trial did not
begin in the antitrust case until November 20, 1995. Judge Pfaelzer also
presided over this trial, but it was held before a different jury. At the close
of evidence and before jury deliberations began, the trial court dismissed, for
failure of proof, Litton's contentions that Honeywell had illegally monopolized
and attempted to monopolize by engaging in below-cost predatory pricing; tying
and bundling product offerings under packaged pricing; misrepresenting its
products and disparaging Litton products; and acquiring the Sperry Avionics
business in 1986. On February 2, 1996, the case was submitted to the jury on the
remaining allegations that Honeywell had illegally monopolized and attempted to
monopolize by entering into certain long-term exclusive dealing and penalty
arrangements with aircraft manufacturers and airlines to exclude Litton from the
commercial aircraft market, and by failing to provide Litton with access to
proprietary software used in the cockpits of certain business jets. On February
29, 1996, the jury returned a $234 million single damages verdict against
Honeywell for illegal monopolization which verdict would have been automatically
trebled. On March 1, 1996, the jury indicated that it was unable to reach a
verdict on damages for attempted monopolization, and a mistrial was declared as
to that claim.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

HONEYWELL INC. AND SUBSIDIARIES

(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

NOTE 22 -- CONTINGENCIES (CONTINUED)
competent evidence to support its speculative, all-or-nothing $298.5 million
damage claim. Litton filed a motion for entry of judgment and a motion for
injunctive relief. On July 24, 1996, the trial court denied Honeywell's
alternative motions for judgment as a matter of law or a complete new trial, but
concluded that Litton's damage study was seriously flawed and granted Honeywell
a retrial on damages only. The court also denied Litton's two motions. At that
time, Judge Pfaelzer was expected to conduct the retrial of antitrust damages
sometime following the retrial of patent/tort damages. These retrials will be
held before two new, and different, juries. However, after the U.S. Supreme
Court remanded the patent/tort case to the Federal Circuit in March 1997, Litton
moved to have the trial court expeditiously schedule the antitrust damages
retrial. In September 1997, the trial court rejected that motion, indicating
that it wished to know the outcome of the current patent/tort appeal before
scheduling retrials of any type.

In the fall of 1996, Litton and Honeywell commenced a court ordered
mediation of the patent, tort and antitrust claims. No claim was resolved or
settled, and the mediation is currently in recess.

ENVIRONMENTAL MATTERS

Honeywell's manufacturing sites generate both hazardous and nonhazardous
wastes, the treatment, storage, transportation and disposal of which are subject
to various local, state and federal laws relating to protection of the
environment. Honeywell is in varying stages of investigation or remediation of
potential, alleged or acknowledged contamination at currently or previously
owned or operated sites and at off-site locations where its wastes were taken
for treatment or disposal. In connection with the cleanup of various off-site
locations, Honeywell, along with a large number of other entities, has been
designated a potentially responsible party (PRP) by the U.S. Environmental
Protection Agency under the Comprehensive Environmental Response, Compensation
and Liability Act or by state agencies under similar state laws (Superfund),
which potentially subject PRPs to joint and several liability for the costs of
such cleanup. In addition, Honeywell is incurring costs relating to
environmental remediation pursuant to the federal Resource Conservation and
Recovery Act. Based on Honeywell's assessment of the costs associated with its
environmental responsibilities, compliance with federal, state and local laws
regulating the discharge of materials into the environment, or otherwise
relating to the protection of the environment, has not had and, in the opinion
of Honeywell management, will not have a material effect on Honeywell's
financial position, net income, capital expenditures or competitive position.
Honeywell's opinion with regard to Superfund matters is based

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

HONEYWELL INC. AND SUBSIDIARIES

(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

NOTE 22 -- CONTINGENCIES (CONTINUED)
on its assessment of the predicted investigation, remediation and associated
costs, its expected share of those costs, and the availability of legal
defenses. In October 1996, The American Institute of Certified Public
Accountants issued Statement of Position (SOP) 96-1, "Environmental Remediation
Liabilities." This SOP provides guidance on specific accounting issues that are
present in the recognition, measurement, display and disclosure of environmental
remediation liabilities. The provisions of the SOP were adopted by Honeywell in
1997 and the discounted liabilities were not materially different from the
undiscounted environmental liability.

OTHER MATTERS

Honeywell is a party to a large number of other legal proceedings, some of
which are for substantial amounts. It is the opinion of management that any
losses in connection with these matters will not have a material effect on
Honeywell's net income, financial position or liquidity.

Honeywell has entered into letter of credit agreements with various
financial institutions to support certain financing instruments and insurance
policies aggregating approximately $204.8 at December 31, 1997.

NOTE 23 -- QUARTERLY DATA (UNAUDITED)

1997 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
- -------------------------------------------- ---------- ---------- ---------- ----------

Sales....................................... $ 1,685.7 $ 1,977.3 $ 2,038.7 $ 2,325.8
Cost of sales............................... 1,149.7 1,359.1 1,390.3 1,526.0
Net income.................................. 75.6 98.4 118.9 178.1
Basic earnings per share.................... 0.60 0.77 0.93 1.41
Diluted earnings per share.................. 0.59 0.76 0.92 1.38

1996 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
- -------------------------------------------- ---------- ---------- ---------- ----------

Sales....................................... $ 1,619.5 $ 1,771.6 $ 1,803.1 $ 2,117.4
Cost of sales............................... 1,109.0 1,222.6 1,221.7 1,422.1
Net income.................................. 65.1 83.3 101.1 153.2
Basic earnings per share.................... 0.51 0.66 0.80 1.21
Diluted earnings per share.................. 0.50 0.65 0.78 1.18

Shareowners of record on January 30, 1998, totaled 30,819.

The fourth quarter of 1997 includes a $16.8 gain from the sale of businesses
($11.5 after-tax) and special charges of $30.3 ($20.8 after-tax).

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

No report on Form 8-K reporting a change in Honeywell's certifying
independent accountants has been filed within the 24 months prior to the date of
the most recent financial statements.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Pages 8 through 12 of the Honeywell Notice of 1998 Annual Meeting and Proxy
Statement are incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

Pages 15 through 23 of the Honeywell Notice of 1998 Annual Meeting and Proxy
Statement are incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Page 14 of the Honeywell Notice of 1998 Annual Meeting and Proxy Statement
are 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) DOCUMENTS FILED AS A PART OF THIS REPORT

1. FINANCIAL STATEMENTS

The financial statements required to be filed as part of this Annual Report
on Form 10-K are listed below with their location in this report.

PAGE
---------

Honeywell Inc. and Subsidiaries:
Independent Auditors' Report....................................................... 28
Income Statement................................................................... 29
Statement of Financial Position.................................................... 30
Statement of Cash Flows............................................................ 31
Notes to Financial Statements...................................................... 32

2. FINANCIAL STATEMENT SCHEDULES

The schedules required to be filed as part of this Annual Report on Form
10-K are listed below with their location in this report.

PAGE
----
Honeywell Inc. and Subsidiaries:
Independent Auditors' Report.................... 28
Schedules for the Years Ended December 31, 1997,
1996 and 1995:
II -- Valuation Reserves................ 63

All schedules, other than indicated above, are omitted because of the
absence of the conditions under which they are required or because the
information required is shown in the financial statements or notes thereto.

3. EXHIBITS

Documents Incorporated by Reference:

(3)(i) Restated Certificate of Incorporation of Honeywell Inc. dated June 18, 1991
is incorporated by reference to Exhibit 3(a) to Honeywell Annual Report on
Form 10-K for the fiscal year ended December 31, 1992, Commission file
number 1-971.
(4)(i) Rights Agreement between Honeywell Inc. and Chemical Mellon Shareholder
Services L.L.C., as Rights Agent, dated as of January 16, 1996 is
incorporated by reference to Exhibit 4 to Honeywell's Current Report on
Form 8-K dated January 31, 1996.
(4)(ii)(a) Indenture, dated as of August 1, 1994, between Honeywell Inc. and The Chase
Manhattan Bank (National Association), as Trustee for Honeywell Inc.
Medium-Term Notes, Series A is incorporated by reference to Exhibit (4)(b)
to Honeywell's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.
(4)(ii)(b) Indenture, dated as of July 15, 1996, between Honeywell Inc., as Guarantor,
Honeywell Canada Limited, Honeywell N.V. and The Chase Manhattan Bank
(National Association), as Trustee for Honeywell Inc., Honeywell Canada
Limited, Honeywell N.V. is incorporated by reference to Exhibit 4.2 to
Honeywell's Current Report on Form 8-K dated July 18, 1996.
(10)(i)(a) Credit Agreement dated as of April 15, 1997 among Honeywell Inc., Morgan
Guaranty Trust Company of New York, as Documentation Agent, Citicorp USA,
Inc., Chase Securities Inc. and J.P. Morgan Securities Inc., as
Co-Arrangers and The Chase Manhattan Bank, as Administrative Agent is
incorporated by reference to Exhibit 99(ii) to Honeywell's Quarterly Report
on Form 10-Q for the fiscal quarter ended March 30, 1997.
(10)(iii)(a) Honeywell Key Employee Severance Plan, as amended is incorporated by
reference to Exhibit (10)(iii)(a) to Honeywell's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994.*
(10)(iii)(b) Honeywell Supplementary Executive Retirement Plan for Mid-Career Hires, as
amended is incorporated by reference to Exhibit (10)(iii)(b) to Honeywell's
Annual Report on Form 10-K for the fiscal year ended December 31, 1994.*
(10)(iii)(c) Honeywell-Norwest Rabbi Trust Agreement, as amended is incorporated by
reference to Exhibit (10)(iii)(c) to Honeywell's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994.*
(10)(iii)(d) 1993 Honeywell Stock and Incentive Plan, is incorporated by reference to
Exhibit (10)(iii)(d) to Honeywell's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994.*
(10)(iii)(e) 1988 Honeywell Stock and Incentive Plan, is incorporated by reference to
Exhibit (10)(iii)(e) to Honeywell's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994.*
(10)(iii)(g) Honeywell Corporate Executive Compensation Plan, as amended is incorporated
by reference to Exhibit (10)(iii)(g) to Honeywell's Annual Report on Form
10-K for the fiscal year ended December 31, 1996.*
(10)(iii)(h) Honeywell Supplementary Executive Retirement Plan for Compensation in
Excess of $200,000, as amended is incorporated by reference to Exhibit
(10)(iii)(h) to Honeywell's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994.*

(10)(iii)(i) Honeywell Supplementary Executive Retirement Plan for CECP Participants, as
amended is incorporated by reference to Exhibit (10)(iii)(i) to Honeywell's
Annual Report on Form 10-K for the fiscal year ended December 31, 1994.*
(10)(iii)(j) Honeywell Supplementary Retirement Plan, as amended is incorporated by
reference to Exhibit (10)(iii)(j) to Honeywell's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994.*
(10)(iii)(k) Honeywell Supplementary Executive Retirement Plan for Benefits in Excess of
Limits Under Tax Reform Act of 1986, as amended is incorporated by
reference to Exhibit (10)(iii)(k) to Honeywell's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994.*
(10)(iii)(l) Honeywell Executive Life Insurance Agreement, is incorporated by reference
to Exhibit 10(iii)(m) to Honeywell's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993.*
(10)(iii)(m) Form of Executive Termination Contract is incorporated by reference to
Exhibit (10)(iii)(m) to Honeywell's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994.*
(10)(iii)(n) Honeywell Senior Management Performance Incentive Plan is incorporated by
reference to Exhibit (10)(iii)(o) to Honeywell's Annual Report on Form 10-K
for the fiscal year ended 1996.*
(99)(ii) Honeywell Notice of 1998 Annual Meeting and Proxy Statement.**

Exhibits submitted herewith:
(3)(ii) By-laws of Honeywell Inc., as amended through April 15, 1997.
(10)(iii)(f) Honeywell Non-Employee Directors Fee and Stock Unit Plan, as amended
through June 17, 1997.*
(10)(iii)(o) 1997 Honeywell Stock and Incentive Plan.*
(11) Computation of Earnings Per Share.
(12) Computation of Ratios of Earnings to Fixed Charges.
(21) Subsidiaries of Honeywell.
(23) Consent of Independent Auditors.
(24) Powers of Attorney.
(27) Financial Data Schedule.
(99)(i) Cautionary Statements for Purposes of the Safe Harbor Provisions of The
Private Securities Litigation Reform Act of 1995.

(B) REPORTS ON FORM 8-K

None

- ------------------------

*Management contract or compensatory plan or arrangement.

**Only the portions of Exhibit (99)(ii) specifically incorporated by reference
are deemed filed with the Commission.

SIGNATURES

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

HONEYWELL INC.

By: /s/ KATHLEEN M. GIBSON
-----------------------------------------
Kathleen M. Gibson, VICE PRESIDENT AND
CORPORATE SECRETARY

Dated: March 17, 1998

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.

SIGNATURE TITLE
- ----------------------------- ----------------------------------------------------------------------------

M. R. BONSIGNORE Chairman of the Board and Chief Executive Officer, and Director

L.W. STRANGHOENER Vice President and Chief Financial Officer

P. M. PALAZZARI Vice President and Controller, and Principal Accounting Officer

A. J. BACIOCCO, JR. Director

E. E. BAILEY Director

W. H. DONALDSON Director

G. FERRARI Director

R. D. FULLERTON Director

J. J. HOWARD Director

B. E. KARATZ Director

A. B. RAND Director

S. G. ROTHMEIER Director

M. W. WRIGHT Director

By: /s/ KATHLEEN M. GIBSON
-------------------------
Kathleen M. Gibson,
ATTORNEY-IN-FACT
March 17, 1998

SCHEDULE II

HONEYWELL INC. AND SUBSIDIARIES

VALUATION RESERVES

FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

(DOLLARS IN MILLIONS)

BALANCE AT ADDITIONS DEDUCTIONS BALANCE
BEGINNING CHARGED TO FROM AT CLOSE
OF YEAR INCOME RESERVES OF YEAR
----------- ----------- ------------ ---------

Reserves deducted from assets to which they apply -- allowance
for doubtful accounts:

RECEIVABLES -- CURRENT
Year ended December 31, 1997.................................... $ 33.5 $ 14.1 (1) $ 9.1 (2) $ 38.5
Year ended December 31, 1996.................................... 34.5 10.5 (1) 11.5 (2) 33.5
Year ended December 31, 1995.................................... 31.1 10.4 (1) 7.0 (2) 34.5

LONG-TERM RECEIVABLES
Year ended December 31, 1997.................................... 0.7 2.0 -- 2.7
Year ended December 31, 1996.................................... 0.7 -- -- 0.7
Year ended December 31, 1995.................................... 0.7 -- -- 0.7

Reserves deducted from assets to which they apply -- valuation
reserve:

LONG-TERM NOTES RECEIVABLE
Year ended December 31, 1997.................................... 1.7 (0.2)(1) -- 1.5
Year ended December 31, 1996.................................... 1.8 (0.1)(1) -- 1.7
Year ended December 31, 1995.................................... 1.9 (0.1)(1) -- 1.8

- ------------------------

Notes:

(1) Represents amounts included in selling, general and administrative expense.

(2) Represents uncollectible accounts written off, less recoveries, translation
adjustments, and reserves acquired.