HONEYWELL INTERNATIONAL INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2001
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OR

[ ] 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 1-8974
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HONEYWELL INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)

DELAWARE 22-2640650
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

101 Columbia Road
P.O. Box 4000
Morristown, New Jersey 07962-2497
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(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (973)455-2000
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Securities registered pursuant to Section 12(b) of the Act:

Name of Each Exchange
Title of Each Class on Which Registered
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Common Stock, par value $1 per share* New York Stock Exchange
Chicago Stock Exchange
Pacific Exchange
9 7/8% Debentures due June 1, 2002 New York Stock Exchange
9.20% Debentures due February 15, 2003 New York Stock Exchange
Zero Coupon Serial Bonds due 2009 New York Stock Exchange
9 1/2% Debentures due June 1, 2016 New York Stock Exchange

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* The common stock is also listed for trading on the London stock exchange.

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

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ]

The aggregate market value of the voting stock held by nonaffiliates of the
Registrant was approximately $27.6 billion at December 31, 2001.

There were 814,966,481 shares of Common Stock outstanding at December 31, 2001.

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TABLE OF CONTENTS

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This report contains certain statements that may be deemed 'forward-looking
statements' within the meaning of Section 21E of the Securities Exchange Act of
1934. All statements, other than statements of historical fact, that address
activities, events or developments that we or our management intends, expects,
projects, believes or anticipates will or may occur in the future are
forward-looking statements. Such statements are based upon certain assumptions
and assessments made by our management in light of their experience and their
perception of historical trends, current conditions, expected future
developments and other factors they believe to be appropriate. The
forward-looking statements included in this report are also subject to a number
of material risks and uncertainties, including but not limited to economic,
competitive, governmental and technological factors affecting our operations,
markets, products, services and prices. Such forward-looking statements are not
guarantees of future performance, and actual results, developments and business
decisions may differ from those envisaged by such forward-looking statements.

PART I.

ITEM 1. BUSINESS

Honeywell International Inc. (Honeywell) is a diversified technology and
manufacturing company, serving customers worldwide with aerospace products and
services, control technologies for buildings, homes and industry, automotive
products, specialty chemicals, fibers, plastics and electronic and advanced
materials. Honeywell was incorporated in Delaware in 1985.

MAJOR BUSINESSES

We globally manage our business operations through strategic business units,
which have been aggregated under four reportable segments: Aerospace, Automation
and Control Solutions, Specialty Materials and Transportation and Power Systems.
Financial information related to our reportable segments is included in 'Item 8.
Financial Statements and Supplementary Data' in Note 24 of Notes to Financial
Statements.

Following is a description of our strategic business units:

AEROSPACE SALES

Our sales to aerospace customers were 41, 40 and 42 percent of our total
sales in 2001, 2000 and 1999, respectively. Our sales to aerospace original
equipment manufacturers were 15, 14 and 15 percent of our total sales in 2001,
2000 and 1999, respectively. If there were a large decline in sales of aircraft
that use our components, operating results could be negatively impacted. In
addition, our sales to aftermarket customers of aerospace products and services
were 21, 21 and 19 percent of our total sales in 2001, 2000 and 1999,
respectively. If there were a large decline in the number of flight hours for
aircraft that use our components or services, operating results could be
negatively impacted. The terrorist attacks on September 11, 2001 resulted in an
abrupt downturn in the aviation industry which was already negatively impacted
by a weak economy. This dramatic downturn in the commercial air transport
industry will continue to adversely impact the operating results of our
Aerospace segment in 2002. In response, we have accelerated our cost-reduction
actions to mitigate the impact of this downturn.

U.S. GOVERNMENT SALES

Sales to the U.S. Government (principally by our Aerospace segment), acting
through its various departments and agencies and through prime contractors,
amounted to $2,491, $2,219 and $2,383 million in 2001, 2000 and 1999,
respectively, which included sales to the U.S. Department of Defense of $1,631,
$1,548 and $1,415 million in 2001, 2000 and 1999, respectively. We are affected
by U.S. Government budget constraints for defense and space programs. U.S.
defense spending increased in 2001 and is also expected to increase in 2002.

In addition to normal business risks, companies engaged in supplying
military and other equipment to the U.S. Government are subject to unusual
risks, including dependence on Congressional appropriations and administrative
allotment of funds, changes in governmental procurement legislation and
regulations and other policies that may reflect military and political
developments, significant changes in contract scheduling, complexity of designs
and the rapidity with which they become obsolete, necessity for constant design
improvements, intense competition for U.S. Government business necessitating
increases in time and investment for design and development, difficulty of
forecasting costs and schedules when bidding on developmental and highly
sophisticated technical work and other factors characteristic of the industry.
Changes are customary over the life of U.S. Government contracts, particularly
development contracts, and generally result in adjustments of contract prices.

We, like other government contractors, are subject to government
investigations of business practices and compliance with government procurement
regulations. Although such regulations provide that a contractor may be
suspended or barred from government contracts under certain circumstances, and
the outcome of pending government investigations cannot be predicted with
certainty, we are not currently aware of any such investigations that we expect,
individually or in the aggregate, will have a material adverse effect on us. In
addition, we have a proactive business compliance program designed to ensure
compliance and sound business practices.

BACKLOG

Our total backlog at year-end 2001 and 2000 was $7,178 and $8,094 million,
respectively. We anticipate that approximately $5,375 million of the 2001
backlog will be filled in 2002. We believe that

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backlog is not necessarily a reliable indicator of our future sales because a
substantial portion of the orders constituting this backlog may be canceled at
the customer's option.

COMPETITION

We are subject to active competition in substantially all product and
service areas. Competition is expected to continue in all geographic regions.
Competitive conditions vary widely among the thousands of products and services
provided by us, and vary country by country. Depending on the particular
customer or market involved, our businesses compete on a variety of factors,
such as price, quality, reliability, delivery, customer service, performance,
applied technology, product innovation and product recognition. Brand identity,
service to customers and quality are generally important competitive factors for
our products and services, and there is considerable price competition. Other
competitive factors for certain products include breadth of product line,
research and development efforts and technical and managerial capability. While
our competitive position varies among our products and services, we believe we
are a significant competitor in each of our major product and service classes.
However, a number of our products and services are sold in competition with
those of a large number of other companies, some of which have substantial
financial resources and significant technological capabilities. In addition,
some of our products compete with the captive component divisions of original
equipment manufacturers.

INTERNATIONAL OPERATIONS

We are engaged in manufacturing, sales and research and development mainly
in the United States, Europe, Canada, Asia and Latin America. U.S. exports and
foreign manufactured products are significant to our operations.

Our international operations, including U.S. exports, are potentially
subject to a number of unique risks and limitations, including: fluctuations in
currency value; exchange control regulations; wage and price controls;
employment regulations; foreign investment laws; import and trade restrictions,
including embargoes; and governmental instability. However, we have limited
exposure in high risk countries and have taken action to mitigate these risks.

Financial information related to geographic areas is included in 'Item 8.
Financial Statements and Supplementary Data' in Note 25 of Notes to Financial
Statements.

RAW MATERIALS

The principal raw materials used in our operations are generally readily
available. We experienced no significant or unusual problems in the purchase of
key raw materials and commodities in 2001. We are not dependent on any one
supplier for a material amount of our raw materials. However, we are highly
dependent on our suppliers and subcontractors in order to meet commitments to
our customers. In addition, many major components and product equipment items
are procured or subcontracted on a sole-source basis with a number of domestic
and foreign companies. We maintain a qualification and performance surveillance
process to control risk associated with such reliance on third parties. While we
believe that sources of supply for raw materials and components are generally
adequate, it is difficult to predict what effects shortages or price increases
may have in the future. However, at present, we have no reason to believe a
shortage of raw materials will cause any material adverse impact during 2002.

PATENTS, TRADEMARKS, LICENSES AND DISTRIBUTION RIGHTS

Our business as a whole, and that of our strategic business units, are not
dependent upon any single patent or related group of patents, or any licenses or
distribution rights. We own, or are licensed under, a large number of patents,
patent applications and trademarks acquired over a period of many years, which
relate to many of our products or improvements to those products and which are
of importance to our business. From time to time, new patents and trademarks are
obtained, and patent and trademark licenses and rights are acquired from others.
We also have distribution rights of varying terms for a number of products and
services produced by other companies. In our judgment, those rights are adequate
for the conduct of our business. We believe that, in the aggregate, the rights
under our patents, trademarks and licenses are generally important to our
operations, but we do not consider any patent, trademark or related group of
patents, or any licensing or distribution rights related to a

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specific process or product to be of material importance in relation to our
total business. See Item 3 at page 10 of this Form 10-K for information
concerning litigation relating to patents in which we are involved.

We have registered trademarks for a number of our products, including such
consumer brands as Honeywell, Prestone, FRAM, Anso and Autolite.

RESEARCH AND DEVELOPMENT

Our research activities are directed toward the discovery and development of
new products and processes, improvements in existing products and processes, and
the development of new uses for existing products.

Research and development expense totaled $832, $818 and $909 million in
2001, 2000 and 1999, respectively. Customer-sponsored (principally the U.S.
Government) research and development activities amounted to an additional $697,
$560 and $682 million in 2001, 2000 and 1999, respectively.

ENVIRONMENT

We are subject to various federal, state and local government requirements
regulating the discharge of materials into the environment or otherwise relating
to the protection of the environment. It is our policy to comply with these
requirements, and we believe that, as a general matter, our policies, practices
and procedures are properly designed to prevent unreasonable risk of
environmental damage, and of resulting financial liability, in connection with
our business. Some risk of environmental damage is, however, inherent in some of
our operations and products, as it is with other companies engaged in similar
businesses.

We are and have been engaged in the handling, manufacture, use and disposal
of many substances classified as hazardous or toxic by one or more regulatory
agencies. We believe that, as a general matter, our handling, manufacture, use
and disposal of these substances are in accord with environmental laws and
regulations. It is possible, however, that future knowledge or other
developments, such as improved capability to detect substances in the
environment or increasingly strict environmental laws and standards and
enforcement policies, could bring into question our handling, manufacture, use
or disposal of these substances.

Among other environmental requirements, we are subject to the federal
superfund law, and similar state laws, under which we have been designated as a
potentially responsible party that may be liable for cleanup costs associated
with various hazardous waste sites, some of which are on the U.S. Environmental
Protection Agency's superfund priority list. Although, under some court
interpretations of these laws, there is a possibility that a responsible party
might have to bear more than its proportional share of the cleanup costs if it
is unable to obtain appropriate contribution from other responsible parties, we
have not had to bear significantly more than our proportional share in multi-
party situations taken as a whole.

Further information regarding environmental matters is included in 'Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations' and 'Item 8. Financial Statements and Supplementary Data' in
Note 22 of Notes to Financial Statements.

EMPLOYEES

We have approximately 115,000 employees at December 31, 2001. Approximately
79,000 were located in the United States, and, of these employees, about 19
percent were unionized employees represented by various local or national
unions.

ITEM 2. PROPERTIES

We have over 1,000 locations consisting of plants, research laboratories,
sales offices and other facilities. Our plants are generally located to serve
large marketing areas and to provide accessibility to raw materials and labor
pools. Our properties are generally maintained in good operating condition.
Utilization of these plants may vary with sales to customers and other business
conditions; however, no major operating facility is significantly idle. Our
facilities, together with planned expansions, are expected to meet our needs for
the foreseeable future. We own or lease warehouses, railroad cars, barges,
automobiles, trucks, airplanes and materials handling and data processing
equipment. We also

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lease space for administrative and sales staffs. Our headquarters and
administrative complex is located at Morristown, New Jersey.

Our principal plants, which are owned in fee unless otherwise indicated, are
as follows:

AEROSPACE
Glendale, AZ South Bend, IN Rocky Mount, NC
(partially leased) Olathe, KS (leased) Redmond, WA
Phoenix, AZ Coon Rapids, MN (leased) Yeovil, Somerset
Tempe, AZ Minneapolis, MN United Kingdom
Tucson, AZ Teterboro, NJ
Torrance, CA Albuquerque, NM
(partially leased)
Clearwater, FL

AUTOMATION AND CONTROL SOLUTIONS
Phoenix, AZ Freeport, IL Syosset, NY
San Diego, CA Golden Valley, MN El Paso, TX (leased)
Northford, CT Plymouth, MN Offenbach, Germany

SPECIALTY MATERIALS
Baton Rouge, LA Pottsville, PA Hopewell, VA
Geismar, LA Columbia, SC Seelze, Germany
Roseville, MN Orange, TX
Moncure, NC Chesterfield, VA

TRANSPORTATION AND POWER SYSTEMS
Torrance, CA Thaon-Les-Vosges, France Atessa, Italy
Glinde, Germany Skelmersdale, United Kingdom

ITEM 3. LEGAL PROCEEDINGS

On November 23, 2001, we agreed to pay a $110,000 penalty to the United
States and a $40,000 penalty to the Commonwealth of Virginia and to perform five
special environmental projects worth $772,000 to settle alleged violations of
federal and state environmental regulations at our plant in Hopewell, Virginia.
In an action filed in federal court in Richmond, Virginia, the state and federal
environmental protection agencies had alleged violations of the federal Clean
Air Act and federal and state regulations on the storage and disposal of
hazardous substances. In the settlement, we neither admitted nor denied
liability for the alleged violations.

Details of other legal proceedings are included in 'Item 8. Financial
Statements and Supplementary Data' in Note 22 of Notes to Financial Statements.

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

At the Annual Meeting of Shareowners of Honeywell held on December 7, 2001,
the following matters set forth in our Proxy Statement dated November 5, 2001,
which was filed with the Securities and Exchange Commission pursuant to
Regulation 14A under the Securities Exchange Act of 1934, were voted upon with
the results indicated below.

(1) The nominees listed below were elected directors for a three-year
term ending at the 2004 Annual Meeting with the respective votes set forth
opposite their names:

(2) A proposal seeking approval of the appointment of
PricewaterhouseCoopers LLP as independent accountants for 2001 was approved,
with 691,216,369 votes cast FOR, 14,080,505 votes cast AGAINST, and
7,142,362 abstentions;

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(3) A shareowner proposal regarding shareowner approval of shareholder
rights plans was approved, with 366,872,596 votes cast FOR, 213,992,781
votes cast AGAINST, 12,829,383 abstentions and 118,744,476 broker non-votes;

(4) A shareowner proposal recommending the annual election of directors
was approved, with 359,851,861 votes cast FOR, 222,104,122 votes cast
AGAINST, 11,738,777 abstentions and 118,744,476 broker non-votes;

(5) A shareowner proposal recommending a change in shareowner voting
provisions was approved, with 353,326,521 votes cast FOR, 228,191,466 votes
cast AGAINST, 12,176,773 abstentions and 118,744,476 broker non-votes.

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PART II.

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

Market and dividend information for Honeywell's common stock is included in
'Item 8. Financial Statements and Supplementary Data' in Note 26 of Notes to
Financial Statements.

The number of record holders of our common stock at December 31, 2001 was
90,386.

ITEM 6. SELECTED FINANCIAL DATA

HONEYWELL INTERNATIONAL INC.

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(1) In 2001, includes net repositioning and other charges, resulting in an
after-tax charge of $1,771 million, or $2.18 per share. In 2000, includes
net repositioning and other charges and a gain on the sale of the TCAS
product line of Honeywell Inc. resulting in a net after-tax charge of $634
million, or $0.78 per share. In 1999, includes merger, repositioning and
other charges and gains on the sales of our Laminate Systems business and
our investment in AMP Incorporated (AMP) common stock resulting in a net
after-tax charge of $624 million, or $0.78 per share. In 1998, includes
repositioning charges, a gain on settlement of litigation claims and a tax
benefit resulting from the favorable resolution of certain prior-year
research and development tax claims resulting in a net after-tax charge of
$4 million, with no impact on the per share amount. In 1997, includes
repositioning and other charges, gains on the sales of our automotive Safety
Restraints and certain Industrial Control businesses and a charge related to
the 1996 sale of our automotive Braking Systems business resulting in a net
after-tax charge of $5 million, with no impact on the per share amount. In
1996, includes repositioning and other charges and a gain on the sale of our
automotive Braking Systems business resulting in a net after-tax gain of $9
million, or $0.01 per share.

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

RESULTS OF OPERATIONS

Net sales in 2001 were $23,652 million, a decrease of $1,371 million, or
5 percent compared with 2000. Net sales in 2000 were $25,023 million, an
increase of $1,288 million, or 5 percent compared with 1999. The change in net
sales in 2001 and 2000 is attributable to the following:

Cost of goods sold of $20,429, $19,090 and $18,495 million in 2001, 2000 and
1999, respectively, included merger, repositioning and other charges of $2,438,
$830 and $947 million in 2001, 2000 and 1999, respectively. See 'Item 8.
Financial Statements and Supplementary Data' in Note 5 of Notes to Financial
Statements for further discussion of the merger, repositioning and other
charges. Excluding these charges, cost of goods sold was $17,991, $18,260 and
$17,548 million in 2001, 2000 and 1999, respectively. Excluding merger,
repositioning and other charges, cost of goods sold as a percent of sales was
76.1, 73.0 and 73.9 percent in 2001, 2000 and 1999, respectively. The increase
in cost of goods sold as a percent of sales in 2001 compared with 2000
principally reflected significantly lower sales in our Specialty Materials
segment and lower sales of higher-margin aftermarket products and services in
our Aerospace segment. This increase was partially offset by lower costs due to
headcount reductions. The decrease in cost of goods sold as a percent of sales
in 2000 compared with 1999 related principally to lower costs due to headcount
reductions and increased sales of higher-margin aftermarket products and
services in our Aerospace segment partially offset by higher raw materials
costs, primarily in our Specialty Materials segment.

Selling, general and administrative expenses were $3,064, $3,134 and $3,216
million in 2001, 2000 and 1999, respectively. Selling, general and
administrative expenses included merger, repositioning and other charges of $151
and $300 million in 2001 and 1999, respectively. See 'Item 8. Financial
Statements and Supplementary Data' in Note 5 of Notes to Financial Statements
for further discussion of the merger, repositioning and other charges. Excluding
these charges, selling, general and administrative expenses were $2,913, $3,134
and $2,916 million in 2001, 2000 and 1999, respectively. Excluding merger,
repositioning and other charges, selling, general and administrative expenses
as a percent of sales were 12.3, 12.5 and 12.3 percent in 2001, 2000 and 1999,
respectively. The decrease in selling, general and administrative expenses as a
percent of sales in 2001 compared with 2000 principally reflected the impact of
headcount reductions and a decline in discretionary spending for professional
services, travel and overtime. The increase in selling, general and
administrative expenses as a percent of sales in 2000 compared with 1999
principally reflected our acquisition of Pittway, which had a higher level of
selling, general and administrative expenses as a percent of sales.

Retirement benefit (pension and other post retirement) plans contributed
cost reductions of $165, $282 and $61 million in 2001, 2000 and 1999,
respectively, principally due to the funding status of our pension plans
(described in 'Item 8. Financial Statements and Supplementary Data' in Note 23
of Notes to Financial Statements) and workforce reductions. Future effects on
operating results will principally depend on pension plan investment performance
and other economic conditions.

(Gain) on sale of non-strategic businesses of $112 million in 2000
represented the pretax gain on the government-mandated divestiture of the TCAS
product line of Honeywell Inc. (the former Honeywell) in connection with the
merger of AlliedSignal Inc. and the former Honeywell in December 1999. (Gain) on
sale of non-strategic businesses of $106 million in 1999 represented the pretax
gain

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on the sale of our Laminate Systems business. See 'Item 8. Financial Statements
and Supplementary Data' in Note 6 of Notes to Financial Statements for further
information.

Equity in (income) loss of affiliated companies was a loss of $193 and $89
million in 2001 and 2000, respectively, and income of $76 million in 1999.
Equity in (income) loss of affiliated companies included repositioning and other
charges of $200, $136 and $40 million in 2001, 2000 and 1999, respectively. See
'Item 8. Financial Statements and Supplementary Data' in Note 5 of Notes to
Financial Statements for further discussion of the repositioning and other
charges. Excluding these charges, equity in (income) loss of affiliated
companies was income of $7, $47 and $116 million in 2001, 2000 and 1999,
respectively. The decrease of $40 million in equity income in 2001 compared with
2000 was due mainly to the gain on the sale of our interest in an automotive
aftermarket joint venture in 2000. The decrease of $69 million in equity income
in 2000 compared with 1999 was due mainly to lower earnings from our UOP process
technology (UOP) joint venture partially offset by the gain on the sale of our
interest in an automotive aftermarket joint venture.

Other (income) expense, $17 million of income in 2001, decreased by $40
million compared with 2000. The current year included a net provision of $5
million consisting of a $6 million charge related to the redemption of our $200
million 5 3/4% dealer remarketable securities and a $1 million credit recognized
upon the adoption of Statement of Financial Accounting Standards No. 133,
'Accounting for Derivative Instruments and Hedging Activities', as amended.
Excluding this net provision, other (income) expense was $22 million of income
in 2001, a decrease of $35 million compared with 2000 due to a decrease in
benefits from foreign exchange hedging and lower interest income, partially
offset by lower minority interests expense. Other (income) expense, $57 million
of income in 2000, decreased by $250 million compared with 1999. The decrease
principally reflected the 1999 net gain of $268 million on our disposition of
our investment in AMP common stock. Excluding this net gain, other (income)
expense was $57 million of income in 2000, compared with $39 million of income
in 1999. This increase in other income of $18 million in 2000 was due
principally to lower minority interests expense and an increase in benefits from
foreign exchange hedging.

Interest and other financial charges of $405 million in 2001 decreased by
$76 million, or 16 percent compared with 2000, due to lower average debt
outstanding and lower average interest rates in 2001. Interest and other
financial charges of $481 million in 2000 increased by $216 million, or
82 percent compared with 1999. The increase resulted from higher average debt
outstanding during 2000 due principally to our acquisition of Pittway and our
share repurchase program, higher average interest rates and the impact of tax
interest expense.

The effective tax (benefit) rate was (76.6), 30.8 and 31.5 percent in 2001,
2000 and 1999, respectively. Excluding the impact of merger, repositioning and
other charges and gains on our sales of non-strategic businesses and our
investment in AMP, the effective tax rate was 29.5, 29.5 and 31.5 percent in
2001, 2000 and 1999, respectively. The decrease in the effective tax rate in
2000 compared with 1999 related principally to tax synergies in Europe
associated with the merger of AlliedSignal Inc. and the former Honeywell. See
'Item 8. Financial Statements and Supplementary Data' in Note 9 of Notes to
Financial Statements for further information.

Net loss was $99 million, or $(0.12) per share, in 2001 compared with net
income of $1,659 million, or $2.05 per share, in 2000. Adjusted for
repositioning and other charges, net income in 2001 was $1,771 million, or $2.17
per share higher than reported. Adjusted for repositioning and other charges and
the gain on the disposition of the TCAS product line of the former Honeywell,
net income in 2000 was $634 million, or $0.78 per share higher than reported.
Net income in 2001 decreased by 27 percent compared with 2000 if both years are
adjusted to exclude the impact of repositioning and other charges and the gain
on the disposition of the TCAS product line of the former Honeywell. Net income
was $1,659 million, or $2.05 per share, in 2000 compared with net income of
$1,541 million, or $1.90 per share, in 1999. Adjusted for the gains on our
dispositions of our Laminate Systems business and our investment in AMP and
merger, repositioning and other charges, net income in 1999 was $624 million, or
$0.78 per share, higher than reported. Net income in 2000 increased by
6 percent compared with 1999 if both years are adjusted for merger,
repositioning and other charges and the gains on our dispositions of the TCAS
product line of the former Honeywell, our Laminate Systems business and our
investment in AMP.

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REVIEW OF BUSINESS SEGMENTS

A reconciliation of segment profit to consolidated income (loss) before
taxes is as follows:

See 'Item 8. Financial Statements and Supplementary Data' in Note 24 of Notes to
Financial Statements for further information on our reportable segments.

Aerospace sales in 2001 were $9,653 million, a decrease of $335 million, or
3 percent compared with 2000. This decrease principally reflected lower sales to
both commercial air transport aftermarket and original equipment customers and
the impact of prior year divestitures. Sales of original equipment to business
and general aviation customers were also lower. This decrease was partially
offset by higher aftermarket sales to business and general aviation customers.
Sales to the military were also moderately higher. The lower commercial sales
resulted from the abrupt downturn in the aviation industry following the
terrorist attacks on September 11, 2001 and the already weak economy. This
dramatic downturn in the commercial air transport industry will continue to
negatively impact the operating results of our Aerospace segment in 2002. In
response, we have accelerated our cost-reduction actions to mitigate the impact
of this downturn. Aerospace sales in 2000 were $9,988 million, an increase of
$80 million, or 1 percent compared with 1999. Higher sales to the aftermarket,
particularly repair and overhaul and the military, and increased original
equipment sales to business and general aviation customers were partially offset
by lower sales to commercial air transport original equipment customers and a
decline in engineering services revenues. Sales also decreased due to the
effects of government-mandated divestitures in connection with the merger of
AlliedSignal and the former Honeywell.

Aerospace segment profit in 2001 was $1,741 million, a decrease of $454
million, or 21 percent compared with 2000. This decrease related principally to
lower sales of higher-margin aftermarket products, higher retirement benefit
costs, engineering and development costs related to new products and the impact
of prior year divestitures. This decrease was partially offset by the impact of
cost-

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reduction actions, primarily workforce reductions. Aerospace segment profit in
2000 was $2,195 million, an increase of $277 million, or 14 percent compared
with 1999, due principally to cost-structure improvements, primarily from
workforce and retirement benefit cost reductions, and merger-related savings.
Increased sales of higher-margin aftermarket products and services also
contributed to the improvement in segment profit.

Automation and Control Solutions sales in 2001 were $7,185 million, a
decrease of $199 million, or 3 percent compared with 2000. Excluding the impact
of foreign exchange, acquisitions and divestitures, sales decreased
approximately 2 percent. This decrease resulted primarily from lower sales for
our Control Products business primarily due to weakness in key end-markets. Our
Service business also had lower sales due primarily to weakness in our security
monitoring business. This decrease was partially offset by higher sales for our
Industry Solutions business. Sales were also higher for our Security and Fire
Solutions business due principally to our acquisition of Pittway in the prior
year. Automation and Control Solutions sales in 2000 were $7,384 million, an
increase of $1,269 million, or 21 percent compared with 1999, due principally to
higher sales for our Security and Fire Solutions business due to our acquisition
of Pittway in February 2000. Sales for our Control Products business also
increased. This increase was partially offset by lower sales in our Service and
Industry Solutions businesses. Our Industry Solutions business was adversely
affected by weakness in the hydrocarbon processing industry. Sales for the
segment were also adversely impacted by foreign currency fluctuations due to the
strong dollar.

Automation and Control Solutions segment profit in 2001 was $819 million, a
decrease of $167 million, or 17 percent compared with 2000. This decrease
resulted principally from lower sales for our Control Products and Service
businesses, higher raw material costs and pricing pressures across the segment,
higher retirement benefit costs and the impact of prior year divestitures. This
decrease was partially offset by the impact of cost-reduction actions, primarily
workforce reductions. Automation and Control Solutions segment profit in 2000
was $986 million, an increase of $219 million, or 29 percent compared with 1999.
Segment profit improved primarily as a result of lower costs due to workforce
and benefit cost reductions and merger-related savings. Our acquisition of
Pittway and other portfolio changes also contributed to the improvement in
segment profit.

Specialty Materials sales in 2001 were $3,313 million, a decrease of $742
million, or 18 percent compared with 2000. Excluding the effect of divestitures,
sales decreased 13 percent. This decrease was driven by a substantial decline in
sales for our Electronic Materials business due to weakness in the electronics
and telecommunications markets. Sales were also lower for our Nylon System and
Performance Fibers businesses due to weakness in the carpet and automotive
end-markets. Specialty Materials sales in 2000 were $4,055 million, an increase
of $48 million, or 1 percent compared with 1999. Higher sales of advanced
circuitry and wafer-fabrication products were largely offset by the impact of
divestitures, principally our Laminate Systems business.

Specialty Materials segment profit in 2001 was $52 million, a decrease of
$282 million, or 84 percent compared with 2000. This decrease resulted primarily
from lower volumes and price declines, principally in our Electronic Materials,
Nylon System and Performance Fibers businesses. Higher energy and raw material
costs principally in our Nylon System and Performance Fibers businesses and the
impact of prior year divestitures also contributed to the decrease in segment
profit. By the end of 2001, we began to experience lower energy and raw
materials costs in these businesses. This decrease in segment profit was
partially offset by the impact of cost-reduction actions, principally plant
shutdowns and workforce reductions. Specialty Materials segment profit in 2000
was $334 million, a decrease of $105 million, or 24 percent compared with 1999.
This decrease principally reflected higher energy and raw material costs
primarily in our Nylon System and Performance Fibers businesses and higher
operating losses in our chip packaging and pharmaceutical chemicals businesses.
This decrease was partially offset by cost-structure improvements and price
increases in certain Specialty Materials businesses.

Transportation and Power Systems sales in 2001 were $3,457 million, a
decrease of $70 million, or 2 percent compared with 2000. Excluding the effects
of foreign exchange, acquisitions and divestitures, sales were flat. Sales were
significantly higher for our Garrett Engine Boosting Systems business due to
continued strong demand for turbochargers in the European diesel-powered

16

passenger car market. This increase was offset by lower sales for our Bendix
Commercial Vehicle Systems business due to decreased heavy-duty truck builds in
North America and lower sales for our Friction Materials and Consumer Products
Group businesses due to weakness in automotive end-markets. Transportation and
Power Systems sales in 2000 were $3,527 million, a decrease of $54 million, or
2 percent compared with 1999 due mainly to lower sales for our Bendix Commercial
Vehicle Systems and Friction Materials businesses. Sales for our Bendix
Commercial Vehicles Systems business were negatively impacted by decreased
heavy-duty truck builds. Sales for our Friction Materials business were lower
mainly due to foreign currency fluctuations. This decrease was partially offset
by higher sales for our Garrett Engine Boosting Systems business as continued
strong world-wide demand for turbochargers more than offset the adverse impact
of foreign currency fluctuations.

Transportation and Power Systems segment profit in 2001 was $289 million, an
increase of $15 million, or 5 percent compared with 2000 due to higher sales in
our Garrett Engine Boosting Systems business and the impact of repositioning
actions across all businesses. The shutdown of our Turbogenerator product line
in 2001 and the fact that the prior year included costs associated with a
product recall in our Bendix Commercial Vehicle Systems business also
contributed to an improvement in segment profit in 2001. This increase was
partially offset by the impact of lower sales in our Bendix Commercial Vehicle
Systems, Consumer Products Group and Friction Materials businesses.
Transportation and Power Systems segment profit in 2000 was $274 million, a
decrease of $48 million, or 15 percent compared with 1999. This decrease
primarily reflected costs associated with a product recall and lower sales in
our Bendix Commercial Vehicle Systems business, costs related to the ramp-up of
our Turbogenerator product line and costs associated with a supplier issue in
our Garrett Engine Boosting Systems business. This decrease was partially offset
by the effects of cost-structure improvements in our Friction Materials and
Consumer Products Group businesses and higher sales in our Garrett Engine
Boosting Systems business.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

We manage our businesses to maximize operating cash flows as the principal
source of our liquidity. We continuously assess the relative strength of each
business in our portfolio as to strategic fit, market position, profit and cash
flow contribution in order to upgrade our combined portfolio and identify
business units that will most benefit from increased investment. We identify
acquisition candidates that will further our strategic plan and strengthen our
existing core businesses. We also identify business units that do not fit into
our long-term strategic plan based on their market position, relative
profitability or growth potential. These business units are considered for
potential divestiture, restructuring or other repositioning actions subject to
regulatory constraints. Considering the current economic environment in which
each of our businesses operate and our business plans and strategies, including
our focus on cost reduction and productivity initiatives, we believe that our
operating cash flows will remain our principal source of liquidity. Our
available cash, committed credit lines, access to the public debt markets using
debt securities and commercial paper, as well as, our ability to sell trade
accounts receivables, provide additional sources of short-term and long-term
liquidity to fund current operations and future investment opportunities. Based
on our current financial position and expected economic performance, we do not
believe that our liquidity will be adversely impacted by an inability to access
our sources of financing.

Total assets at December 31, 2001 were $24,226 million, a decrease of $949
million, or 4 percent from December 31, 2000. Inventories and accounts
receivable were lower compared with the prior year-end driven by an improvement
in working capital performance. The decrease in total assets also resulted from
asset writedowns included in repositioning and other charges, which are
discussed in detail in 'Item 8. Financial Statements and Supplementary Data' in
Note 5 of Notes to Financial Statements. Total assets at December 31, 2000 were
$25,175 million, an increase of $1,648 million, or 7 percent from December 31,
1999. This increase related principally to our acquisition of Pittway in
February 2000.

Cash provided by operating activities of $1,996 million during 2001
increased by $7 million compared with 2000. This increase was driven by an
improvement in working capital performance offset by lower net income excluding
non-cash repositioning and other charges and gains on sales of

17

non-strategic businesses in both years. Cash provided by operating activities of
$1,989 million during 2000 decreased by $385 million compared with 1999 due
principally to spending related to merger and repositioning actions, a
deterioration in working capital performance and higher pension income. This
decrease was partially offset by lower taxes paid on sales of businesses and
investments and higher net income excluding non-cash merger, repositioning and
other charges and gains on sales of non-strategic businesses and our investment
in AMP in both years.

Cash used for investing activities of $906 million during 2001 decreased by
$1,808 million compared with 2000 due principally to our acquisition of Pittway
in 2000. This decrease was partially offset by lower proceeds from the sales of
businesses and property, plant and equipment and a slight increase in capital
spending. Cash used for investing activities of $2,714 million during 2000
increased by $2,423 million compared with 1999. Our acquisition of Pittway, the
fact that the prior year included the net proceeds from our disposition of our
investment in AMP and lower proceeds from sales of businesses were principally
responsible for the increase. This increase was partially offset by lower
capital spending in 2000.

Capital expenditures were $876, $853 and $986 million in 2001, 2000 and
1999, respectively. Spending by the reportable segments and Corporate since 1999
is shown in 'Item 8. Financial Statements and Supplementary Data' in Note 24 of
Notes to Financial Statements. Our total capital expenditures in 2002 are
currently projected at approximately $735 million. The expected decrease in
capital spending in 2002 principally reflects our intention to limit capital
spending at non-strategic businesses. These expenditures are expected to be
financed principally by cash provided by operating activities and are primarily
intended for expansion and cost reduction.

Cash used for financing activities of $893 million during 2001 increased by
$823 million compared with 2000. This increase resulted principally from reduced
long-term borrowings in the current year. During 2001, we issued $500 million of
5 1/8% Notes due 2006, $500 million of 6 1/8% Notes due 2011 and $247 million of
5.25% Notes due 2006. During 2000, we issued $1 billion of 7.50% Notes due 2010
and $750 million of 6.875% Notes due 2005. Total debt of $5,270 million at
December 31, 2001 was $353 million, or 6 percent lower than at December 31,
2000. This decrease resulted from lower levels of commercial paper outstanding
at the current year-end. The increase in cash used for financing activities also
resulted from lower proceeds from issuances of common stock partially offset by
lower repurchases of common stock. Cash used for financing activities of $70
million during 2000 decreased by $1,040 million compared with 1999 led
principally by a decrease in stock repurchases and higher net issuances of debt.
During 2000, we repurchased 4.3 million shares of our common stock for $166
million in connection with our share repurchase program which was rescinded
effective October 21, 2000. Total debt of $5,623 million at December 31, 2000
was $557 million, or 11 percent higher than at December 31, 1999 due to our
acquisition of Pittway.

We maintain a $2 billion bank revolving credit facility which is comprised
of (a) a $1 billion Five-Year Credit Agreement; and, (b) a $1 billion 364-Day
Credit Agreement. The credit agreements were established for general corporate
purposes including support for the issuance of commercial paper. There was $3
and $1,192 million of commercial paper outstanding at year-end 2001 and 2000,
respectively. See 'Item 8. Financial Statements and Supplementary Data' in
Note 16 of Notes to Financial Statements for details of long-term debt and a
discussion of our credit agreements.

Following are summaries of our contractual obligations and other commercial
commitments at December 31, 2001.

We have entered into agreements to lease land, equipment and buildings.
Principally all our operating leases have initial terms of up to 25 years and
some contain renewal options subject to customary conditions. At any time during
the terms of some of our leases, we may at our option purchase the leased assets
for amounts that approximate fair value. If we elect not to purchase the assets
at the end of each such lease, we have guaranteed the residual values of the
underlying assets (principally aircraft, equipment, buildings and land). We have
also issued or are party to various direct and indirect guarantees of the debt
of unconsolidated affiliates and third parties. The minimum operating lease
payments, residual value guarantees, and maximum amount of unconsolidated
affiliates and third party guarantees are reflected in the above table. We do
not expect that any of our commercial commitments will have a material adverse
effect on our consolidated results of operations, financial position or
liquidity.

MERGER, REPOSITIONING AND OTHER CHARGES

In 2001, we recognized a repositioning charge of $1,016 million for the
cost of actions designed to reduce our cost structure and improve our future
profitability. These actions consisted of announced global workforce reductions
of approximately 20,000 manufacturing and administrative positions across all of
our reportable segments of which approximately 15,000 positions have been
eliminated as of December 31, 2001. These actions are expected to be completed
by September 30, 2002. The repositioning charge also included asset impairments
and other exit costs related to plant closures and the rationalization of
manufacturing capacity and infrastructure, principally in our Specialty
Materials, Engines, Systems and Services and Transportation and Power Systems
businesses, including the shutdown of our Turbogenerator product line. The
components of the charge included severance costs of $727 million, asset
impairments of $194 million and other exit costs of $95 million consisting of
contract cancellations and penalties, including lease terminations, negotiated
or subject to reasonable estimation. Also, $119 million of previously
established accruals, mainly for severance, were returned to income in 2001 due
principally to higher than expected voluntary employee attrition resulting in
reduced severance liabilities, principally in our Aerospace and Automation and
Control Solutions reportable segments.

In 2000, we recognized a repositioning charge of $239 million related to
announced global workforce reductions across all of our reportable segments,
costs to close a chip package manufacturing plant and related workforce
reductions, and other asset impairments principally associated with the
completion of previously announced plant shut-downs in our Specialty Materials
reportable segment. The components of the repositioning charge included
severance costs of $151 million and asset impairments of $88 million. The
announced workforce reductions consisted of approximately 2,800 manufacturing
and administrative positions, which are complete. Asset impairments were
principally related to manufacturing plant and equipment held for sale and
capable of being taken out of service and actively marketed in the period of
impairment. Also, $46 million of previously established accruals, principally
for severance, were returned to income in 2000 due to higher than expected
voluntary employee attrition resulting in reduced severance liabilities,
principally in our Automation and Control Solutions and Aerospace reportable
segments. We also recognized a repositioning charge of $99 million in equity in
(income) loss of affiliated companies for costs to close an affiliate's chemical
manufacturing operations. The components of the repositioning charge included
severance costs of $6 million, asset impairments of $53 million, and other
environmental exit costs and period expenses of $40 million.

19

In 1999, upon completion of the merger between AlliedSignal and the former
Honeywell, we recognized a repositioning charge of $642 million for the cost of
actions designed to improve our combined competitiveness, productivity and
future profitability. The merger-related actions included the elimination of
redundant corporate offices and functional administrative overhead; elimination
of redundant and excess facilities and workforce in our combined aerospace
businesses; adoption of Six Sigma productivity initiatives at the former
Honeywell businesses; and, the transition to a global shared services model. The
components of the repositioning charge included severance costs of $342 million,
asset impairments of $108 million, other exit costs of $57 million and
merger-related transaction and period expenses of $135 million. Global workforce
reductions consisted of approximately 6,500 administrative and manufacturing
positions, which are complete. Asset impairments were principally related to the
elimination of redundant or excess corporate and aerospace facilities and
equipment. Other exit costs were related to lease terminations and contract
cancellation losses negotiated or subject to reasonable estimation at year-end.
Merger-related transaction and period expenses consisted of investment banking
and legal fees, former Honeywell deferred compensation vested upon change in
control and other direct merger-related expenses incurred in the period the
merger was completed. All merger-related actions are complete.

In 1999, we also recognized a repositioning charge of $321 million for the
cost of actions designed to reposition principally the AlliedSignal businesses
for improved productivity and future profitability. These actions included the
organizational realignment of our aerospace businesses to strengthen market
focus and simplify business structure; elimination of an unprofitable product
line, closing of a wax refinery and carbon materials plant and rationalization
of manufacturing capacity and infrastructure in our Specialty Materials
reportable segment; a reduction in the infrastructure in our Garrett Engine
Boosting Systems business; elimination of two manufacturing facilities in our
Electronic Materials business; a plant closure and outsourcing activity in our
automotive Consumer Products Group business; and related and general workforce
reductions in all AlliedSignal businesses and our Automation and Control
Solutions reportable segment. The components of the repositioning charge
included severance costs of $140 million, asset impairments of $149 million, and
other exit costs of $32 million. Global workforce reductions consisted of
approximately 5,100 manufacturing, administrative, and sales positions, which
are complete. Asset impairments were principally related to manufacturing plant
and equipment held for sale and capable of being taken out of service and
actively marketed in the period of impairment. Other exit costs principally
consisted of environmental exit costs associated with chemical plant shutdowns.
All repositioning actions, excluding environmental remediation, are complete.

These repositioning actions are expected to generate incremental pretax
savings of approximately $760 million in 2002 compared with 2001 principally
from planned workforce reductions and facility consolidations. Cash expenditures
for severance and other exit costs necessary to execute these actions were $422
and $344 million in 2001 and 2000, respectively. Such expenditures for severance
and other exit costs have been funded through operating cash flows, proceeds
from sales of non-strategic businesses and government required divestitures
resulting from the merger of AlliedSignal and the former Honeywell, and sale of
merger-related, excess or duplicate facilities and equipment. Cash expenditures
for severance and other exit costs necessary to execute the remaining 2001
actions will approximate $500 million in 2002 and will be funded principally
through operating cash flows.

In 2001, we recognized other charges consisting of a settlement of the
Litton Systems, Inc. litigation for $440 million (see 'Item 8. Financial
Statements and Supplementary Data' in Note 22 of Notes to Financial Statements
for further discussion), probable and reasonably estimable legal and
environmental claims of $408 million (see 'Item 8. Financial Statements and
Supplementary Data' in Note 22 of Notes to Financial Statements for further
discussion), customer claims and settlements of contract liabilities of $310
million and write-offs principally related to asset impairments, including
receivables and inventories, of $335 million. In 2001, we adopted a plan to
dispose of our Friction Materials business and held discussions with a potential
acquiror of the business. The Friction Materials business was designated as held
for disposal, and we recognized an impairment charge of $145 million related to
the write-down of property, plant and equipment, goodwill and other identifiable
intangible assets to their fair value less costs to sell. We recognized charges
of $112 million related to an other than temporary decline in the value of an
equity investment and an equity investee's loss

20

contract, and a $100 million charge for write-off of investments, including
inventory, related to a regional jet engine contract cancellation. We also
recognized $42 million of transaction expenses related to the proposed merger
with GE and redeemed our $200 million 5 3/4% dealer remarketable securities due
2011, resulting in a loss of $6 million.

In 2000, we identified certain business units and manufacturing facilities
as non-core to our business strategy. As a result of this assessment, we
implemented cost reduction initiatives and conducted discussions with potential
acquirors of these businesses and assets. As part of this process, we evaluated
the businesses and assets for possible impairment. As a result of our analysis,
we recognized impairment charges in 2000 of $245 and $165 million principally
related to the write-down of property, plant and equipment, goodwill and other
identifiable intangible assets of our Friction Materials business and a chemical
manufacturing facility, respectively. We recognized other charges consisting of
probable and reasonably estimable environmental liabilities of $87 million, and
contract claims, merger-related period expenses, other contingencies, and
write-offs of tangible assets removed from service, including inventory,
totaling $140 million. In addition, we recognized a charge of $37 million for
costs principally related to an equity investee's customer claims.

In 1999, we recognized other charges consisting of losses on aerospace
engine maintenance contracts and a contract cancellation penalty totaling $45
million, customer and employee claims of $69 million, contract settlements and
contingent liabilities of $18 million, and other write-offs principally related
to tangible and intangible assets removed from service, including inventory, of
$152 million. We also recognized a $36 million charge resulting from an other
than temporary decline in value of an equity investment due to a significant
deterioration in market conditions and a $4 million charge related to an equity
investee's severance action involving approximately 220 employees.

The following table summarizes the pretax impact of total merger,
repositioning and other charges by reportable business segment.

ENVIRONMENTAL MATTERS

We are subject to various federal, state and local government requirements
relating to the protection of employee health and safety and the environment. We
believe that, as a general matter, our policies, practices and procedures are
properly designed to prevent unreasonable risk of environmental damage and
personal injury to our employees and employees of our customers and that our
handling, manufacture, use and disposal of hazardous or toxic substances are in
accord with environmental laws and regulations. However, mainly because of past
operations and operations of predecessor companies, we, like other companies
engaged in similar businesses, have incurred remedial response and voluntary
cleanup costs for site contamination and are a party to lawsuits and claims
associated with environmental matters, including past production of products
containing toxic substances. Additional lawsuits, claims and costs involving
environmental matters are likely to continue to arise in the future.

With respect to environmental matters involving site contamination, we
continually conduct studies, individually at our owned sites, and jointly as a
member of industry groups at non-owned sites, to determine the feasibility of
various remedial techniques to address environmental matters. With respect to
environmental matters involving the production of products containing toxic
substances, we believe that the costs of defending and resolving such matters
will be largely covered by insurance, subject to deductibles, exclusions,
retentions and policy limits. It is our policy (see 'Item 8. Financial
Statements and Supplementary Data' in Note 1 of Notes to Financial Statements)
to record appropriate liabilities

21

for environmental matters when environmental assessments are made or remedial
efforts or damage claim payments are probable and the costs can be reasonably
estimated. With respect to site contamination, the timing of these accruals is
generally no later than the completion of feasibility studies. We expect that we
will be able to fund expenditures for these matters from operating cash flow.
The timing of cash expenditures depends on a number of factors, including the
timing of litigation and settlements of personal injury and property damage
claims, insurance recoveries, regulatory approval of cleanup projects, remedial
techniques to be utilized and agreements with other parties.

Remedial response and voluntary cleanup expenditures were $82, $75 and $78
million in 2001, 2000 and 1999, respectively, and are currently estimated to be
approximately $77 million in 2002. We expect that we will be able to fund such
expenditures from operating cash flow.

Remedial response and voluntary cleanup costs charged against pretax
earnings were $152, $110 and $23 million in 2001, 2000 and 1999, respectively.
At December 31, 2001 and 2000, the recorded liability for environmental matters
was $456 and $386 million, respectively. In addition, in 2001 and 2000 we
incurred operating costs for ongoing businesses of approximately $75 and $80
million, respectively, relating to compliance with environmental regulations.

Although we do not currently possess sufficient information to reasonably
estimate the amounts of liabilities to be recorded upon future completion of
studies, litigation or settlements, and neither the timing nor the amount of the
ultimate costs associated with environmental matters can be determined, they
could be material to our consolidated results of operations. However,
considering our past experience, insurance coverage and reserves, we do not
expect that environmental matters will have a material adverse effect on our
consolidated financial position.

See 'Item 8. Financial Statements and Supplementary Data' in Note 5 of Notes
to Financial Statements for a discussion of our legal and environmental charges
and in Note 22 of Notes to Financial Statements for a discussion of our
commitments and contingencies, including those related to environmental matters
and toxic tort litigation.

FINANCIAL INSTRUMENTS

As a result of our global operating and financing activities, we are exposed
to market risks from changes in interest and foreign currency exchange rates and
commodity prices, which may adversely affect our operating results and financial
position. We minimize our risks from interest and foreign currency exchange rate
and commodity price fluctuations through our normal operating and financing
activities and, when deemed appropriate, through the use of derivative financial
instruments. We do not use derivative financial instruments for trading or other
speculative purposes and do not use leveraged derivative financial instruments.
A summary of our accounting policies for derivative financial instruments is
included in 'Item 8. Financial Statements and Supplementary Data' in Note 1 of
Notes to Financial Statements.

We conduct our business on a multinational basis in a wide variety of
foreign currencies. Our exposure to market risk for changes in foreign currency
exchange rates arises from international financing activities between
subsidiaries, foreign currency denominated monetary assets and liabilities and
anticipated transactions arising from international trade. Our objective is to
preserve the economic value of cash flows in non-functional currencies. We
attempt to have all transaction exposures hedged with natural offsets to the
fullest extent possible and, once these opportunities have been exhausted,
through foreign currency forward and option agreements with third parties. Our
principal currency exposures relate to the Euro countries, the British pound,
the Canadian dollar, and the U.S. dollar.

Our exposure to market risk from changes in interest rates relates primarily
to our debt obligations. As described in 'Item 8. Financial Statements and
Supplementary Data' in Notes 16 and 18 of Notes to Financial Statements, we
issue both fixed and variable rate debt and use interest rate swaps to manage
our exposure to interest rate movements and reduce overall borrowing costs.

Financial instruments, including derivatives, expose us to counterparty
credit risk for nonperformance and to market risk related to changes in interest
or currency exchange rates. We manage our exposure to counterparty credit risk
through specific minimum credit standards, diversification of counterparties,
and procedures to monitor concentrations of credit risk. Our counterparties are

22

substantial investment and commercial banks with significant experience using
such derivative instruments. We monitor the impact of market risk on the fair
value and cash flows of our derivative and other financial instruments
considering reasonably possible changes in interest and currency exchange rates
and restrict the use of derivative financial instruments to hedging activities.

The following table illustrates the potential change in fair value for
interest rate sensitive instruments based on a hypothetical immediate
one-percentage-point increase in interest rates across all maturities, the
potential change in fair value for foreign exchange rate sensitive instruments
based on a 10 percent increase in U.S. dollar per local currency exchange rates
across all maturities, and the potential change in fair value of contracts
hedging commodity purchases based on a 20 percent decrease in the price of the
underlying commodity across all maturities at December 31, 2001 and 2000.

- ---------

(1) Asset or (liability).

(2) Excludes capitalized leases.

(3) Changes in the fair value of foreign currency exchange contracts are offset
by changes in the fair value or cash flows of underlying hedged foreign
currency transactions.

(4) Changes in the fair value of forward commodity contracts are offset by
changes in the cash flows of underlying hedged commodity transactions.

The above discussion of our procedures to monitor market risk and the estimated
changes in fair value resulting from our sensitivity analyses are
forward-looking statements of market risk assuming certain adverse market
conditions occur. Actual results in the future may differ materially from these
estimated results due to actual developments in the global financial markets.
The methods used by us to assess and mitigate risk discussed above should not be
considered projections of future events.

OTHER MATTERS

LITIGATION

See 'Item 8. Financial Statements and Supplementary Data' in Note 22 of
Notes to Financial Statements for a discussion of litigation matters.

CRITICAL ACCOUNTING POLICIES

The preparation of our consolidated financial statements in conformity with
generally accepted accounting principles requires management to make complex and
subjective judgments in the selection and application of accounting policies.
'Item 8. Financial Statements and Supplementary

23

Data' in Note 1 of Notes to Financial Statements contains a detailed summary of
our significant accounting policies. We believe that a number of our accounting
policies are critical to understanding our financial position and results of
operations. Following is a summary of those accounting policies that we believe
are our critical accounting policies, the judgments and uncertainties affecting
the application of those policies, and the likelihood that materially different
amounts would be reported under different conditions or using different
assumptions.

SALES RECOGNITION -- Product and service sales are recognized when an
agreement of sale exists, product delivery has occurred or services have been
rendered, pricing is fixed or determinable, and collection is reasonably
assured. Sales under long-term contracts in the Aerospace and Automation and
Control Solutions segments are recorded on a 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.

We apply judgment to ensure that the criteria for recognizing sales are
consistently applied and achieved for all recognized sales transactions. Upon
recognizing long-term contract sales, judgment must be applied to ensure that
anticipated losses are properly recognized in the period that they become
evident. Long-term contract loss experience is dependent upon the economic
health of our customers who are principally in the Aerospace and Automation and
Control segments, as well as our ability to estimate contract cost inputs and
perform according to contract terms and conditions. We believe that all relevant
conditions and assumptions are considered when recognizing sales and contract
losses.

ACCOUNTING FOR CONTINGENT LIABILITIES -- We are subject to a number of
lawsuits, investigations and claims (some of which involve substantial dollar
amounts) that arise out of the conduct of our global business operations. These
contingencies relate to commercial transactions, government contracts, product
liabilities, and environmental health and safety matters. As enumerated in 'Item
8. Financial Statements and Supplementary Data' in Notes 1 and 22 of Notes to
Financial Statements, we recognize a liability for any contingency that is
probable of occurrence and reasonably estimable based on our judgment. Although
it is impossible to predict the outcome of any lawsuit, investigation or claim,
'Item 8. Financial Statements and Supplementary Data' in Note 22 of Notes to
Financial Statements provides a summary of all material contingencies currently
pending against us and our expectations related to the financial outcome of each
contingency.

LONG-LIVED ASSETS (INCLUDING TANGIBLE AND INTANGIBLE ASSETS AND GOODWILL) --
To conduct our global business operations and execute our strategy, we acquire
tangible and intangible assets. We periodically evaluate the recoverability of
the carrying amount of our long-lived assets (including property, plant and
equipment, goodwill and other intangible assets) whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be fully
recoverable. An impairment is assessed when the undiscounted expected future
cash flows derived from an asset are less than its carrying amount. Impairment
losses are measured as the amount by which the carrying value of an asset
exceeds its fair value and are recognized in operating earnings. We continually
apply our best judgment when applying these impairment rules to determine the
timing of the impairment test, the undiscounted cash flows used to assess
impairments, and the fair value of an impaired asset. The dynamic economic
environment in which each of our businesses operate and the resulting
assumptions used to estimate future cash flows impact the outcome of all
impairment tests.

PENSION AND OTHER POSTRETIREMENT BENEFITS -- We maintain pension plans
covering a majority of our employees and retirees, and postretirement benefit
plans for retirees that include health care benefits and life insurance coverage
(see 'Item 8. Financial Statements and Supplementary Data' in Note 23 of Notes
to Financial Statements for additional details). For financial reporting
purposes, net periodic pension and other postretirement benefit costs (income)
are calculated based upon a number of actuarial assumptions including a discount
rate for plan obligations, assumed rate of return on pension plan assets,
assumed annual rate of compensation increase for plan employees, and an annual
rate of increase in the per capita costs of covered postretirement healthcare
benefits. Each of these assumptions is based upon our judgment, considering all
known trends and uncertainties. Actual asset returns for our pension plans
significantly below our assumed rate of return would result in lower

24

net periodic pension income (or higher expense) in future years. Actual annual
rates of increase in the per capita costs of covered postretirement healthcare
benefits above assumed rates of increase would result in higher net periodic
postretirement benefit costs in future years.

EURO CONVERSION

On January 1, 1999, certain member countries of the European Union
established fixed conversion rates between their existing currencies and the
European Union's common currency (Euro). The transition period for the
introduction of the Euro was between January 1, 1999 and January 1, 2002. We are
ensuring that Euro conversion compliance issues are addressed and do not expect
any adverse consequences.

SALES TO THE U.S. GOVERNMENT

Sales to the U.S. Government, acting through its various departments and
agencies and through prime contractors, amounted to $2,491, $2,219 and $2,383
million in 2001, 2000 and 1999, respectively. This included sales to the
Department of Defense (DoD), as a prime contractor and subcontractor, of $1,631,
$1,548 and $1,415 million in 2001, 2000 and 1999, respectively. Sales to the DoD
accounted for 6.9, 6.2 and 6.0 percent of our total sales in 2001, 2000 and
1999, respectively. We are affected by U.S. Government budget constraints for
defense and space programs. U.S. defense spending increased in 2001 and is also
expected to increase in 2002.

BACKLOG

Our total backlog at year-end 2001 and 2000 was $7,178 and $8,094 million,
respectively. We anticipate that approximately $5,375 million of the 2001
backlog will be filled in 2002. We believe that backlog is not necessarily a
reliable indicator of our future sales because a substantial portion of the
orders constituting this backlog may be canceled at the customer's option.

INFLATION

Highly competitive market conditions have minimized inflation's impact on
the selling prices of our products and the costs of our purchased materials.
Cost increases for materials and labor have generally been low, and productivity
enhancement programs, including Six Sigma initiatives, have largely offset any
impact.

RECENT ACCOUNTING PRONOUNCEMENTS

See 'Item 8. Financial Statements and Supplementary Data' in Note 1 of Notes
to Financial Statements for a discussion of recent accounting pronouncements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information relating to market risk is included in 'Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations' under
the caption 'Financial Instruments.'

25

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

HONEYWELL INTERNATIONAL INC.
CONSOLIDATED STATEMENT OF OPERATIONS

The Notes to Financial Statements are an integral part of this statement.

26

HONEYWELL INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEET

The Notes to Financial Statements are an integral part of this statement.

27

HONEYWELL INTERNATIONAL INC.
CONSOLIDATED STATEMENT OF CASH FLOWS

The Notes to Financial Statements are an integral part of this statement.

28

HONEYWELL INTERNATIONAL INC.
CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY

The Notes to Financial Statements are an integral part of this statement.

29

HONEYWELL INTERNATIONAL INC.

NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

HONEYWELL INTERNATIONAL INC. is a diversified technology and manufacturing
company, serving customers worldwide with aerospace products and services,
control technologies for buildings, homes and industry, automotive products,
specialty chemicals, fibers, plastics and electronic and advanced materials. As
described in Note 2, Honeywell International Inc. was formed upon the merger of
AlliedSignal Inc. and Honeywell Inc. in 1999. The following is a description of
the significant accounting policies of Honeywell International Inc.

PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include
the accounts of Honeywell International Inc. and all of its subsidiaries in
which a controlling interest is maintained. All intercompany transactions and
balances are eliminated in consolidation.

INVENTORIES -- Inventories are valued at the lower of cost or market using
the first-in, first-out or the average cost method and the last-in, first-out
(LIFO) method for certain qualifying domestic inventories.

INVESTMENTS -- Investments in affiliates over which we have a significant
influence, but not a controlling interest, are accounted for using the equity
method of accounting. Other investments are carried at market value, if readily
determinable, or cost. All equity investments are periodically reviewed to
determine if declines in fair value below cost basis are other-than-temporary.
Significant and sustained decreases in quoted market prices and a series of
historic and projected operating losses by investees are considered in the
review. If the decline in fair value is determined to be other-than-temporary,
an impairment loss is recorded and the investment is written down to a new cost
basis.

PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment are recorded
at cost less accumulated depreciation. For financial reporting, the straight-
line method of depreciation is used over the estimated useful lives of 10 to
40 years for buildings and improvements and 3 to 15 years for machinery
and equipment.

GOODWILL -- Goodwill represents the excess of acquisition costs over the
fair value of net assets of businesses acquired and is amortized on a
straight-line basis over appropriate periods up to 40 years. Accumulated
amortization was $1,148 and $974 million at December 31, 2001 and 2000,
respectively.

OTHER INTANGIBLE ASSETS -- Other intangible assets include investments in
long-term contracts, patents, trademarks, customer lists and other items
amortized on a straight-line basis over the expected period benefited by future
cash inflows up to 25 years. Accumulated amortization was $548 and $498 million
at December 31, 2001 and 2000, respectively.

LONG-LIVED ASSETS -- We periodically evaluate the recoverability of the
carrying amount of long-lived assets (including property, plant and equipment,
goodwill and other intangible assets) whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be fully
recoverable. An impairment is assessed when the undiscounted expected future
cash flows derived from an asset are less than its carrying amount. Impairment
losses are measured as the amount by which the carrying value of an asset
exceeds its fair value and are recognized in operating earnings. We also
continually evaluate the estimated useful lives of all long-lived assets and
periodically revise such estimates based on current events.

SALES RECOGNITION -- Product and service sales are recognized when an
agreement of sale exists, product delivery has occurred or services have been
rendered, pricing is fixed or determinable, and collection is reasonably
assured. Sales under long-term contracts in the Aerospace and Automation and
Control Solutions segments are recorded on a 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.

30

HONEYWELL INTERNATIONAL INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

ENVIRONMENTAL EXPENDITURES -- Environmental expenditures that relate to
current operations are expensed or capitalized as appropriate. Expenditures that
relate to an existing condition caused by past operations, and that do not
provide future benefits, are expensed as incurred. Liabilities are recorded when
environmental assessments are made or remedial efforts are probable and the
costs can be reasonably estimated. The timing of these accruals is generally no
later than the completion of feasibility studies. The liabilities for
environmental costs recorded in Accrued Liabilities and Other Liabilities at
December 31, 2001 were $81 and $375 million, respectively, and at December 31,
2000 were $171 and $215 million, respectively.

FOREIGN CURRENCY TRANSLATION -- Assets and liabilities of subsidiaries
operating outside the United States with a functional currency other than U.S.
dollars are translated into U.S. dollars using year-end exchange rates. Sales,
costs and expenses are translated at the average exchange rates effective during
the year. Foreign currency translation gains and losses are included as a
component of Accumulated Other Nonowner Changes. For subsidiaries operating in
highly inflationary environments, inventories and property, plant and equipment,
including related expenses, are remeasured at the exchange rate in effect on the
date the assets were acquired, while monetary assets and liabilities are
remeasured at year-end exchange rates. Remeasurement adjustments for these
operations are included in earnings.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES -- Statement of Financial
Accounting Standards No. 133, 'Accounting for Derivative Instruments and Hedging
Activities', as amended (SFAS No. 133), is effective January 1, 2001. Under SFAS
No. 133, all derivatives are recorded on the balance sheet as assets or
liabilities and measured at fair value. For derivatives designated as hedges of
the fair value of assets or liabilities, the changes in fair values of both the
derivatives and the hedged items are recorded in current earnings. For
derivatives designated as cash flow hedges, the effective portion of the changes
in fair value of the derivatives are recorded in Accumulated Other Nonowner
Changes and subsequently recognized in earnings when the hedged items impact
income. Changes in the fair value of derivatives not designated as hedges and
the ineffective portion of cash flow hedges are recorded in current earnings.

Our adoption of SFAS No. 133 as of January 1, 2001 resulted in a cumulative
effect adjustment of $1 million of income that is included in Other (Income)
Expense. This accounting change impacts only the pattern and timing of non-cash
accounting recognition for derivatives and did not significantly impact 2001
operating results.

TRANSFERS OF FINANCIAL INSTRUMENTS -- Sales, transfers and securitization of
financial instruments are accounted for under Statement of Financial Accounting
Standards No. 140, 'Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities.' We sell interests in designated pools of
trade accounts receivables to a third party. The receivables are removed from
the Consolidated Balance Sheet at the time they are sold. The value assigned to
undivided interests retained in trade receivables sold is based on the relative
fair values of the interests retained and sold. The carrying value of the
retained interests approximates fair value due to the short-term nature of the
receivable collection period.

INCOME TAXES -- Deferred tax liabilities or assets reflect temporary
differences between amounts of assets and liabilities for financial and tax
reporting. Such amounts are adjusted, as appropriate, to reflect changes in tax
rates expected to be in effect when the temporary differences reverse. A
valuation allowance is established for any deferred tax asset for which
realization is not likely.

RESEARCH AND DEVELOPMENT -- Research and development costs for company-
sponsored research and development projects are expensed as incurred. Such
costs are classified as part of Cost of Goods Sold and were $832, $818 and
$909 million in 2001, 2000 and 1999, respectively.

EARNINGS PER SHARE -- Basic earnings per share is based on the weighted
average number of common shares outstanding. Diluted earnings per share is based
on the weighted average number of

31

HONEYWELL INTERNATIONAL INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

common shares outstanding and all dilutive potential common shares outstanding.
All earnings per share data in this report reflect earnings per share --
assuming dilution, unless otherwise indicated.

CASH AND CASH EQUIVALENTS -- Cash and cash equivalents includes cash on hand
and on deposit and highly liquid, temporary cash investments with an original
maturity of three months or less.

USE OF ESTIMATES -- The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts in the financial
statements and related disclosures in the accompanying notes. Actual results
could differ from those estimates. Estimates and assumptions are periodically
reviewed and the effects of revisions are reflected in the consolidated
financial statements in the period they are determined to be necessary.

RECENT ACCOUNTING PRONOUNCEMENTS -- In August 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
144, 'Accounting for the Impairment or Disposal of Long-Lived Assets' (SFAS No.
144), the provisions of which are effective for us on January 1, 2002. SFAS No.
144 provides guidance on the accounting and reporting for the impairment or
disposal of long-lived assets. The adoption of the provisions of SFAS No. 144
will not have a material effect on our consolidated results of operations and
financial position.

In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, 'Accounting for Asset Retirement Obligations' (SFAS No. 143), the
provisions of which are effective for us on January 1, 2003. SFAS No. 143
requires entities to recognize the fair value of a liability for tangible
long-lived asset retirement obligations in the period incurred, if a reasonable
estimate of fair value can be made. We are currently evaluating the effect that
the adoption of the provisions of SFAS No. 143 will have on our consolidated
results of operations and financial position.

In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, 'Business Combinations' (SFAS No. 141), and Statement of Financial
Accounting Standards No. 142, 'Goodwill and Other Intangible Assets' (SFAS
No. 142). SFAS No. 141 requires that all business combinations initiated after
June 30, 2001 be accounted for using the purchase method only and that certain
acquired intangible assets in a business combination be recognized as assets
apart from goodwill. We adopted SFAS No. 141 in 2001, which did not have a
material impact on our consolidated results of operations and financial
condition. SFAS No. 142 requires that goodwill and certain other intangible
assets having indefinite lives no longer be amortized to income, but instead be
replaced with periodic testing for impairment. Intangible assets determined to
have definite lives will continue to be amortized over their useful lives. The
amortization and non-amortization provisions of SFAS No. 142 have been applied
to any goodwill and intangible assets acquired after June 30, 2001. With respect
to goodwill and intangible assets acquired prior to July 1, 2001, we are
required to adopt SFAS No. 142 effective January 1, 2002. We are currently
evaluating the effect, if any, of the application of the goodwill impairment
provisions of SFAS No. 142 on our consolidated results of operations and
financial condition. In 2001, amortization expense for goodwill and other
intangible assets having indefinite lives was approximately $196 million after
tax, or $0.24 per share.

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

NOTE 2 -- ALLIEDSIGNAL - HONEYWELL MERGER

On December 1, 1999, AlliedSignal Inc. (AlliedSignal) and Honeywell Inc.
(former Honeywell) completed a merger under an Agreement and Plan of Merger
(Merger Agreement) dated as of June 4, 1999. Under the Merger Agreement, a
wholly-owned subsidiary of AlliedSignal merged with and into the former
Honeywell. As a result of the merger, the former Honeywell became a wholly-owned

32

HONEYWELL INTERNATIONAL INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

subsidiary of AlliedSignal. At the effective time of the merger AlliedSignal was
renamed Honeywell International Inc. (Honeywell).

The former Honeywell shareowners received 1.875 shares of Honeywell common
stock for each share of the former Honeywell common stock with cash paid in lieu
of any fractional shares. As a result, former Honeywell shareowners received
approximately 241 million shares of Honeywell common stock valued at
approximately $15 billion at the merger date. In addition, outstanding former
Honeywell employee stock options were converted at the same exchange factor into
options to purchase approximately 10 million shares of Honeywell common stock.

The merger qualified as a tax-free reorganization and was accounted for
under the pooling-of-interests accounting method. Accordingly, Honeywell's
consolidated financial statements have been restated for all periods prior to
the merger to include the results of operations, financial position and cash
flows of the former Honeywell as though it had always been a part of Honeywell.

There were no material transactions between AlliedSignal and the former
Honeywell prior to the merger, and there were no material adjustments to conform
the accounting policies of the combining companies.

The net sales and net income previously reported by the separate companies
and the combined amounts presented in the accompanying Consolidated Statement of
Operations were as follows:

As described in Note 5, fees and expenses related to the merger and costs to
integrate the combined companies were expensed in the fourth quarter of 1999.

NOTE 3 -- ACQUISITIONS

In addition to the pooling-of-interests transaction discussed in Note 2, we
acquired businesses for an aggregate cost of $122, $2,646 and $1,314 million in
2001, 2000 and 1999, respectively. The following table presents information
about the more significant acquisitions (there were no significant acquisitions
in 2001):

(footnotes on next page)

33

HONEYWELL INTERNATIONAL INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

(footnotes from previous page)

(1) Pittway Corporation designs, manufactures and distributes security and fire
systems for homes and buildings.

(2) Johnson Matthey Electronics supplies wafer fabrication materials and
interconnect products to the electronics and telecommunications industries.

(3) TriStar Aerospace Co. distributes fasteners, fastening systems and related
hardware and provides customized inventory management services to original
equipment manufacturers of aircraft and aircraft components, commercial
airlines and aircraft maintenance, repair and overhaul facilities.

All the acquisitions were accounted for under the purchase method of
accounting, and accordingly, the assets and liabilities of the acquired
businesses were 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, of $42, $1,678 and $678 million in 2001, 2000 and 1999,
respectively, was recorded as goodwill and is being amortized over estimated
useful lives. In connection with these acquisitions the amounts recorded for
transaction costs and the costs of integrating the acquired businesses into
Honeywell were not material. The results of operations of the acquired
businesses have been included in the consolidated results of Honeywell from
their respective acquisition dates. The pro forma results for 2001, 2000 and
1999, assuming these acquisitions had been made at the beginning of the year,
would not be materially different from reported results.

NOTE 4 -- HONEYWELL-GENERAL ELECTRIC MERGER

On October 22, 2000, Honeywell and General Electric Company (GE) entered
into an Agreement and Plan of Merger (Merger Agreement) providing for a business
combination between Honeywell and GE. On July 3, 2001, the European Commission
issued its decision prohibiting the proposed merger. Approval by the European
Commission was a condition for completion of the merger. On October 2, 2001,
Honeywell and GE terminated the Merger Agreement by mutual consent and released
each other from claims arising out of the Merger Agreement.

NOTE 5 -- MERGER, REPOSITIONING AND OTHER CHARGES

In 2001, we recognized a repositioning charge of $1,016 million for the
cost of actions designed to reduce our cost structure and improve our future
profitability. These actions consisted of announced global workforce reductions
of approximately 20,000 manufacturing and administrative positions across all of
our reportable segments of which approximately 15,000 positions have been
eliminated as of December 31, 2001. These actions are expected to be completed
by September 30, 2002. The repositioning charge also included asset impairments
and other exit costs related to plant closures and the rationalization of
manufacturing capacity and infrastructure, principally in our Specialty
Materials, Engines, Systems and Services and Transportation and Power Systems
businesses, including the shutdown of our Turbogenerator product line. The
components of the charge included severance costs of $727 million, asset
impairments of $194 million and other exit costs of $95 million consisting of
contract cancellations and penalties, including lease terminations, negotiated
or subject to reasonable estimation. Also, $119 million of previously
established accruals, mainly for severance, were returned to income in 2001 due
principally to higher than expected voluntary employee attrition resulting in
reduced severance liabilities, principally in our Aerospace and Automation and
Control Solutions reportable segments.

In 2000, we recognized a repositioning charge of $239 million related to
announced global workforce reductions across all of our reportable segments,
costs to close a chip package manufacturing plant and related workforce
reductions, and other asset impairments principally associated with the
completion of previously announced plant shut-downs in our Specialty Materials

34

HONEYWELL INTERNATIONAL INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

reportable segment. The components of the repositioning charge included
severance costs of $151 million and asset impairments of $88 million. The
announced workforce reductions consisted of approximately 2,800 manufacturing
and administrative positions, which are complete. Asset impairments were
principally related to manufacturing plant and equipment held for sale and
capable of being taken out of service and actively marketed in the period of
impairment. Also, $46 million of previously established accruals, principally
for severance, were returned to income in 2000 due to higher than expected
voluntary employee attrition resulting in reduced severance liabilities,
principally in our Automation and Control Solutions and Aerospace reportable
segments. We also recognized a repositioning charge of $99 million in equity in
(income) loss of affiliated companies for costs to close an affiliate's chemical
manufacturing operations. The components of the repositioning charge included
severance costs of $6 million, asset impairments of $53 million, and other
environmental exit costs and period expenses of $40 million.

In 1999, upon completion of the merger between AlliedSignal and the former
Honeywell, we recognized a repositioning charge of $642 million for the cost of
actions designed to improve our combined competitiveness, productivity and
future profitability. The merger-related actions included the elimination of
redundant corporate offices and functional administrative overhead; elimination
of redundant and excess facilities and workforce in our combined aerospace
businesses; adoption of Six Sigma productivity initiatives at the former
Honeywell businesses; and, the transition to a global shared services model. The
components of the repositioning charge included severance costs of
$342 million, asset impairments of $108 million, other exit costs of
$57 million and merger-related transaction and period expenses of $135 million.
Global workforce reductions consisted of approximately 6,500 administrative and
manufacturing positions, which are complete. Asset impairments were principally
related to the elimination of redundant or excess corporate and aerospace
facilities and equipment. Other exit costs were related to lease terminations
and contract cancellation losses negotiated or subject to reasonable estimation
at year-end. Merger-related transaction and period expenses consisted of
investment banking and legal fees, former Honeywell deferred compensation vested
upon change in control and other direct merger-related expenses incurred in the
period the merger was completed. All merger-related actions are complete.

In 1999, we also recognized a repositioning charge of $321 million for the
cost of actions designed to reposition principally the AlliedSignal businesses
for improved productivity and future profitability. These repositioning actions
included the organizational realignment of our aerospace businesses to
strengthen market focus and simplify business structure; elimination of an
unprofitable product line, closing of a wax refinery and carbon materials plant
and rationalization of manufacturing capacity and infrastructure in our
Specialty Materials reportable segment; a reduction in the infrastructure in our
Garrett Engine Boosting Systems business; elimination of two manufacturing
facilities in our Electronic Materials business; a plant closure and outsourcing
activity in our automotive Consumer Products Group business; and related and
general workforce reductions in all AlliedSignal businesses and our Automation
and Control Solutions reportable segment. The components of the repositioning
charge included severance costs of $140 million, asset impairments of
$149 million, and other exit costs of $32 million. Global workforce reductions
consisted of approximately 5,100 manufacturing, administrative, and sales
positions, which are complete. Asset impairments were principally related to
manufacturing plant and equipment held for sale and capable of being taken out
of service and actively marketed in the period of impairment. Other exit costs
principally consisted of environmental exit costs associated with chemical plant
shutdowns. All repositioning actions, excluding environmental remediation, are
complete.

35

HONEYWELL INTERNATIONAL INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

The following table summarizes the status of our total merger and
repositioning costs.

In 2001, we recognized other charges consisting of a settlement of the
Litton Systems, Inc. litigation for $440 million (see Note 22 for further
discussion), probable and reasonably estimable legal and environmental claims of
$408 million (see Note 22 for further discussion), customer claims and
settlements of contract liabilities of $310 million and write-offs principally
related to asset impairments, including receivables and inventories, of $335
million. In 2001, we adopted a plan to dispose of our Friction Materials
business and held discussions with a potential acquiror of the business. The
Friction Materials business was designated as held for disposal, and we
recognized an impairment charge of $145 million related to the write-down of
property, plant and equipment, goodwill and other identifiable intangible assets
to their fair value less costs to sell. We recognized charges of $112 million
related to an other than temporary decline in the value of an equity investment
and an equity investee's loss contract and a $100 million charge for write-off
of investments, including inventory, related to a regional jet engine contract
cancellation. We also recognized $42 million of transaction expenses related to
the proposed merger with GE and redeemed our $200 million 5 3/4% dealer
remarketable securities due 2011, resulting in a loss of $6 million.

In 2000, we identified certain business units and manufacturing facilities
as non-core to our business strategy. As a result of this assessment, we
implemented cost reduction initiatives and conducted discussions with potential
acquirors of these businesses and assets. As part of this process, we evaluated
the businesses and assets for possible impairment. As a result of our analysis,
we recognized impairment charges in 2000 of $245 and $165 million principally
related to the write-down of property, plant and equipment, goodwill and other
identifiable intangible assets of our Friction Materials business and a chemical
manufacturing facility, respectively. We recognized other charges consisting of
probable and reasonably estimable environmental liabilities of $87 million, and
contract claims, merger-related period expenses, other contingencies, and
write-offs of tangible assets removed from service, including inventory,
totaling $140 million. In addition, we recognized a charge of $37 million for
costs principally related to an equity investee's customer claims.

In 1999, we recognized other charges consisting of losses on aerospace
engine maintenance contracts and a contract cancellation penalty totaling $45
million, customer and employee claims of $69 million, contract settlements and
contingent liabilities of $18 million, and other write-offs principally related
to tangible and intangible assets removed from service, including inventory, of
$152 million. We also recognized a $36 million charge resulting from an other
than temporary decline in value of an equity investment due to a significant
deterioration in market conditions and a $4 million charge related to an equity
investee's severance action involving approximately 220 employees.

36

HONEYWELL INTERNATIONAL INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

The following table summarizes the pretax impact of total merger,
repositioning and other charges by reportable business segment.

The following table summarizes the pretax distribution of total merger,
repositioning and other charges by income statement classification.

NOTE 6 -- GAIN ON SALE OF NON-STRATEGIC BUSINESSES

In 2001 Bendix Commercial Vehicle Systems (BCVS) was designated as held for
disposal, and in January 2002, we reached an agreement in principle with
Knorr-Bremse AG (Knorr) to transfer our global interests in BCVS to Knorr. The
transfer is expected to be completed in the first quarter of 2002. At
December 31, 2001, the assets of BCVS of approximately $173 million were
classified in Other Current Assets. BCVS had sales and segment profit of
approximately $375 and $57 million, respectively, in 2001.

In 2000, as a result of a government mandate in connection with the merger
of AlliedSignal and the former Honeywell, we sold the TCAS product line of the
former Honeywell. We received approximately $215 million in cash resulting in a
pretax gain of $112 million. The TCAS product line had annual sales of
approximately $100 million.

In 1999, we sold our Laminate Systems business for approximately $425
million in cash resulting in a pretax gain of $106 million. The Laminate Systems
business had annual sales of about $400 million.

NOTE 7 -- OTHER (INCOME) EXPENSE

In April 1999, we reached an agreement with Tyco International Ltd. (Tyco)
and AMP Incorporated (AMP), settling AMP's claim to the gain we would realize on
the disposition of our investment in AMP common stock. We made a payment to AMP
of $50 million, and the parties released all claims that they had against each
other relating to AMP. Subsequently, we converted our investment in AMP

37

HONEYWELL INTERNATIONAL INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

common stock into Tyco common stock and sold the Tyco common stock for net cash
proceeds of $1.2 billion resulting in a pretax gain of $268 million, net of the
settlement payment.

NOTE 8 -- INTEREST AND OTHER FINANCIAL CHARGES

Cash payments of interest during the years 2001, 2000 and 1999 were $297,
$573 and $328 million, respectively.

The weighted average interest rate on short-term borrowings and commercial
paper outstanding at December 31, 2001 and 2000 was 7.46 and 6.60 percent,
respectively.

NOTE 9 -- INCOME TAXES

INCOME (LOSS) BEFORE TAXES

TAX EXPENSE (BENEFIT)

38

HONEYWELL INTERNATIONAL INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

DEFERRED INCOME TAXES

DEFERRED TAX ASSETS (LIABILITIES)

The amount of federal tax net operating losses available for carryback or
carryforward at December 31, 2001 was $625 million, including $507 million
generated in 2001. The current year's loss can be carried back two years or
carried forward twenty years. Also, included are $118 million of loss
carryforwards that were generated by certain subsidiaries prior to their
acquisition and have expiration

39

HONEYWELL INTERNATIONAL INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

dates through 2019. The use of pre-acquisition operating losses is subject to
limitations imposed by the Internal Revenue Code. We do not anticipate that
these limitations will affect utilization of the carryforwards prior to their
expiration. We also have foreign net operating losses of $807 million which are
available to reduce future income tax payments in several countries, subject to
varying expiration rules.

We have U.S. tax credit carryforwards of $167 million at December 31, 2001,
including carryforwards of $124 million with various expiration dates, and tax
credits of $43 million which are not subject to expiration.

The increase in the valuation allowance of $47 million in 2001 is primarily
due to an increase in foreign net operating losses attributable to a Specialty
Material's business that are not expected to be utilized.

Deferred income taxes have not been provided on approximately $2.0 billion
of undistributed earnings of foreign affiliated companies, which are considered
to be permanently reinvested. It is not practicable to estimate the amount of
tax that might be payable on the eventual remittance of such earnings.

Cash payments of income taxes during the years 2001, 2000 and 1999 were $79,
$442 and $625 million, respectively.

NOTE 10 -- EARNINGS (LOSS) PER SHARE

The following table sets forth the computations of basic and diluted
earnings (loss) per share:

As a result of the net loss for 2001, 4,269,601 of dilutive securities
issuable in connection with stock plans have been excluded from the diluted loss
per share calculation because their effect would reduce the loss per share. In
2000 and 1999, the diluted earnings per share calculation excludes the effect of
stock options when the options' exercise prices exceed the average market price
of the common shares during the period. In 2000 and 1999, the number of stock
options not included in the computations was 14,563,673 and 868,631,
respectively. These stock options were outstanding at the end of each of the
respective years.

40

HONEYWELL INTERNATIONAL INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

NOTE 11 -- ACCOUNTS AND NOTES RECEIVABLE

We sell interests in designated pools of trade accounts receivables to a
third party. The sold receivables are over-collateralized and we retain an
interest in the pool of receivables representing that over-collateralization.
New receivables are sold under the agreement as previously sold receivables are
collected. Losses are recognized when our interest in the receivables are sold.
The retained interest in the receivables is shown at the amounts expected to be
collected by us, and such carrying value approximates the fair value of our
retained interest. We are compensated for our services in the collection and
administration of the receivables.

Losses on sales of receivables were $22, $34 and $28 million in 2001, 2000
and 1999, respectively. No credit losses were incurred during those years.

NOTE 12 -- INVENTORIES

Inventories valued at LIFO amounted to $112 and $167 million at December 31,
2001 and 2000, respectively. Had such LIFO inventories been valued at current
costs, their carrying values would have been approximately $116 and $129 million
higher at December 31, 2001 and 2000, respectively.

41

HONEYWELL INTERNATIONAL INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

NOTE 13 -- INVESTMENTS AND LONG-TERM RECEIVABLES

Investments include unrealized holding gains of $0 and $3 million at
December 31, 2001 and 2000, respectively, on equity securities classified as
available-for-sale. The cost basis of these equity securities was $92 and $95
million at December 31, 2001 and 2000, respectively.

NOTE 14 -- PROPERTY, PLANT AND EQUIPMENT

Depreciation expense was $723, $791 and $730 million in 2001, 2000 and 1999,
respectively.

NOTE 15 -- ACCRUED LIABILITIES

42

HONEYWELL INTERNATIONAL INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

NOTE 16 -- LONG-TERM DEBT AND CREDIT AGREEMENTS

The schedule of principal payments on long-term debt is as follows:

We maintain $2 billion of bank revolving credit facilities with a group of
banks which are comprised of: (a) a $1 billion Five-Year Credit Agreement and
(b) a $1 billion 364-Day Credit Agreement. The credit agreements are maintained
for general corporate purposes including support for the issuance of commercial
paper. We had no balance outstanding under either agreement at December 31,
2001.

Neither of the credit agreements restricts our ability to pay dividends and
neither contains financial covenants. The failure to comply with customary
conditions or the occurrence of customary events of default contained in the
credit agreements would prevent any further borrowings and would generally
require the repayments of any outstanding borrowings under such credit
agreements. Such events of default include (a) non-payment of credit agreement
debt and interest, (b) non-compliance with the terms of the credit agreement
covenants, (c) default on other debt in certain circumstances, (d) bankruptcy
and (e) defaults upon obligations under the Employee Retirement Income Security
Act. Additionally, each of the banks has the right to terminate its commitment
to lend under the credit

43

HONEYWELL INTERNATIONAL INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

agreements if any person or group acquires beneficial ownership of 30 percent or
more of our voting stock or, during any 12-month period, individuals who were
directors of Honeywell at the beginning of the period cease to constitute a
majority of the Board of Directors (the Board).

Loans under the Five-Year Credit Agreement are required to be repaid no
later than December 2, 2004. We have agreed to pay a facility fee of 0.065
percent per annum on the aggregate commitment for the Five-Year Credit
Agreement.

Interest on borrowings under the Five-Year Credit Agreement would be
determined, at our option, by (a) an auction bidding procedure; (b) the highest
of the floating base rate of the agent bank, 0.5 percent above the average CD
rate, or 0.5 percent above the Federal funds rate or (c) the Eurocurrency rate
plus 0.135 percent (applicable margin).

The commitments under the 364-Day Credit Agreement terminate on November 28,
2002. Annually, prior to the Agreement's anniversary date, we may request that
the termination date of the 364-Day Credit Agreement be extended by 364 days. We
have agreed to pay a facility fee of 0.06 percent per annum on the aggregate
commitment for the 364-Day Credit Agreement, and we have paid upfront fees of
0.04 percent.

Interest on borrowings under the 364-Day Credit Agreement would be
determined, at our option, by (a) an auction bidding procedure; (b) the highest
of the floating base rate of the agent bank, 0.5 percent above the average CD
rate, or 0.5 percent above the Federal funds rate or (c) the Eurocurrency rate
plus 0.24 percent (applicable margin).

The facility fee and the applicable margin over the Eurocurrency rate on
both the Five-Year Credit Agreement and the 364-Day Credit Agreement are subject
to increase or decrease if our long-term debt ratings change, but the revolving
credit facilities are not subject to termination based on a decrease in our debt
ratings.

NOTE 17 -- LEASE COMMITMENTS

Future minimum lease payments under operating leases having initial or
remaining noncancellable lease terms in excess of one year are as follows:

We have entered into agreements to lease land, equipment and buildings.
Principally all our operating leases have initial terms of up to 25 years, and
some contain renewal options subject to customary conditions. At any time during
the terms of some of our leases, we may at our option purchase the leased assets
for amounts that approximate fair value. If we elect not to purchase the assets
at the end of each such lease, we have guaranteed the residual values of the
underlying assets (principally aircraft, equipment, buildings and land),
totaling approximately $349 million at December 31, 2001. We do not expect that
any of our commitments under the lease agreements will have a material adverse
effect on our consolidated results of operations, financial position or
liquidity.

Rent expense was $321, $306 and $291 million in 2001, 2000 and 1999,
respectively.

44

HONEYWELL INTERNATIONAL INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

NOTE 18 -- FINANCIAL INSTRUMENTS

As a result of our global operating and financing activities, we are exposed
to market risks from changes in interest and foreign currency exchange rates and
commodity prices, which may adversely affect our operating results and financial
position. We minimize our risks from interest and foreign currency exchange rate
and commodity price fluctuations through our normal operating and financing
activities and, when deemed appropriate, through the use of derivative financial
instruments.

CREDIT AND MARKET RISK -- Financial instruments, including derivatives,
expose us to counterparty credit risk for nonperformance and to market risk
related to changes in interest or currency exchange rates. We manage our
exposure to counterparty credit risk through specific minimum credit standards,
diversification of counterparties, and procedures to monitor concentrations of
credit risk. Our counterparties are substantial investment and commercial banks
with significant experience using such derivative instruments. We monitor the
impact of market risk on the fair value and cash flows of our derivative and
other financial instruments considering reasonably possible changes in interest
and currency exchange rates and restrict the use of derivative financial
instruments to hedging activities. We do not use derivative financial
instruments for trading or other speculative purposes and do not use leveraged
derivative financial instruments.

We continually monitor the creditworthiness of our customers to which we
grant credit terms in the normal course of business. While concentrations of
credit risk associated with our trade accounts and notes receivable are
considered minimal due to our diverse customer base, a significant portion of
our customers are in the commercial aviation industry (aircraft manufacturers
and airlines) accounting for approximately 19 percent of our consolidated sales
in 2001. Following the abrupt downturn in the aviation industry after the
terrorist attacks on September 11, 2001 and the already weak economy, we
modified terms and conditions of our credit sales to mitigate or eliminate
concentrations of credit risk with any single customer. Our sales are not
materially dependent on a single customer or a small group of customers.

FOREIGN CURRENCY RISK MANAGEMENT -- We conduct our business on a
multinational basis in a wide variety of foreign currencies. Our exposure to
market risk for changes in foreign currency exchange rates arises from
international financing activities between subsidiaries, foreign currency
denominated monetary assets and liabilities and anticipated transactions arising
from international trade. Our objective is to preserve the economic value of
cash flows in non-functional currencies. We attempt to have all transaction
exposures hedged with natural offsets to the fullest extent possible and, once
these opportunities have been exhausted, through foreign currency forward and
option agreements with third parties. Our principal currency exposures relate to
the Euro countries, the British pound, the Canadian dollar, and the U.S. dollar.

We hedge monetary assets and liabilities denominated in foreign currencies.
Prior to conversion into U.S dollars, these assets and liabilities are
remeasured at spot exchange rates in effect on the balance sheet date. The
effects of changes in spot rates are recognized in earnings and included in
Other (Income) Expense. We hedge our exposure to changes in foreign exchange
rates principally with forward contracts. Forward contracts are marked-to-market
with the resulting gains and losses similarly recognized in earnings offsetting
the gains and losses on the foreign currency denominated monetary assets and
liabilities being hedged.

We partially hedge forecasted 2002 sales and purchases denominated in
foreign currencies with currency forward contracts. When the dollar strengthens
against foreign currencies, the decline in value of forecasted foreign currency
cash inflows (sales) or outflows (purchases) is partially offset by the
recognition of gains (sales) and losses (purchases), respectively, in the value
of the forward contracts designated as hedges. Conversely, when the dollar
weakens against foreign currencies, the increase in value of forecasted foreign
currency cash inflows (sales) or outflows (purchases) is partially offset by the
recognition of losses (sales) and gains (purchases), respectively, in the value
of the forward

45

HONEYWELL INTERNATIONAL INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

contracts designated as hedges. Market value gains and losses on these contracts
are recognized in earnings when the hedged transaction is recognized. Deferred
gains and losses on forward contracts, used to hedge forecasted sales and
purchases, were $2 and $2 million, respectively, at December 31, 2001. The
deferred gains and losses are expected to be reclassified into Sales and Cost of
Goods Sold within the next twelve months. All open forward contracts mature by
December 31, 2002.

At December 31, 2001 and 2000, we had contracts with notional amounts of
$1,507 and $1,542 million, respectively, to exchange foreign currencies,
principally in the Euro countries and Great Britain.

COMMODITY PRICE RISK MANAGEMENT -- Our exposure to market risk for commodity
prices arises from changes in our cost of production. We mitigate our exposure
to commodity price risk through the use of long-term, firm-price contracts with
our suppliers and forward commodity purchase agreements with third parties
hedging anticipated purchases of several commodities (principally natural gas).
Forward commodity purchase agreements are marked-to-market, with the resulting
gains and losses recognized in earnings when the hedged transaction is
recognized.

INTEREST RATE RISK MANAGEMENT -- We use a combination of financial
instruments, including medium-term and short-term financing, variable-rate
commercial paper, and interest rate swaps to manage the interest rate mix of our
total debt portfolio and related overall cost of borrowing. At December 31, 2001
and 2000, interest rate swap agreements designated as fair value hedges
effectively changed $1,096 and $1,600 million, respectively, of fixed rate debt
at an average rate of 6.55 and 7.10 percent, respectively, to LIBOR based
floating rate debt. Our interest rate swaps mature through 2007.

FAIR VALUE OF FINANCIAL INSTRUMENTS -- The carrying value of cash and cash
equivalents, trade accounts and notes receivables, payables, commercial paper
and short-term borrowings contained in the Consolidated Balance Sheet
approximates fair value. Summarized below are the carrying values and fair
values of our other financial instruments at December 31, 2001 and 2000. The
fair values are based on the quoted market prices for the issues (if traded),
current rates offered to us for debt of the same remaining maturity and
characteristics, or other valuation techniques, as appropriate.

NOTE 19 -- CAPITAL STOCK

We are authorized to issue up to 2,000,000,000 shares of common stock, with
a par value of one dollar. Common shareowners are entitled to receive such
dividends as may be declared by the Board, are entitled to one vote per share,
and are entitled, in the event of liquidation, to share ratably in all the
assets of Honeywell which are available for distribution to the common
shareowners. Common shareowners do not have preemptive or conversion rights.
Shares of common stock issued and

46

HONEYWELL INTERNATIONAL INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

outstanding or held in the treasury are not liable to further calls or
assessments. There are no restrictions on us relative to dividends or the
repurchase or redemption of common stock.

On July 21, 2000, our Board authorized a share repurchase program to
purchase up to 40,000,000 shares of our common stock in the open market or in
privately negotiated transactions, depending on market conditions and other
factors. As a result of the proposed merger with General Electric Company (See
Note 4), Honeywell rescinded its share repurchase program effective October 21,
2000.

We are authorized to issue up to 40,000,000 shares of preferred stock,
without par value, and can determine the number of shares of each series, and
the rights, preferences and limitations of each series. At December 31, 2001,
there was no preferred stock outstanding.

NOTE 20 -- OTHER NONOWNER CHANGES IN SHAREOWNERS' EQUITY

Total nonowner changes in shareowners' equity are included in the
Consolidated Statement of Shareowners' Equity. The components of Accumulated
Other Nonowner Changes are as follows:

47

HONEYWELL INTERNATIONAL INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

The components of Accumulated Other Nonowner Changes are as follows:

NOTE 21 -- STOCK-BASED COMPENSATION PLANS

We have stock plans available to grant incentive stock options,
non-qualified stock options and stock appreciation rights to officers and
employees.

FIXED STOCK OPTIONS -- The exercise price, term and other conditions
applicable to each option granted under the stock plans are generally determined
by the Management Development and Compensation Committee of the Board. The
options are granted at a price equal to our stock's fair market value on the
date of grant. The options generally become exercisable over a three-year period
and expire after ten years.

The following table summarizes information about stock option activity for
the three years ended December 31, 2001:

48

HONEYWELL INTERNATIONAL INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

The following table summarizes information about stock options outstanding
at December 31, 2001:

- ---------

(1) Average remaining contractual life in years.

There were 26,998,346 and 30,927,704 options exercisable at weighted average
exercise prices of $32.06 and $27.21 at December 31, 2000 and 1999,
respectively. There were 9,948,269 shares available for future grants under the
terms of our stock option plans at December 31, 2001.

Statement of Financial Accounting Standards No. 123, 'Accounting for
Stock-Based Compensation,' (SFAS No. 123) requires that the cost of stock-based
compensation be measured using a fair value based method. As permitted by SFAS
No. 123, we elected to continue to account for stock-based compensation using
the intrinsic value based method under Accounting Principles Board Opinion
No. 25, 'Accounting for Stock Issued to Employees.' Accordingly, no compensation
cost has been recognized for our fixed stock option plans. The following table
sets forth pro forma information, including related assumptions, as if
compensation cost had been determined consistent with the requirements of SFAS
No. 123.

- ---------

(1) Estimated on date of grant using Black-Scholes option-pricing model.

RESTRICTED STOCK UNITS -- Restricted stock unit (RSU) awards entitle the
holder to receive one share of common stock for each unit when the units vest.
RSU's are issued to certain key employees as compensation and as incentives tied
directly to the achievement of certain performance objectives.

RSU's issued were 186,500, 1,374,640 and 1,175,127 in 2001, 2000 and 1999,
respectively. There were 1,580,091, 2,449,749 and 2,657,561 RSU's outstanding,
with a weighted average grant date fair value per share of $43.49, $47.33 and
$37.81 at December 31, 2001, 2000 and 1999, respectively.

49

HONEYWELL INTERNATIONAL INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

NON-EMPLOYEE DIRECTORS' PLAN -- We also have a Stock Plan for Non-Employee
Directors (Directors' Plan) under which restricted shares and options are
granted. Each new director receives a one-time grant of 3,000 shares of common
stock, subject to specific restrictions. The Directors' Plan provides for an
annual grant to each director of options to purchase 2,000 shares of common
stock at the fair market value on the date of grant. We have set aside 450,000
shares for issuance under the Directors' Plan. Options generally become
exercisable over a three-year period and expire after ten years.

EMPLOYEE STOCK MATCH PLANS -- We sponsor employee savings plans under which
we match, in the form of our common stock, certain eligible U.S. employee
savings plan contributions. Shares issued under the stock match plans were 4.9,
3.9 and 2.6 million in 2001, 2000 and 1999, respectively, at a cost of $185,
$161 and $142 million, respectively.

NOTE 22 -- COMMITMENTS AND CONTINGENCIES

LITTON LITIGATION -- On March 13, 1990, Litton Systems, Inc. (Litton) filed
a legal action against the former Honeywell in U.S. District Court, Central
District of California, Los Angeles with claims that were subsequently split
into two separate cases. One alleged patent infringement under federal law for
using an ion-beam process to coat mirrors incorporated in the former 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 alleged
monopolization and attempted monopolization under federal antitrust laws by the
former Honeywell in the sale of inertial reference systems containing ring laser
gyroscopes into the commercial aircraft market. On December 21, 2001, we settled
the Litton legal action for $440 million, reaching a settlement agreement with
Northrop Grumman (Northrop), which purchased Litton earlier in 2001. The
settlement amount was included as part of Costs of Goods Sold. In December 2001,
$220 million of the settlement amount was paid to Northrop with the remaining
$220 million due on or before July 1, 2002. The settlement ends the patent
infringement, antitrust and other claims that Litton originally brought against
the former Honeywell and allows us to continue to sell ring-laser-gyroscope-
based products and certain other inertial reference systems free from any claims
from Northrop.

SHAREOWNER LITIGATION -- Honeywell and seven of its current and former
officers were named as defendants in several purported class action lawsuits
filed in the United States District Court for the District of New Jersey (the
Securities Law Complaints). The Securities Law Complaints principally allege
that the defendants violated federal securities laws by purportedly making false
and misleading statements and by failing to disclose material information
concerning Honeywell's financial performance, thereby allegedly causing the
value of Honeywell's stock to be artificially inflated. The purported class
period for which damages are sought is December 20, 1999 to June 19, 2000. On
January 15, 2002, the District Court dismissed the consolidated complaint
against four of Honeywell's current and former officers.

In addition, Honeywell, seven of its current and former officers and its
Board have been named as defendants in a purported shareowner derivative action
which was filed on November 27, 2000 in the United States District Court for the
District of New Jersey (the Derivative Complaint). The Derivative Complaint
alleges a single claim for breach of fiduciary duty based on nearly identical
allegations to those set forth in the Securities Law Complaints.

We believe that there is no factual or legal basis for the allegations in
the Securities Law Complaints and the Derivative Complaint. Although it is not
possible at this time to predict the result of these cases, we expect to
prevail. However, an adverse outcome could be material to our consolidated
financial position or results of operations. As a result of the uncertainty
regarding the outcome of this matter, no provision has been made in our
financial statements with respect to this contingent liability.

50

HONEYWELL INTERNATIONAL INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

ENVIRONMENTAL MATTERS -- We are subject to various federal, state and local
government requirements relating to the protection of employee health and safety
and the environment. We believe that, as a general matter, our policies,
practices and procedures are properly designed to prevent unreasonable risk of
environmental damage and personal injury to our employees and employees of our
customers and that our handling, manufacture, use and disposal of hazardous or
toxic substances are in accord with environmental laws and regulations. However,
mainly because of past operations and operations of predecessor companies, we,
like other companies engaged in similar businesses, have incurred remedial
response and voluntary cleanup costs for site contamination and are a party to
lawsuits and claims associated with environmental matters, including past
production of products containing toxic substances. Additional lawsuits, claims
and costs involving environmental matters are likely to continue to arise in the
future.

With respect to environmental matters involving site contamination, we
continually conduct studies, individually at our owned sites, and jointly as a
member of industry groups at non-owned sites, to determine the feasibility of
various remedial techniques to address environmental matters. With respect to
environmental matters involving the production of products containing toxic
substances, we believe that the costs of defending and resolving such matters
will be largely covered by insurance, subject to deductibles, exclusions,
retentions and policy limits. It is our policy (see Note 1) to record
appropriate liabilities for environmental matters when environmental assessments
are made or remedial efforts or damage claim payments are probable and the costs
can be reasonably estimated. With respect to site contamination, the timing of
these accruals is generally no later than the completion of feasibility studies.
We expect that we will be able to fund expenditures for these matters from
operating cash flow. The timing of cash expenditures depends on a number of
factors, including the timing of litigation and settlements of personal injury
and property damage claims, insurance recoveries, regulatory approval of cleanup
projects, remedial techniques to be utilized and agreements with other parties.

Although we do not currently possess sufficient information to reasonably
estimate the amounts of liabilities to be recorded upon future completion of
studies, litigation or settlements, and neither the timing nor the amount of the
ultimate costs associated with environmental matters can be determined, they
could be material to our consolidated results of operations. However,
considering our past experience, insurance coverage and reserves, we do not
expect that these matters will have a material adverse effect on our
consolidated financial position.

ASBESTOS MATTERS -- Like more than a thousand other industrial companies,
Honeywell is a defendant in personal injury actions related to asbestos. Our
involvement is limited because we did not mine or produce asbestos, nor did we
make or sell insulation products or other construction materials that have been
identified as the primary cause of asbestos-related disease in the vast majority
of claimants. Rather, we made several products that contained small amounts of
asbestos.

Honeywell's Bendix Friction Materials business manufactured automotive brake
pads that included asbestos in an encapsulated form. There is a limited group of
potential claimants consisting largely of professional brake mechanics. During
the twenty-year period from 1981 through 2001, we have resolved approximately
53,000 Bendix claims at an average cost per claim of one thousand dollars.
Honeywell has had no out-of-pocket costs for these cases since its insurance
deductible was satisfied many years ago. There are currently approximately
47,000 claims pending and we have no reason to believe that the historic rate of
dismissal will change. We have $2 billion of insurance remaining.

Another source of claims is refractory products (high temperature bricks and
cement) sold largely to the steel industry in the East and Midwest by North
American Refractories Company (NARCO), a business we owned from 1979 to 1986.
Less than 2 percent of NARCO's products contained asbestos.

When we sold the NARCO business in 1986, we agreed to indemnify NARCO with
respect to personal injury claims for products that had been discontinued prior
to the sale (as defined in the sale agreement). NARCO retained all liability for
all other claims. NARCO has resolved approximately

51

HONEYWELL INTERNATIONAL INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

176,000 claims in the past 18 years at an average cost per claim of two thousand
two hundred dollars. Of those claims, 43 percent were dismissed on the ground
that there was insufficient evidence that NARCO was responsible for the
claimant's asbestos exposure. There are approximately 116,000 claims currently
pending against NARCO, including approximately 7 percent in which Honeywell is
also named as a defendant. During the past 18 years, Honeywell and our insurers
have contributed to the cost of the NARCO defense. We have in excess of $1.2
billion of insurance remaining that can be specifically allocated to
NARCO-related liability.

On January 4, 2002, NARCO filed for reorganization under Chapter 11 of the
U.S. Bankruptcy Code. As a result, all of the claims pending against NARCO are
automatically stayed pending the reorganization of NARCO. In addition, because
the claims pending against Honeywell necessarily will impact the liabilities of
NARCO, because the insurance policies held by Honeywell are essential to a
successful NARCO reorganization, and because Honeywell has offered to commit
those policies to the reorganization, the bankruptcy court has temporarily
enjoined any claims against Honeywell, current or future, related to NARCO. In
connection with NARCO's bankruptcy filing, we paid NARCO's parent company $40
million and have agreed to provide NARCO with up to $20 million in financing. We
have also agreed to pay $20 million to NARCO's parent company upon the filing of
a plan of reorganization for NARCO acceptable to Honeywell, and to pay NARCO's
parent company $40 million, and to forgive any outstanding NARCO indebtedness,
upon the confirmation and consummation of such a plan.

We believe that, as part of the NARCO plan of reorganization, a trust will
be established for the benefit of all asbestos claimants, current and future.
Honeywell intends to contribute its insurance coverage (which is in excess of
$1.2 billion) to the trust in exchange for its indemnity obligation to NARCO. If
that trust is put in place and approved by the court as fair and equitable,
Honeywell as well as NARCO will be entitled to a permanent channeling injunction
barring all present and future individual actions in state or federal courts and
requiring all asbestos-related claims based on exposure to NARCO products to be
made against the federally-supervised trust. In our view, our existing insurance
plus the existing NARCO assets should be sufficient to fund the trust. There is
no assurance that a stay will remain in effect, that a plan of reorganization
will be proposed or confirmed, or that any plan that is confirmed will provide
relief to Honeywell.

Although it is impossible to predict the outcome of pending or future claims
or the NARCO bankruptcy, in light of the nature of the potential exposure, our
experience over the past 20 years in resolving asbestos-related claims, our
insurance coverage, our existing reserves and the NARCO bankruptcy proceeding,
we do not believe that asbestos-related claims will have a material adverse
effect on our consolidated results of operations or financial position.

OTHER MATTERS -- We are subject to a number of other lawsuits,
investigations and claims (some of which involve substantial amounts) arising
out of the conduct of our business. With respect to all these other matters,
including those relating to commercial transactions, government contracts,
product liability and non-environmental health and safety matters, while the
ultimate results of these lawsuits, investigations and claims cannot be
determined, we do not expect that these matters will have a material adverse
effect on our consolidated results of operations or financial position.

We have issued or are a party to various direct and indirect guarantees of
the debt of unconsolidated affiliates and third parties of $80 million. We do
not expect that these guarantees will have a material adverse effect on our
consolidated results of operations, financial position or liquidity.

NOTE 23 -- PENSION AND OTHER POSTRETIREMENT BENEFITS

We maintain pension plans covering the majority of our employees and
retirees, and postretirement benefit plans for retirees that include health care
benefits and life insurance coverage. Pension benefits for substantially all
U.S. employees are provided through non-contributory, defined benefit pension
plans. Employees in foreign countries, who are not U.S. citizens, are covered by

52

HONEYWELL INTERNATIONAL INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

various retirement benefit arrangements, some of which are considered to be
defined benefit pension plans for accounting purposes. Our retiree medical plans
cover U.S. and Canadian employees who retire with pension eligibility for
hospital, professional and other medical services. Most of the U.S. retiree
medical plans require deductibles and copayments, and virtually all are
integrated with Medicare. Retiree contributions are generally required based
on coverage type, plan and Medicare eligibility. The retiree medical and life
insurance plans are not funded. Claims and expenses are paid from our general
assets.

Net periodic pension and other postretirement benefit costs (income) include
the following components:

The following table summarizes the balance sheet impact, including the
benefit obligations, assets, funded status and actuarial assumptions associated
with our significant pension and other postretirement benefit plans.

53

HONEYWELL INTERNATIONAL INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

Funded status of plans....................... 99 2,132 (2,149) (1,952)
Unrecognized transition (asset).............. (8) (21) -- --
Unrecognized net (gain) loss................. 1,118 (1,276) 297 89
Unrecognized prior service cost (credit)..... 239 258 (157) (170)
------- ------- ------- -------
Prepaid (accrued) benefit cost............... $ 1,448 $ 1,093 $(2,009) $(2,033)
------- ------- ------- -------
------- ------- ------- -------
Actuarial assumptions at December 31:
Discount rate............................ 7.25% 7.75% 7.25% 7.75%
Assumed rate of return on plan assets.... 10.00% 10.00% -- --
Assumed annual rate of compensation
increase............................... 4.00% 4.00% -- --

The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for our pension plans with accumulated benefit obligations
in excess of plan assets were $1,296, $1,262 and $865 million, respectively, at
December 31, 2001 and $350, $310 and $44 million, respectively, at December 31,
2000.

For measurement purposes, we assumed an annual health-care cost trend rate
of 8.25 percent for covered healthcare benefits in 2002. The rate was assumed to
decrease gradually to 5 percent in 2007 and remain at that level thereafter.
Assumed health-care cost trend rates have a significant effect on the amounts
reported for our retiree health-care plan. A one-percentage-point change in
assumed health-care cost trend rates would have the following effects:

NOTE 24 -- SEGMENT FINANCIAL DATA

Statement of Financial Accounting Standards No. 131, 'Disclosures about
Segments of an Enterprise and Related Information' (SFAS No. 131), establishes
standards for reporting information about operating segments. The following
information is provided in accordance with the requirements of SFAS No. 131 and
is consistent with how business results are reported internally to management.

We globally manage our business operations through strategic business units
(SBUs) serving customers worldwide with aerospace products and services, control
technologies for buildings, homes and industry, automotive products and
chemicals. Based on similar economic and operational characteristics, our SBUs
are aggregated into the following four reportable segments:

Aerospace includes Engines, Systems and Services (auxiliary power units;
propulsion engines; environmental control systems; engine controls; repair
and overhaul services; hardware; logistics and power generation systems);
Aerospace Electronic Systems (flight safety communications, navigation,
radar and surveillance systems; aircraft and airfield lighting; management
and technical services and advanced systems and instruments); and Aircraft
Landing Systems (aircraft wheels and brakes).

Automation and Control Solutions includes Control Products (controls for
heating, cooling, indoor air quality, ventilation, humidification and home
automation; advanced software applications for home/building control and
optimization; sensors, switches, control systems and instruments for
measuring pressure, air flow, temperature, electrical current and more);
Service (installs, maintains and upgrades systems that keep buildings safe,
comfortable and productive); Security & Fire Solutions (manufactures and
distributes security and fire detection, access control and video
surveillance systems); and Industry Solutions (provides full range of
automation and control solutions for industrial plants, offering advanced
software and

54

HONEYWELL INTERNATIONAL INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

automation systems that integrate, control and monitor complex processes in
many types of industrial settings).

Specialty Materials includes fibers; plastic resins; specialty films;
intermediate chemicals; fluorine-based products; pharmaceutical and
agricultural chemicals; specialty waxes, adhesives and sealants; process
technology; wafer fabrication materials and services; advanced circuits;
and amorphous metals.

Transportation and Power Systems includes Garrett Engine Boosting Systems
(turbochargers and charge-air coolers); Bendix Commercial Vehicle Systems
(air brake and anti-lock braking systems); the Consumer Products Group (car
care products including anti-freeze, filters, spark plugs, cleaners, waxes
and additives); and Friction Materials (friction material and related brake
system components).

The accounting policies of the segments are the same as those described in
Note 1. We evaluate segment performance based on segment profit, which excludes
general corporate unallocated expenses, gains on sales of non-strategic
businesses, equity income, other (income) expense, interest and other financial
charges and merger, repositioning and other charges. Intersegment sales
approximate market and are not significant. Reportable segment data were as
follows:

55

HONEYWELL INTERNATIONAL INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

A reconciliation of segment profit to consolidated income (loss) before
taxes is as follows:

- ---------

(1) In 2001 includes cumulative effect adjustment of $1 million of income
related to adoption of SFAS No. 133.

NOTE 25 -- GEOGRAPHIC AREAS -- FINANCIAL DATA

- ---------

(1) Sales between geographic areas approximate market and are not significant.
Net sales are classified according to their country of origin. Included in
United States net sales are export sales of $3,074, $3,194 and $3,715
million in 2001, 2000 and 1999, respectively.

(2) Long-lived assets are comprised of property, plant and equipment, goodwill
and other intangible assets.

56

HONEYWELL INTERNATIONAL INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

NOTE 26 -- UNAUDITED QUARTERLY FINANCIAL INFORMATION

- ---------

(1) Includes a $495 million provision for repositioning and other charges, a
charge of $95 million for the impairment of an equity investment and an
equity investee's loss contract and a net provision of $5 million,
consisting of $6 million for a charge related to the early extinguishment
of debt and a $1 million benefit recognized upon the adoption of SFAS
No. 133. The total pretax charge was $595 million, after-tax $374 million,
or $0.46 per share. The total pretax charge included in gross profit was
$474 million.

(2) Includes a $573 million net provision for repositioning and other charges
and a charge of $78 million for the impairment of an equity investment. The
total pretax charge was $651 million, after-tax $400 million, or $0.49 per
share. The total pretax charge included in gross profit was $508 million.

(3) Includes a $981 million net provision for repositioning and other charges
and a charge of $27 million for the impairment of an equity investment. The
total pretax charge was $1,008 million, after-tax $668 million, or $0.82
per share. The total pretax charge included in gross profit was
$916 million.

(4) Includes a charge of $440 million for the Litton settlement and a charge of
$100 million for the write-off of investments related to a regional jet
engine contract cancellation. The total pretax charge was $540 million, all
of which was included in gross profit, after-tax $329 million, or $0.40 per
share.

(5) Includes a $96 million provision for repositioning charges, all of which
was included in gross profit, after-tax $59 million, or $0.08 per share.

(6) Includes an after-tax gain of $71 million, or $0.09 per share, on the sale
of the TCAS product line of the former Honeywell.

(7) Includes a $116 million net provision for repositioning and other charges,
an impairment charge of $245 million for the write-down of long-lived
assets of our Friction Materials business and a charge of $99 million for
costs associated with closing an affiliate's operations. The total pretax
charge was $460 million, after-tax $331 million, or $0.41 per share. The
total pretax charge included in gross profit was $361 million.

(8) Includes a $208 million provision for repositioning and other charges, an
impairment charge of $165 million for the write-down of long-lived assets
of a chemical manufacturing facility and a charge of $37 million for costs
principally related to an equity investee's customer claims. The total
pretax charge was $410 million, after-tax $315 million, or $0.39 per share.
The total pretax charge included in gross profit was $373 million.

(9) Dilutive securities issuable in connection with stock plans have been
excluded from the calculation of loss per share because their effect would
reduce the loss per share.

(10) From composite tape - stock is primarily traded on the New York Stock
Exchange.

57

REPORT OF INDEPENDENT ACCOUNTANTS

TO THE BOARD OF DIRECTORS AND SHAREOWNERS OF
HONEYWELL INTERNATIONAL INC.

In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 68 present fairly, in all material
respects, the financial position of Honeywell International Inc. and its
subsidiaries at December 31, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States of America. In addition, in our opinion, the financial
statement schedule listed in the index appearing under Item 14(a)(2) on page 68
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

/s/ PRICEWATERHOUSECOOPERS LLP

PricewaterhouseCoopers LLP
Florham Park, New Jersey
February 7, 2002

58

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

Not Applicable.

PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information with respect to the directors and executive officers of
Honeywell International Inc. is set forth below:

- ----------
(a) Also an officer.

59

The executive officers of Honeywell, listed above, are elected annually.
There are no family relationships among them.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

The rules of the Securities and Exchange Commission require that we disclose
late filings of reports of stock ownership (and changes in stock ownership) by
our directors and executive officers. To the best of Honeywell's knowledge, all
of the filings for our executive officers and directors were made on a timely
basis in 2001, except that the ownership of 421 shares by Larry E. Kittelberger,
Senior Vice President Administration and Chief Information Officer, was reported
after the filing deadline.

62

ITEM 11. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table provides a summary of cash and non-cash compensation
with respect to Honeywell's two Chief Executive Officers during 2001 and the
other four most highly compensated officers of Honeywell during 2001.

- ---------

(1) The total number of units held and their value as of December 31, 2001 were
as follows: Mr. Bossidy, 150,000 ($5,073,000); Mr. R. Johnson, 30,000
($1,014,600); Mr. Kreindler, 17,500 ($591,850); Mr. Wallman, 17,500
($591,850); and Dr. B. Johnson, 30,000 ($1,014,600). Common stock dividend
equivalents are payable on each unit. One third of the restricted units for
Mr. R. Johnson, Mr. Kreindler, Mr. Wallman and Dr. B. Johnson will vest on
April 1, 2003 if Honeywell achieves specified operating margin targets and
two thirds will vest upon their death or total disability or upon a change
of control. Mr. Bonsignore's restricted units were forfeited upon his
retirement.

(2) Amounts shown for 2001 consist of matching contributions made by Honeywell
under the Savings Plan and Supplemental Savings Plan: for Mr. Bossidy,
$79,385; Mr. Bonsignore, $427,846; Mr. R. Johnson, $46,336; Mr. Kreindler,
$39,600; Mr. Wallman, $36,877 and Dr. B. Johnson, $9,231; the value of life
insurance premiums: for Mr. Bossidy, $9,628; Mr. Bonsignore, $83,542;
Mr. R. Johnson, $16,147 and Mr. Kreindler, $13,781; above-market interest
earned on deferred compensation: for Mr. Bossidy, $65,454; Mr. Bonsignore,
$32,914; Mr. R. Johnson, $424; Mr. Kreindler, $161,235; Mr. Wallman,
$183,655 and Dr. B. Johnson, $4,915; management incentive awards: for Mr.
Kreindler, $200,000 and Mr. Wallman, $100,000; a special cash recognition
award: for Mr. R. Johnson, $25,000; a special stock recognition award: for
Dr. B. Johnson, $23,305; a cash retention payment: for Dr. B. Johnson,
$80,000; a Supplemental Executive Retirement Plan enhancement: for
Mr. Bonsignore, $5,225,000; a severance payment: for Mr. Bonsignore,
$9,000,000; forgiveness of interest on a tax loan: for Mr. Bonsignore,
$349,161; the value of perquisites: for Mr. Bossidy, $56,704 which includes
a $25,000 cash flexible perquisite payment and $29,641 for the value of
personal use of company-provided aircraft; Mr. Bonsignore, $219,375 which
includes $85,440 for administrative services in retirement, $48,234 for tax
gross-up of the administrative services and $42,124 for the value of
personal use of company-provided aircraft; and Dr. B. Johnson, $57,685 which
includes a $50,000 cash flexible perquisite payment.

(3) Mr. Bossidy was rehired on July 3, 2001.

(4) Mr. Bonsignore retired on July 3, 2001.

63

OPTION GRANTS IN LAST FISCAL YEAR

The stock options included in the following table were all granted with an
exercise price equal to 100 percent of the fair market value of the common stock
on the date of grant.

- ---------

(1) Options are valued using a Black-Scholes option pricing model which assumes
a historic five-year average volatility of 40.8 percent, the average
dividend yield for the three years ended December 31, 2001 (1.5 percent), a
5.2 percent risk-free rate of return (based on the five-year U.S. Treasury
note yield on the date of grant), and an expected option life of 5.0 years
based on past experience. No adjustments are made for non-transferability or
risk of forfeiture. Options will have no actual value unless, and then only
to the extent that, the common stock price appreciates from the grant date
to the exercise date. If the grant date present values are realized, total
shareowner value will have appreciated by approximately $11.3 billion, and
the value of the granted options reflected in the table will be less than
0.15 percent of the total shareowner appreciation.

(2) Vests 100 percent on July 1, 2002.

(3) Vests 40 percent on January 1, 2002 and 30 percent on each of January 1,
2003 and 2004.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES

- ---------

(1) The table reflects options exercised prior to Mr. Bossidy's return to
Honeywell on July 3, 2001.

(2) Upon his retirement, Mr. Bonsignore forfeited 500,000 unexercisable options.

EMPLOYMENT AND TERMINATION ARRANGEMENTS

Mr. Bossidy's employment agreement provides for his employment as Chairman
and Chief Executive Officer through June 30, 2002. During the term of the
agreement, Mr. Bossidy will have an annual salary of at least $2,000,000 and
will have an annual target bonus equal to 100 percent of base salary. If his
employment is terminated prior to the expiration of his agreement, Honeywell
will continue to provide Mr. Bossidy with compensation, benefits, and other
compensation arrangements for the balance of the outstanding term.

Mr. Bonsignore's employment agreement provided for his employment as
Chairman and Chief Executive Officer through December 31, 2004. During the term
of the agreement, Mr. Bonsignore was entitled to receive an annual salary of at
least $1,500,000 and an annual target bonus equal to 100 percent of base salary.
Under the terms of his agreement, he was entitled to a severance payment of
three times his annual salary and bonus upon his retirement in July 2001.

64

Under the Severance Plan for Senior Executives, the current executive
officers named in the Summary Compensation Table would be entitled to payments
equivalent to base salary and annual incentive bonus (and continuation of
certain benefits, such as group life and medical insurance coverage) for a
period of 36 months if their employment is terminated other than for 'gross
cause' (which includes fraud and criminal conduct). The payments would be made
in a lump sum following a change in control. The Severance Plan for Senior
Executives provides for an additional payment sufficient to eliminate the effect
of any applicable excise tax on severance payments in excess of an amount
determined under Section 280G of the Internal Revenue Code. Payments subject to
the excise tax would not be deductible by Honeywell.

On February 19, 2002, Mr. David M. Cote entered into an employment agreement
with Honeywell that provides for his employment as President and Chief Executive
Officer through June 30, 2002 and Chairman and Chief Executive Officer effective
July 1, 2002 through June 30, 2007. During the term of the agreement Mr. Cote
will have an annual salary of at least $1,500,000 and an annual target bonus
equal to 125 percent of his base salary. He was granted 2,202,200 stock options
and 770,000 restricted units on his start date. He may also receive a cash
payment equal to any amount due him under the bonus plan of his prior employer
not paid by that employer. If his employment is terminated prior to the
expiration of his agreement, Honeywell will continue to provide Mr. Cote with
compensation, benefits, and other compensation arrangements for the balance of
the outstanding term.

RETIREMENT BENEFITS

The following table illustrates the estimated annual pension benefits which
would be provided on retirement at age 65 under Honeywell's retirement program
and an unfunded supplemental retirement plan, after applicable deductions for
Social Security benefits, to salaried employees having specified average
annual remuneration and years of service.

The benefit amounts shown in the Pension Table are computed on a straight
life annuity basis. At January 1, 2002, the following individuals had the
indicated number of years of credited service for pension purposes:
Mr. Bossidy, 9; Mr. Bonsignore, 31; Mr. R. Johnson, 7; Mr. Kreindler, 10;
Mr. Wallman, 6; and Dr. B. Johnson, 2.

The amounts in the Salary and Bonus columns of the Summary Compensation
Table for 2001 would be included in computing remuneration for pension purposes
as well as any payroll based reward and recognition awards. Average annual
remuneration under the retirement program is calculated based on the highest
paid 60 consecutive months of an employee's last 120 months of employment.

Under their employment agreements, Messrs. Bossidy, Cote and Bonsignore are
entitled to receive during their lifetimes, commencing on retirement, Honeywell
facilities and services comparable to those provided prior to their retirement,
and a retirement benefit equivalent to 60 percent of final average compensation
(based on their highest three years of salary and bonus) payable annually for
life. Benefits under the agreements will be reduced by any retirement benefits
payable under Honeywell's retirement and supplemental retirement plans, and
under certain circumstances, benefits payable under retirement plans of former
employers. Mr. Bonsignore's early retirement agreement increases his retirement
benefit to 70 percent of final average compensation.

Dr. B. Johnson is covered by a pension arrangement that provides an age 60
retirement benefit of $36,139, payable annually for life, to complement the
benefit from his former employer.

65

DIRECTOR COMPENSATION

Directors who are employees of Honeywell receive no compensation for service
on the Board. Each non-employee director receives an annual Board retainer of
$65,000, of which $20,000 is automatically credited to the director's account in
the Deferred Compensation Plan for Non-Employee Directors in the form of common
stock equivalents (which are only payable after termination of Board service).
They also receive a fee of $2,000 for Board meetings attended on any day (eleven
during 2001), an annual retainer of $7,000 for each Board Committee served, and
an additional Committee Chair retainer of $5,000 for the Audit and Management
Development and Compensation Committees and $3,000 for all other Board
Committees. While no fees are generally paid for attending Committee meetings, a
$1,000 fee is paid for attendance at a Committee meeting, or other extraordinary
meeting related to Board business which occurs apart from a Board meeting.
Non-employee directors are also provided with $350,000 in business travel
accident insurance and are eligible to elect $100,000 in term life insurance and
medical and dental coverage for themselves and their eligible dependents.

Directors may elect to defer, until a specified calendar year or retirement
from the Board, all or any portion of their annual retainers and fees that are
not automatically deferred and to have such compensation credited to their
account in the Deferred Compensation Plan. Amounts credited either accrue
interest (11 percent for 2001) or are valued as if invested in common stock
equivalents or one of the other funds available to participants in our savings
plan. Amounts deferred in a common stock account earn amounts equivalent to
dividends. Upon a change of control, a director will be entitled to a lump-sum
payment of all deferred amounts.

Under the Stock Plan for Non-Employee Directors, each new director receives
a one-time grant of 3,000 shares of common stock, which are subject to transfer
restrictions until the director's service terminates with the consent of a
majority of the Board, provided termination occurs at or after age 65. During
the restricted period, the director is entitled to one-fifth of the shares
granted for each year of service (up to five). However, the shares will be
forfeited if the director's service terminates (other than for death or
disability) prior to the end of the restricted period. The Plan also provides
for an annual grant to each director of options to purchase 2,000 shares of
common stock at 100 percent of the fair market value on the date of grant.
Option grants vest in cumulative installments of 40 percent on April 1 of the
year following the grant date and an additional 30 percent on April 1 of each of
the next two years.

MANAGEMENT DEVELOPMENT AND COMPENSATION COMMITTEE

The primary functions of the Management Development and Compensation
Committee of the Board are to review and recommend the compensation arrangements
for officers; approve compensation arrangements for other senior level
employees; consider matters related to management development and succession and
recommend individuals for election as officers; and review or take such other
action as may be required in connection with the bonus, stock and other benefit
plans of Honeywell and its subsidiaries. The members of the Committee are:
Robert P. Luciano (Chair), Hans W. Becherer, Gordon M. Bethune, Bruce Karatz,
Ivan G. Seidenberg and John R. Stafford.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

At December 31, 2001, State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts, 02101 held 72,047,278 shares or approximately 8.8
percent of our outstanding common stock as trustee of certain of Honeywell's
savings plans. Under the terms of the plans, State Street is required to vote
shares attributable to any participant in accordance with instructions received
from the participant and to vote all shares for which it does not receive
instructions in the same ratio as the shares for which instructions were
received. State Street disclaims beneficial ownership of the shares referred to
above. State Street also held 19,171,688 shares, or approximately 2.4 percent of
our outstanding common stock in various other fiduciary capacities.

At December 31, 2001, Capital Research and Management Company, 333 South
Hope Street, Los Angeles, California, 90071 owned 47,698,600 shares of common
stock representing approximately 5.9 percent of our outstanding common stock.

66

STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS

In general, 'beneficial ownership' includes those shares a director or
executive officer has the power to vote or transfer, and stock options that are
exercisable currently or within 60 days. On December 31, 2001, the directors and
executive officers of Honeywell beneficially owned, in the aggregate, 6,678,131
shares of common stock which are included in the table below. Directors and
executive officers also have interests in stock-based units under Honeywell's
plans. While these units may not be voted or transferred, we have included them
in the table below as they represent the total economic interest of the
directors and executive officers in Honeywell stock.

- ---------

(1) The total beneficial ownership for any individual is less than 0.3 percent,
and the total for the group is less than 0.9 percent, of the shares of
common stock outstanding.

(2) Includes the following number of shares or share-equivalents in deferred
accounts, as to which no voting or investment power exists: Mr. Becherer,
23,226; Mr. Bethune, 5,159; Mr. Bonsignore, 3,961; Mr. Bossidy, 20,354;
Mr. Carter, 6,948; Mr. Chico Pardo, 8,504; Ms. Fudge, 8,289; Mr. Howard,
33,162; Dr. B. Johnson, 225; Mr. R. Johnson, 968; Mr. Karatz, 25,040;
Mr. Kreindler, 22,300; Mr. Luciano, 11,492; Mr. Palmer, 11,230;
Mr. Seidenberg, 12,514; Mr. Stafford, 17,213; Mr. Wallman, 72,256;
Mr. Wright, 46,249; and all directors and executive officers as a group,
353,162.

(3) Includes shares which the following have the right to acquire within 60 days
through the exercise of vested stock options: Mr. Becherer, 12,200;
Mr. Bethune, 800; Mr. Bonsignore, 1,883,194; Mr. Bossidy, 1,500,000;
Mr. Carter, 2,200; Mr. Chico Pardo, 800; Ms. Fudge, 12,200; Mr. Howard, 800;
Dr. B. Johnson, 132,000; Mr. R. Johnson, 340,000; Mr. Karatz, 800;
Mr. Kreindler, 477,500; Mr. Luciano, 12,200; Mr. Palmer, 8,200;
Mr. Seidenberg, 10,200; Mr. Stafford, 12,200; Mr. Wallman, 657,750;
Mr. Wright, 800; and all directors and executive officers as a group,
5,923,744.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In connection with certain tax planning for Honeywell, we secured
supplemental retirement payments for three executives by funding them through an
escrow arrangement. By securing the payments, the executive's tax liability was
accelerated. We loaned each executive an amount equal to the related withholding
tax obligation at the time the payments were secured. The loans bear interest at
5.53 percent compounded semiannually and are due December 31, 2004. At
December 31, 2001, the amount of loans outstanding totaled $3,089,590, of which
$1,635,200 was loaned to Mr. Bonsignore, $765,450 to Mr. Wallman and $688,940 to
Dr. B. Johnson. Mr. Bonsignore's loan has been repaid.

67

PART IV.

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

PAGE NUMBER
(a)(1.) Consolidated Financial Statements: IN FORM 10-K
------------

Consolidated Statement of Operations for the
years ended December 31, 2001, 2000 and 1999 26
Consolidated Balance Sheet at December 31, 2001
and 2000 27
Consolidated Statement of Cash Flows for the
years ended December 31, 2001, 2000 and 1999 28
Consolidated Statement of Shareowners' Equity
for the years ended December 31, 2001, 2000
and 1999 29
Notes to Financial Statements 30
Report of Independent Accountants 58

PAGE NUMBER
(a)(2.) Consolidated Financial Statement Schedules: IN FORM 10-K
------------

Schedule II -- Valuation and Qualifying Accounts 73

All other financial statement schedules have been omitted because they are
not applicable to us or the required information is shown in the consolidated
financial statements or notes thereto.

(a)(3.) Exhibits

See the Exhibit Index on pages 70 through 72 of this Form 10-K Annual
Report.

(b) Reports on Form 8-K

During the three months ended December 31, 2001, Current Reports on Form 8-K
were filed on October 10, reporting the termination of the Merger Agreement with
the General Electric Company, and on October 25, reporting third quarter 2001
financial results.

68

SIGNATURES

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

HONEYWELL INTERNATIONAL INC.

March 19, 2002 By: /s/ JOHN J. TUS
-------------------------------
John J. Tus
Vice President and Controller

Pursuant to the requirements of the Securities Exchange Act of 1934, this
annual report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated:

March 19, 2002

69

EXHIBIT INDEX

- ---------

The Exhibits identified above with an asterisk(*) are management contracts
or compensatory plans or arrangements.

72

HONEYWELL INTERNATIONAL INC

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 2001
(IN MILLIONS)

ALLOWANCE FOR DOUBTFUL ACCOUNTS:

Balance December 31, 1998................................... $ 78
Provision charged to income............................. 31
Deductions from reserves(1)............................. (25)
----
Balance December 31, 1999................................... 84
Provision charged to income............................. 52
Deductions from reserves(1)............................. (37)
----
Balance December 31, 2000................................... 99
Provision charged to income............................. 84
Deductions from reserves(1)............................. (55)
----
Balance December 31, 2001................................... $128
----
----

- ---------

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

73

STATEMENT OF DIFFERENCES
------------------------

The registered trademark symbol shall be expressed as ................... 'r'
Characters normally expressed as subscript shall be preceded by.......... [u]