TYCO INTERNATIONAL LTD /BER/ - 10-Q Quarterly Report

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

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FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003

OR

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

001-13836
(COMMISSION FILE NUMBER)

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TYCO INTERNATIONAL LTD.
(Exact name of Registrant as specified in its charter)

BERMUDA 04-2297459
(Jurisdiction of Incorporation) (I.R.S. Employer Identification Number)

THE ZURICH CENTRE, SECOND FLOOR, 90 PITTS BAY ROAD, PEMBROKE, HM 08, BERMUDA
(Address of Registrant's principal executive office)

441-292-8674
(Registrant's telephone number)

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Indicate by check mark whether the Registrant (1) has filed all reports to
be filed by Section 13 or 15 (d) of the Securities Exchange Act 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 whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes /X/ No / /

The number of common shares outstanding as of May 6, 2003 was 1,996,886,178.

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TYCO INTERNATIONAL LTD.
INDEX TO FORM 10-Q

PART I--FINANCIAL INFORMATION

ITEM 1--FINANCIAL STATEMENTS

TYCO INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)

See Notes to Consolidated Financial Statements (Unaudited).

1

TYCO INTERNATIONAL LTD.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN MILLIONS, EXCEPT SHARE DATA)

See Notes to Consolidated Financial Statements (Unaudited).

2

TYCO INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN MILLIONS)

See Notes to Consolidated Financial Statements (Unaudited).

3

TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

BASIS OF PRESENTATION--The unaudited Consolidated Financial Statements
include the consolidated accounts of Tyco International Ltd., a company
incorporated in Bermuda, and its subsidiaries (hereinafter "we," the "Company"
or "Tyco").

The financial statements have been prepared in accordance with the
instructions to Form 10-Q and do not include all the information and note
disclosures required by generally accepted accounting principles ("GAAP") in the
United States. These statements should be read in conjunction with the Company's
Annual Report on Form 10-K for the fiscal year ended September 30, 2002.

The Consolidated Financial Statements have not been audited by independent
accountants in accordance with generally accepted auditing standards, but in the
opinion of management, such financial statements include all adjustments,
consisting only of normal recurring adjustments, other than the matters
discussed below, necessary to summarize fairly the Company's financial position
and results of operations. Certain prior period amounts have been reclassified
to conform with the current period presentation. All references in this
Form 10-Q to "$" are to U.S. dollars.

CHANGES IN ACCOUNTING METHODS--As discussed in the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 2002, the Company purchases
residential security monitoring contracts from an external network of
independent dealers who operate under ADT's authorized dealer program (the
"dealer program"). The purchase price of these customer contracts is recorded as
an intangible asset (i.e., contracts and related customer relationships), and
historically has been amortized on a straight-line method generally over a
ten-year period. During the quarter ended March 31, 2003, the Company concluded
a comprehensive review of its amortization policy with respect to these dealer
customer account costs. This review included a detailed attrition study of the
dealer program customer base conducted by an independent appraiser using data
through March 31, 2003.

The Company generally divides its electronic security assets into three
asset pools: internally generated residential systems, internally generated
commercial systems and accounts acquired through our dealer program. After
evaluating various methods that would reflect the most recent attrition pattern
of the accounts acquired through the dealer program, the Company concluded that
the most appropriate amortization method would be an accelerated method that
approximates the allocation of costs to the revenue curve generated by our
actual attrition data. The estimated life of a dealer account pool generated
from the results of the appraiser's lifing study is approximately twelve years.
The Company believes that the change to this method is appropriate based on its
actual attrition data that indicates an increase in the rate of customer
attrition following the expiration of the initial three-year term of monitoring
contracts with customers. The accelerated method that presently best achieves
the matching objective described above is the double-declining balance method
based on a ten-year life for the first eight years of the estimated life of the
customer relationships, converting to the straight-line method of amortization
to completely amortize the asset pool by the end of the twelfth year. This
method of amortization will be periodically reviewed and compared to observed
actual attrition.

Adoption of the declining-balance method together with the related change in
expected asset life prevents the Company from distinguishing the effect of the
change in method (straight-line to declining-balance) from the change in
estimated life. In such cases, generally accepted accounting principles require
that the effect of such a change be recognized in operations in the period of
the change, rather than as a cumulative effect of a change in accounting
principle. Accordingly, the effect of the change increased amortization expense
reported in the second quarter by $364.5 million, $315.5 million of which
relates to the cumulative adjustment as of January 1, 2003 and $49.0 million of
which relates to the second quarter of fiscal 2003.

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

1. BASIS OF PRESENTATION (CONTINUED)
The Company also undertook a comprehensive review of its depreciation policy
with respect to security monitoring systems installed in residential and
commercial customer premises. The costs of these systems are combined in
separate pools for internally generated residential and commercial account
customers, and generally depreciated over ten years. Based on the results of
this review, the Company concluded that for residential and commercial account
pools the straight-line method of amortization over a ten-year period continues
to be appropriate given the observed actual attrition data for these pools.

In addition to the change in method of amortization for its dealer account
pool, the Company also changed its method of accounting for the non-refundable
charge associated with its dealer program. For detailed information on this
accounting change, see Note 8--"Cumulative Effect of Accounting Change."

CHARGES RELATED TO CURRENT PERIOD CHANGES IN ESTIMATES--During the quarter
ended March 31, 2003, the Company intensified a process whereby internal audits
and detailed controls and operating reviews were conducted. As a result of this
process, the Company recorded $471.4 million of pre-tax charges relating to new
information and changes in facts and circumstances occurring during the quarter.
The process included assessing the continued recoverability of assets, including
accounts receivable, inventory and installed security systems and equity
investments, and the estimates of costs relating to legal, environmental and
insurance obligations. The assessments were based primarily on an analysis of
recent events and more detailed experience that occurred during the quarter.
Concurrent with this review process and resulting assessments by management
during the quarter, decisions were made to discontinue existing product lines
and terminate information technology systems implementation projects. As a
result of these decisions, inventory and other asset balances were written down
to their net realizable value.

The charges of $471.4 million include $165.0 million related to increased
cost estimates for environmental, legal and product liability, workers
compensation and general liability insurance accruals, $107.8 million related to
accounts receivable and inventory reserve valuations, $84.1 million related to
an other than temporary decline in the value of investments, $36.6 million for
account write-offs, where management concluded that the recoverability of
various asset balances which had become doubtful, and $77.9 million for other
accounting estimate changes. The Company also recorded an expense of $91.5
million for a retroactive, incremental premium on prior period directors and
officers insurance coverage negotiated with its third party insurance carriers
during the quarter (see Note 12).

CHARGES RELATING TO PRIOR YEARS AND QUARTERS RECORDED IN THE QUARTER ENDED
MARCH 31, 2003--As a result of the Company's intensified internal audits and
detailed controls and operating reviews, the Company identified and recorded
pre-tax charges of $434.5 million for charges related to prior periods. These
charges resulted from capitalizing certain selling expenses to property, plant
and equipment and other non-current assets, mostly in the Fire and Security
Services segment and reconciliation items relating to balance sheet accounts
where certain account analysis or periodic reconciliations were deficient,
resulting in adjustments primarily related to the Engineered Products and
Services segment. Additionally, charges related to the correction of balances
primarily related to corporate pension and deferred compensation accruals as of
September 30, 2002 and other accounting adjustments (e.g. purchase price
accounting accruals, deferred commissions, accounting related to leases in the
Fire and Security Services and Engineered Products and Services segments).
Management has concluded that the effect of these adjustments, as well as those
adjustments relating to prior years recorded in the quarter

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

1. BASIS OF PRESENTATION (CONTINUED)
ended December 31, 2001 (see below), are not material individually or in the
aggregate to prior periods. Accordingly, prior period financial statements have
not been restated.

CHARGES RELATING TO PRIOR YEARS RECORDED IN THE QUARTER ENDED DECEMBER 31,
2001--As discussed in the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 2002, during the fourth quarter of fiscal 2002, the
Company identified various adjustments relating to prior year financial
statements. At the time the fiscal 2002 financial statements were issued,
management concluded the effects of these adjustments, as well as any unrecorded
proposed audit adjustments, were not material individually or in the aggregate
to fiscal 2002 or any year prior. Accordingly, prior year financial statements
were not restated. Instead, these adjustments that aggregate $261.6 million on a
pre-tax income basis or $199.7 million on an after-tax income basis were
recorded effective October 1, 2001. The nature and amounts of these adjustments
are principally as follows:

- The Company determined the amounts reimbursed from dealers under its
dealer program exceeded the costs actually incurred. The cumulative effect
of reimbursements recorded in years prior to fiscal 2002 in excess of
costs incurred, net of the effect of the deferred credit, which would have
been amortized as described in Note 1 to the Company's Form 10-K for the
year ended September 30, 2002 is $185.9 million. This amount is included
on the selling, general and administrative expenses line in the
December 31, 2001 Consolidated Statement of Operations.

- The Company determined that the net gain of $64.1 million on the issuance
of TyCom shares previously reported for fiscal 2001 should have been lower
by $39.6 million. The $39.6 million associated with the sale of common
shares of TyCom is included on a separate line in the December 31, 2001
Consolidated Statement of Operations.

- As described in Note 1 to the Company's Form 10-K for the year ended
September 30, 2002, the Company identified several adjustments, both as a
result of the Phase 2 review and the recording of previously unrecorded
audit adjustments, which are more appropriately recorded as expenses,
rather than as part of the Company's acquisition accounting. The
cumulative effect of the adjustments necessary to revise the prior
accounting is a pre-tax charge of $36.1 million, $25.4 million of which is
included in selling, general and administrative expenses and
$10.7 million of which is included in cost of sales in the December 31,
2001 Consolidated Statement of Operations.

IMPACT ON PRIOR PERIODS--The tables below present the pre-tax charges for
the following items in the periods to which the charges relate: (i) the
$261.6 million charge relating to prior periods recorded during the quarter
ended December 31, 2001; (ii) the $434.5 million charge relating to prior years
and quarters recorded in the quarter ended March 31, 2003; and (iii) certain
other adjustments that represent timing differences between periods comprised of
$16.0 million relating to the recognition of revenue at one of the Company's
business units (TyCom) and $154.3 million relating to the settlement of
litigation and related subsequent transactions with respect to the Healthcare
segment.

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

1. BASIS OF PRESENTATION (CONTINUED)
($ IN MILLIONS)

(INCREASE) DECREASE IN INCOME

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(1) The adjustment for the Healthcare divestiture transaction is subjective in
regards to a judgmental assessment of the assigned value of an intangible
asset (and related amortization), which was not subjected to a
contemporaneous appraisal and was subsequently sold as part of a business
divestiture. The Company had assigned a value of $166.8 million to the
intangible asset relating to the settlement of litigation. The analysis
above presents the adjustment that would be necessary if there were zero
value assigned to the intangible asset. Management believes that the
intangible asset was worth more than zero. However, because it was not
subjected to a contemporaneous appraisal, the Company could not substantiate
the value. As such the table above reflects the necessary adjustment as if
it had zero value.

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

1. BASIS OF PRESENTATION (CONTINUED)
The table below discloses the impact the above adjustments would have had on
income or loss from continuing operations and net income or loss for each period
presented.

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(1) The fair value was calculated using the Black-Scholes option pricing model
with a volatity of 64% for the quarter and six months ended March 31, 2003.
All other assumptions are consistent with those disclosed in the Company's
Annual Report on Form 10-K for the fiscal year ended September 30, 2002.

In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities." This interpretation clarifies the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," relating to consolidation
of certain entities. FIN 46 requires identification of the Company's
participation in variable interest entities (VIE), which are defined as entities
with a level of invested equity that is not sufficient to fund future activities
to permit them to operate on a stand alone basis, or whose equity holders lack
certain characteristics of a controlling financial interest. For entities
identified as VIE, FIN 46 sets forth a model to evaluate potential consolidation
based on an assessment of which party to the VIE, if any, bears a majority of
the risk to its expected losses, or stands to gain from a majority of its
expected returns. FIN 46 applies immediately to variable interest entities
created or acquired after January 31, 2003. We have not created any variable
interest in any variable interest entities subsequent to January 31, 2003. FIN
46 also sets forth certain disclosures regarding interests in VIE's that are
deemed significant, even if consolidation is not required. For variable interest
entities in which the Company holds a variable interest acquired on or before
January 31, 2003, the Company will adopt FIN 46's accounting provisions on
July 1, 2003. See Note 16 for further discussion of the impact of FIN 46.

2. ACQUISITIONS AND DIVESTITURES

During the first six months of fiscal 2003, the Company purchased five
businesses within the Healthcare, Engineered Products and Services, and
Electronics segments for an aggregate cost of $34.6 million in cash, net of
$1.3 million of cash acquired. During the first six months of fiscal 2003, the
Company paid $113.2 million of cash for utilization of purchase accounting
liabilities related to prior years' acquisitions. In addition, the Company paid
cash of approximately $76.3 million relating to holdback and earn-out
liabilities related to certain prior period acquisitions. Holdback liabilities
represent a portion of the purchase price withheld from the seller pending
finalization of the

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

2. ACQUISITIONS AND DIVESTITURES (CONTINUED)
acquisition balance sheet. Certain acquisitions have provisions that would
require Tyco to make additional "earn-out" payments to the sellers if the
acquired company achieves certain milestones subsequent to its acquisition by
Tyco. These earn-out payments are tied to certain performance measures, such as
revenue, gross margin or earnings growth and are generally treated as additional
purchase price. In addition, the Company paid $358.3 million (after adjusting
for the impact of the change in accounting discussed in Note 8) of cash during
the six months ended March 31, 2003, to acquire approximately 377,500 customer
contracts for electronic security services through the Company's dealer program.
The cash portions of acquisition costs for the business and customer contracts
were funded utilizing cash from operations. The results of operations of the
acquired companies have been included in Tyco's consolidated results from their
respective acquisition dates.

The Company purchased all of the voting equity interests in each of the
businesses acquired. At the time each purchase acquisition is made, the Company
records each asset acquired and each liability assumed at its estimated fair
value, which amount is subject to future adjustment when appraisals or other
valuation data are obtained. The excess of (i) the total consideration paid for
the acquired company over (ii) the fair value of tangible and intangible assets
acquired less liabilities assumed and purchase accounting liabilities
established is recorded as goodwill. As a result of acquisitions completed
during the first six months of fiscal 2003, and adjustments to the fair values
of assets and liabilities and purchase accounting liabilities recorded for
acquisitions completed prior to fiscal 2003, Tyco recorded a net decrease of
$373.3 million in goodwill and an additional $59.0 million in other intangible
assets during the six months ended March 31, 2003. The net decrease in goodwill
includes $383.6 million associated with prior years' acquisitions, primarily
Sensormatic Electronics Corporation ("Sensormatic"), acquired in November 2001,
Mallinckrodt, Inc. ("Mallinckrodt"), acquired in October 2000, and Lucent
Technologies' Power Systems ("LPS"), acquired in December 2000, slightly offset
by an increase of $10.3 million due to current year acquisitions. Adjustments
for Sensormatic primarily relate to fair value adjustments as well as the
finalization of deferred tax adjustments related to previously recorded purchase
accounting liabilities. Adjustments for LPS and Mallinckrodt primarily relate to
reductions in purchase accounting liabilities due to actual costs being less
than originally estimated. See roll forward of purchase accounting accruals
below. The increase in intangible assets is due to adjustments associated with
prior years' acquisitions.

Acquisitions were an important part of Tyco's growth during the past few
years. When Tyco made acquisitions it sought to complement existing products and
services, enhance the Company's product lines and/or expand its customer base.
Tyco determined what it was willing to pay for an acquisition partially based on
its expectation that it could cost effectively integrate the products and
services of an acquired company into Tyco's existing infrastructure and improve
earnings by removing overhead costs in areas where there are duplicate sales,
administrative or other facilities and functions. In addition, the Company
utilized existing infrastructure (e.g., established sales force, distribution
channels, customer relations, etc.) of acquired companies to cost effectively
introduce Tyco's products to new geographic areas. The Company also targeted
companies that were perceived to be experiencing depressed financial
performance. All these factors contributed to acquisition prices in excess of
the fair value of net assets acquired and the resultant goodwill. However, the
Company expects to complete significantly fewer acquisitions as compared to the
past few years due to its focus on enhancing internal growth within its existing
businesses.

The following table shows the fair values of assets and liabilities recorded
for purchase acquisitions completed in the first six months of fiscal 2003,
adjusted to reflect changes in the fair values of assets

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

2. ACQUISITIONS AND DIVESTITURES (CONTINUED)
and liabilities and purchase accounting liabilities and holdback/earn-out
liabilities recorded for purchase acquisitions completed prior to fiscal 2003 ($
in millions):

Accounts receivable......................................... $ 29.3
Inventories................................................. 19.2
Prepaid expenses and other current assets................... 11.3
Deferred income taxes....................................... (91.4)
Property, plant and equipment, net.......................... 41.0
Goodwill.................................................... (373.3)
Intangible assets........................................... 59.0
Other assets................................................ 11.5
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(293.4)
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Accounts payable............................................ 0.8
Accrued expenses and other current liabilities.............. (277.1)
Holdback/earn-out liabilities............................... 8.5
Deferred income taxes....................................... (73.9)
Other long-term liabilities................................. 5.1
Fair value of debt assumed.................................. 8.6
-------
(328.0)
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Cash consideration paid (net of $1.3 million of cash
acquired)................................................. $ 34.6
=======

Purchase accounting liabilities recorded during the first six months of
fiscal 2003 in connection with fiscal 2003 purchase acquisitions were
immaterial.

The following table summarizes the purchase accounting liabilities recorded
in connection with fiscal 2002 purchase acquisitions ($ in millions):

During the six months of fiscal 2003, the Company recorded additions to
purchase accounting liabilities as it continued to formulate the integration
plans of fiscal 2002 acquisitions, such as Paragon (integrated within the
Healthcare segment) and Eberle (integrated within the Electronics segment).
Finalization of components of integration plans associated with acquisitions
resulted in additional

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

2. ACQUISITIONS AND DIVESTITURES (CONTINUED)
purchase accounting liabilities of $21.7 million and a corresponding increase to
goodwill and deferred tax assets. These additions reflect the termination of an
additional 549 employees, the closure of an additional 17 facilities, additional
distributor and supplier cancellation fees and other acquisition related costs
consisting primarily of professional fees and other costs.

During the first six months ended March 31, 2003, the Company reduced its
estimate of purchase accounting liabilities relating to fiscal 2002 acquisitions
by $9.0 million primarily because actual costs were less than originally
estimated since the Company severed 497 fewer employees and closed 32 fewer
facilities than originally anticipated due to revisions to integration plans.
Goodwill and related deferred tax assets were reduced by an equivalent amount.

Tyco has not yet finalized all of its business integration plans for fiscal
2002 acquisitions. Accordingly, purchase accounting liabilities are subject to
revision in future quarters. However, we do not expect any resulting adjustments
to be significant.

The following table summarizes the purchase accounting liabilities recorded
in connection with the fiscal 2001 purchase acquisitions ($ in millions):

During the first six months of fiscal 2003, the Company reduced its estimate
of purchase accounting liabilities relating to fiscal 2001 acquisitions by
$145.7 million primarily because actual costs were less than originally
estimated since the Company severed 518 fewer employees and closed 21 fewer
facilities than originally anticipated due to revisions to integration plans.
Goodwill and related deferred tax assets were reduced by an equivalent amount.

At March 31, 2003, there remained a total of $24.5 million in reserves
related to fiscal 2000 and prior acquisitions. These liabilities primarily
relate to facility-related costs (principally for rents under non-cancelable
leases for vacated premises), employee severance (principally for payments to
employees already terminated with severance paid out over time), and other
costs. Tyco expects that the termination of employees and consolidation of
facilities related to all acquisitions will be substantially complete within two
years of the related dates of acquisition, except for certain long-term
contractual obligations.

At March 31, 2003, holdback/earn-out liabilities of $216.9 million remained
on the Consolidated Balance Sheet, of which $100.8 million are included in
accrued expenses and other current liabilities and $116.1 million are included
in other long-term liabilities. In addition, a total of $288.1 million of
purchase accounting liabilities related to all acquisitions remained on the
Consolidated Balance Sheet,

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

2. ACQUISITIONS AND DIVESTITURES (CONTINUED)
of which $158.6 million are included in accrued expenses and other current
liabilities and $129.5 million are included in other long-term liabilities. At
March 31, 2003, the Company had a contingent liability of $80 million related to
the fiscal 2001 acquisition of Com-Net by the Electronics segment. The
$80 million is the maximum amount payable to the former shareholders of Com-Net
only after the construction and installation of a communications system for the
State of Florida is finished and the State has approved the system based on the
guidelines set forth in the contract. The $80 million is not accrued at
March 31, 2003, as the outcome of this contingency cannot be reasonably
determined.

During the six months ended March 31, 2003, the Company sold certain of its
businesses within the Healthcare segment for net proceeds of approximately
$5.4 million in cash.

In accordance with SFAS No. 141, "Business Combinations," the following
unaudited pro forma data summarizes the results of operations for the periods
indicated as if fiscal 2003 acquisitions, fiscal 2002 acquisitions and the
amalgamation with TyCom had been completed as of the beginning of the periods
presented. The pro forma data give effect to actual operating results prior to
the acquisitions and adjustments to interest expense and income taxes. No effect
has been given to cost reductions or operating synergies in this presentation.
These pro forma amounts do not purport to be indicative of the results that
would have actually been achieved if the acquisitions and amalgamation had
occurred as of the beginning of the periods presented or that may be achieved in
the future.

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(1) Includes $434.5 million of charges related to prior periods recorded in the
quarter ended March 31, 2003, restructuring and other credits of
$76.2 million, of which $13.1 million is included in cost of sales and
charges for the impairment of long-lived assets of $23.3 million.

(2) Includes restructuring and other charges of $680.8 million, of which
$257.1 million is included in cost of sales, charges for the impairment of
long-lived assets of $2,351.7 million primarily related to the write-down of
the Tyco Global Network ("TGN") and charges related to prior years of $261.6
recorded in the quarter ended December 31, 2001.

3. CONSOLIDATED SEGMENT DATA

During fiscal 2003, a change was made to the Company's internal reporting
structure such that the operations of Tyco's plastics and adhesives businesses
(previously reported within the Healthcare and Specialty Products segment) now
comprise the Company's new Plastics and Adhesives reportable segment. The
Company has conformed its segment reporting accordingly and has reclassified

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

3. CONSOLIDATED SEGMENT DATA (CONTINUED)
comparative prior period information to reflect this change. In addition, during
the quarter ended March 31, 2003, management began evaluating segment
performance based upon operating results calculated in accordance with GAAP as
opposed to on an adjusted basis. Accordingly, operating (loss) income by segment
shown below has been presented in accordance with GAAP. Prior year amounts have
been conformed accordingly, and as such, include the charges for amounts
previously excluded from management's internal reporting. These items are
footnoted below the table.

Selected information for the Company's five segments is presented in the
following table.

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

(1) Includes a charge of $364.5 million reflecting a change in the method of
amortization used for dealer program account assets, a charge of
$7.0 million resulting from the change in method of accounting for the
non-refundable charge associated with the dealer program, a charge of
$270.4 million related to prior periods (of which $2.5 million is included
in impairment of long-lived assets), a charge of $10.2 million for the
impairment of property, plant and equipment, and a restructuring credit of
$2.0 million due to costs being less than anticipated.

(2) Includes a restructuring credit of $54.8 million, of which $12.9 million is
included in cost of sales.

(3) Includes a restructuring credit of $4.7 million.

(4) Includes a charge of $118.9 million related to prior periods.

(5) Includes a charge of $20.7 million related to prior periods and a
restructuring credit of $0.4 million due to costs being less than
anticipated.

(6) Includes charges of $24.5 million related to prior years, a restructuring
credit of $10.6 million due to costs being less than anticipated, and a
charge of $10.6 million for the impairment of property, plant and equipment.

(7) Includes restructuring charges of $14.3 million primarily related to
severance associated with the closure of existing facilities that had
become redundant due to acquisitions and a charge of $13.8 million related
to the write-up of inventory under purchase accounting, which is included in
cost of revenue.

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

3. CONSOLIDATED SEGMENT DATA (CONTINUED)
(8) Includes charges for the impairment of property, plant and equipment of
$2,346.0 million primarily related to the write-down of the TGN (See
Note 5) and the closure of certain facilities. Also includes restructuring
charges of $611.5 million, of which $237.5 million is included in cost of
revenue, related to the write-down of inventory and certain facility
closures.

(9) Includes a charge of $7.8 million related to the write-off of legal fees
and other deal costs associated with an acquisition that was not completed.

(10) Includes restructuring and other charges of $6.8 million primarily related
to the closure of facilities and charges of $5.7 million for the impairment
of property, plant and equipment primarily related to the termination of
employees and the write-down of inventory associated with exiting a product
line.

(11) Includes a restructuring charge of $0.9 million related to the write-off of
legal fees and other deal costs associated with an acquisition that was not
completed.

(12) Includes a charge of $364.5 million reflecting a change in the method of
amortization used for dealer program account assets, a charge of
$18.5 million resulting from the change in method of accounting for the
non-refundable charge associated with the dealer program, a charge of
$270.4 million related to the prior periods (of which $2.5 million is
included in impairment of long-lived assets), a charge of $10.2 million for
the impairment of property, plant and equipment, and a restructuring credit
of $2.0 million due to costs being less than anticipated.

(13) Includes a restructuring credit of $56.5 million, of which $12.9 million is
included in cost of sales.

(14) Includes a restructuring credit of $6.7 million, of which $0.2 million is
included in cost of sales.

(15) Includes restructuring charges of $22.1 million primarily related to
severance associated with the closure of existing facilities that had
become redundant due to acquisitions and a charge of $13.8 million related
to the write-up of inventory under purchase accounting, which is included in
cost of revenue.

(16) Includes restructuring and other charges of $24.7 million, of which
$5.8 million is included in cost of sales and charges of $5.7 million for
the impairment of property, plant and equipment primarily related to the
termination of employees and the write-down of inventory associated with
exiting a product line.

(17) Includes charges related to prior years of $222.0 million (see Note 1).

4. RESTRUCTURING AND OTHER (CREDITS) CHARGES, NET

Restructuring and other (credits) charges, net, are as follows ($ in
millions):

2003 CREDITS

During the first six months of fiscal 2003, the Electronics segment recorded
restructuring credits of $56.5 million, of which $12.9 million is included in
cost of sales, the Healthcare segment recorded restructuring credits of
$6.7 million, of which $0.2 million is included in cost of sales, the Fire and
Security Services segment recorded restructuring credits of $2.0 million and the
Plastics and Adhesives segment recorded restructuring credits of $0.4 million,
related to a revision of estimates of prior years' restructuring charges.
Additionally, credits of $10.6 million were recorded due to costs being less
than anticipated.

16

TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

4. RESTRUCTURING AND OTHER (CREDITS) CHARGES, NET (CONTINUED)

2002 CHARGES AND CREDITS

The disclosures in the Company's fiscal 2002 Annual Report on Form 10-K
discuss net restructuring and other charges of $1,954.3 million recorded during
fiscal 2002 and the related activity with respect to these charges through
September 30, 2002. The following tables provide a summary by segment of the
remaining balances as of September 30, 2002 related to these charges and the
activity with respect to these charges during the six months ended March 31,
2003 ($ in millions):

During fiscal 2002, the Electronics segment incurred charges of
$608.2 million for inventory write-downs, of which $143.1 million was scrapped
as of September 30, 2002. The remaining $465.1 million is comprised of a lower
of cost or market write-down of $166.1 million and a write-down related to
inventory to be scrapped of $299.0 million. Of the $299.0 million,
$204.7 million of inventory was

17

TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

4. RESTRUCTURING AND OTHER (CREDITS) CHARGES, NET (CONTINUED)
scrapped during the six months ended March 31, 2003. We expect the remaining
$94.3 million to be scrapped over the next three months.

In addition to the above segment liabilities, a total of $7.4 million
remained on the balance sheet at March 31, 2003 related to 2002 corporate
restructuring and other charges. These liabilities primarily relate to severance
and other items associated with the termination of employees at the corporate
headquarters.

At March 31, 2003, there remained a total of $461.1 million in reserves
related to fiscal 2002 restructuring and other charges on the Consolidated
Balance Sheet, of which $309.8 million is included in accrued expenses and other
current liabilities and $151.3 million is included in other long-term
liabilities. The Company currently anticipates that the restructuring activities
related to the fiscal 2002 total charges will be substantially completed within
fiscal 2003, except for certain long-term contractual obligations.

2001 CHARGES AND CREDITS

The disclosures in the Company's fiscal 2002 Annual Report on Form 10-K
discuss net restructuring and other charges of $418.5 million recorded during
fiscal 2001 and the related activity with respect to these charges through
September 30, 2002. The following tables provide a summary by

18

TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

4. RESTRUCTURING AND OTHER (CREDITS) CHARGES, NET (CONTINUED)
segment of the remaining balances as of September 30, 2002 related to these
charges and the activity with respect to these charges during the quarter ended
March 31, 2003 ($ in millions):

At March 31, 2003, there remained a total of $39.2 million in liabilities
related to fiscal 2001 restructuring and other charges on the Consolidated
Balance Sheet, of which $23.4 million is included in accrued expenses and other
current liabilities and $15.8 million is included in other long-term
liabilities. These remaining liabilities primarily relate to future payments on
certain long-term contractual obligations.

19

TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

4. RESTRUCTURING AND OTHER (CREDITS) CHARGES, NET (CONTINUED)
2000 AND PRIOR YEARS' CHARGES AND CREDITS

At March 31, 2003, there remained a total of $6.8 million in liabilities
related to fiscal 2000 and prior years' restructuring and other charges on the
Consolidated Balance Sheet, of which $4.5 million is included in accrued
expenses and other current liabilities and $2.3 million is included in other
long-term liabilities. These liabilities primarily relate to certain long-term
obligations.

5. CHARGES FOR THE IMPAIRMENT OF LONG-LIVED ASSETS

The Company reviews the recoverability of the carrying value of long-lived
assets, including property, plant and equipment, intangible assets as well as
the TGN, for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be fully recoverable. The Company
evaluates the recoverability of long-lived assets relying on a number of factors
including operating results, business plans, economic projections and
anticipated future cash flows. An impairment in the carrying value of an asset
is recognized whenever anticipated future cash flows (undiscounted) from an
asset are estimated to be less than its carrying value. When indicators of
impairment are present, the carrying values of the assets are evaluated in
relation to the operating performance and future undiscounted cash flows of the
underlying business. The net book value of an asset is adjusted to fair value if
its expected future undiscounted cash flows is less than book value. Fair values
are based on assumptions concerning the amount and timing of estimated future
cash flows and assumed discount rates, reflecting varying degrees of perceived
risk.

During the six months ended March 31, 2003, the Company recorded total
charges for the impairment of long-lived assets in continuing operations of
$23.3 million. Of this charge, $12.7 million was recorded within the Fire and
Security Services segment related to the impairment of property, plant and
equipment associated with the termination of a software development project. In
addition, $10.6 million was recorded as a corporate expenses related to the
impairment of property, plant and equipment.

During the six months ended March 31, 2002, the Company recorded total
charges for the impairment of long-lived assets in continuing operations of
$2,351.7 million, of this charge, $2,346.0 million was recorded by the
Electronic segment related to the impairment of the TGN ($2,181.4 million), as
well as the impairment of property, plant and equipment ($164.6 million)
associated with restructuring activities and the related closure of facilities.
The entire TGN placed in service and a portion of construction in progress of
the TGN was written off. The remaining charge of $5.7 million was recorded
within the Engineered Products and Services segment related to the write-off of
property, plant and equipment associated with acquisitions.

20

TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

6. OTHER EXPENSE, NET

Other expense, net is as follows ($ in millions):

Tyco has repurchased some debt prior to scheduled maturities. During the
quarter and six months ended March 31, 2003, the Company recorded other income
from the early retirement of debt totaling $22.7 million and $24.1 million,
respectively, as compared to expense of $2.4 million and $6.7 million during the
quarter and six months ended March 31, 2002, respectively.

During the quarter and six months ended March 31, 2003, the Company
recognized a $75.6 million loss on various equity investments when it became
evident that the declines in the fair value of the investments were other than
temporary, primarily due to the continuing depressed economic conditions
specifically within the telecommunications industry. During the quarter and six
months ended March 31, 2002, the Company recognized a $141.0 million loss on
equity investments, primarily related to its investments in FLAG Telecom
Holdings when it became evident that the declines in the fair value of FLAG and
other investments were other than temporary.

During the quarter and six months ended March 31, 2003, the Company
recognized other expense of $8.5 million in connection with a bank guarantee on
behalf of an equity investee (see Note 17).

During the six months ended March 31, 2003, the Company recorded other
income of $20.0 million related to the return of an unauthorized payment to a
former director of the Company in connection with the acquisition of The CIT
Group, Inc.

7. DISCONTINUED OPERATIONS OF TYCO CAPITAL (CIT GROUP INC.)

On July 8, 2002, the Company completed the sale of 100% of the common shares
of CIT Group Inc., a wholly-owned subsidiary, through an initial public
offering. Operating results from the

21

TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

7. DISCONTINUED OPERATIONS OF TYCO CAPITAL (CIT GROUP INC.) (CONTINUED)
discontinued operations of Tyco Capital for the quarter and six months ended
March 31, 2002 were as follows ($ in millions):

During the quarter ended March 31, 2002, Tyco experienced disruptions to its
business surrounding its announced break-up plan, a downgrade in its credit
ratings, and a significant decline in its market capitalization. During this
same time period, CIT also experienced credit downgrades and a disruption to its
historical funding base.

Further, market-based information used in connection with the Company's
preliminary consideration of the proposed IPO of CIT indicated that CIT's book
value exceeded its estimated fair value as of March 31, 2002. As a result, the
Company performed a SFAS 142 first step impairment analysis as of March 31, 2002
and concluded that an impairment charge was warranted at that date.

Management's objective in performing the SFAS 142 first step analysis was to
obtain relevant market-based data to calculate the estimated fair value of CIT
as of March 31, 2002 based on its projected earnings and market factors expected
to be used by market participants in ascribing value to CIT in the planned
separation of CIT from Tyco. Management obtained relevant market data from
financial advisors regarding the range of price to earnings multiples and market
condition discounts applicable to CIT as of March 31, 2002 and applied these
market data to CIT's projected annual earnings as of March 31, 2002 to calculate
an estimated fair value and any resulting goodwill impairment. The estimated
fair value was compared to the corresponding carrying value of CIT at March 31,
2002. The Company's Consolidated Financial Statements for the quarter ended
March 31, 2002 reflect an impairment for the decline in the estimated fair value
of CIT at that time, resulting in

22

TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

7. DISCONTINUED OPERATIONS OF TYCO CAPITAL (CIT GROUP INC.) (CONTINUED)
an estimated $4,512.7 million impairment charge as of March 31, 2002, which is
included in discontinued operations.

8. CUMULATIVE EFFECT OF ACCOUNTING CHANGE

As discussed in the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 2002, the Company incurs costs associated with maintaining
and operating its ADT authorized dealer program. Dealers reimburse the Company a
non-refundable amount for each of the contracts purchased representing their
reimbursement of such costs. The Company recognizes this non-refundable charge
at the time the contract is accepted for purchase. Prior to fiscal 2002, the
Company recognized in earnings the entire amount of reimbursements from dealers.
Commencing October 1, 2001, to the extent that the amount of dealer
reimbursement exceeded the actual costs incurred by the Company, the excess was
recorded as a deferred credit and amortized on a straight line-basis over ten
years. As described in the following paragraph, during the quarter ended
March 31, 2003, the Company has changed its method of accounting for these
reimbursements from dealers, retroactive to October 1, 2002.

The FASB's Emerging Issues Task Force ("EITF") recently issued EITF 02-16,
"Accounting by a Customer (Including a Reseller) for Certain Consideration
Received from a Vendor," which is applicable to the arrangement between the
Company and its authorized dealers for the electronic security services
business. The issues addressed in EITF 02-16 were brought to the EITF for the
purpose of addressing the wide diversity found in practice, across a variety of
arrangements and industries, in accounting for payments received by purchasers
of goods and services from vendors or suppliers. Pursuant to this consensus, the
consideration received by ADT relating to the non-refundable charge to each
dealer for reimbursement of ADT costs to support the dealer program should be
presumed to be a reduction in the cost to ADT of acquiring customer contracts.
Based on the transition rules of EITF 02-16, we are required to apply this new
consensus to all customer contracts acquired after December 31, 2002. As
permitted under EITF 02-16, during the second quarter of fiscal 2003, the
Company changed its method of accounting for the consideration received by ADT
for the non-refundable charge to dealers for reimbursement of ADT costs to
support the dealer program retroactive to the beginning of the fiscal year. This
was reported as a $206.7 million after-tax ($265.5 million pre-tax) charge for
the cumulative effect of change in accounting principle in the Consolidated
Statement of Operations for the six months ended March 31, 2003, retroactive to
October 1, 2002. The impact on the balance sheet of the cumulative adjustment is
a decrease in net intangible assets of $566.8 million and a decrease in
liabilities for the previously deferred non-refundable charge to dealers of
$301.4 million.

In addition to the charge for the cumulative effect of the change in
accounting described above, the impact of adopting this accounting change was to
decrease the purchase price of customer accounts acquired from the dealers by
$32.0 million and $74.0 million for the quarter and six months ended March 31,
2003, respectively. The impact of the change on results of operations for the
quarter ended March 31, 2003 was an increase to both loss from continuing
operations and net loss of $5.7 million ($7.0 million pre-tax). The change had
no effect on loss from continuing operations per common share or net loss per
common share for the quarter ended March 31, 2003. The impact of the change for
the six months ended March 31, 2003, before the charge for the cumulative effect
of the change discussed above, was a decrease to both income from continuing
operations and net income of $14.7 million ($18.5 million pre-tax) or $0.01 per
common share.

23

TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

8. CUMULATIVE EFFECT OF ACCOUNTING CHANGE (CONTINUED)
The following statement of operations for the quarter ended December 31,
2002 reflects the change in accounting retroactive to the beginning of the
fiscal year, October 1, 2002 (in millions, except per share data):

24

TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

8. CUMULATIVE EFFECT OF ACCOUNTING CHANGE (CONTINUED)
The pro forma amounts shown below give effect to the retroactive application
of the change in accounting which would have been made had the new method been
in effect for the periods presented ($ in millions, except per share data).

9. EARNINGS (LOSS) PER COMMON SHARE

The reconciliations of basic and diluted earnings (loss) per common share
are as follows (in millions, except per share data):

25

TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

9. EARNINGS (LOSS) PER COMMON SHARE (CONTINUED)
The computation of diluted earnings per common share in the quarter and six
months ended March 31, 2003 excludes the effect of the potential exercise of
options to purchase approximately 135.4 million and 131.2 million shares,
respectively, because the effect would be anti-dilutive. Diluted earnings per
common share for both the quarter and six months ended March 31, 2003 excludes
33.0 million shares related to the Company's zero coupon convertible debentures
due 2020 because conversion conditions have not been met. It also excludes
114.1 million and 56.4 million shares for the quarter and six months ended
March 31, 2003 related to the Company's convertible senior debentures due 2018,
respectively and 59.8 million and 29.6 million shares related to the Company's
senior debentures due 2023, respectively, because the effect would be
anti-dilutive.

The computation of diluted earnings per common shares in the quarter and six
months ended March 31, 2002 excludes the potential exercise of options to
purchase approximately 108.2 million and 112.5 million shares, respectively,
because the effect would be anti-dilutive. Dilutive earnings per common share
for both the quarter and six months ended March 31, 2002 excludes 48.0 million
and 26.4 million shares respectively, related to the Company's zero coupon
convertible debentures due 2020 and 2021, respectively, because conversion
conditions had not been met.

10. GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in the carrying amount of goodwill for the six months ended
March 31, 2003 are as follows ($ in millions):

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

(1) These adjustments to goodwill arose from the Company's ongoing program of
intensified internal audits and detailed controls and operating reviews and
impact the Statement of Operations.

The following table sets forth the gross carrying amount and accumulated
amortization of the Company's intangible assets ($ in millions):

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

(1) Intangible assets not subject to amortization are excluded from the
calculation of the weighted average amortization period.

26

TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

As of March 31, 2003 and September 30, 2002 the Company had $140.2 million
and $140.1 million, respectively, of intellectual property, consisting primarily
of trademarks acquired from Sensormatic, that are not subject to amortization.
As of March 31, 2003 and September 30, 2002, the Company had $25.8 million and
$26.2 million, respectively, of other intangible assets that are not subject to
amortization but will be tested at least annually for impairment.

Intangible asset amortization expense for the quarters ended March 31, 2003
and 2002 was $520.3 million and $134.8 million, respectively. Intangible asset
amortization expense for the six months ended March 31, 2003 and 2002 was
$659.1 million and $255.9 million, respectively. Included within amortization
expense for the quarter and six months ended March 31, 2003, is $364.5 million
recorded as a result of a change in accounting method (see Note 1). The
estimated aggregate amortization expense on intangible assets currently owned by
the Company is expected to be approximately $650 million for fiscal 2004,
$600 million for fiscal 2005, $500 million for fiscal 2006, $450 million for
fiscal 2007, and $400 million for fiscal 2008.

11. DEBT

Debt is as follows(1) ($ in millions):

27

TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

11. DEBT (CONTINUED)
- ------------------------------
(1) Debt maturity dates are presented on a calendar basis, consistent with the
respective offering documents.

(2) In January 2003, Tyco International Group S.A. ("TIG"), a wholly-owned
subsidiary of the Company, entered into a $1.5 billion 364-day unsecured
revolving credit facility which also provides for issuance of unsecured
letters of credit. The facility, which is fully and unconditionally
guaranteed by Tyco and certain of its subsidiaries and is guaranteed in part
by various subsidiaries of TIG, has a variable interest rate based on LIBOR.
The margin over LIBOR payable by TIG can vary depending upon changes in its
credit rating and in the market price of one of its outstanding debt
securities. TIG also pays a commitment fee of 0.50% annually on any unused
portion of the line of credit.

(3) In January 2003, TIG repaid its $3.855 billion unsecured term loan from
banks scheduled to expire on February 6, 2003.

(4) In June 1998, TIG issued $750,000,000 of 6.25% Dealer Remarketable
Securities ("Drs.") due 2013. Under the terms of the Drs., the Remarketing
Dealer has an option to remarket the Drs. in June 2003. If this option is
exercised it would subject the Drs. to mandatory tender to the Remarketing
Dealer and reset the interest rate to an adjusted fixed rate until
June 2013. However, TIG may elect to repurchase the securities for a Dollar
Price based upon the $750,000,000 par value of the Drs. plus the difference
between the Base Rate of 5.55% and the ten-year United States Treasury
yield-to-maturity as of June 2003, estimated to be approximately
$110 million based upon the March 31, 2003 ten-year treasury
yield-to-maturity (approximately $120 million as of May 13, 2003). If the
Remarketing Dealer does not exercise its option, then all Drs. are required
to be tendered to the Company in June 2003 and TIG would be required to
repurchase the Drs. from the holders for cash at par value of $750,000,000
and pay the Remarketing Dealer the difference between the Dollar Price and
the par value of the Drs. In either case, the payment above the par value
would be recorded as a loss to income.

TIG has been contemplating an exchange of a new debt security for the Drs.
The exchange would be for the par value of the Drs. and the excess of the
Dollar Price over par value with the latter being amortized over the life of
the new bonds under exchange accounting. The final decision will depend on
the prevailing interest rate environment, the Company's overall liquidity
and its future maturity profile.

(5) In November 2000, Tyco issued $4,657,500,000 principal amount at maturity
of zero coupon convertible debentures due 2020 for aggregate net proceeds
of approximately $3,374,000,000. The debentures accrete interest at a rate
of 1.5% per annum. During the six months ended March 31, 2003, Tyco
purchased $1,085.7 million (par value $1,415.2 million) of its outstanding
zero coupon convertible debentures with a November 2003 put option for cash
of approximately $1,062.8 million. Tyco may be required to repurchase these
securities for cash at the option of the holder at the accreted value of
approximately $2.5 billion in November 2003.

(6) In January 2003, TIG issued $3.0 billion of 2.75% Series A convertible
senior debentures due January 2018 and $1.5 billion of 3.125% Series B
convertible senior debentures due January 2023. These debentures are fully
and unconditionally guaranteed by Tyco, and at any time, holders may convert
each of their debentures into Tyco common shares prior to the stated
maturity at a rate of $22.7832 and $21.7476 respectively, per share.
Additionally, holders of the Series A debentures may require the Company to
purchase all or a portion of their debentures on January 15, 2008 and
January 15, 2013, and holders of the Series B debentures may require the
Company to purchase all or a portion of their debentures on January 15,
2015. If the option is exercised at any one of the aforementioned dates, TIG
must repurchase the debentures at par plus accrued interest, and may elect
to repurchase the securities for cash, Tyco common shares, or some
combination thereof. TIG may redeem for cash some or all of the Series A
debentures and Series B debentures at any time on or after January 20, 2006
and January 20, 2008, respectively. Net proceeds of approximately
$4,387.5 million, before out of pocket expenses, from these debentures were
used primarily to repay debt.

(7) At February 12, 2003, the accreted value of TIG's zero coupon convertible
debentures with a February 2003 put option was $1,850.8 million. On
February 13, 2003, TIG purchased $1,850.1 million of these debentures for
cash at the accreted value. This purchase resulted from the exercise of
investors' option under the indenture to require TIG to purchase debentures
validly surrendered by February 12, 2003.

(8) These instruments, plus $83.7 million of the amount shown as other,
comprise the current portion of long-term debt as of March 31, 2003.

Our credit agreements contain a number of financial covenants, such as
interest coverage and leverage ratios, and restrictive covenants that limit the
amount of debt we can incur and restrict our ability to pay dividends or make
other payments in connection with our capital stock, to make acquisitions or
investments, to pledge assets and to prepay debt that matures after
December 31, 2004. We have several synthetic lease facilities with similar
covenants. Our outstanding indentures contain customary covenants including a
negative pledge, limit on subsidiary debt and limit on sale/leasebacks. None of
these covenants is presently considered restrictive to our operations.

12. COMMITMENTS AND CONTINGENCIES

As a result of actions taken by our former senior corporate management,
Tyco, some members of our former senior corporate management, and former members
of our board of directors are named defendants in a number of purported class
actions alleging violations of the disclosure provisions of the federal
securities laws, as well as in a number of derivative actions. Tyco, certain of
our current and

28

TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
former employees, some members of our former senior corporate management, and
some former members of our board of directors also are named as defendants in
several ERISA actions. In addition, Tyco and some members of our former senior
corporate management are subject to an SEC inquiry; some members of our former
senior corporate management are named as defendants in criminal cases being
prosecuted by the District Attorney of New York County; and some members of our
former senior corporate management are subject to an investigation by, or are
named as a defendant in a criminal case being prosecuted by, the U.S. Attorney
for the District of New Hampshire. The findings and outcomes of the prosecutions
and the SEC civil action may affect the course of the purported class actions,
derivative actions and ERISA claims pending against Tyco. We are generally
obliged to indemnify our directors and our former directors and officers who are
also named as defendants in some or all of these matters to the extent permitted
by Bermuda law. In addition, our insurance carriers may decline coverage, or our
coverage may be insufficient to cover our expenses and liability in some or all
of these matters. On February 13, 2003, one of Tyco's insurance carriers filed
an action in the Supreme Court of the State of New York seeking to rescind
certain directors and officers liability and fiduciary liability insurance
policies issued to Tyco and its directors, officers and fiduciaries on the basis
of alleged misrepresentations made by our former senior corporate management. On
May 8, 2003 Tyco's negotiations with the Company's directors and officers
liability insurance carriers and fiduciary carriers concluded with the filing of
a notice of dismissal of this action. In exchange for a payment of additional
policy premiums, Tyco maintained, in part, its available directors and officers
liability insurance coverage and fiduciary insurance coverage for claims made
during the 2001-2003 policy period. We are unable at this time to estimate what
our ultimate liability in these matters may be, and since Tyco's agreement with
its carriers reduced the overall limits of coverage available to Tyco and other
insureds, we may be required to pay judgments or settlements and incur expenses
in aggregate amounts that would have a material adverse effect on our financial
position, results of operations and liquidity.

We and others have received subpoenas and requests from the SEC, the
District Attorney of New York County, the U.S. Attorney for the District of New
Hampshire and others seeking the production of voluminous documents in
connection with various investigations into our governance, management,
operations, accounting and related controls. In addition, the Department of
Labor is investigating us and the administrators of certain of our benefit
plans. We are also subject to ongoing audits by the Internal Revenue Service. We
cannot predict when these investigations will be completed, nor can we predict
what the results of these investigations may be. It is possible that we will be
required to pay material fines, consent to injunctions on future conduct, lose
the ability to conduct business with government instrumentalities or suffer
other penalties, each of which could have a material adverse effect on our
business. We cannot assure you that the effects and results of these
investigations will not be material and adverse to our business, financial
position, results of operations and liquidity.

Tyco is involved in various stages of investigation and cleanup related to
environmental remediation matters at a number of sites. See "Risk Factors" and
Part II, Item 1. "Legal Proceedings." The ultimate cost of site cleanup is
difficult to predict given the uncertainties regarding the extent of the
required cleanup, the interpretation of applicable laws and regulations and
alternative cleanup methods. We have concluded that it is probable that we will
incur remedial costs in the range of approximately $145 million to
$440 million. As of March 31, 2003, we concluded that the best estimate within
this range is approximately $269 million, of which $32 million is included in
accrued expenses and other current liabilities and $237 million is included in
other long-term liabilities on the accompanying Consolidated Balance Sheet.
Environmental laws are complex, change frequently and have tended to become more
stringent over time. While we have budgeted for future capital and

29

TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
operating expenditures to maintain compliance with such laws, we cannot assure
you that our costs of complying with current or future environmental protection
and health and safety laws, or our liabilities arising from past or future
releases of, or exposures to, hazardous substances will not exceed our estimates
or adversely affect our financial condition and results of operations or that we
will not be subject to additional environmental claims for personal injury or
cleanup in the future based on our past, present or future business activities.

The Company and its subsidiaries' income tax returns are routinely examined
by various regulatory tax authorities. In connection with such examinations, tax
authorities, including the Internal Revenue Service, have raised issues and
proposed tax deficiencies. We are reviewing the issues raised by the tax
authorities and are contesting the proposed deficiencies. Amounts related to
these tax deficiencies and other tax contingencies that management has assessed
as probable and estimable have been accrued through the income tax provision. We
believe but we cannot assure you that the ultimate resolution of these tax
deficiencies and contingencies will not have a material adverse effect on our
results of operations, financial position or cash flows.

Like many other companies, Tyco and some of our subsidiaries are named as
defendants in personal injury lawsuits based on alleged exposure to
asbestos-containing materials. Consistent with the national trend of increased
asbestos-related litigation, we have observed an increase in the number of these
lawsuits in the past several years. The majority of these cases have been filed
against subsidiaries in our Healthcare segment and our Engineered Products and
Services segment. A limited number of the cases allege premises liability, based
on claims that individuals were exposed to asbestos while on a subsidiary's
property. Some of the cases involve product liability claims, based principally
on allegations of past distribution of heat-resistant industrial products
incorporating asbestos or the past distribution of industrial valves that
incorporated asbestos-containing gaskets or packing. Each case typically names
between dozens to hundreds of corporate defendants.

Tyco's involvement in asbestos cases has been limited because our
subsidiaries did not mine or produce asbestos. Furthermore, in our experience, a
large percentage of these claims were never substantiated and have been
dismissed by the courts. Our vigorous defense of these lawsuits has resulted in
judgments in our favor in all cases tried to verdict. We have not suffered an
adverse verdict in a trial court proceeding related to asbestos claims.

When appropriate, we settle claims. However, the total amount paid to date
to settle and defend all asbestos claims has been immaterial. Currently, there
are approximately 12,000 asbestos liability cases pending against us and our
subsidiaries.

We believe that we and our subsidiaries have substantial indemnification
protection and insurance coverage, subject to applicable deductibles, with
respect to asbestos claims. These indemnitors and the relevant carriers
typically have been honoring their duty to defend and indemnify. We believe that
we have valid defenses to these claims and intend to continue to defend them
vigorously. Additionally, based on our historical experience in asbestos
litigation and an analysis of our current cases, we believe that we have
adequate amounts accrued for potential settlements and judgments in
asbestos-related litigation. While it is not possible at this time to determine
with certainty the ultimate outcome of these asbestos-related proceedings, we
believe that the final outcome of all known and anticipated future claims, after
taking into account our substantial indemnification rights and insurance
coverage, will not have a material adverse effect on our results of operations,
financial position or cash flows.

30

TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

13. SHAREHOLDERS' EQUITY

DIVIDENDS--Tyco paid a quarterly cash dividend of $0.0125 per common share
in each of the first two quarters of fiscal 2003 and fiscal 2002.

14. COMPREHENSIVE (LOSS) INCOME

Total comprehensive (loss) income and its components are as follows ($ in
millions):

15. SUPPLEMENTARY BALANCE SHEET INFORMATION

Selected supplementary balance sheet information is presented below ($ in
millions):

31

TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

15. SUPPLEMENTARY BALANCE SHEET INFORMATION (CONTINUED)

16. NON-CONTROLLED ENTITIES

The Company has programs under which it sells machinery and equipment and/or
accounts receivable to investors (or affiliated companies) who, in turn,
purchase and receive ownership and security interests in those assets. As such,
the Company may have certain investments in those affiliated companies whereby
it provides varying degrees of financial support and are entitled to a share in
the results of those entities but do not consolidate these entities. While these
entities may be substantive operating companies, they are being evaluated for
potential consolidation under FIN 46.

Synthetic lease programs are utilized, to some extent, by all of the
Company's segments to finance capital expenditures for manufacturing machinery
and equipment and for ships used by Tyco Telecommunications. The Company is
currently in discussions with financial institutions to restructure the
synthetic lease arrangements in order to have a third party be the majority
equity owner. If the Company is unable to restructure these arrangements, the
resulting accounting would be an increase to net property, plant and equipment
and total debt of approximately $840 million and a decrease to pre-tax income of
approximately $60 million annually resulting from the difference between lease
expense and estimated depreciation and interest expense.

The Company's accounts receivable securitization programs do not meet the
consolidation requirements of FIN 46. Potential exposure to the Company is an
increase in the discount rate/fee charged to Tyco. The incremental increase to
general and administrative expense would be approximately $5.0 million annually,
based on our current utilization.

17. GUARANTEES

TIG has issued a guarantee to a bank on behalf of an equity investee for a
reducing revolving line of credit, due November 30, 2005. The maximum borrowing
permitted under the facility is $8.5 million, all of which is outstanding. The
maximum borrowing permitted under the facility will be further reduced by
$0.75 million on both December 20, 2003 and 2004. In the event that the equity
investee defaults on its payment obligations, the bank may demand that the
Company pay the outstanding principal on the loan. During the quarter ended
March 31, 2003, the Company recorded a liability for the guarantee of
$8.5 million as a result of the equity investee experiencing financial
constraints. This amount has been included in other expense, net, in the
Consolidated Statements of Operations (see Note 6). In the instance that the
Company would be required to pay the bank, the Company has no

32

TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

17. GUARANTEES (CONTINUED)
recourse from a third-party other than ultimate reimbursement from the equity
investee in cash or common shares.

The Company's Healthcare business may, from time to time, enter into sales
contracts whereby it will buy back (at a discount) a transaction from a
customer's third-party financier in the event of a customer's default. For such
transactions that include "shared risk," the Company accrues a liability based
on historical loss data. As of March 31, 2003, $3.2 million was accrued related
to these contracts. In the event the Company must pay for this shared risk, the
Company's recourse is as follows: place the lease with a financially viable
third-party financier; repossess the purchased products or equipment; seek
payment through a personal guarantee issued by the customer; or, alternatively,
sue the customer.

The Company's Fire and Security Services business has guaranteed the
performance of a third-party contractor. The performance guarantee arose from
contract negotiations, because the contractor could provide cost-effective
service on a telecommunications contract. In the event the contractor does not
perform its contractual obligations, Tyco Fire and Security would perform the
service itself. Therefore, the Company's exposure would be the cost on any
services performed, which would not have a material effect to the Company's
financial position or results of operations. However, because it is not probable
that the Company will have to make any payments or perform any services pursuant
to the guarantee, it is not accrued. The contract was entered into in July 2002
and the performance guarantee expires in August 2003. If the third-party
sub-contractor does not perform its obligations, Tyco may consider withholding
any future payment for work performed by the contractor.

The Company, in disposing of assets or businesses, often provides
representations, warranties and/or indemnities to cover various risks including,
for example, unknown damage to the assets, environmental risks involved in the
sale of real estate, liability to investigate and remediate environmental
contamination at hazardous waste disposal sites and manufacturing facilities,
and unidentified tax liabilities and legal fees related to periods prior to
disposition. The Company does not have the ability to estimate the potential
liability from such indemnities because they relate to unknown conditions.
However, we have no reason to believe that these uncertainties would have a
material adverse effect on the Company's financial position, results of
operations or liquidity.

The Company has recorded liabilities for known indemnifications included as
part of environmental liabilities. The range of probability and the amount
accrued for known liabilities has not changed significantly since September 30,
2002. In view of our financial position and reserves for environmental matters,
we believe that any potential payment of such estimated amounts or additional
monetary sanctions will not have a material adverse effect on the Company's
financial position, results of operations or liquidity.

Due to the Company's downsizing of certain operations as part of
restructuring plans, acquisitions, or otherwise, the Company has leased
properties which it has vacated but has sub-let to third parties. In the event
third parties vacate the premises, the Company would be legally obligated under
master lease arrangements. The Company believes that the financial risk of
default by sub-lessors is individually and in the aggregate not material to the
Company's financial position, results of operations or liquidity.

In the normal course of business, the Company is liable for contract
completion and product performance. In the opinion of management, such
obligations will not significantly affect the Company's financial position,
results of operations or liquidity.

The Company generally accrues estimated product warranty costs at the time
of sale. In other instances, additional amounts are recorded when such costs are
probable and can be reasonably estimated. Manufactured products are warranted
against defects in material and workmanship when

33

TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

17. GUARANTEES (CONTINUED)
properly used for their intended purpose, installed correctly, and appropriately
maintained. Generally, product warranties are implicit in the sale; however, the
customer may purchase an extended warranty. Manufactured equipment is also
warranted in the same manner as product warranties. However, in most instances
the warranty is either negotiated in the contract or sold as a separate
component. Warranty period terms range from 90 days (e.g., consumable products)
up to 20 years (e.g., power system batteries.) The amount of the accrued
warranty liability is determined based on historical information such as past
experience, product failure rates or number of units repaired, estimated cost of
material and labor, and in certain instances estimated property damage. The
liability, shown in the following table, is reviewed for reasonableness at least
as often as quarterly.

Following is a roll forward of the Company's warranty accrual for the
quarter and six months ended March 31, 2003 ($ in millions).

34

TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

18. TYCO INTERNATIONAL GROUP S.A.

TIG has issued public and private debt securities, which are fully and
unconditionally guaranteed by Tyco. In accordance with SEC rules, the following
presents condensed consolidating financial information for Tyco, TIG and all
other subsidiaries. Condensed financial information for Tyco and TIG on a
stand-alone basis are presented using the equity method of accounting for
subsidiaries in which they own or control twenty percent or more of the voting
shares.

CONSOLIDATING STATEMENT OF OPERATIONS
QUARTER ENDED MARCH 31, 2003
($ IN MILLIONS)

35

TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

18. TYCO INTERNATIONAL GROUP S.A. (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
QUARTER ENDED MARCH 31, 2002
($ IN MILLIONS)

36

TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

18. TYCO INTERNATIONAL GROUP S.A. (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 2003
($ IN MILLIONS)

37

TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

18. TYCO INTERNATIONAL GROUP S.A. (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 2002
($ IN MILLIONS)

38

TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

18. TYCO INTERNATIONAL GROUP S.A. (CONTINUED)
CONSOLIDATING BALANCE SHEET
MARCH 31, 2003
($ IN MILLIONS)

39

TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

18. TYCO INTERNATIONAL GROUP S.A. (CONTINUED)
CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2002
($ IN MILLIONS)

40

TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

18. TYCO INTERNATIONAL GROUP S.A. (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED MARCH 31, 2003
($ IN MILLIONS)

41

TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

18. TYCO INTERNATIONAL GROUP S.A. (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED MARCH 31, 2002
($ IN MILLIONS)

42

ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

RESULTS OF OPERATIONS

INTRODUCTION

CHANGES IN ACCOUNTING METHODS--As discussed in the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 2002, the Company purchases
residential security monitoring contracts from an external network of
independent dealers who operate under ADT's authorized dealer program (the
"dealer program"). The purchase price of these customer contracts is recorded as
an intangible asset (i.e., contracts and related customer relationships), and
historically has been amortized on a straight-line method generally over a
ten-year period. During the quarter ended March 31, 2003, the Company concluded
a comprehensive review of its amortization policy with respect to these dealer
customer account costs. This review included a detailed attrition study of the
dealer program customer base conducted by an independent appraiser using data
through March 31, 2003.

The Company generally divides its electronic security assets into three
asset pools: internally generated residential systems, internally generated
commercial systems and accounts acquired through our dealer program. After
evaluating various methods that would reflect the most recent attrition pattern
of the accounts acquired through the dealer program, the Company concluded that
the most appropriate amortization method would be an accelerated method that
approximates the allocation of costs to the revenue curve generated by our
actual attrition data. The estimated life of a dealer account pool generated
from the results of the appraiser's lifing study is approximately twelve years.
The Company believes that the change to this method is appropriate based on its
actual attrition data that indicates an increase in the rate of customer
attrition following the expiration of the initial three-year term of monitoring
contracts with customers. The accelerated method that presently best achieves
the matching objective described above is the double-declining-balance method
based on a ten-year life for the first eight years of the estimated life of the
customer relationships, converting to the straight-line method of amortization
to completely amortize the asset pool by the end of the twelfth year. This
method of amortization will be periodically reviewed and compared to observed
actual attrition.

Adoption of the declining-balance method together with the related change in
expected asset life prevents the Company from distinguishing the effect of the
change in method (straight-line to declining-balance) from the change in
estimated life. In such cases, generally accepted accounting principles require
that the effect of such a change be recognized in operations in the period of
the change, rather than as a cumulative effect of a change in accounting
principle. Accordingly, the effect of the change increased amortization expense
reported in the second quarter by $364.5 million, $315.5 million of which
relates to the cumulative adjustment as of January 1, 2003 and $49.0 million of
which relates to the second quarter of fiscal 2003.

The Company also undertook a comprehensive review of its depreciation policy
with respect to security monitoring systems installed in residential and
commercial customer premises. The costs of these systems are combined in
separate pools for internally generated residential and commercial account
customers, and generally depreciated over ten years. Based on the results of
this review, the Company concluded that for residential and commercial account
pools the straight-line method of amortization over a ten-year period continues
to be appropriate given the observed actual attrition data for these pools.

In addition to the change in method of amortization for its dealer account
pool, the Company also changed its method of accounting for the non-refundable
charge associated with its dealer program. For detailed information of this
accounting change, see Note 8--"Cumulative Effect of Accounting Change."

CHARGES RELATED TO CURRENT PERIOD CHANGES IN ESTIMATES--During the quarter
ended March 31, 2003, the Company intensified a process whereby internal audits
and detailed controls and operating reviews were conducted. As a result of this
process, the Company recorded $471.4 million of pre-tax charges relating to new
information and changes in facts and circumstances occurring during the quarter.
The process included assessing the continued recoverability of assets, including
accounts receivable, inventory and installed security systems and equity
investments, and the estimates of costs relating to legal, environmental and
insurance obligations. The assessments were based primarily on an analysis of
recent events and more detailed experience that occurred during the quarter.
Concurrent with this

43

review process and resulting assessments by management during the quarter,
decisions were made to discontinue existing product lines and terminate
information technology systems implementation projects. As a result of these
decisions, inventory and other asset balances were written down to their net
realizable value.

The charges of $471.4 million include $165.0 milion related to increased
cost estimates for environmental, legal and product liability, workers
compensation and general liability insurance accruals, $107.8 million related to
accounts receivable and inventory reserve valuations, $84.1 million related to
an other than temporary decline in the value of investments, $36.6 million for
account write-offs, where management concluded that the recoverability of
various asset balances which had become doubtful, and $77.9 million for other
accounting estimate changes. The Company also recorded an expense of $91.5
million for a retroactive, incremental premium on prior period directors and
officers insurance coverage negotiated with its third party insurance carriers
during the quarter.

CHARGES RELATING TO PRIOR YEARS AND QUARTERS RECORDED IN THE QUARTER ENDED
MARCH 31, 2003--As a result of the Company's intensified internal audits and
detailed controls and operating reviews, the Company identified and recorded
pre-tax charges of $434.5 million for charges related to prior periods. These
charges resulted from capitalizing certain selling expenses to property, plant
and equipment and other non-current assets, mostly in the Fire and Security
Services segment and reconciliation items relating to balance sheet accounts
where certain account analysis or periodic reconciliations were deficient,
resulting in adjustments primarily related to the Engineered Products and
Services segment. Additionally, charges related to the correction of balances
primarily related to corporate pension and deferred compensation accruals as of
September 30, 2002 and other accounting adjustments (e.g. purchase price
accounting accruals, deferred commissions, accounting related to leases in the
Fire and Security Services and Engineered Products and Services segments).
Management has concluded that the effect of these adjustments, as well as those
adjustments relating to prior years recorded in the quarter ended December 31,
2001 (see below), are not material individually or in the aggregate to prior
periods. Accordingly, prior period financial statements have not been restated.

CHARGES RELATING TO PRIOR YEARS RECORDED IN THE QUARTER ENDED DECEMBER 31,
2001--As discussed in the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 2002, during the fourth quarter of fiscal 2002, the
Company identified various adjustments relating to prior year financial
statements. At the time the fiscal 2002 financial statements were issued,
management concluded the effects of these adjustments, as well as any unrecorded
proposed audit adjustments, were not material individually or in the aggregate
to fiscal 2002 or any year prior. Accordingly, prior year financial statements
were not restated. Instead, these adjustments that aggregate $261.6 million on a
pre-tax income basis or $199.7 million on an after-tax income basis have were
recorded effective October 1, 2001. The nature and amounts of these adjustments
are principally as follows:

- The Company determined the amounts reimbursed from dealers under its
dealer program exceeded the costs actually incurred. The cumulative effect
of reimbursements recorded in years prior to fiscal 2002 in excess of
costs incurred, net of the effect of the deferred credit, which would have
been amortized as described in Note 1 to the Company's Form 10-K for the
year ended September 30, 2002 is $185.9 million. This amount is included
on the selling, general and administrative expenses line in the
December 31, 2001 Consolidated Statement of Operations.

- The Company determined that the net gain of $64.1 million on the issuance
of TyCom shares previously reported for fiscal 2001 should have been lower
by $39.6 million. The $39.6 million associated with the sale of common
shares of TyCom is included on a separate line in the December 31, 2001
Consolidated Statement of Operations.

- As described in Note 1 to the Company's Form 10-K for the year ended
September 30, 2002, the Company identified several adjustments, both as a
result of the Phase 2 review and the recording of previously unrecorded
audit adjustments, which are more appropriately recorded as expenses,
rather than as part of the Company's acquisition accounting. The
cumulative effect of the adjustments necessary to revise the prior
accounting is a pre-tax charge of $36.1 million, $25.4 million of which is
included in selling, general and administrative expenses and
$10.7 million of which is included in cost of sales in the December 31,
2001 Consolidated Statement of Operations.

44

IMPACT ON PRIOR PERIODS--The tables below present the pre-tax charges for
the following items in the periods to which the charges relate: (i) the $261.6
million charge relating to prior periods recorded during the quarter ended
December 31, 2001; (ii) the $434.5 million charge relating to prior years and
quarters recorded in the quarter ended March 31, 2003; and (iii) certain other
adjustments that represent timing differences between periods comprised of
$16.0 million relating to the recognition of revenue at one of the Company's
business units (TyCom) and $154.3 million relating to the settlement of
litigation and related subsequent transactions with respect to the Healthcare
segment.

($ IN MILLIONS)
(INCREASE) DECREASE IN INCOME

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

(1) The adjustment for the Healthcare divestiture transaction is subjective in
regards to a judgmental assessment of the assigned value of an intangible
asset (and related amortization), which was not subjected to a
contemporaneous appraisal and was subsequently sold as part of a business
divestiture. The Company had assigned a value of $166.8 million to the
intangible asset relating to the settlement of litigation. The analysis
above presents the adjustment that would be necessary if there were zero
value assigned to the intangible asset. The value assigned to the intangible
asset is subjective and could range from zero to $166.8 million. Management
believes that the intangible asset was worth more than zero. However,
because it was not subjected to a contemporaneous appraisal, the Company
could not substantiate the value. As such the table above reflects the
necessary adjustment as if it had zero value.

45

The table below discloses the impact the above adjustments would have had on
income or loss from continuing operations and net income or loss for each period
presented.

Both the estimated life and method of amortization relating to the dealer
account pool, as well as the Company's accounting for the non-refundable charge
relating to the dealer program discussed above have been the subject of an
ongoing process of responding to the Staff of the SEC Division of Corporation
Finance inquiries regarding the dealer program and certain other accounting
matters. Also, subjects of this ongoing process have been the charges related to
current period changes in estimates and charges related to prior years and
quarters discussed above. The Company has not completed such discussions. The
Company cannot predict the outcome of its discussions with the SEC or that such
outcome will not necessitate further amendments or restatements of the Company's
previously filed periodic reports. The Company hopes to resolve all issues
raised by the ongoing SEC Division of Corporation Finance review during its
fiscal third quarter.

Information for all periods presented below reflects the grouping of Tyco's
businesses into five segments, consisting of Fire and Security Services,
Electronics, Healthcare, Engineered Products and Services, and Plastics and
Adhesives.

During fiscal 2003, a change was made to the Company's internal reporting
structure such that the operations of Tyco's plastics and adhesives businesses
(previously reported within the Healthcare and Specialty Products segment) now
comprise the Company's new Plastics and Adhesives segment. The Company has
conformed its segment reporting accordingly and has reclassified comparative
prior period information to reflect this change. In addition, during the quarter
ended March 31, 2003, management began evaluating segment performance based upon
operating results calculated in accordance with generally accepted accounting
principles.

OVERVIEW

Revenues increased 4.3% during the quarter ended March 31, 2003 to
$8,980.3 million from $8,611.4 million in the quarter ended March 31, 2002. Tyco
had a loss from continuing operations and net loss of $467.9 million for the
quarter ended March 31, 2003, as compared to a loss from continuing operations
of $2,055.0 million in the quarter ended March 31, 2002. Loss from continuing
operations for the quarter ended March 31, 2003 included charges totaling
$1,346.2 million ($1,119.0 million

46

after-tax) consisting of the following: (i) charges related to prior periods'
errors of $434.5 million and charges related to current period changes in
estimates of $471.4 million, which arose from the Company's ongoing program of
intensified internal audits and detailed controls and operating reviews
(includes restructuring credits of $72.5 million, of which $12.9 million is
included in cost of sales, impairment charges of $23.3 million, a loss on
investments of $75.6 million, and expense of $8.5 million related to a guarantee
of an equity investee, both of which are included in other expense, net);
(ii) a charge of $364.5 million reflecting a change in the method of
amortization used for ADT dealer program account assets; (iii) a charge of $91.5
million for a retroactive, incremental premium on prior period directors and
officers insurance; (iv) a charge of $7.0 million associated with the dealer
program non-refundable charge that is now being recognized as a reduction of the
dealer asset account as opposed to a reduction in costs associated with the
program; and (v) other income of $22.7 million from the early extinguishment of
debt. Loss from continuing operations for the quarter ended March 31, 2002
included charges totaling $3,150.2 million ($3,049.4 million after-tax)
consisting of the following: (i) impairment charges of $2,351.7 million
primarily related to the write-down of the Tyco Global Network ("TGN");
(ii) restructuring and other charges of $655.1 million, of which $251.3 million
is included in cost of sales, primarily related to the write-down of inventory
and facility closures within our Electronics segment; (iii) a loss on the
write-off of investments of $141.0 million; and (iv) other expense of
$2.4 million from the early extinguishment of debt.

Revenues increased 4.2% during the six months ended March 31, 2003 to
$17,919.7 million from $17,190.1 million in the six months ended March 31, 2002.
Tyco had income from continuing operations of $157.6 million in the six months
ended March 31, 2003, as compared to a loss from continuing operations of
$1,120.3 million in the six months ended March 31, 2002. Income from continuing
operations for the six months ended March 31, 2003 included charges totaling
$1,332.6 million ($1,110.0 million after-tax) consisting of the following:
(i) charges recorded in the second quarter of fiscal 2003 related to prior
periods' errors of $434.5 million and charges related to current period changes
in estimates of $471.4 million, which arose from the Company's ongoing program
of intensified internal audits and detailed controls and operating reviews
(includes restructuring credits of $72.5 million, of which $12.9 million is
included in cost of sales, impairment charges of $23.3 million, a loss on
investments of $75.6 million, and expense of $8.5 million related to a guarantee
of an equity investee, both of which are included in other expense, net);
(ii) a charge of $364.5 million reflecting a change in the method of
amortization used for ADT dealer program account assets; (iii) a charge of $91.5
million for a retroactive, incremental premium on prior period directors and
officers insurance; (iv) a charge of $18.5 million associated with the dealer
program non-refundable charge that is now being recognized as a reduction of the
dealer asset account as opposed to a reduction in costs associated with the
program; (v) restructuring credits of $3.7 million, of which $0.2 million is
included in cost of sales; (vi) other income of $20.0 million related to a
restitution payment; and (vii) other income of $24.1 million from the early
extinguishment of debt. Loss from continuing operations for the six months ended
March 31, 2002 included charges totaling $3,441.8 million ($3,269.6 million
after-tax) consisting of the following: (i) impairment charges of
$2,351.7 million primarily related to the write-down of the TGN;
(ii) restructuring and other charges of $680.8 million, of which $257.1 million
is included in cost of sales, primarily related to the write-down of inventory
and facility closures within our Electronics segment; (iii) a loss on the
write-off of investments of $141.0 million; (iv) other expense of $6.7 million
from the early extinguishment of debt; and (v) charges related to prior years of
$261.6 million.

We are currently assessing the potential impact of various legislative
proposals that would deny U.S. federal government contracts to U.S. companies
that move their corporate location abroad. Tyco's evolution to becoming a
Bermuda-based company was a result of the 1997 business combination of Tyco
International Ltd., a Massachusetts corporation, and ADT Limited (a public
company that had been located in Bermuda since the 1980's with origins dating
back to the United Kingdom since the early 1900's). Tyco's revenues related to
U.S. federal government contracts account for less than 3% of the net revenues
for the six months ended March 31, 2003. In addition, various state and other
municipalities in the U.S. have proposed similar legislation. There is also
other similar proposed tax legislation which could substantially increase our
corporate income taxes and, consequently, decrease future net income and
increase our future cash outlay for taxes. We are unable to predict, with any
level of certainty, the likelihood or final form in which any proposed
legislation might become law, or

47

the nature of regulations that may be promulgated under any such future
legislative enactments. In addition, in the normal course of business the
Company is subject to government audits as a result of its contracts with the
U.S. federal government.

The following table details net revenues and earnings for the quarters and
six months ended March 31, 2003 and 2002 ($ in millions):

Net revenues increased $368.9 million, or 4.3%, to $8,980.3 million in the
first quarter of fiscal 2003, and increased $729.6 million, or 4.2%, to
$17,919.7 million in the six months ended March 31, 2003. For the quarter ended
March 31, 2003, the increase in revenue at Fire and Security Services,
Healthcare, and Plastics and Adhesives in the aggregate exceeded the decrease in
revenue in the Engineered Products and Services segment, resulting in an overall
increase in revenues. Revenue at our Electronics segment remained level quarter
over quarter. For the six months ended March 31, 2003, the increases in revenue
at Fire and Security Services, Healthcare, Engineered Products and Services, and
Plastics and Adhesives in the aggregate exceeded the decrease in revenue in the
Electronics segment, resulting in an overall increase in revenues. Operating
income for the quarter ended March 31, 2003 increased $1,556.5 million to a loss
of $104.7 million as compared to a loss of $1,661.2 million in the prior year's
quarter. Operating income for the six months ended March 31, 2003 increased
$1,310.0 million to $1,007.9 million from a loss of $302.1 million. Operating
income and margins declined in each of our business segments, most notably in
Fire and Security Services and Engineered Products and Services. We expect total
revenues and operating income to increase during the next quarter primarily as a
result of our continued focus on increasing organic growth, the timing of
backlog executions, seasonal trends, and cost-cutting initiatives implemented in
prior periods.

Historically, in acquisitions, the acquired company has been immediately
integrated with our existing operations. As part of our integration process, we
often eliminate duplicate functions by closing corporate and administrative
offices, and we attempt to make the combined companies more cost efficient by
combining manufacturing processes, product lines, sales offices and marketing
efforts. As a result of our integration processes, most acquired companies
become no longer separately identifiable.

48

Consequently, we do not separately track the post-acquisition financial results
of acquired companies, and therefore, are not able to quantify the actual impact
of our acquisitions on revenues, expenses or operating results. The discussions
following the tables below include pro forma percentages for revenue growth or
decline that exclude increased revenue attributable to specified acquisitions
and that eliminate the effects of period to period currency fluctuations.
Revenue growth percentages excluding the specified acquisitions are pro forma
estimates calculated by assuming the acquisitions were made at the beginning of
the relevant fiscal periods by adding back pre-acquisition results of the
specified acquired companies for both periods in the comparison. We calculate
pro forma segment growth using this methodology because we generally do not have
the ability to capture post-acquisition revenues related to individual
acquisitions since most companies are immediately integrated upon acquisition.
The calculations of the pro forma growth analysis, excluding acquisitions
discussed in the segment narratives below, include all acquisitions with a
purchase price of $10 million or more in the pro forma calculation and do not
include acquisitions with a purchase price of less than $10 million, due to the
relative size of these smaller acquisitions compared to Tyco's operating results
and the large number of acquisitions during the periods presented. These smaller
acquisitions represent approximately 6% of the aggregate purchase price for all
acquisitions during the six months ended March 31, 2003 and the fiscal year
ended September 30, 2002. Since these pro forma estimates are based on
pre-acquisition revenues, they are not necessarily indicative of
post-acquisition results. Further, the pro forma amount provided inherently
assumes that the acquired companies have a comparable organic growth percentage
and earn revenues in the same proportion throughout the year as the segments
that acquired the companies. In cases where the organic growth percentages or
the proportion of revenue earned during the year are different, the pro forma
amount could vary significantly from the actual organic growth of the segment.
This calculation is similar to the method used in calculating the
acquisition-related pro forma results of operations in Note 2 to the
Consolidated Financial Statements, pursuant to Statement of Financial Accounting
Standards No. 141.

QUARTER ENDED MARCH 31, 2003 COMPARED TO QUARTER ENDED MARCH 31, 2002

SALES AND OPERATING INCOME AND MARGINS

FIRE AND SECURITY SERVICES

The following table sets forth revenues and operating income and margins for
the Fire and Security Services segment ($ in millions):

Net revenues in the Fire and Security Services segment increased 8.1% in the
quarter ended March 31, 2003 over the quarter ended March 31, 2002, including a
4.7% increase in product revenue and an 11.1% increase in service revenue. The
increase in net revenues was due to favorable changes in foreign currency
exchange rates and, to a lesser extent, security account growth related to the
dealer program. Excluding a $150.4 million increase from foreign currency
fluctuations, revenue from customer accounts acquired through our dealer program
(the Company purchases residential monitoring contracts from an external network
of dealers who operate under its dealer program) and all acquisitions with a
purchase price of $10 million or more, revenues (calculated in the manner
described above in "Overview") for the segment decreased 2.3% from
$2,540.1 million for the quarter ended March 31, 2002 to $2,482.1 million for
the quarter ended March 31, 2003. Although, our net revenue growth has
historically been due to acquisitions (including the dealer program), our
current strategy is to grow our existing business. We plan to do this by gaining
and maintaining high quality security monitoring accounts through our internal
sales force supplemented by the authorized dealer program in key geographic
areas as well as by growth in our fire prevention and suppression contracting
businesses worldwide.

49

Operating income and margins significantly decreased in the quarter ended
March 31, 2003 over the quarter ended March 31, 2002 due to charges recorded in
the current year's quarter of $270.4 million related to prior periods, which
includes $170.4 million of capitalized costs related to improper capitalization
of selling expenses, $76.9 million ($2.5 million is included in impairment of
long-lived assets) of other accounting adjustments primarily related to the
improper use of purchase accounting reserves, adjustments of accrual balances,
such as dismantlement provision and vacation accruals, and improper accounting
for leases and $23.1 million primarily of reconciling items mostly due to
inter-company amounts in the European and Asian operations, and charges of
$294.9 million related to current period changes in estimates, which includes
$167.1 million (also includes impairment of property, plant and equipment of
$10.2 million) primarily related to the adjustments of accrual balances such as
workers compensation, professional fees, and environmental exposure (includes
$2.0 million restructuring credit due to costs being less than anticipated),
$89.4 million primarily due to adjusting reserves for doubtful accounts and slow
and non-moving inventory, and $38.4 million of other accounting adjustments
primarily related to deferred commissions. These charges were recorded in
connection with the Company's ongoing program of intensified internal audits,
and as a result of applying management's judgments and estimates and detailed
controls and operating reviews. Operating income for the quarter ended
March 31, 2003 also includes a $364.5 million charge ($315.5 million relates to
a cumulative adjustment as of January 1, 2003 and $49.0 million relates to the
quarter ended March 31, 2003) reflecting a change in amortization method used
for dealer account assets; and a $7.0 million charge related to a change in
accounting for the dealer program non-refundable charge. The decrease in
operating income was also caused by an incremental increase in depreciation and
amortization expense in our security business amounting to $48 million,
reflecting the impact of growth in the subscriber asset and dealer asset base
during the past year as well as increased amortization related to acquisitions.
In addition, the decline resulted from a year over year decline in operating
income of $42 million in the European security business primarily reflecting
allowance for doubtful accounts and other expenses related to higher than
expected attrition rates; a weaker worldwide fire and contracting environment,
particularly in the retail sector; and decreased capacity utilization in our
manufacturing business.

Attrition rates for customers in our global electronic security services
business averaged 14.4% on a trailing twelve-month basis for the quarter ended
March 31, 2003, as compared to 13.2% for the full year of fiscal 2002. This
increase primarily relates to customer accounts acquired through our dealer
program.

The change in the amortization method used for dealer account assets is
expected to result in increased amortization expense of approximately
$40 million to $45 million per quarter in the third and fourth quarters of
fiscal 2003.

Operating income and margins for the quarter ended March 31, 2002 include
restructuring charges of $14.3 million primarily related to severance associated
with the closure of existing facilities that had become redundant due to
acquisitions and a charge of $13.8 million related to the write-up of inventory
under purchase accounting, which is included in cost of revenue.

ELECTRONICS

The following table sets forth revenues and operating income and margins for
the Electronics segment ($ in millions):

Net revenues for the Electronics segment remained relatively level in the
quarter ended March 31, 2003 compared with the quarter ended March 31, 2002,
including a 0.1% decrease in product revenue

50

and a 10.8% increase in service revenue, as a result of favorable changes in
foreign currency exchange rates, offset by further softening in customer demand
in the markets we serve and completion of third-party undersea fiber optic
system installations. Revenues at the electronics components group increased
$141.6 million, or 6.1% due primarily to the impact of changes in foreign
currency exchange rates. Revenues at the segment's Telecommunications business
declined $133.5 million, or 82.2%, due to the completion of third-party undersea
fiber optic system installations in the prior year and a lack of demand in the
current year for third-party system builds. Excluding a $161.0 million increase
from foreign currency fluctuations, the acquisition of Communications
Instruments, Inc. ("CII") in January 2002, and all other acquisitions with a
purchase price of $10 million or more, sales (calculated in the manner described
above in "Overview") for the segment decreased 6.4% from $2,502.3 million for
the quarter ended March 31, 2002 to $2,341.0 million for the quarter ended
March 31, 2003.

The significant increase in operating income and margins for the quarter
ended March 31, 2003 compared with the quarter ended March 31, 2002 was
primarily due to charges totaling $2,957.5 million (discussed below) that were
included in the prior year's quarter. Operating income for the quarter ended
March 31, 2003 includes a net credit of $17.3 million related to changes in
estimates, consisting of restructuring credits of $54.8 million to accruals
primarily relating to the completion of certain restructuring actions for less
than the original estimates, of which $12.9 million is included in cost of
sales, $14.9 million related to the adjustments of accrual balances,
$12.7 million related to reconciliation items in the current period, and
$9.9 million of other accounting adjustments related to M/A-COM. These charges
were recorded in connection with the Company's ongoing program of intensified
internal audits, and as a result of applying management's judgments and
estimates and detailed controls and operating reviews.

Operating income and margins for the quarter ended March 31, 2002 include
charges for the impairment of property, plant and equipment of $2,346.0 million
primarily related to the write-down of the TGN and the closure of certain
facilities. The results also include restructuring charges of $611.5 million, of
which $237.5 million is included in cost of revenue, related to the write-down
of inventory and certain facility closures.

HEALTHCARE

The following table sets forth revenues and operating income and margins for
the Healthcare segment ($ in millions):

Net revenues for the Healthcare segment increased 8.6% in the quarter ended
March 31, 2003 over the quarter ended March 31, 2002, including an 8.9% increase
in product revenue and a 21.6% decrease in service revenue. The increase in net
revenues resulted primarily from organic growth and, to a lesser extent,
favorable foreign currency exchange rates. Strong organic growth was due to the
following: increases in the surgical sector concurrent with the award of the
Consorta contract and continued organic growth within certain surgical stapling
lines; increases in the International division as a result of favorable sales to
European governments, strong respiratory and medical sales in Japan, and
increased sales in other Asia-Pacific countries, and; increases in the
pharmaceutical, medical, and respiratory businesses. These sales increases were
partially offset by a decrease in the retail business' diaper product line due
to the adverse impact of new package down-counts, which were implemented on an
industry-wide basis. Excluding a $86.5 million increase from foreign currency
exchange fluctuations, the acquisition of Paragon Trade Brands ("Paragon") in
January 2002 and the divestiture of Surgical Dynamics, Inc. in July 2002,
revenue for the Healthcare segment increased an estimated 6.0% from
$1,802.3 million for the quarter ended March 31, 2002 to $1,911.2 million for
the quarter ended March 31, 2003.

51

The 16.0% increase in operating income and increase in margins in the
quarter ended March 31, 2003 compared to the quarter ended March 31, 2002 was
due primarily to the favorable sales impacts noted above, favorable
manufacturing variances as a result of increased production volumes, favorable
foreign currency exchange rates, and our continued focus on maximizing operating
efficiencies. Operating income for the quarter ended March 31, 2003 also
includes a net charge of $7.7 million related to current period changes in
estimates, which includes a restructuring reversal of $4.7 million to accruals
due to costs being less than anticipated, $8.2 million related to asset reserves
for inventory, $3.5 million of reconciliation items related to the current
period, and $0.7 million for the adjustments to accrual balances related to
workers compensation in the current period. These charges were recorded in
connection with the Company's ongoing program of intensified internal audits,
and as a result of applying management's judgments and estimates and detailed
controls and operating reviews.

Operating income and margins for the quarter ended March 31, 2002 include
charges of $7.8 million, related to the write-off of legal and other deal costs
associated with an acquisition that was not completed.

52

ENGINEERED PRODUCTS AND SERVICES

The following table sets forth revenues and operating income and margins for
the Engineered Products and Services segment ($ in millions):

Net revenues for the Engineered Products and Services segment decreased 2.5%
in the quarter ended March 31, 2003 over the quarter ended March 31, 2002,
including a 3.8% decrease in product revenue and a 8.6% increase in service
revenue. The decrease in net revenue was primarily due to weak conditions in
Tyco Flow Control's and Tyco Electrical and Metal Products' major markets, most
notably in non-residential construction, in addition to lower levels of capital
expenditures for environmental, construction, and telecommunications projects by
our customers. Excluding a $60.6 million increase from foreign currency exchange
fluctuations, the acquisition of Clean Air Systems in February 2002, and all
other acquisitions with a purchase price of $10 million or more, revenue
(calculated in the manner described above in "Overview") for the segment
decreased 8.8% from $1,111.1 million for the quarter ended March 31, 2002 to
$1,013.0 million for the quarter ended March 31, 2003.

The significant decrease in operating income and margins in the quarter
ended March 31, 2003 compared to the quarter ended March 31, 2002 was due
primarily to charges recorded in the current year's quarter of $118.9 million
related to prior periods, which includes $103.2 million of reconciling items
primarily related to inter-company transactions, $12.8 million of asset reserve
adjustment for receivables, $2.6 million of capitalized costs associated with
inventory, and $0.3 million related to the adjustments to accrual balances,
charges of $59.4 million related to current period changes in estimates, which
includes $33.9 million related to the adjustments to workers compensation and
health insurance accruals, $18.0 million primarily related to reconciling items
in the current period, and $7.5 million associated with asset reserves. These
charges were recorded in connection with the Company's ongoing program of
intensified internal audits, and as a result of applying management's judgments
and estimates and detailed controls and operating reviews. The decrease is also
due to the effects of lower revenue as described above; competitive conditions
in major markets for valves and controls, thermal controls, and electrical and
metal products; and increased raw material costs.

Operating income and margins for the quarter ended March 31, 2002 includes
restructuring and other charges of $6.8 million, and charges of $5.7 million for
the impairment of property, plant and equipment, primarily related to the
termination of employees and the shut down of facilities associated with a
restructuring plan.

PLASTICS AND ADHESIVES

The following table sets forth revenues and operating income and margins for
the Plastics and Adhesives segment ($ in millions):

53

Net revenues at Tyco Plastics and Adhesives increased 2.1% in the quarter
ended March 31, 2003 over the quarter ended March 31, 2002 primarily due to
sales price increases as a result of higher raw material costs, increased sales
volume of plastic sheeting and duct tape products as a result of the heightened
level of security related to the potential likelihood of terrorist attacks, and
favorable foreign currency exchange rates. These increases were offset by the
generally weak economy, most notably to the retail, food service, automotive,
and industrial markets we serve. Excluding a $9.2 million increase from foreign
currency exchange fluctuations and all acquisitions with a purchase price of
$10 million or more, revenues (calculated in the manner described above in
"Overview") for the Plastics and Adhesives segment remained level from
$478.5 million for the quarter ended March 31, 2002 to $479.3 million for the
quarter ended March 31, 2003.

The 57.4% decrease in operating income and decrease in operating margins in
the quarter ended March 31, 2003 over the quarter ended March 31, 2002 was
primarily due to $20.7 million of charges related to prior periods, which
includes $10.9 million of other accounting adjustments primarily related to
amortization expense on intellectual property, $5.9 million related to
reconciling items, $2.2 million for the adjustments to accrual balances, and
$1.7 million related to asset reserves, and charges of $6.0 million related to
current period changes in estimates, which includes $4.0 million for the
adjustments to accrual balances, $2.4 million related to reconciliation items,
and a restructuring credit of $0.4 million to asset reserves due to costs being
less than anticipated. These charges were recorded in connection with the
Company's ongoing program of intensified internal audits, and as a result of
applying management's judgments and estimates and detailed controls and
operating reviews. The results also include higher raw material costs, increased
pricing competition, a less favorable sales mix, and negative manufacturing
variances. These costs were partially offset by favorable selling, general and
administrative costs as our business implements various cost saving initiatives
and decreased sales commission expense due to volume shortfalls.

Operating income and margins for the quarter ended March 31, 2002 includes
restructuring and other charges of $0.9 million for legal and other deal fees
that were written-off.

FOREIGN CURRENCY

The effect of changes in foreign exchange rates for the quarter ended
March 31, 2003 compared to the quarter ended March 31, 2002 was an increase in
revenues and operating income of approximately $467.7 million and
$62.7 million, respectively.

CORPORATE EXPENSES

Corporate expenses were $218.8 million and $59.7 million in the quarters
ended March 31, 2003 and 2002, respectively. Corporate expenses for the current
period include charges of $152.2 million, which includes a $91.5 million
incremental increase in directors and officers insurance (see Note 1--"Basis of
Presentation" and Note 12--"Committments and Contingencies" to the Consolidated
Financial Statements), $24.5 million of charges related to prior periods
(includes $13.9 million related to the adjustments to accrual balances and a
charge of $10.6 million related to capitalized costs associated with the
impairment of property, plant and equipment), and $46.8 million of charges
related to changes in estimates (includes $29.2 million for other accounting
adjustments primarily related to a severance accrual for corporate employees,
$12.6 million for the adjustments to accrual balances, $5.0 million related to
asset reserves). Also included within the $152.2 million is a restructuring
credit of $10.6 million ($8.7 million to accruals and $1.9 million to asset
reserves) due to costs being less than anticipated, which is also a change in
estimates. In addition, the increase in the quarter ended March 31, 2003 as
compared to the quarter ended March 31, 2002 was partially due to increased
insurance costs and professional fees.

OTHER EXPENSE, NET

Tyco has repurchased some debt prior to scheduled maturities. During the
quarters ended March 31, 2003, the Company recorded other income from the early
retirement of debt totaling

54

$22.7 million, as compared to expense of $2.4 million during the quarter ended
March 31, 2002. Also, during the quarter ended March 31, 2003, the Company
recorded a loss of $75.6 million related to the write-down of various equity
investments and $8.5 million of other expense related to a bank guarantee on
behalf of an equity investee. These charges were recorded in connection with the
Company's ongoing program of intensified internal audits, and as a result of
applying management's judgments and estimates and detailed controls and
operating reviews, and are considered to be changes in estimates. During the
quarter ended March 31, 2002, the Company recorded a $141.0 million loss on
equity investments, primarily related to its investment in FLAG Telecom
Holdings.

INTEREST INCOME AND EXPENSE

Interest income was $21.8 million in the quarter ended March 31, 2003, as
compared to $29.5 million in the quarter ended March 31, 2002. Interest expense
was $299.8 million in the quarter ended March 31, 2003, as compared to
$255.1 million in the quarter ended March 31, 2002. Interest expense also
includes $0.4 million related to changes in estimates related to other
accounting adjustments. The increase in interest expense is primarily the result
of a decrease in capitalized interest due to the completion of the TGN. We
expect both interest income and expense to remain relatively level next quarter.

INCOME TAX EXPENSE

Income tax expense was $22.8 million on pre-tax loss of $444.1 million for
the quarter ended March 31, 2003 as compared to income tax expense of
$23.2 million on pre-tax loss of $2,030.2 million for the quarter ended
March 31, 2002. The difference in the rate is due to a decrease in losses in low
tax jurisdictions partially offset by an increase in valuation allowance due to
the uncertainty of the utilization of certain non-U.S. deferred tax assets
related to the ongoing intensified internal audits and detailed controls and
operating reviews.

The effective income tax rate, excluding the impact of restructuring and
other charges, was 27.7% and 11.1% in the quarters ended March 31, 2003 and
2002, respectively. The increase in the effective income tax rate was primarily
due to lower earnings in tax jurisdictions with lower income tax rates as well
as an increase in valuation allowance due to the uncertainty of the utilization
of certain non-U.S. deferred tax assets related to the Company's ongoing
intensified internal audits and detailed controls and operating reviews.

SIX MONTHS ENDED MARCH 31, 2003 COMPARED TO SIX MONTHS ENDED MARCH 31, 2002

SALES AND OPERATING INCOME AND MARGINS

FIRE AND SECURITY SERVICES

The following table sets forth revenues and operating income and margins for
the Fire and Security Services segment ($ in millions):

Net revenues in the Fire and Security Services segment increased 9.7% in the
six months ended March 31, 2003 over the six months ended March 31, 2002,
including an 8.4% increase in product revenue and a 10.7% increase in service
revenue. The increase in net revenues was due to fiscal 2002 acquisitions and
customer contracts purchased through our dealer program, in addition to
favorable foreign currency exchange rates. Significant acquisitions included
SBC/Smith Alarm Systems in

55

October 2001, and DSC Group and Sensormatic in November 2001. Excluding a
$220.0 million increase from foreign currency fluctuations, revenue from
customer accounts acquired through our dealer program, the acquisitions listed
above and all other acquisitions with a purchase price of $10 million or more,
revenues (calculated in the manner described above in "Overview") for the
segment decreased 3.1% from $5,205.3 million for the six months ended March 31,
2002 to $5,043.5 million for the six months ended March 31, 2003. Although, our
net revenue growth has historically been due to acquisitions (including the
dealer program), our current strategy is to grow our existing business. We plan
to do this by gaining and maintaining high quality security monitoring accounts
through our internal sales force supplemented by the authorized dealer program
in key geographic areas as well as by growth in our fire prevention and
suppression contracting businesses worldwide.

Operating income and margins decreased significantly in the six months ended
March 31, 2003 over the six months ended March 31, 2002 due to charges recorded
in the second quarter of fiscal 2003 of $270.4 million related to prior periods,
which includes $170.4 million of capitalized costs related to improper
capitalization of selling expenses, $76.9 million ($2.5 million is included in
impairment of long-lived assets) of other accounting adjustments primarily
related to the improper use of purchase accounting reserves, adjustments of
accrual balances, such as dismantlement provision and vacation accruals, and
improper accounting for leases, and $23.1 million primarily of reconciling items
mostly due to inter-company amounts in the European and Asian operations, and
charges of $294.9 million related to current period changes in estimates, which
includes $167.1 million (also includes impairment of property, plant and
equipment of $10.2 million) primarily related to the adjustments to accrual
balances such as dismantlement provision, workers compensation, professional
fees, and environmental exposure (includes $2.0 million restructuring credit due
to costs being less than anticipated), $89.4 million primarily due to adjusting
reserves for doubtful accounts and slow and non-moving inventory, and
$38.4 million of other accounting adjustments primarily related to deferred
commissions. These charges were recorded in connection with the Company's
ongoing program of intensified internal audits, and as a result of applying
management's judgments and estimates and detailed controls and operating
reviews. Operating income for the six months ended March 31, 2003 also includes
a $364.5 million charge ($315.5 million relates to a cumulative adjustment as of
January 1, 2003 and $49.0 million relates to the quarter ended March 31, 2003)
reflecting a change in amortization method used for dealer account assets and a
$18.5 million charge related to a change in accounting for the dealer program
non-refundable charge. The decrease was also due to increased depreciation and
amortization expense in the security business due to growth in the subscriber
asset and dealer asset base as well as the impact of the acquisitions of
Sensormatic and DSC in fiscal 2002; decline in operating income in the European
security business; and a weaker worldwide fire and contracting environment.

Attrition rates for customers in our global electronic security services
business averaged 14.4% on a trailing twelve-month basis for the quarter ended
March 31, 2003, as compared to 13.2% for the full year of fiscal 2002. This
increase primarily relates to customer accounts acquired through our dealer
program.

Operating income and margins for the six months ended March 31, 2002 include
restructuring charges of $22.1 million primarily related to severance associated
with the closure of existing facilities that had become redundant due to
acquisitions and a charge of $13.8 million related to the write-up of inventory
under purchase accounting, which is included in cost of revenue.

ELECTRONICS

The following table sets forth revenues and operating income (loss) and
margins for the Electronics segment ($ in millions):

56

Net revenues for the Electronics segment decreased 5.3% in the six months
ended March 31, 2003 compared with the six months ended March 31, 2002,
including a 5.2% decrease in product revenue and a 7.7% decrease in service
revenue, as a result of further softening in customer demand in the markets we
serve and completion of third-party undersea fiber optic system installations.
Revenues at the electronics components group increased $231.8 million, or 4.9%
due primarily to the favorable impact of foreign currency exchange rates.
Revenues at the segment's Telecommunications business declined $512.7 million,
or 90.3%, due to completion of third-party undersea fiber optic system
installations in the prior year and a lack of demand in the current year for
third-party system builds. Excluding a $233.3 million increase from foreign
currency fluctuations and the acquisitions of Transpower Technologies in
November 2001, CII in January 2002, and all other acquisitions with a purchase
price of $10 million or more, revenue (calculated in the manner described above
in "Overview") for the segment decreased 10.8% from $5,380.1 million for the six
months ended March 31, 2002 to $4,797.0 million for the six months ended
March 31, 2003.

The increase in operating income and margins for the six months ended
March 31, 2003 as compared to the six months ended March 31, 2002 was due to
unusually low operating income in the prior year, primarily as a result of
charges totaling $2,957.5 million (discussed below) that were recorded in the
six months ended March 31, 2002. Operating income and margins decreased year
over year also as a result of the decrease in net revenue noted above.
Additionally, we recorded net restructuring credits of $56.5 million, of which
$12.9 million has been included in cost of sales, in the six months ended
March 31, 2003 due to completion of restructuring actions for less than
originally anticipated, and charges of $37.5 million related to current period
changes in estimates, which includes $14.9 million related to the adjustments to
accrual balances, $12.7 million of reconciliation items related to the current
period, and $9.9 million of other accounting adjustments related to M/A-COM.
These charges were recorded in connection with the Company's ongoing program of
intensified internal audits, and as a result of applying management's judgments
and estimates and detailed controls and operating reviews.

Operating income and margins for the six months ended March 31, 2002 include
charges for the impairment of property, plant and equipment of $2,346.0 million
primarily related to the write-down of the TGN and the closure of certain
facilities. Also includes restructuring charges of $611.5 million, of which
$237.5 million is included in cost of revenue, related to the write-down of
inventory and certain facility closures.

HEALTHCARE

The following table sets forth revenues and operating income and margins for
the Healthcare segment ($ in millions):

Net revenues for the Healthcare segment increased 10.8% in the six months
ended March 31, 2003 over the six months ended March 31, 2002, including a 10.9%
increase in product revenue and a 2.6% decrease in service revenue. The increase
in net revenues resulted primarily from organic growth and, to a lesser extent,
favorable foreign currency exchange rates. Strong organic growth was due to the
following: increases in the surgical sector concurrent with the award of the
Consorta contract and continued organic growth within certain surgical stapling
lines; increases in the medical sector; new

57

product launches in sharps; higher demand in the ultrasound market; increases in
imaging and pharmaceuticals; increases in the International division as a result
of favorable sales to European governments, and; strong respiratory and medical
sales in Japan, and increased sales in other Asia-Pacific countries. These sales
increases were partially offset by a decrease in the retail business' diaper
product line due to the adverse impact of new package down-counts, which were
implemented on an industry-wide basis. Excluding a $118.8 million increase from
foreign currency exchange fluctuations, the acquisition of Paragon Trade Brands
("Paragon") in January 2002 and the divestiture of Surgical Dynamics, Inc. in
July 2002 revenues for the Healthcare segment increased an estimated 5.9% from
$3,542.3 million for the six months ended March 31, 2002 to $3,751.2 million for
the six months ended March 31, 2003.

The 5.5% increase in operating income in the six months ended March 31, 2003
compared to the six months ended March 31, 2002 was due primarily to
acquisitions completed in fiscal 2002, favorable foreign currency exchange rates
and, to a lesser extent, favorable sales performance and manufacturing variances
and our continued focus on optimizing operating expenses. Offsetting the effect
of those items and contributing to the decrease in operating margins were
increased legal fees, higher sales and marketing expense as a result of program
development aimed at supporting organic growth initiatives. Additionally, during
the six months ended March 31, 2003, we recorded restructuring credits of
$6.7 million, of which $0.2 million has been included in cost of sales, and
$12.4 million of charges related to current period changes in estimates, which
includes $8.2 million related to asset reserves for inventory, $3.5 million of
reconciliation items related to the current period, and $0.7 million for the
adjustments to accrual balances related to workers compensation in the current
period. These charges were recorded in connection with the Company's ongoing
program of intensified internal audits, and as a result of applying management's
judgments and estimates and detailed controls and operating reviews.

Operating income and margins for the six months ended March 31, 2002 include
charges of $7.8 million, related to the write-off of legal and other deal costs
associated with an acquisition that was not completed.

ENGINEERED PRODUCTS AND SERVICES

The following table sets forth revenues and operating income and margins for
the Engineered Products and Services segment ($ in millions):

Net revenues for the Engineered Products and Services segment increased 4.4%
in the six months ended March 31, 2003 over the six months ended March 31, 2002,
including a 1.7% increase in product revenue and a 28.6% increase in service
revenue. The increase in net revenue was primarily due to the favorable impact
of foreign currency exchange rates and, to a lesser extent, the effect of
acquisitions. Acquisitions included Century Tube Corporation ("Century") in
October 2001, Water & Power Technologies ("Water & Power") in November 2001, and
Clean Air Systems in February 2002. Excluding a $88.4 million increase from
foreign currency exchange fluctuations, the acquisitions listed above, and all
other acquisitions with a purchase price of $10 million or more, revenues
(calculated in the manner described above in "Overview") for the segment
decreased 1.5% from $2,214.1 million for the six months ended March 31, 2002 to
$2,180.9 million for the six months ended March 31, 2002.

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The 78.3% decrease in operating income and the decrease in margins in the
six months ended March 31, 2003 compared to the six months ended March 31, 2002
was due primarily to charges recorded in the second quarter of fiscal 2003 of
$118.9 million related to prior periods, which includes $103.2 million of
reconciling items primarily related to inter-company transactions,
$12.8 million of asset reserve adjustment for receivables, $2.6 million of
capitalized costs associated with inventory, and $0.3 million related to the
adjustments to accrual balances, charges of $59.4 million related to current
period changes in estimates, which includes $33.9 million related to the
adjustments to workers compensation and health insurance accruals,
$18.0 million primarily related to reconciling items in the current period, and
$7.5 million associated with asset reserves. These charges were recorded in
connection with the Company's ongoing program of intensified internal audits,
and as a result of applying management's judgments and estimates and detailed
controls and operating reviews; lower volume; competitive conditions in major
markets for valves and controls, thermal controls, and electrical and metal
products; and increased raw material costs.

Operating income and margins for the six months ended March 31, 2002
includes restructuring and other charges of $24.7 million, of which
$5.8 million is included in cost of sales, and charges of $5.7 million for the
impairment of long-lived assets, primarily related to the termination of
employees and the write-down of inventory associated with exiting a product
line.

PLASTICS AND ADHESIVES

The following table sets forth revenues and operating income and margins for
the Plastics and Adhesives segment ($ in millions):

Net revenues at Tyco Plastics and Adhesives increased 2.4% in the six months
ended March 31, 2003 over the six months ended March 31, 2002 due to the effect
of acquisitions and favorable foreign currency exchange rates. Sales increases
were achieved by higher selling prices as a result of higher raw material costs,
increased sales volume of plastic sheeting and duct tape products as a result of
the heightened level of security related to the potential likelihood of
terrorist attacks. These increases were offset by increased competition and
decreases in our Corrosion Protection business, which has been negatively
impacted by a slow down in the oil and gas pipeline construction markets created
by uncertainty in the Middle East and Venezuela. Excluding a $14.0 million
increase from foreign currency exchange fluctuations and the acquisition of Linq
Industrial Fabrics, Inc. in December 2001, and all other acquisitions with a
purchase price of $10 million or more, revenues (calculated in the manner
described above in "Overview") for the Plastics and Adhesives segment decreased
an estimated 1.4% from $938.5 million for the six months ended March 31, 2002 to
$925.1 million for the six months ended March 31, 2003.

The 54.3% decrease in operating income and decrease in operating margins in
the six months ended March 31, 2003 over the six months ended March 31, 2002 was
primarily due to increased raw material costs, increased pricing competition, a
less favorable sales mix, and negative manufacturing variances, in addition to
$20.7 million of charges recorded in the second quarter of fiscal 2003 related
to prior periods, which includes $10.9 million of other accounting adjustments
primarily related to amortization expense on intellectual property,
$5.9 million related to reconciling items, $2.2 million for the adjustments to
accrual balances, and $1.7 million related to asset reserves, and charges of
$6.0 million related to current period changes in estimates, which includes
$4.0 million for the adjustments to accrual balances, $2.4 million related to
reconciliation items, and a restructuring credit of $0.4 million due to costs
being less than anticipated. These charges were recorded in connection with

59

the Company's ongoing program of intensified internal audits, charges as a
result of applying management's judgments and estimates and detailed controls
and operating reviews. These costs were partially offset by favorable selling,
general and administrative costs as our business implements various cost saving
initiatives and decreased sales commission expense due to volume shortfalls.

Operating income and margins in the six months ended March 31, 2002 includes
restructuring and other charges of $0.9 million for legal and other deal fees
that were written-off.

FOREIGN CURRENCY

The effect of changes in foreign exchange rates for the six months ended
March 31, 2003 compared to the six months ended March 31, 2002 was an increase
in revenues and operating income of approximately $674.5 million and
$83.2 million, respectively.

CORPORATE EXPENSES

Corporate expenses were $287.0 million and $335.0 million in the six months
ended March 31, 2003 and 2002, respectively. Corporate expenses for the current
period include charges of $152.2 million, which includes a $91.5 million
incremental increase in directors and officers insurance (see Note 1--"Basis of
Presentation" and Note 12--"Committments and Contingencies" to the Consolidated
Financial Statements), $24.5 million of charges related to prior periods
(includes $13.9 million related to the adjustments to accrual balances and a
charge of $10.6 million related to capitalized costs associated with the
impairment of property, plant and equipment), and $46.8 million of charges
related to changes in estimates (includes $29.2 million for other accounting
adjustments primarily related to a severance accrual for corporate employees,
$12.6 million for the adjustments to accrual balances, and $5.0 million related
to asset reserves). Also included within the $152.2 million is a restructuring
credit of $10.6 million due to costs being less than anticipated, which is also
a change in estimate. Current period corporate expenses also include charges of
$38.5 million related to internal investigation fees, and charges associated
with the severance of corporate employees. Corporate expenses for the six months
ended March 31, 2002 include charges related to prior years of $222.0 million.
In addition, the increase in the six months ended March 31, 2003 as compared to
the six months ended March 31, 2002 was partially due to increased insurance
costs and professional fees.

OTHER EXPENSE, NET

Tyco has repurchased some debt prior to scheduled maturities. During the six
months ended March 31, 2003, the Company recorded other income from the early
retirement of debt totaling $24.1 million, as compared to expense of
$6.7 million during the six months ended March 31, 2002. During the six months
ended March 31, 2003, the Company recorded other income of $20.0 million related
to the return of an unauthorized payment to a former director of the Company in
connection with the acquisition of The CIT Group, Inc. Also, during the six
months ended March 31, 2003, the Company recorded a loss of $75.6 million
related to the write-down of various equity investments and $8.5 million of
other expense related to a bank guarantee on behalf of an equity investee. These
charges were recorded in connection with the Company's ongoing program of
intensified internal audits, and as a result of applying management's judgments
and estimates and detailed controls and operating reviews, and are considered to
be changes in estimates. During the six months ended March 31, 2002, the Company
recorded a loss on equity investments of $141.0 million, primarily related to
its investment in FLAG Telecom Holdings.

INTEREST INCOME AND EXPENSE

Interest income was $47.6 million in the six months ended March 31, 2003, as
compared to $49.1 million in the six months ended March 31, 2002. Interest
expense was $588.8 million in the six months ended March 31, 2003, as compared
to $463.9 million in the six months ended March 31, 2002. Interest expense also
includes $0.4 million related to changes in estimates related to other
accounting adjustments. The increase in interest expense is primarily the result
of a decrease in capitalized interest

60

due to the completion of TGN and a higher average interest rate in the current
period. We expect both interest income and expense to remain relatively level
next quarter.

INCOME TAX EXPENSE

Income tax expense was $267.4 million on pre-tax income of $426.7 million
for the six months ended March 31, 2003 as compared to income tax expense of
$216.0 million on pre-tax loss of $904.2 million for the six months ended
March 31, 2002. The difference in the rate is due to a decrease in losses in low
tax jurisdictions partially offset by an increase in valuation allowance due to
the uncertainty of the utilization of certain non-U.S. deferred tax assets
related to the ongoing intensified internal audits and detailed controls and
operating reviews.

The effective income tax rate, excluding the impact of restructuring and
other charges, was 27.9% and 15.3% in the six months ended March 31, 2003 and
2002, respectively. The increase in the effective income tax rate was primarily
due to lower earnings in tax jurisdictions with lower income tax rates as well
as an increase in valuation allowance due to the uncertainty of the utilization
of certain non-U.S. deferred tax assets related to the Company's ongoing
intensified internal audits and detailed controls and operating reviews.

CUMULATIVE EFFECT OF ACCOUNTING CHANGE

As discussed in the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 2002, the Company incurs costs associated with maintaining
and operating its ADT authorized dealer program. Dealers reimburse the Company a
non-refundable amount for each of the contracts purchased representing their
reimbursement of such costs. The Company recognizes this non-refundable charge
at the time the contract is accepted for purchase. Prior to fiscal 2002, the
Company recognized in earnings the entire amount of reimbursements from dealers.
Commencing October 1, 2001, to the extent that the amount of dealer
reimbursement exceeded the actual costs incurred by the Company, the excess was
recorded as a deferred credit and amortized on a straight line-basis over ten
years. As described in the following paragraph, during the quarter ended
March 31, 2003, the Company has changed its method of accounting for these
reimbursements from dealers, retroactive to October 1, 2002.

The FASB's Emerging Issues Task Force ("EITF") recently issued EITF 02-16,
"Accounting by a Customer (Including a Reseller) for Certain Consideration
Received from a Vendor", which is applicable to the arrangement between the
Company and its authorized dealers for the electronic security services
business. The issues addressed in EITF 02-16 were brought to the EITF for the
purpose of addressing the wide diversity found in practice, across a variety of
arrangements and industries, in accounting for payments received by purchasers
of goods and services from vendors or suppliers. Pursuant to this consensus, the
consideration received by ADT relating to the non-refundable charge to each
dealer for reimbursement of ADT costs to support the dealer program should be
presumed to be a reduction in the cost to ADT of acquiring customer contracts.
Based on the transition rules of EITF 02-16, we are required to apply this new
consensus to all customer contracts acquired after December 31, 2002. As
permitted under EITF 02-16, during the second quarter of fiscal 2003, the
Company changed its method of accounting for the consideration received by ADT
for the non-refundable charge to dealers for reimbursement of ADT costs to
support the dealer program retroactive to the beginning of the fiscal year. This
was reported as a $206.7 million after-tax ($265.5 million pre-tax) charge for
the cumulative effect of change in accounting principle in the Consolidated
Statement of Operations for the six months ended March 31, 2003, retroactive to
October 1, 2002. The impact on the balance sheet of the cumulative adjustment is
a decrease in net intangible assets of $566.8 million and a decrease in
liabilities for the previously deferred non-refundable charge to dealers of
$301.4 million.

In addition to the charge for the cumulative effect of a change in
accounting described above, the impact of adopting this accounting change was to
decrease the purchase price of customer accounts

61

acquired from the dealers by $32.0 million and $74.0 million for the quarter and
six months ended March 31, 2003, respectively. The impact of the change on
results of operations for the quarter ended March 31, 2003 was a decrease to
both loss from continuing operations and net loss of $5.7 million ($7.0 million
pre-tax). The change had no effect on loss from continuing operations per common
share or net loss per common share for the quarter ended March 31, 2003. The
impact of the change for the six months ended March 31, 2003, before the charge
for the cumulative effect of the change discussed above, was a decrease to both
income from continuing operations and net income of $14.7 million
($18.5 million pre-tax) or $0.01 per common share.

The following statement of operations for the quarter ended December 31,
2002 reflects the change in accounting retroactive to the beginning of the
fiscal year, October 1, 2002 (in millions, except per share data):

62

The pro forma amounts shown below give effect to the retroactive application
of the change in accounting which would have been made had the new method been
in effect for the periods presented ($ in millions, except per share data).

CRITICAL ACCOUNTING POLICIES

The preparation of consolidated financial statements in conformity with GAAP
requires management to use judgment in making estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities and the reported amounts of revenues and expenses. The
following accounting policies are based on, among other things, judgments and
assumptions made by management that include inherent risks and uncertainties.
Management's estimates are based on the relevant information available at the
end of each period.

LONG-LIVED ASSETS--Management periodically evaluates the net realizable
value of long-lived assets, including property, plant and equipment, the TGN and
intangible assets, relying on a number of factors including operating results,
business plans, economic projections and anticipated future cash flows. We carry
long-lived assets at the lower of cost or fair value. Since judgment is involved
in determining the fair value of long-lived assets, there is risk that the
carrying value of our long-lived assets may be overstated or understated.

We wrote off a significant portion of the TGN during fiscal 2002, and
management continues to monitor developments in the fiber optic capacity
markets. It is possible that the assumptions underlying an impairment analysis
will change in such a manner that a further impairment in value may occur in the
future. In addition, we may experience TGN impairments if the downturn in the
telecommunications industry continues.

The determination of the depreciable lives of subscriber systems included in
property, plant and equipment, and the amortizable lives of customer contracts
and related customer relationships included in intangible assets, are primarily
based on historical attrition rates, third party lifing studies and the useful
life of the underlying tangible asset. The realizable value and remaining useful
lives of these assets could be impacted by changes in customer attrition rates.

CHANGES IN ACCOUNTING METHODS--As discussed in the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 2002, the Company purchases
residential security monitoring contracts from an external network of
independent dealers who operate under ADT's authorized dealer program (the
"dealer program"). The purchase price of these customer contracts is recorded as
an intangible asset (i.e., contracts and related customer relationships), and
historically has been amortized on a straight-line method generally over a
ten-year period. During the quarter ended March 31, 2003, the Company concluded
a comprehensive review of its amortization policy with respect to these dealer

63

customer account costs. This review included a detailed attrition study of the
dealer program customer base conducted by an independent appraiser using data
through March 31, 2003.

The Company generally divides its electronic security assets into three
asset pools: internally generated residential systems, internally generated
commercial systems and accounts acquired through our dealer program. After
evaluating various methods that would reflect the most recent attrition pattern
of the accounts acquired through the dealer program, the Company concluded that
the most appropriate amortization method would be an accelerated method that
approximates the allocation of costs to the revenue curve generated by our
actual attrition data. The estimated life of a dealer account pool generated
from the results of the appraiser's lifing study is approximately twelve years.
The Company believes that the change to this method is appropriate based on its
actual attrition data that indicates an increase in the rate of customer
attrition following the expiration of the initial three-year term of monitoring
contracts with customers. The accelerated method that presently best achieves
the matching objective described above is the double-declining balance method
based on a ten-year life for the first eight years of the estimated life of the
customer relationships, converting to the straight-line method of amortization
to completely amortize the asset pool by the end of the twelfth year. This
method of amortization will be periodically reviewed and compared to observed
actual attrition.

The Company also undertook a comprehensive review of its depreciation policy
with respect to security monitoring systems installed in residential and
commercial customer premises. The costs of these systems are combined in
separate pools for internally generated residential and commercial account
customers, and generally depreciated over ten years. Based on the results of
this review, the Company concluded that for residential and commercial account
pools the straight-line method of amortization over a ten-year period continues
to be appropriate given the observed actual attrition data for these pools.

GOODWILL--Management assesses goodwill for impairment at least as often as
annually and as triggering events occur. In making this assessment, management
relies on a number of factors including operating results, business plans,
economic projections, anticipated future cash flows, and transactions and market
place data. There are inherent uncertainties related to these factors and
management's judgment in applying them to the analysis of goodwill impairment.
Since management's judgment is involved in performing goodwill valuation
analyses, there is risk that the carrying value of our goodwill may be
overstated or understated.

Disruptions to our business such as end market conditions and protracted
economic weakness, unexpected significant declines in operating results of
reporting units, continued downgrades in our credit ratings, and additional
market capitalization declines may result in our having to perform an SFAS 142
first step valuation analysis for all of our reporting units prior to the
required annual assessment. These types of events and the resulting analysis
could result in additional charges for goodwill and other asset impairments in
the future.

We elected to make July 1 the annual assessment date for all reporting
units. Goodwill valuations have historically been calculated using an income
approach based on the present value of future cash flows of each reporting unit.
This approach includes many assumptions related to future growth rates, discount
factors, future tax rates, etc. Changes in economic and operating conditions
impacting these assumptions could result in a goodwill impairment in future
periods.

REVENUE RECOGNITION--Contract sales for the installation of fire protection
systems, large security intruder systems, underwater cable systems and other
construction related projects are recorded on the percentage-of-completion
method. Profits recognized on contracts in process are based upon contracted
revenue and related estimated cost to completion. The risk of this methodology
is its dependence upon estimates of costs to completion, which are subject to
the uncertainties inherent in long-term contracts. Revisions in cost estimates
as contracts progress have the effect of increasing or decreasing profits in the
current period. Provisions for anticipated losses are made in the period in
which they first become

64

determinable. If estimates are inaccurate, there is risk that our revenues and
profits for the period may be overstated or understated.

INCOME TAXES--Estimates of full year taxable income of the various legal
entities and jurisdictions are used in the tax rate calculation, which change
throughout the year. Management uses judgment in estimating what the income will
be for the year. Since judgment is involved, there is risk that the tax rate may
significantly increase or decrease in any period.

DISCONTINUED OPERATIONS OF TYCO CAPITAL (CIT GROUP INC.)

On July 8, 2002, the Company completed the sale of 100% of the common shares
of CIT Group Inc., a wholly-owned subsidiary, through an initial public
offering. Operating results from the discontinued operations of Tyco Capital for
the quarter and six months ended March 31, 2002 were as follows ($ in millions):

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

(1) This amount is the sum of depreciation of tangible property
($367.0 million and $371.9 million for the quarters ended March 31, 2003
and 2002, and $728.1 million and $731.5 million for the six months ended
March 31, 2003 and 2002, respectively) and amortization of intangible assets
($520.3 million and $134.8 million for the quarters ended March 31, 2003 and
2002, and $659.1 million and $255.9 million for the six months ended
March 31, 2003 and 2002, respectively).

66

(2) This amount includes cash paid out for restructuring and other charges of
$131.1 million and $91.1 million for the quarters ended March 31, 2003 and
2002, and $290.1 million and $182.0 million for the six months ended
March 31, 2003 and 2002, respectively.

(3) This amount is net of proceeds of $29.5 million received in sale-leaseback
transactions during the six months ended March 31, 2002. It is also net of
proceeds of $37.1 million and $42.8 million for the quarters ended
March 31, 2003 and 2002, and $66.0 million and $58.2 million for the six
months ended March 31, 2003 and 2002, respectively, received in sale/
disposition of property, plant and equipment.

The following table shows cash flow from operating activities and free cash
flow by segment for the six months ended March 31, 2003.

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

(1) These amounts include cash paid out for restructuring and other charges.

The net change in working capital, net of the effects of acquisitions and
divestitures, was a decrease of $236.3 million in the six months ended
March 31, 2003, including cash paid out for restructuring and other charges of
$290.1 million. The components of this change are set forth in detail in our
Consolidated Statement of Cash Flows. The significant changes in working capital
included a $420.7 million decrease in accounts payable, a $279.4 million
decrease in accounts receivable, and a $184.0 million decrease in accrued
expenses and other current liabilities.

During the six months ended March 31, 2003, we paid out $189.5 million in
cash that was charged against reserves established in connection with
acquisitions. This amount is included in "Cash paid for

67

purchase accounting and holdback/earn-out liabilities" under Cash Flows From
Investing Activities in the Consolidated Statement of Cash Flows.

During the six months ended March 31, 2003, we recorded restructuring
credits of $76.2 million, of which $13.1 million is included in cost of sales,
related to a revision of estimates of prior years' restructuring charges. At
September 30, 2002, there were liabilities for restructuring and other charges
of $1,006.9 million on the Consolidated Balance Sheet. During the six months
ended March 31, 2003, we paid out $290.1 million in cash and incurred
$0.3 million in non-cash uses that were charged against these liabilities. We
also reclassified $183.0 million of restructuring accruals to the appropriate
balance sheet accounts. We also recorded $7.9 million in foreign currency
translation adjustments and non-cash adjustments of $28.8 million. At March 31,
2003, there were $507.1 million of reserves remaining for restructuring and
other charges on our Consolidated Balance Sheet, of which $337.7 million is
included in accrued expenses and other current liabilities and $169.4 million is
included in other long-term liabilities.

During the six months ended March 31, 2003, we purchased businesses for cash
of $34.6 million, net of $1.3 million of cash acquired, and customer contracts
for electronic security services for cash of $358.3 million.

At the beginning of fiscal 2003, our purchase accounting reserves were
$539.0 million as a result of purchase accounting transactions in prior years.
Purchase accounting liabilities of $21.9 million and a corresponding increase to
goodwill and deferred tax assets were recorded during the six months ended
March 31, 2003 relating to fiscal 2003 and 2002 acquisitions. These reserves
related primarily to revisions associated with finalizing the exit plans of
Paragon and Eberle, both acquired during fiscal 2002. Also, during fiscal 2003,
we reclassified $0.9 million of fair value adjustments related to the write-down
of assets for fiscal 2002 acquisitions out of purchase accounting accruals into
the appropriate asset or liability account. We also recorded $9.3 million in
cumulative translation adjustments. During the six months ended March 31, 2003,
we paid out $113.2 million in cash for utilization of purchase accounting
liabilities related to prior years' acquisitions. In addition, we paid out
$76.3 million relating to holdback/earn-out liabilities related to certain prior
period acquisitions. Holdback liabilities represent a portion of the purchase
price that is withheld from the seller pending finalization of the acquisition
balance sheet. Certain acquisitions have provisions which require Tyco to make
additional "earn-out" payments to the sellers if the acquired company achieves
certain milestones subsequent to its acquisition by Tyco. These earn-out
payments are tied to certain performance measures, such as revenue, gross margin
or earnings growth. Also, in the six months ended March 31, 2003, we determined
that $168.0 million of purchase accounting reserves related to acquisitions
prior to fiscal 2003 were not needed and reversed that amount against goodwill.
At March 31, 2003, there remained $288.1 million in purchase accounting reserves
on our Consolidated Balance Sheet, of which $158.6 million is included in
accrued expenses and other current liabilities and $129.5 million is included in
other long-term liabilities. In addition, $216.9 million of holdback/earn-out
liabilities remained on our Consolidated Balance Sheet, of which $100.8 million
are included in accrued expenses and other current liabilities and
$116.1 million are included in other long-term liabilities at March 31, 2003.

GUARANTEES, COMMITMENTS AND CONTINGENCIES

TIG has issued a guarantee to a bank on behalf of an equity investee for a
reducing revolving line of credit, due November 30, 2005. The maximum borrowing
permitted under the facility is now $8.5 million, all of which is outstanding.
The maximum borrowing permitted under the facility will be further reduced by
$0.75 million on both December 20, 2003 and 2004. In the event that the equity
investee defaults on its payment obligations, the bank may demand that the
Company pay the outstanding principal on the loan. During the quarter ended
March 31, 2003, the Company recorded a liability for the guarantee of
$8.5 million as a result of the equity investee experiencing financial

68

constraints. This amount has been included in other expense, net, in the
accompanying Consolidated Financial Statements. In the instance that the Company
would be required to pay the bank, the Company has no recourse from a
third-party other than ultimate reimbursement from the equity investee in cash
or common shares.

The Company's Healthcare business may, from time to time, enter into sales
contracts whereby it will buy back (at a discount) a transaction from a
customer's third-party financier in the event of a customer's default. For such
transactions that include "shared risk," the Company accrues a liability based
on historical loss data. As of March 31, 2003, $3.2 million was accrued related
to these contracts. In the event the Company must pay for this shared risk, the
Company's recourse is as follows: place the lease with a financially viable
third-party financier; repossess the purchased products or equipment; seek
payment through a personal guarantee issued by the customer; or, alternatively,
sue the customer.

The Company's Fire and Security Services business has guaranteed the
performance of a third-party contractor. The performance guarantee arose from
contract negotiations, because the contractor could provide cost-effective
service on a telecommunications contract. In the event the contractor does not
perform its contractual obligations, Tyco Fire and Security would perform the
services itself. Therefore, the Company's exposure would be the cost on any
services performed, which would not have a material effect to the Company's
financial position or results of operations. However, because it is not probable
that the Company will have to make any payments pursuant to the guarantee, it is
not accrued. The contract was entered into in July 2002 and the performance
guarantee expires in August 2003. If the third-party sub-contractor does not
perform its obligations, Tyco may consider withholding any future payment for
work performed by the contractor.

The Company, in disposing of assets or businesses, often provides
representations, warranties and/or indemnities to cover various risks including,
for example, unknown damage to the assets, environmental risks involved in the
sale of real estate, liability to investigate and remediate environmental
contamination at hazardous waste disposal sites and manufacturing facilities,
and unidentified tax liabilities and legal fees related to periods prior to
disposition. The Company does not have the ability to estimate the potential
liability from such indemnities because they relate to unknown conditions.
However, we have no reason to believe that these uncertainties would have a
material adverse effect on the Company's financial position, results of
operations or liquidity.

The Company has recorded liabilities for known indemnifications included as
part of environmental liabilities. The range of probability and the amount
accrued for known liabilities has not changed significantly since September 30,
2002. In view of our financial position and reserves for environmental matters,
we believe that any potential payment of such estimated amounts or additional
monetary sanctions will not have a material adverse effect on the Company's
financial position, results of operations or liquidity.

Due to the Company's downsizing of certain operations as part of
restructuring plans, acquisitions, or otherwise, the Company has leased
properties, which it has vacated, but has sub-let to third parties. In the event
third parties vacate the premises, the Company would be legally obligated under
master lease arrangements. The Company believes that the financial risk of
default by sub-lessors is individually and in the aggregate not material to the
Company's financial position, results of operations or liquidity.

In the normal course of business, the Company is liable for contract
completion and product performance. In the opinion of management, such
obligations will not significantly affect the Company's financial position,
results of operations or liquidity.

The Company generally accrues estimated product warranty costs at the time
of sale. In other instances, additional amounts are recorded when such costs are
probable and can be reasonably estimated. Manufactured products are warranted
against defects in material and workmanship when

69

properly used for their intended purpose, installed correctly, and appropriately
maintained. Generally, product warranties are implicit in the sale; however, the
customer may purchase an extended warranty. Manufactured equipment is also
warranted in the same manner as product warranties. However, in most instances
the warranty is either negotiated in the contract or sold as a separate
component. Warranty period terms range from 90 days (e.g., consumable products)
up to 20 years (e.g., power system batteries.) The amount of the accrued
warranty liability is determined based on historical information such as past
experience, product failure rates or number of units repaired, estimated cost of
material and labor, and in certain instances estimated property damage. The
liability which is $438.5 million as of March 31, 2003, is reviewed for
reasonableness at least as often as quarterly.

Except as disclosed elsewhere in this document, our contractual obligations,
contingencies and commitments for minimum lease payment obligations under
non-cancelable operating leases have not changed materially from September 30,
2002.

As a result of actions taken by our former senior corporate management,
Tyco, some members of our former senior corporate management, and former members
of our board of directors are named defendants in a number of purported class
actions alleging violations of the disclosure provisions of the federal
securities laws, as well as in a number of derivative actions. Tyco, certain of
our current and former employees, some members of our former senior corporate
management, and some former members of our board of directors also are named as
defendants in several ERISA actions. In addition, Tyco and some members of our
former senior corporate management are subject to an SEC inquiry; some members
of our former senior corporate management are named as defendants in criminal
cases being prosecuted by the District Attorney of New York County; and some
members of our former senior corporate management are subject to an
investigation by, or named as a defendant in a criminal case being prosecuted
by, the U.S. Attorney for the District of New Hampshire. The findings and
outcomes of the prosecutions and the SEC civil action may affect the course of
the purported class actions, derivative actions and ERISA claims pending against
Tyco. We are generally obliged to indemnify our directors and our former
directors and officers who are also named as defendants in some or all of these
matters to the extent permitted by Bermuda law. In addition, our insurance
carriers may decline coverage, or our coverage may be insufficient to cover our
expenses and liability in some or all of these matters. On February 13, 2003,
one of Tyco's insurance carriers filed an action in the Supreme Court of the
State of New York seeking to rescind certain directors and officers liability
and fiduciary liability insurance policies issued to Tyco and its directors,
officers and fiduciaries on the basis of alleged misrepresentations made by our
former senior corporate management. On May 8, 2003, Tyco's negotiations with the
Company's directors and officers liability insurance carriers and fiduciary
carriers concluded with the filing of a notice of dismissal of this action. In
exchange for a payment of additional policy premiums, Tyco maintained, in part,
its available directors and officers liability insurance coverage and fiduciary
insurance coverage for claims made during the 2001-2003 policy period. We are
unable at this time to estimate what our ultimate liability in these matters may
be, and since Tyco's agreement with its carriers reduced the overall limits of
coverage available to Tyco and other insureds, we may be required to pay
judgments or settlements and incur expenses in aggregate amounts that would have
a material adverse effect on our financial position, results of operations and
liquidity. See "Risk Factors" and Part II, Item 1. "Legal Proceedings."

We and others have received subpoenas and requests from the SEC, the
District Attorney of New York County, and the U.S. Attorney for the District of
New Hampshire and others seeking the production of voluminous documents in
connection with various investigations into our governance, management,
operations, accounting and related controls. In addition, the Department of
Labor is investigating us and the administrators of certain of our benefit
plans. We are also subject to ongoing audits by the Internal Revenue Service. We
cannot predict when these investigations will be completed, nor can we predict
what the results of these investigations may be. It is possible that we will be
required to pay material fines, consent to injunctions on future conduct, lose
the ability to conduct

70

business with government instrumentalities or suffer other penalties, each of
which could have a material adverse effect on our business. We cannot assure you
that the effects and results of these investigations will not be material and
adverse to our business, financial condition and liquidity. See "Risk Factors"
and Part II, Item 1. "Legal Proceedings."

Tyco is involved in various stages of investigation and cleanup related to
environmental remediation matters at a number if sites. See "Risk Factors" and
Part II, Item 1. "Legal Proceedings." The ultimate cost of site cleanup is
difficult to predict given the uncertainties regarding the extent of the
required cleanup, the interpretation of applicable laws and regulations and
alternative cleanup methods. We have concluded that it is probable that we will
incur remedial costs in the range of approximately $145 million to
$440 million. As of March 31, 2003, we concluded that the best estimate within
this range is approximately $269 million, of which $32 million is included in
accrued expenses and other current liabilities and $237 million is included in
other long-term liabilities on the accompanying Consolidated Balance Sheet.
Environmental laws are complex, change frequently and have tended to become more
stringent over time. While we have budgeted for future capital and operating
expenditures to maintain compliance with such laws, we cannot assure you that
our costs of complying with current or future environmental protection and
health and safety laws, or our liabilities arising from past or future releases
of, or exposures to, hazardous substances will not exceed our estimates or
adversely affect our financial condition and results of operations or that we
will not be subject to additional environmental claims for personal injury or
cleanup in the future based on our past, present or future business activities.

The Company and its subsidiaries' income tax returns are routinely examined
by various regulatory tax authorities. In connection with such examinations, tax
authorities, including the Internal Revenue Service, have raised issues and
proposed tax deficiencies. We are reviewing the issues raised by the tax
authorities and are contesting the proposed deficiencies. Amounts related to
these tax deficiencies and other tax contingencies that management has assessed
as probable and estimable have been accrued through the income tax provision. We
cannot assure you that the ultimate resolution of these tax deficiencies and
contingencies will not have a material adverse effect on our results of
operations, financial position or cash flows.

Like many other companies, Tyco and some of our subsidiaries are named as
defendants in personal injury lawsuits based on alleged exposure to
asbestos-containing materials. Consistent with the national trend of increased
asbestos-related litigation, we have observed an increase in the number of these
lawsuits in the past several years. The majority of these cases have been filed
against subsidiaries in our Healthcare segment and our Engineered Products and
Services segment. A limited number of the cases allege premises liability, based
on claims that individuals were exposed to asbestos while on a subsidiary's
property. Some of the cases involve product liability claims, based principally
on allegations of past distribution of heat-resistant industrial products
incorporating asbestos or the past distribution of industrial valves that
incorporated asbestos-containing gaskets or packing. Each case typically names
between dozens to hundreds of corporate defendants.

Tyco's involvement in asbestos cases has been limited because our
subsidiaries did not mine or produce asbestos. Furthermore, in our experience, a
large percentage of these claims were never substantiated and have been
dismissed by the courts. Our vigorous defense of these lawsuits has resulted in
judgments in our favor in all cases tried to verdict. We have not suffered an
adverse verdict in a trial court proceeding related to asbestos claims.

When appropriate, we settle claims. However, the total amount paid to date
to settle and defend all asbestos claims has been immaterial. Currently, there
are approximately 12,000 asbestos liability cases pending against us and our
subsidiaries.

We believe that we and our subsidiaries have substantial indemnification
protection and insurance coverage, subject to applicable deductibles, with
respect to asbestos claims. These indemnitors and the

71

relevant carriers typically have been honoring their duty to defend and
indemnify. We believe that we have valid defenses to these claims and intend to
continue to defend them vigorously. Additionally, based on our historical
experience in asbestos litigation and an analysis of our current cases, we
believe that we have adequate amounts accrued for potential settlements and
judgments in asbestos-related litigation. While it is not possible at this time
to determine with certainty the ultimate outcome of these asbestos-related
proceedings, we believe that the final outcome of all known and anticipated
future claims, after taking into account our substantial indemnification rights
and insurance coverage, will not have a material adverse effect on our results
of operations, financial position or cash flows.

CAPITALIZATION

Shareholders' equity was $25,385.9 million, or $12.71 per share, at
March 31, 2003, compared to $24,790.6 million, or $12.42 per share, at
September 30, 2002. The increase in shareholders' equity was due primarily to
currency translation adjustments of $655.9 million for the six months ended
March 31, 2003 offset by a net loss of $49.1 million.

Tangible shareholders' deficit was $6,489.8 million at March 31, 2003, as
compared to $7,865.2 million at September 30, 2002. Goodwill and other
intangible assets were $31,875.7 million at March 31, 2003, compared to
$32,655.8 million at September 30, 2002. Acquisitions have been an important
part of Tyco's growth in recent years. While we may continue to make selected
complementary acquisitions, the amount of acquisition activity has been and will
continue to be significantly reduced and, therefore, our growth rate from
acquisitions will continue to be reduced as compared to prior quarters.

Total debt as a percentage of total capitalization (total debt and
shareholders' equity) was 46% at March 31, 2003 and 49% at September 30, 2002.
Tyco International Group S.A. ("TIG"), a wholly-owned subsidiary of Tyco, is
party to a $2.0 billion revolving credit facility due 2006 containing a covenant
that would result in a default if our total debt as a percentage of total
capitalization exceeds 52.5%. A significant decline in our shareholders' equity,
including a decline due to a significant impairment of goodwill or other assets,
could cause a default under this covenant. We had approximately $4.0 billion of
cash and cash equivalents as of March 31, 2003. Net debt (total debt less cash
and cash equivalents) as a percent of net capitalization (net debt and
shareholders' equity) was 41% and 42% at March 31, 2003 and September 30, 2002,
respectively. Management believes net debt is an important measure of liquidity
which it uses to measure its ability to meet its future debt obligations.

At March 31, 2003, total debt was $21,829.5 million, as compared to
$24,205.8 million at September 30, 2002. Our cash balance decreased to
$3,965.2 million at March 31, 2003, as compared to $6,186.8 million at
September 30, 2002.

72

The following summarizes Tyco's change in net debt for the six months ended
March 31, 2003 ($ in millions):

Total debt at September 30, 2002........................ $24,205.8
Less: cash and cash equivalents at September 30, 2002... (6,186.8)
---------
NET DEBT BALANCE AT SEPTEMBER 30, 2002.................. 18,019.0
Less the following:
Operating cash flow from continuing operations.......... 2,154.4
Purchase of property, plant and equipment, net.......... (595.0)
Dividends paid.......................................... (50.4)
Decreases in sale of accounts receivable programs....... 96.5
Construction in progress--TGN........................... (89.0)
Acquisition of customer accounts........................ (358.3)
Cash paid for purchase accounting and holdback/earn-out
liabilities........................................... (189.5)
--------
Free cash flow.......................................... 968.7
Acquisition of business, net of cash acquired........... (34.6)
Increase in restricted cash............................. (310.7)
Cash invested in short-term investments................. (278.1)
Other items............................................. (190.6)
--------
154.7
---------
NET DEBT BALANCE AT MARCH 31, 2003...................... 17,864.3
Plus: cash and cash equivalents at March 31, 2003....... 3,965.2
---------
Total debt at March 31, 2003............................ $21,829.5
=========

In January 2003, TIG repaid its $3.855 billion unsecured term loan from
banks scheduled to expire on February 6, 2003.

In January 2003, TIG issued $3.0 billion of 2.75% Series A convertible
senior debentures due January 2018 and $1.5 billion of 3.125% Series B
convertible senior debentures due January 2023. These debentures are fully and
unconditionally guaranteed by Tyco, and at any time, holders may convert each of
their debentures into Tyco common shares prior to the stated maturity at a rate
of $22.7832 and $21.7476 respectively, per share. Additionally, holders of the
Series A debentures may require the Company to purchase all or a portion of
their debentures on January 15, 2008 and January 15, 2013, and holders of the
Series B debentures may require the Company to purchase all or a portion of
their debentures on January 15, 2015. If the option is exercised at any one of
the aforementioned dates, TIG must repurchase the debentures at par plus accrued
interest, and may elect to repurchase the securities for cash, Tyco common
shares, or some combination thereof. TIG may redeem for cash some or all of the
Series A debentures and Series B debentures at any time on or after January 20,
2006 and January 20, 2008, respectively. Net proceeds of approximately
$4,387.5 million, before out of pocket expenses, from these debentures were used
primarily to repay debt.

73

Also in January 2003, TIG entered into a $1.5 billion 364-day unsecured
revolving credit facility which also provides for issuance of unsecured letters
of credit. The facility, which is fully and unconditionally guaranteed by Tyco
and certain of its subsidiaries and is guaranteed in part by various
subsidiaries of TIG, has a variable interest rate based on LIBOR. The margin
over LIBOR payable by TIG can vary depending upon changes in its credit rating
and in the market price of one of its outstanding debt securities. TIG also pays
a commitment fee of 0.50% annually on any unused portion of the line of credit.

At February 12, 2003, the accreted value of TIG's zero coupon convertible
debentures with a February 2003 put option was $1,850.8 million. On
February 13, 2003, TIG purchased $1,850.1 million of these debentures for cash
at the accreted value. This purchase resulted from the exercise of investors'
option under the indenture to require TIG to purchase debentures validly
surrendered by February 12, 2003.

During the six months ended March 31, 2003, Tyco purchased $1,085.7 million
(par value $1,415.2 million) of its outstanding zero coupon convertible
debentures with a November 2003 put option for cash of approximately
$1,062.8 million. In November 2000, Tyco issued $4,657,500,000 principal amount
at maturity of zero coupon convertible debentures due 2020 for aggregate net
proceeds of approximately $3,374,000,000. The debentures accrete interest at a
rate of 1.5% per annum. Tyco may be required to repurchase these securities for
cash at the option of the holder at the accreted value of approximately
$2.5 billion in November 2003.

Our credit agreements contain a number of financial covenants, such as
interest coverage and leverage ratios, and restrictive covenants that limit the
amount of debt we can incur and restrict our ability to pay dividends or make
other payments in connection with our capital stock, to make acquisitions or
investments, to pledge assets and to prepay debt that matures after
December 31, 2004. We have several synthetic lease facilities with similar
covenants. Our outstanding indentures contain customary covenants including a
negative pledge, limit on subsidiary debt and limit on sale/leasebacks. None of
these covenants is presently considered restrictive to our operations.

As a result of the rating agencies' downgrade of Tyco's debt to below
investment grade status in fiscal 2002, investors in one of our accounts
receivable programs have the option to discontinue reinvestment in new
receivables. The amount outstanding under this program was $139.1 million at
March 31, 2003.

As of May 1, 2003, Moody's debt rating on Tyco's convertible debentures was
upgraded to a Ba2 rating from Ba3 as a result of a newly issued guarantee from
TIG.

In June 1998, TIG issued $750,000,000 of 6.25% Dealer Remarketable
Securities ("Drs.") due 2013. Under the terms of the Drs., the Remarketing
Dealer has an option to remarket the Drs. in June 2003. If this option is
exercised it would subject the Drs. to mandatory tender to the Remarketing
Dealer and reset the interest rate to an adjusted fixed rate until June 2013.
However, TIG may elect to repurchase the securities for a Dollar Price based
upon the $750,000,000 par value of the Drs. plus the difference between the Base
Rate of 5.55% and the ten-year United State Treasury yield-to-maturity as of
June 2003, estimated to be approximately $110 million based upon the March 31,
2003 ten-year treasury yield-to-maturity (approximately $120 million as of
May 13, 2003). If the Remarketing Dealer does not exercise its option, then all
Drs. are required to be tendered to the Compay in June 2003 and TIG would be
required to repurchase the Drs. from the holders for cash at par value of
$750,000,000 and pay the Remarketing Dealer the difference between the Dollar
Price and the par value of the Drs. In either case, the payment above the par
value would be recorded as a loss to income.

TIG has been contemplating an exchange of a new debt security for the Drs.
The exchange would be for the par value of the Drs. and the excess of the Dollar
Price over par value with the latter being

74

amortized over the life of the new bonds under exchange accounting. The final
decision will depend on the prevailing interest rate environment, the Company's
overall liquidity and its future maturity profile.

The table below includes our projected cash flows through December 2003, our
first quarter of fiscal 2004 ($ in millions).

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

(1) Fiscal 2003 free cash flow is estimated to be in the range of $1.55 billion
to $1.85 billion. The table presents fiscal 2003 free cash flow based on
management's current expectations that we will perform at the high end of
the range.

(2) From time to time the Company repurchases its debentures in the open market
prior to maturity.

(3) Of this amount, $3.9 billion represents repayment of our $3.855 billion
term loan and $1.8 billion of this amount represents payment for repurchase
of substantially all of the zero coupon convertible debentures with
February 2003 put option. In addition, during the quarter ended March 31,
2003, Tyco purchased $1,415.2 million outstanding under its zero coupon
convertible debentures with a November 2003 put option for cash of
$1,062.8 million.

(4) Amount assumes that the $750 million Dealer Remarketable Securities are
repurchased.

(5) This amount represents payment for repurchase of the zero coupon
convertible bonds at the option of the holders in November 2003.

(6) The Company does not expect restricted cash to significantly increase in
the foreseeable future.

(7) Amounts assume that the $350 million outstanding under one of the Company's
accounts receivable program will be renewed in the fourth quarter of fiscal
2003.

(8) This amount excludes approximately $460 million of short-term restricted
cash and $47 million of non-current restricted cash primarily related to
the funding of long-term construction projects.

As illustrated in the foregoing table and discussed above, we have
significant amounts of debt which matures in the remainder of calendar 2003.
Beyond calendar 2003, there are no substantial amounts of debt maturing until
calendar 2006. In addition, our accounts receivable program with amounts
outstanding, and available capacity of $350 million expires during this fiscal
year. We anticipate however, that this program will be renewed. In addition, as
previously discussed, in January 2003, we received net proceeds of approximately
$4.4 billion from the issuance of convertible debt. We used the proceeds and
cash on hand to repay our $3.9 billion then existing credit facility and
$1.8 billion outstanding under our zero coupon convertible senior debentures due
February 2021 (with a February 2003 put option.). In addition, in January 2003
we entered into a new $1.5 billion 364-day unsecured revolving credit facility,
none of which has been drawn down. We believe that our cash flow from our
operations, together with proceeds from the convertible debt offering and our
new credit facility, is adequate to fund our operations and service our debt
through March 31, 2004. However, events beyond our control such as the result of
ongoing litigation and governmental investigations, a decrease in demand for our
products and services, further debt rating downgrades or deterioration in our
financial ratios could negatively impact our access to financing and increase
our cost of funds.

75

The Company's zero coupon convertible senior debentures due 2020 (with a
November 2003 put option) may be converted into Tyco common shares at the option
of the holders if any one of the following conditions is satisfied for the
relevant debentures:

- if the closing sale price of Tyco common shares for at least 20 trading
days in the 30 trading day period ending on the trading day prior to the
date of surrender is more than 110% of the accreted conversion price per
common share of the relevant debentures on that preceding day;

- if the Company has called the relevant debentures for redemption after a
certain date; and

- upon the occurrence of specified corporate transactions, such as if Tyco
makes a significant distribution to its shareholders or if it is a party
to specific consolidations, mergers or binding share exchanges.

The conversion feature of the zero coupon convertible debentures due 2020
was not available to the debt holders at March 31, 2003 as shown in the
following table:

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

(1) Accreted conversion price per common share is equal to the accreted value
of the debentures at March 31, 2003 divided by the conversion rate. The
conversion price increases as interest on the notes accretes.

NON-CONTROLLED ENTITIES

In January 2003, the FASB issued FASB Interpretation No. ("FIN") 46,
"Consolidation of Variable Interest Entities." This interpretation clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," relating to consolidation of certain entities. FIN 46 requires
identification of the Company's participation in variable interest entities
(VIE), which are defined as entities with a level of invested equity that is not
sufficient to fund future activities to permit them to operate on a stand alone
basis, or whose equity holders lack certain characteristics of a controlling
financial interest. For entities identified as VIE, FIN 46 sets forth a model to
evaluate potential consolidation based on an assessment of which party to the
VIE, if any, bears a majority of the risk to its expected losses, or stands to
gain from a majority of its expected returns. FIN 46 applies immediately to
variable interest entities created or acquired after January 31, 2003. We have
not created any variable interest in any variable interest entities subsequent
to January 31, 2003. FIN 46 also sets forth certain disclosures regarding
interests in VIE's that are deemed significant, even if consolidation is not
required (see Note 16). For variable interest entities in which the Company
holds a variable interest acquired on or before January 31, 2003, the Company
will adopt FIN 46's accounting provisions on July 1, 2003.

The Company has programs under which it sells machinery and equipment and/or
accounts receivable to investors (or affiliated companies) who, in turn,
purchase and receive ownership and security interests in those assets. As such,
the Company may have certain investments in those affiliated companies whereby
it provides varying degrees of financial support and are entitled to a share in
the results of those entities but do not consolidate these entities. While these
entities may be substantive operating companies, they are being evaluated for
potential consolidation under FIN 46.

Synthetic lease programs are utilized, to some extent, by all of the
Company's segments to finance capital expenditures for manufacturing machinery
and equipment and for ships used by Tyco Telecommunications. The Company is
currently in discussions with financial institutions to restructure

76

the synthetic lease arrangements in order to have a third party be the majority
equity owner. If the Company is unable to restructure these arrangements, the
resulting accounting would be an increase to net property, plant and equipment
and total debt of approximately $840 million and a decrease to pre-tax income of
approximately $60 million annually resulting from the difference between lease
expense and estimated depreciation and interest expense.

The Company's accounts receivable securitization programs do not meet the
consolidation requirements of FIN 46. Potential exposure to the Company is an
increase in the discount rate/fee charged to Tyco. The incremental increase to
general and administrative expense would be approximately $5.0 million annually,
based on our current utilization.

BACKLOG

At March 31, 2003, Tyco had a backlog of unfilled orders, including annual
recurring revenue in the Fire and Security Services segment, of 11,356.8
million. Total backlog decreased, as compared to a backlog of
$11,395.0 million at December 31, 2002 and $11,135.2 million at September 30,
2002. Backlog by industry segment is as follows ($ in millions):

Within the Fire and Security Services segment, backlog increased due
primarily to an increase in recurring revenue in force resulting from net growth
in its dealer program and price increases in various markets. Backlog at
September 30, 2002 within the Engineered Products and Services segment was
decreased by approximately $390.5 million as a result of our previously
including amounts related to two unconsolidated joint ventures. Within the
Engineering Products and Services and Electronics segments, backlog remained
relatively flat. Backlog in the Healthcare segment represents unfilled orders,
which, in the nature of the business, are normally shipped shortly after
purchase orders are received. We do not view backlog in the Healthcare and
Plastics and Adhesives segments to be a significant indicator of the level of
future sales activity.

ACCOUNTING PRONOUNCEMENTS

In November 2002, the EITF reached a consensus on EITF Issue No. 00-21,
"Revenue Arrangements with Multiple Deliverables." EITF No. 00-21 provides
guidance on how to determine when an arrangement that involves multiple
revenue-generating activities or deliverables should be divided into separate
units of accounting for revenue recognition purposes. It further states, that if
this division is required, the arrangement consideration should be allocated
among the separate units of accounting. The guidance in the consensus is
effective for revenue arrangements entered into in fiscal periods that begin
after June 15, 2003. We are currently assessing the impact of this new standard.

In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities," which amends
and clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 149, which is to be applied prospectively, is
effective for contracts entered into or modified after

77

June 30, 2003, and for hedging relationships designated after June 30, 2003. We
are currently assessing the impact of this new standard.

RISK FACTORS

YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE INVESTING IN
OUR PUBLICLY TRADED SECURITIES. THE RISKS DESCRIBED BELOW ARE NOT THE ONLY ONES
FACING US. OUR BUSINESS IS ALSO SUBJECT TO THE RISKS THAT AFFECT MANY OTHER
COMPANIES, SUCH AS COMPETITION, TECHNOLOGICAL OBSOLESCENCE, LABOR RELATIONS,
GENERAL ECONOMIC CONDITIONS, GEOPOLITICAL EVENTS AND INTERNATIONAL OPERATIONS.
ADDITIONAL RISKS NOT CURRENTLY KNOWN TO US OR THAT WE CURRENTLY BELIEVE ARE
IMMATERIAL ALSO MAY IMPAIR OUR BUSINESS OPERATIONS AND OUR LIQUIDITY.

RISKS RELATING TO RECENT DEVELOPMENTS AT TYCO

CONTINUING NEGATIVE PUBLICITY MAY ADVERSELY AFFECT OUR BUSINESS.

As a result of actions taken by our former senior corporate management, Tyco
has been the subject of continuing negative publicity focusing on former senior
corporate management's actions. Some of these press reports have suggested that
the accounting treatment of several of our prior acquisitions was improper, that
certain of our operating companies improperly conducted business or recorded
revenues and assets and that information was withheld from the SEC in connection
with an inquiry into our accounting practices. This negative publicity
contributed to significant declines in the prices of our publicly traded
securities, and we have experienced reluctance on the part of certain customers
and suppliers to continue working with us on customary terms. A number of
suppliers have requested letters of credit to support our purchase orders. We
also believe that many of our employees are operating under stressful
conditions, which reduces morale and could lead to increased employee turnover.
Continuing negative publicity could have a material adverse effect on our
results of operations and liquidity and the market price of our publicly traded
securities.

PENDING LITIGATION COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR LIQUIDITY AND
FINANCIAL CONDITION.

As a result of actions taken by our former senior corporate management,
Tyco, some members of our former senior corporate management, and former members
of our board of directors are named defendants in a number of purported class
actions alleging violations of the disclosure provisions of the federal
securities laws, as well as in a number of derivative actions. Tyco, certain of
our current and former employees, some members of our former senior corporate
management, and some former members of our board of directors also are named as
defendants in several ERISA actions. In addition, Tyco and some members of our
former senior corporate management are subject to an SEC inquiry; some members
of our former senior corporate management are named as defendants in criminal
cases being prosecuted by the District Attorney of New York County; and some
members of our former senior corporate management are subject to an
investigation by, or are named as a defendant in a criminal case being
prosecuted by, the U.S. Attorney for the District of New Hampshire. The findings
and outcomes of the prosecutions and the SEC civil action may affect the course
of the purported class actions, derivative actions and ERISA claims pending
against Tyco. We are generally obliged to indemnify our directors and our former
directors and officers who are also named as defendants in some or all of these
matters to the extent permitted by Bermuda law. In addition, our insurance
carriers may decline coverage, or our coverage may be insufficient to cover our
expenses and liability in some or all of these matters. On February 13, 2003,
one of Tyco's insurance carriers filed an action in the Supreme Court of the
State of New York seeking to rescind certain directors and officers liability
and fiduciary liability insurance policies issued to Tyco and its directors,
officers and fiduciaries on the basis of alleged misrepresentations made by our
former senior corporate management. On May 8, 2003 Tyco's negotiations with the
Company's directors and officers liability insurance carriers and fiduciary
carriers concluded with the filing of a notice of dismissal of this action. In
exchange for a payment of additional policy premiums, Tyco maintained, in part,
its available directors and officers liability

78

insurance coverage and fiduciary insurance coverage for claims made during the
2001-2003 policy period. We are unable at this time to estimate what our
ultimate liability in these matters may be, and since Tyco's agreement with its
carriers reduced the overall limits of coverage available to Tyco and other
insureds, we may be required to pay judgments or settlements and incur expenses
in aggregate amounts that would have a material adverse effect on our financial
position, results of operations and liquidity.

OUR SENIOR CORPORATE MANAGEMENT TEAM IS NEW TO TYCO AND IS REQUIRED TO DEVOTE
SIGNIFICANT ATTENTION TO MATTERS ARISING FROM ACTIONS OF PRIOR MANAGEMENT.

In the past year, we replaced our senior corporate executives with an
entirely new team, and our entire board of directors determined not to stand for
reelection. A new board of directors was elected at our annual general meeting
of shareholders in March 2003. It will take some time for our new management
team and our new board of directors to learn about our various businesses and to
develop strong working relationships with our cadre of operating managers at our
various subsidiary companies. Our new senior corporate management team's ability
to complete this process has been and continues to be hindered by their need to
spend significant time and effort dealing with internal and external
investigations, developing effective corporate governance procedures,
strengthening reporting lines and reviewing internal controls. During this
period and in order to complete this process, our new executives will depend in
part on advisors, including certain former directors. We cannot assure you that
this major restructuring of our board of directors and senior management team
and the accompanying distractions, in this environment, will not adversely
affect our results of operations.

CONTINUED SCRUTINY RESULTING FROM ONGOING INVESTIGATIONS MAY HAVE AN ADVERSE
EFFECT ON OUR BUSINESS.

We and others have received subpoenas and requests from the SEC, the
District Attorney of New York County, the U.S. Attorney for the District of New
Hampshire and others seeking the production of voluminous documents in
connection with various investigations into our governance, management,
operations, accounting and related controls. In addition, the Department of
Labor is investigating us and the administrators of certain of our benefit
plans. We are also subject to ongoing audits by the Internal Revenue Service. We
cannot predict when these investigations will be completed, nor can we predict
what the results of these investigations may be. It is possible that we will be
required to pay material fines, consent to injunctions on future conduct, lose
the ability to conduct business with government instrumentalities or suffer
other penalties, each of which could have a material adverse effect on our
business. We cannot assure you that the effects and results of these
investigations will not be material and adverse to our business, financial
position, results of operations and liquidity.

The Company and its subsidiaries' income tax returns are routinely examined
by various regulatory tax authorities. In connection with such examinations, tax
authorities, including the Internal Revenue Service, have raised issues and
proposed tax deficiencies. We are reviewing the issues raised by the tax
authorities and are contesting the proposed deficiencies. Amounts related to
these tax deficiencies and other tax contingencies that management has assessed
as probable and estimable have been accrued through the income tax provision. We
cannot assure you that the ultimate resolution of these tax deficiencies and
contingencies will not have a material adverse effect on our results of
operations, financial position or cash flows.

AN ONGOING SEC REVIEW OF OUR PUBLIC FILINGS MAY REQUIRE US TO AMEND OR RESTATE
OUR PUBLIC DISCLOSURES.

We continue to be engaged in a dialogue with the staff of the SEC's Division
of Corporation Finance as part of their review of our periodic filings with the
SEC and are subject to an investigation by the SEC's Division of Enforcement. We
anticipate that we will resolve the remaining comments that the staff has made
on our periodic filings during our third fiscal quarter. We cannot assure you
the resolution of the remaining comments or the resolution of the Division of
Enforcement's investigation

79

will not necessitate amendments or restatements to our previously-filed periodic
reports or lead to some enforcement proceedings against Tyco.

THE PHASE 2 REVIEW WAS NOT AN EXHAUSTIVE REVIEW OF OUR ACCOUNTING AND
GOVERNANCE.

In December 2002, we released a report summarizing the findings of the Phase
2 review. The Phase 2 review covered a variety of aspects of our accounting,
including a review of many specific accounting policies and 15 of our most
significant acquisitions. You should be aware that the review did have
limitations, as it did not seek to go back and identify every accounting
decision and every corporate act that was wrong or questionable over a
multi-year period. Moreover, in part because of the passage of time,
documentation was not always available; the documentation that was available was
often dispersed; and the review did not have the benefit of information from
prior senior corporate management. In addition, the conclusion reached by the
review required the exercise of judgment, and others could disagree with its
conclusions. Neither the SEC Division of Enforcement nor its Division of
Corporation Finance has completed its review of our accounting, including the
matters covered by the Phase 2 review.

You should note that the review found that, during at least the five years
preceding our prior CEO's resignation in June 2002, Tyco's prior management
engaged in a pattern of aggressive accounting that, even when in accordance with
GAAP, was intended to increase reported earnings above what they would have been
if more conservative accounting had been employed. This pattern may have had the
effect of reducing the clarity and effectiveness of the financial statements in
conveying to investors the most accurate picture of our operations and may
affect the comparability of our historical financial results to our current and
future results of operations.

FURTHER INSTANCES OF BREAKDOWNS IN OUR INTERNAL CONTROLS AND PROCEDURES COULD
HAVE AN ADVERSE EFFECT ON US.

New management has determined that, in the past, Tyco in general suffered
from: poor documentation; inadequate policies and procedures to prevent the
misconduct of senior corporate executives; inadequate procedures for proper
corporate authorizations; inadequate approval procedures and documentation; a
lack of oversight by senior management at the corporate level; a pattern of
using aggressive accounting that, even when in accordance with GAAP, was
intended to increase reported earnings above what they would have been if more
conservative accounting had been employed; pressure on, and inducements to,
segment and unit managers to increase current earnings, including by decisions
as to what accounting treatment to employ; and a lack of a stated and
demonstrable commitment by former senior corporate management to set high
standards of ethics, integrity, accounting, and corporate governance. We cannot
assure you that we will not discover that there have been further instances of
breakdowns in our internal controls and procedures. See "Item 4--Controls and
Procedures."

THE PRICE OF TYCO COMMON SHARES HAS DECLINED CONSIDERABLY IN THE LAST YEAR AND
MAY FLUCTUATE WIDELY IN THE FUTURE.

The market price of the Tyco common shares has declined considerably since
January 2002, due in part to disclosures regarding alleged breaches of fiduciary
duties, fraud and other wrongful conduct on the part of certain former officers
and directors of Tyco. In addition, our publicly traded securities, and the
global stock markets generally, have experienced significant price and volume
fluctuations over the past year. We cannot assure you that the price of our
publicly traded securities will not decline further or will not continue to
experience significant price and volume fluctuations. In addition, we believe
that factors such as quarterly fluctuations in financial results, earnings below
analysts' estimates and financial performance and other activities of other
publicly traded companies in our industries could cause the price of our
publicly traded securities to fluctuate substantially.

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RISKS RELATING TO OUR SUBSTANTIAL DEBT AND LIQUIDITY

WE HAVE SUBSTANTIAL CASH NEEDS AND WILL NEED TO OBTAIN ADDITIONAL FUNDING TO
SATISFY THOSE NEEDS.

We have approximately $4.4 billion of debt payable at maturity or upon the
option of the holder thereof through March 31, 2004. In addition, we have other
substantial capital commitments in fiscal 2003, including the following:

- approximately $650-$700 million of cash to acquire ADT accounts from
dealers, of which approximately $360 million has been spent through
March 31, 2003;

- approximately $500 million of cash restructuring expenses relating to
restructuring charges we have previously recorded, of which approximately
$290 million has been spent through March 31, 2003;

- approximately $350 million of cash purchase accounting spending, including
earn-out payments, holdbacks of purchase price and the cost of exit plans,
of which approximately $190 million has been spent through March 31, 2003;
and

- minimum operating lease payments of $808.4 million.

We estimate that our available cash and our cash flow from operations will
be adequate to fund our operations and service our debt through March 31, 2004.
In making this estimate, we have not assumed the need to make any material
payments in connection with our pending litigation during that period and have
assumed that we will be able to extend one of our receivables facilities that
expires in fiscal 2003. At March 31, 2003, there was approximately $350 million
outstanding under this facility. Any material adverse legal judgments, fines,
penalties or settlements arising from our pending investigations and litigations
could require additional funding. We have also assumed a certain level of
operating performance in making these estimates. Our future operating
performance will be affected by general economic, financial, competitive,
legislative, regulatory, geopolitical, business and other factors beyond our
control. If our future operating performance is less than anticipated, our need
for additional funding would increase.

If our estimates are incorrect and we need to obtain additional funding, we
cannot assure you that we will be able to obtain the additional funding that we
need on commercially reasonably terms or at all, which would have a material
adverse effect on our results of operations and liquidity.

OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND
PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER OUR DEBENTURES.

Our substantial indebtedness could have important consequences to you. For
example, it could:

- require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures, research and development efforts and other general corporate
purposes;

- increase our vulnerability to general adverse economic and industry
conditions;

- limit our flexibility in planning for, or reacting to, changes in our
businesses and the industries in which we operate;

- restrict our ability to introduce new technologies or exploit business
opportunities;

- make it more difficult for us to satisfy our payment obligations with
respect to the debentures; and

- increase the difficulty and/or cost to us of refinancing our indebtedness.

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See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."

RESTRICTIVE COVENANTS IN OUR DEBT INSTRUMENTS MAY ADVERSELY AFFECT US.

Our credit agreements contain a number of financial covenants, such as
interest coverage and leverage ratios, and minimum levels of net worth and
restrictive covenants that limit the amount of debt we can incur and restrict
our ability to pay dividends or make other payments in connection with our
capital stock, to make acquisitions or investments, to enter into sale/leaseback
transactions, to pledge assets and to prepay debt that matures after
December 31, 2004. We have several synthetic lease facilities with similar
covenants. Our outstanding indentures contain customary covenants including a
negative pledge, limit on subsidiary debt and limit on sale/leasebacks.

Our ability to meet these financial ratios and tests can be affected by
events beyond our control, and we cannot assure you that we will meet those
tests. A breach of any of these covenants could result in a default under our
credit agreements or indentures. Upon the occurrence of an event of default
under any of our credit agreements, the lenders could elect to declare all
amounts outstanding thereunder to be immediately due and payable and terminate
all commitments to extend further credit. If the lenders under our credit
agreements accelerate the repayment of borrowings, we cannot assure you that we
will have sufficient assets to repay our credit facilities and our other
indebtedness, including the debentures. Acceleration of any obligation under any
of our material debt instruments will permit the holders of our other material
debt to accelerate their obligations.

DOWNGRADES OF OUR RATINGS WOULD ADVERSELY AFFECT US AND THE TRADING PRICES OF
OUR SECURITIES.

Certain downgrades by Moody's and S&P would permit the providers of our
receivables facilities to cease further purchases under the facilities and would
increase the interest cost of our credit facility borrowings. It may also
increase our cost of capital and make it harder for us to obtain new financing
and would likely negatively impact the trading price of our securities.

RISKS RELATING TO OUR BUSINESSES

CYCLICAL INDUSTRY AND ECONOMIC CONDITIONS HAVE AFFECTED AND MAY CONTINUE TO
ADVERSELY AFFECT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Our operating results in some of our segments are affected adversely by the
general cyclical pattern of the industries in which they operate. For example,
demand for the products and services of our Fire and Security Services and
Engineered Products and Services segments is significantly affected by levels of
commercial construction and consumer and business discretionary spending. Most
importantly, our electronics components business is heavily dependent on the end
markets it serves and therefore has been affected by the weak demand and
declining capital investment in the communications, computer, consumer
electronics, industrial machine and aerospace industries. We have also
experienced pricing pressures, which have reduced our margins, and we cannot
assure you that there will be significant margin improvements in the near
future. This cyclical impact can be amplified because some of our business
segments purchase products from other business segments. For example, our Fire
and Security Services segment purchases certain products sold by our Engineered
Products and Services segment. Therefore, a drop in demand for our fire
prevention products, due to lower new residential or office construction or
other factors, can cause a drop in demand for certain of our products sold by
our Engineered Products and Services segment.

WE WILL NOT BE ABLE TO GROW OUR BUSINESS AT THE SAME RATE AS WE HAVE IN THE
RECENT PAST DUE TO REDUCED ACQUISITION ACTIVITY AND CAPITAL CONSTRAINTS.

Acquisitions of complementary products and businesses have been an important
part of Tyco's growth in recent years. Our current business strategy and
near-term actions will focus on conserving

82

cash and enhancing internal growth within our existing businesses. In addition,
our new credit agreements impose restrictions on our ability to consummate new
acquisitions. Our business requires substantial capital expenditures for new
technology and product innovation, expansion or replacement of facilities and
equipment and compliance with environmental laws and regulations. We may be
required to pay significant amounts in excess of any insurance coverage as a
result of settlements of or judgments in pending litigation. In addition, we may
require access to capital in order to repay substantial indebtedness which
matures in calendar 2003 and in future periods. The concentration of available
capital resources to repay indebtedness, combined with our reduced share price,
will limit our ability to make acquisitions of other companies and to purchase
new contracts under its dealer program. As a result, we do not anticipate that
we will experience growth in the foreseeable future that is comparable to our
historic growth.

OUR OPERATIONS EXPOSE US TO THE RISK OF MATERIAL ENVIRONMENTAL LIABILITIES,
LITIGATION AND VIOLATIONS.

We are subject to numerous foreign, federal, state and local environmental
protection and health and safety laws governing, among other things: the
generation, storage, use and transportation of hazardous materials; emissions or
discharges into the ground, air or water; and the health and safety of our
employees. There can be no assurances that we have been or will be at all times
in compliance with environmental laws. If we violate these laws, we could be
fined, criminally charged or otherwise sanctioned by regulators. One of our
subsidiaries in our Electronics segment was advised by the U.S. Attorney for the
District of Connecticut that it is the target of a federal grand jury
investigation concerning alleged Clean Water Act violations at two manufacturing
plants. We understand that employees at these plants are subjects of the
investigation relating to violations of applicable permits, and that a former
supervisor at one of these plants who is no longer an employee has pleaded
guilty to a felony violation of the Clean Water Act.

Certain environmental laws assess liability on current or previous owners or
operators of real property for the cost of removal or remediation of hazardous
substances at their properties or at properties at which they have disposed of
hazardous substances and costs to restore damage to natural resources. In
addition to clean-up costs resulting from environmental laws, private parties
could bring personal injury or other claims due to the presence of, or exposure
to, hazardous substances used, stored or disposed of by us or contained in our
products.

We have been notified by the U.S. Environmental Protection Agency and
certain foreign and state environmental agencies that conditions at a number of
sites where we and others disposed of hazardous wastes require clean-up and
other possible remedial action and may be the basis for monetary sanctions. We
also have a number of projects underway at several of our current and former
manufacturing facilities in order to comply with environmental laws. These
projects relate to a variety of activities, including radioactive materials
decontamination and decommissioning, solvent and metal contamination clean-up
and oil spill equipment upgrades and replacement. These projects, some of which
are voluntary and some of which are required under applicable law, involve both
remediation expenses and capital improvements. In addition, we remain
responsible for certain environmental issues at manufacturing locations sold by
us.

The ultimate cost of site cleanup is difficult to predict given the
uncertainties regarding the extent of the required cleanup, the interpretation
of applicable laws and regulations and alternative cleanup methods. We have
concluded that it is probable that we will incur remedial costs in the range of
approximately $145 million to $440 million. As of March 31, 2003, we concluded
that the best estimate within this range is approximately $269 million, of which
$32 million is included in accrued expenses and other current liabilities and
$237 million is included in other long-term liabilities on the accompanying
Consolidated Balance Sheet. Environmental laws are complex, change frequently
and have tended to become more stringent over time. While we have budgeted for
future capital and operating expenditures to maintain compliance with such laws,
we cannot assure you that our costs of complying with current or future
environmental protection and health and safety laws, or our liabilities

83

arising from past or future releases of, or exposures to, hazardous substances
will not exceed our estimates or adversely affect our financial condition and
results of operations or that we will not be subject to additional environmental
claims for personal injury or cleanup in the future based on our past, present
or future business activities.

WE MAY BE REQUIRED TO RECOGNIZE ADDITIONAL IMPAIRMENT CHARGES.

Pursuant to GAAP, we are required to periodically assess our goodwill to
determine if it is impaired. Further disruptions to our business, protracted
economic weakness, unexpected significant declines in operating results of
reporting units, continued downgrades in our credit ratings or additional market
capitalization declines may result in additional charges to goodwill and other
asset impairments in the future. Future impairment charges could substantially
affect our reported earnings in the period of such charge. In addition, such
charges would reduce our consolidated net worth and our shareholders' equity,
increasing our debt-to-total-capitalization ratio. Such reduction in
consolidated net worth and increase in debt as a percent of total capitalization
could result in a default under our credit facilities.

WE ARE SUBJECT TO A VARIETY OF LITIGATION IN THE COURSE OF OUR BUSINESS THAT
COULD CAUSE AN ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS AND FINANCIAL
CONDITION.

In the ordinary course of business, we are subject to a significant amount
of litigation, including litigation alleging the infringement of intellectual
property rights, litigation alleging anti-competitive behavior and product
liability litigation. Patent infringement and anti-trust laws permit successful
plaintiffs to recover treble damages. In addition, our Healthcare business is
subject to regulation and potential litigation. The defense of these lawsuits
may divert our management's attention, and we may incur significant expenses in
defending these lawsuits. In addition, we may be required to pay awards or
settlements that could cause a material adverse effect on our financial
condition and results of operations.

OUR ADT BUSINESS HAS RECENTLY EXPERIENCED HIGHER RATES OF CUSTOMER ATTRITION,
WHICH MAY REDUCE OUR FUTURE REVENUES AND COULD REQUIRE US TO CHANGE THE USEFUL
LIFE OF ACCOUNTS, INCREASING OUR DEPRECIATION AND AMORTIZATION EXPENSE.

Attrition rates for customers in our global electronic security services
business have increased to 14.4% on a trailing twelve-month basis for the
quarter ended March 31, 2003, compared to 13.2%, 12.3% and 13.0% for the full
fiscal years ended September 30, 2002, 2001 and 2000, respectively. If attrition
rates continue to rise, ADT's recurring revenues and results of operations will
be adversely affected. In the second fiscal quarter of 2003, the Company changed
the amortization of costs of its contracts and related customer relationships
purchased through its dealer program from a straight-line method generally over
a ten-year period to a double-declining balance method based on a ten-year life
for the first eight years of the estimated life of the consumer relationships,
converting to the straight-line method of amortization to completely amortize
the asset pool by the end of the twelfth year. No change was made in the method
used for the internally generated residential and commercial account pools,
since the Company concluded that the straight-line method was most appropriate
given the most recently observed attrition data.

RISKS RELATING TO OUR JURISDICTIONS OF INCORPORATION

PROPOSED LEGISLATION AND NEGATIVE PUBLICITY REGARDING BERMUDA COMPANIES COULD
INCREASE OUR TAX BURDEN AND AFFECT OUR OPERATING RESULTS.

Several members of the U.S. Congress have introduced legislation relating to
the tax treatment of U.S. companies that have undertaken certain types of
expatriation transactions, which could be deemed to cover the combination in
1997 with ADT, as a result of which ADT, a Bermuda company, changed its name to
Tyco and became the parent of the Tyco group. Any such legislation, if enacted,
could have

84

the effect of substantially reducing or eliminating the tax benefits of our
structure and materially increasing our future tax burden or otherwise adversely
affecting our business. In addition, even if no tax legislation is ultimately
enacted that specifically covers our 1997 combination, the enactment of other
tax proposals that have been or may be made in the future to address
expatriation transactions could have a material impact on our future tax burden.
Other federal and state legislative proposals, if enacted, could limit or even
prohibit our eligibility to be awarded U.S. or state government contracts. We
are unable to predict the likelihood or final form in which any proposed
legislation might become law or the nature of regulations that may be
promulgated under any such future legislative enactments. As a result of these
uncertainties, we are unable to assess the impact on us of any proposed
legislation in this area. There has recently been negative publicity regarding,
and criticism of, U.S. companies' use of, or relocation to, offshore
jurisdictions, including Bermuda. As a Bermuda company, this negative publicity
could harm our reputation and impair our ability to generate new business if
companies or government agencies decline to do business with us as a result of
the negative public image of Bermuda companies or the possibility of our clients
receiving negative media attention from doing business with a Bermuda company.

BERMUDA LAW DIFFERS FROM THE LAWS IN EFFECT IN THE UNITED STATES AND MAY AFFORD
LESS PROTECTION TO HOLDERS OF OUR SECURITIES.

Holders of Tyco common shares may have more difficulty protecting their
interests than would holders of securities of a corporation incorporated in a
jurisdiction of the United States.

As a Bermuda company, Tyco is governed by the Companies Act 1981 of Bermuda,
which differs in some material respects from laws generally applicable to United
States corporations and shareholders, including differences relating to
interested director and officer transactions, shareholder lawsuits and
indemnification. Under Bermuda law, directors and officers may have a personal
interest in contracts or arrangements with a company or its subsidiaries'
transactions so long as such personal interest is first disclosed to the
company. Likewise, the duties of directors and officers of a Bermuda company are
generally owed to the company only. Shareholders of Bermuda companies do not
generally have a personal right of action against directors or officers of the
company and may only do so on behalf of the company in limited circumstances.
Under Bermuda law, a company may also agree to indemnify directors and officers
for any personal liability, not involving fraud or dishonesty, incurred in
relation to the company.

FORWARD-LOOKING INFORMATION

We have made forward-looking statements in this report, including the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations," that are based on our management's beliefs and
assumptions and on information currently available to our management.
Forward-looking statements include the information concerning our possible or
assumed future results of operations, future liquidity needs, business
strategies, financing plans, competitive position, potential growth
opportunities, cost saving expectations, litigation and governmental
investigations, the effects of future regulation and the effects of competition.

Forward-looking statements include all statements that are not historical
facts and can be identified by the use of forward-looking terminology such as
the words "believes," "expects," "anticipates," "intends," "plans," "estimates"
or similar expressions. Forward-looking statements involve risks, uncertainties
and assumptions. Actual results may differ materially from those expressed in
these forward-looking statements. You should not put undue reliance on any
forward-looking statements. We do not have any intention or obligation to update
forward-looking statements after the date of this report.

You should understand that many important factors, in addition to those
discussed elsewhere in this report, could cause our results to differ materially
from those expressed in forward-looking statements. These factors include the
"Risk Factors" included in this report.

85

ITEM 3--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's exposure to market risk from changes in interest rates,
foreign currency exchange rates and commodity prices has not changed materially
from our exposure during the year ended September 30, 2002.

ITEM 4--CONTROLS AND PROCEDURES

As reported more fully in our Form 10-K filed December 30, 2002, we learned
of instances of breakdowns of certain internal controls during fiscal 2002.

Our former Board of Directors retained the law firm of Boies, Schiller &
Flexner LLP in April 2002 to conduct an investigation. The scope of the
investigation consisted of a review and analysis of transactions between and
among Tyco and its subsidiaries and our directors and officers. The findings of
the first phase (Phase 1) were reported on September 17, 2002 in a Current
Report on Form 8-K.

In connection with the Phase 1 findings and at the direction of the Board
and our new Chief Executive Officer, the investigation was expanded to a second
phase (Phase 2), which involved a more comprehensive review of Tyco's accounting
and financial reporting. The scope of the Phase 2 review included an examination
of Tyco's reported revenues, profits, cash flow, internal auditing and control
procedures, use of reserves, and non-recurring charges, as well as corporate
governance issues such as the personal use of corporate assets and the use of
corporate funds to pay personal expenses, and employee loan and loan forgiveness
programs. Phase 2 of the investigation was completed by the Boies firm in late
December 2002.

It was concluded that:

- There was no significant or systemic fraud affecting Tyco's prior
financial statements;

- There were a number of accounting entries and treatments that were
incorrect and required correction;

- The incorrect accounting entries and treatments are not individually or in
the aggregate material to the overall financial statements of Tyco;

- Our prior senior management engaged in a pattern of aggressive accounting
which, even when in accordance with generally accepted accounting
principles, was intended to increase reported earnings above what they
would have been if more conservative accounting had been employed; and

- Reversal or restatement of prior accounting entries and treatments
resulting from the aggressive accounting pursued by prior senior
management would not materially adversely affect our reported revenue,
earnings and cash flow for 2003 and thereafter.

These findings were reported on December 30, 2002 in a Current Report on
Form 8-K.

While most of the matters identified by the review as "aggressive
accounting" were determined by Tyco, in consultation with its auditors, to be in
accordance with generally accepted accounting principles, there were, as
indicated above, certain adjustments (19 in total) identified as relating to
years preceding fiscal 2002. These adjustments which included adjustments from
the recording of previously unrecorded audit adjustments aggregated
$36.1 million and were recorded in the first quarter of fiscal 2002.

Additionally, our new senior management team in conjunction with our Board
of Directors reviewed overall company policies and procedures in areas that were
viewed as important. Specific areas of focus included acquisition accounting,
restructuring, financial and legal controls, reserve

86

utilization, incentive compensation and a number of other areas relevant to our
financial statements. New senior management determined that Tyco's existing
policies and standards of approval needed substantial improvement and found that
there were instances in which documentation of important financial reporting
matters was substandard; there had been limited review of bonuses and incentive
compensation across Tyco; and the manner in which former senior management
managed Tyco did not reflect a commitment to sound corporate governance nor the
processes required to ensure the highest standards of financial integrity and
accounting rigor to which the new senior management team and our Board of
Directors is committed and our shareholders deserve.

New senior management believes that prior senior management's primary focus
was on earnings-per-share accretive acquisitions which resulted in our growing
considerably over the past several years, including the acquisition of
approximately 700 companies of varying size and in varying businesses around the
world, but which also strained the internal control environment and limited our
investment in these areas. In addition, new senior management believes that
prior senior management during the past three years placed undue reliance on
non-recurring charges and pro forma financial information. New senior management
also believes that the rapid pace of acquisitions and attendant restructurings
made it difficult to ascertain the level of our organic growth.

New senior management is committed to improving the state of our internal
controls, corporate governance and financial reporting. Our Board of Directors
and new senior management have initiated the following actions:

- Replaced the Board of Directors;

- Created new Board charters;

- Created a new employee guide to ethical conduct and conducted worldwide
employee meetings to train employees;

- Created new mission, values and goals statements;

- Conducted the Phase 2 review;

- Instituted detailed operating reviews with the Chief Executive Officer and
Chief Financial Officer and each business segment;

- Realigned reporting such that the business segment chief financial
officers and general counsels report directly to our Chief Financial
Officer and our General Counsel, respectively, and instituted similar
reporting within each business segment;

- Reviewed total incentive compensation spending with the Compensation
Committee of the Board of Directors;

- Issued a new delegation of authority to govern, among other business
processes, the expenditure or commitment of funds;

- Initiated a controllership assessment process to identify the status of
key routines and controls;

- Conducted a thorough review of internal audit processes and procedures;

- Required internal representation letters, similar to the certifications by
our Chief Executive Officer and Chief Financial Officer, for key financial
and legal executives;

- Instituted a code of conduct for all financial executives;

- Developed a corporate policy manual to provide broadly applicable and
consistent direction on authority, procedures and accountability with
respect to business operations;

- Instituted an account reconciliation process to improve controls over core
accounting records;

87

- Created an Ombudsman network;

- Continued to initiate a process of conducting intensified internal audits,
detailed controls and operating reviews, and reported the results of such
audits and reviews;

- Development of an accounting policy and procedures manual to ensure
conformity with GAAP;

- Development of a treasury department policies and procedures manual to
ensure appropriate utilization of funds;

- Expanded the resources and responsibilities of the internal audit
function, with a senior internal audit officer who reports directly to the
Audit Committee of the Board of Directors; and

- Created disclosure committees that include senior personnel from the
legal, finance and human resources departments throughout our businesses,
and which are responsible for reviewing results of operations, evaluating
compliance with policies and procedures and communicating material
findings to the Company's CEO and CFO.

Although the framework has been put in place to materially improve the
control structure of Tyco, it will take some time to realize all of the benefits
from our initiatives. Our Board of Directors and new senior management are
committed not only to a sound internal control environment but also to be
recognized as a leader in corporate governance. We have committed considerable
resources to date on the aforementioned reviews and remedies. A review of
controls of a company the size of Tyco, which includes approximately 2,300
subsidiaries, is not a one-time event. We are committed to ongoing periodic
reviews of our controls and their effectiveness, the results of which will be
reported to our shareholders. During the quarter ended March 31, 2003, the
Company continued to initiate a process of conducting intensified internal
audits and detailed controls and operating reviews were conducted, resulting in
pre-tax charges of $905.9 million being recorded in the quarter, consisting of
$471.4 million for charges related to current period changes in estimates and
$434.5 million for charges related to prior periods. Our controls are improving
and new senior management has no reason to believe that the financial statements
included in this report are not fairly stated in all material respects. There
can be no assurances, however, that new problems will not be found in the
future. We expect to continue to improve our controls with each passing quarter.
It will take some time, however, before we have in place the rigorous controls
that our Board of Directors and new senior management desires and our
shareholders deserve.

Within the past 90 days, an evaluation was performed of the effectiveness of
the design and operation of the Company's disclosure controls and procedures by
senior management. Based on that evaluation, the Company's management, including
the CEO and CFO, concluded that these procedures and controls are effective,
given the cautions stated above. Other than as described above, this quarter,
there have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls. The Company
will continue to make ongoing assessments of these controls and procedures
periodically.

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PART II--OTHER INFORMATION

ITEM 1--LEGAL PROCEEDINGS

SECURITIES CLASS ACTIONS

As previously reported in our periodic filings, Tyco and certain of our
former directors and officers have been named as defendants in more than two
dozen securities class actions.

All of the securities class actions have now been transferred to the United
States District Court for the District of New Hampshire by the Judicial Panel on
Multidistrict Litigation for coordinated or consolidated pretrial proceedings.
In six of the actions, plaintiffs have moved to have their cases remanded to
state courts.

On January 28, 2003, the court-appointed lead plaintiffs in the New
Hampshire securities actions filed a Consolidated Securities Class Action
Complaint against certain of our former directors and officers, our auditors and
Tyco. As to Tyco and certain of its former directors and officers, the complaint
asserts causes of action under Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder, and Section 14(a) of that Act and
Rule 14a-9 promulgated thereunder, as well as Sections 11 and 12(a)(2) of the
Securities Act of 1933. Claims against our former directors and officers are
also asserted under Sections 20(a) and 20A of the Securities Exchange Act of
1934 and Section 15 of the Securities Act of 1933. The complaint asserts that
the Tyco defendants violated the securities laws by making materially false and
misleading statements and omissions concerning, among other things, the
following: Tyco's mergers and acquisitions and the accounting therefor, as well
as allegedly undisclosed acquisitions; misstatements of Tyco's financial
results; the impact of a new accounting standard (SAB 101, promulgated in 1999)
on our earnings performance; compensation of certain of our former executives;
their improper use of our funds for personal benefit and their improper
self-dealing real estate transactions; their sales of Tyco stock; payment of
$20 million to one of our former directors and a charity of which he is a
trustee; and the criminal investigation of our former Chief Executive Officer.
The plaintiffs seek class certification, compensatory damages, rescission,
disgorgement and attorneys' fees and expenses.

On March 31, 2003, Tyco made a motion to dismiss the consolidated class
action complaint. The other defendants moved to dismiss shortly thereafter.

As previously reported in our periodic filings, on November 27, 2002, the
State of New Jersey, on behalf of several state pension funds, filed a complaint
in the United States District Court for the District of New Jersey against Tyco,
our auditors, and certain of our former directors and officers. The Judicial
Panel on Multidistrict Litigation transferred the action to the United States
District Court for the District of New Hampshire. On March 24, 2003, the
plaintiffs filed an amended complaint. By order dated March 26, 2003, the
District Court of New Hampshire assigned the case to the Securities Actions
pending before it.

As against all defendants, the amended complaint asserts causes of action
under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder, for common law fraud, aiding and abetting common law
fraud, conspiracy to commit fraud and negligent misrepresentation. Claims are
asserted against the individual defendants under Section 20(a) of the Securities
Exchange Act of 1934, Section 15 of the Securities Act of 1933, Section 24(d) of
the New Jersey Uniform Securities Law, Sections 421-B:25(II) & (III) of the New
Hampshire Uniform Securities Law, and for breaches of fiduciary duties. Claims
are also asserted against certain of the individual defendants under
Section 20A of the Securities Exchange Act of 1934; against Tyco under
Section 12(a)(2) of the Securities Act of 1933, Section 24(c) of the New Jersey
Uniform Securities Law, and the New Jersey RICO Statute on the basis of
respondeat superior liability; against Tyco and certain of the individual
defendants under Section 14(a) of the Securities Act of 1933 and Rule 14a-9
promulgated thereunder; and against Tyco, our auditors, and certain of the
individual defendants for violation of, aiding and

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abetting violation of, and conspiracy to violate the New Jersey RICO Statute.
Finally, claims are asserted against the individual defendants and our auditors
for aiding and abetting the individual defendants' breaches of fiduciary duties.

The amended complaint asserts that the defendants violated the securities
laws and otherwise engaged in fraudulent acts by making materially false and
misleading statements and omissions concerning, among other things, the
following: unauthorized and improper compensation of certain of our former
executives; their improper use of our funds for personal benefit and their
improper self-dealing real estate transactions; their improper accounting
practices; payment of $20 million to one of our former directors and a charity
of which he is a trustee; criminal conduct of certain former executives; and the
criminal investigation of our former Chief Executive Officer. Plaintiffs seek
damages, including treble damages and punitive damages, along with attorneys'
fees and costs.

As previously reported in our periodic filings, in November 2002, a class
action complaint, SCHULDT LIMITED PARTNERSHIP V. TYCO INTERNATIONAL LTD., ET
AL., was filed in the Circuit Court for Palm Beach County, Florida, asserting
causes of action against Tyco and certain of our former directors and officers
under the Securities Act of 1933. Defendants removed the case to the United
States District Court for the Southern District of Florida and plaintiffs have
moved that Court to remand the action to state court. The Judicial Panel on
Multidistrict Litigation has transferred the action to the United States
District Court for the District of New Hampshire.

The complaint purports to bring suit on behalf of persons who exchanged
their Sensormatic Electronics Corp. ("Sensormatic") stock for shares of Tyco in
connection with our acquisition of Sensormatic. The complaint alleges that the
registration statement filed in connection with the Sensormatic acquisition
contained false and misleading statements concerning, among other things,
financial disclosures concerning certain of our mergers and acquisitions and
accounting therefor. Plaintiff seeks class certification, compensatory damages
and attorneys' fees and expenses.

As previously reported in our periodic filings, in December 2002, four
additional class action complaints were filed in the Circuit Court for Palm
Beach County, Florida: (1) HROMYAK V. TYCO INTERNATIONAL LTD., ET AL.;
(2) RAPPOLD V. TYCO INTERNATIONAL LTD., ET AL.; (3) MYERS V. TYCO
INTERNATIONAL LTD., ET AL.; AND (4) GOLDFARB V. TYCO INTERNATIONAL LTD., ET AL.
Plaintiffs in each of these actions also assert claims against Tyco, certain of
our former directors and officers, and in three instances our auditors under the
Securities Act of 1933, and seek class certification, compensatory damages and
attorneys' fees and expenses. Defendants removed these four actions from Florida
state court to the United States District Court for the Southern District of
Florida. The Judicial Panel on Multidistrict Litigation transferred the actions
to the United States District Court for the District of New Hampshire.

The HROMYAK complaint purports to bring suit on behalf of persons who
exchanged their United States Surgical Corporation ("US Surgical") stock for
shares of Tyco in connection with our acquisition of US Surgical in or about
October of 1998. The complaint alleges that the registration statement filed in
connection with the US Surgical acquisition contained false and misleading
statements concerning, among other things, financial disclosures concerning
certain of our mergers and acquisitions and accounting therefor.

The RAPPOLD complaint purports to bring suit on behalf of persons who
exchanged their InnerDyne, Inc. ("InnerDyne") stock for shares of Tyco in
connection with our acquisition of InnerDyne in or about December of 2001. The
complaint alleges that the registration statement filed in connection with the
InnerDyne acquisition contained false and misleading statements concerning,
among other things, financial disclosures concerning certain of our mergers and
acquisitions and accounting therefor.

The MYERS complaint purports to bring suit on behalf of persons who
exchanged their TyCom, LTD ("TyCom") stock for shares of Tyco in connection with
our acquisition of TyCom in or about December

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of 2001. The complaint alleges that the registration statement filed in
connection with the TyCom acquisition contained false and misleading statements
concerning, among other things, financial disclosures concerning certain of our
mergers and acquisitions and accounting therefor.

The GOLDFARB complaint purports to bring suit on behalf of persons who
exchanged their Scott Technologies, Inc. ("Scott") stock for shares of Tyco in
connection with our acquisition of Scott in or about May of 2001. The complaint
alleges that the registration statement filed in connection with the Scott
acquisition contained false and misleading statements concerning, among other
things, financial disclosures concerning certain of our mergers and acquisitions
and accounting therefor.

Defendants removed these four actions from Florida state court to the United
States District Court for the Sourthern District of Florida and they have been
transferred by the Judicial Panel on Multidistrict Litigation to the United
States District Court for the District of New Hampshire. Plaintiffs in these
four actions have moved to have their cases remanded to the Florida state court.

Plaintiffs Philip M. Cirella, Philip Cirella and Marguerite Cirella, who
purport to be common stock shareholders in Tyco International Ltd., filed suit
against Tyco International Ltd., Dennis Kozlowski, Mark H. Swartz and Mark A.
Belnick in the United States District Court for the District of New Jersey.
Plaintiff Philip M. Cirella alleges that he was a shareholder in CIT who
received common shares of Tyco when it acquired CIT in 2000, and later purchased
additional Tyco shares with Marguerite Cirella. Plaintiffs assert a cause of
action against all defendants for violation of Section 10(b) and 10(b)(5) of the
Securities Exchange Act of 1934 and a cause of action against the individual
defendants for violation of Section 20(a) of the Exchange Act. The complaint
alleges that the defendants failed to disclose related-party transactions,
including the following: providing interest free loans, forgiving personal
loans, purchasing personal properties, using company funds to purchase personal
items, selling individual Tyco shares while concealing information from
investors, and failing to disclose an ongoing criminal investigation of
Kozlowski, all of which resulted in an artificially-inflated stock price.
Plaintiffs seek compensatory damages and costs against all defendants and
punitive exemplary damages against the individual defendants. The Judicial Panel
on Multidistrict Litigation has been notified that this may be an action that
should be transferred to the United States District Court for the District of
New Hampshire.

SHAREHOLDER DERIVATIVE LITIGATION

As previously reported in our periodic filings, five actions have been filed
purporting to bring suit derivatively on behalf of Tyco against certain former
officers and certain former directors of Tyco and against Tyco as a nominal
defendant.

Two of these actions were filed in the United States District Court for the
District of New Hampshire. A third action was transferred to that Court by the
Judicial Panel on Multidistrict Litigation. The fourth derivative action is
pending in the Supreme Court of the State of New York (New York County).
Plaintiffs in that state court action have agreed to stay the action pending
resolution of the federal action. The fifth derivative action, O'BRIEN V.
ASHCROFT, ET AL., was filed in the Superior Court of New Hampshire (Rockingham
County) on January 7, 2003. The complaint alleges causes of action against
thirteen of our former officers and directors for breach of fiduciary duties,
ultra vires acts and waste of corporate assets. These claims are based on
allegations of, among other things, unauthorized and improper compensation of
certain of our former executives; their improper use of our funds for personal
benefit; and payment of $20 million to one of our former directors and a charity
of which he is trustee. The complaint alleges causes of action against our
auditors, PricewaterhouseCoopers LLP ("PwC"), for aiding and abetting breach of
fiduciary duty, professional negligence and breach of contract. These claims are
based on allegations that PwC, among other things, violated Generally Accepted
Accounting Standards and Generally Accepted Accounting Principles in

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connection with its auditing of the Company's financial statements and
negligently performed its professional duties in a manner that permitted the
wrongful conduct of the individual defendants.

On January 29, 2003, plaintiffs in the actions pending in the United States
District Court for the District of New Hampshire filed a Verified Stockholders'
First Consolidated and Amended Derivative Complaint against certain former
officers and certain former directors of Tyco, our auditors, and Tyco as a
nominal defendant. As to our former personnel, the complaint asserts causes of
action for breach of fiduciary duty and waste of corporate assets. As against
our auditors, the complaint asserts causes of action for negligence, negligent
misrepresentations, and breach of contract. The action alleges that individual
defendants engaged in, permitted and /or acquiesced in the following alleged
improper conduct: using Tyco funds for personal benefit, including
misappropriation of funds from our Key Employee Loan Program and relocation
programs; engaging in improper self-dealing real estate transactions; entering
into improper undisclosed retention agreements; and filing false and misleading
financial statements with the Securities and Exchange Commission that were based
on improper accounting methods. Plaintiffs seek money damages and attorneys'
fees and expenses.

On March 17, 2003, Tyco moved to dismiss the consolidated and amended
complaint on the ground that Tyco is already pursuing claims against four of its
former officers and directors, and Tyco should remain in control of its claims
and potential claims. The other defendants have since moved to dismiss as well.

ERISA LITIGATION AND INVESTIGATION

As previously reported in our periodic filings, Tyco and certain of our
current and former employees, officers and directors, have been named as
defendants in eight class actions brought under the Employee Retirement Income
Security Act ("ERISA"). The complaints purported to bring claims on behalf of
the Tyco International (US) Inc. Retirement Savings and Investment Plans and the
participants therein.

Two of the actions were filed in the United States District Court for the
District of New Hampshire, and the six remaining actions were transferred to
that Court by the Judicial Panel on Multidistrict Litigation. All eight actions
have been consolidated in the District Court in New Hampshire.

On February 3, 2003, the plaintiffs filed a Consolidated Amended Complaint
asserting causes of action under ERISA. That complaint named as defendants Tyco
and certain of its present and former officers and directors, its wholly-owned
subsidiary Tyco International (US) Inc., its retirement committee, and certain
of its present and former officers, directors and employees. The complaint
asserts that the defendants breached their fiduciary duties under ERISA by
negligently misrepresenting and negligently failing to disclose material
information concerning, among other things, the following: related-party
transactions and executive compensation; Tyco's mergers and acquisitions and the
accounting therefor, as well as allegedly undisclosed acquisitions; and
misstatements of Tyco's financial results. The complaint also asserts that the
defendants breached their fiduciary duties by allowing the Plans to invest in
Tyco stock when it was not a prudent investment. The plaintiffs seek a
declaration that the defendants are not entitled to protection under ERISA's
safe harbor provision; an order compelling the defendants to make good to the
Plans all losses caused by the defendants' alleged breaches of fiduciary duty;
imposition of a constructive trust on any amounts by which any defendant was
unjustly enriched; an order enjoining future violations of ERISA; actual damages
in the amount of any losses the Plans suffered; costs and attorneys' fees, and
an order for equitable restitution and other appropriate equitable monetary
relief.

On April 4, 2003, Tyco and several other defendants moved to dismiss the
consolidated complaint. Shortly thereafter the other defendants also moved to
dismiss.

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We and certain of our current and former executives have received requests
from the United States Department of Labor for information concerning the
administration of the Tyco International (US) Inc. Retirement Savings and
Investment Plans. The current focus of the Department's inquiry concerns losses
allegedly experienced by the plans due to investments in our stock. The
Department of Labor has authority to bring suit on behalf of the plans and their
participants against those acting as fiduciaries to the plans for recovery of
losses and additional penalties, although it has not informed us of any
intention to do so.

TYCO LITIGATION AGAINST FORMER SENIOR MANAGEMENT

TYCO INTERNATIONAL LTD V. MARK A. BELNICK, UNITED STATES DISTRICT COURT,
SOUTHERN DISTRICT OF NEW YORK, NO. 02-CV-4644, FILED JUNE 17, 2002. As
previously reported in our periodic filings, we have filed a civil complaint
against our former Executive Vice President and Chief Corporate Counsel for
breach of fiduciary duty and other wrongful conduct. The action alleges that the
defendant: solicited and accepted cash and stock bonuses without Board approval;
took interest-free loans from our relocation program without Board approval;
failed to disclose to the Board and to the SEC his Retention Agreement and
compensation; failed to advise the Board of the improper conduct of other
officers; refused to cooperate with internal investigations; and engaged in
other improper conduct. The complaint asserts causes of action for breach of
fiduciary duty, inducement to breach fiduciary duty, conspiracy to breach
fiduciary duty, fraud and other wrongful conduct and seeks to recover
compensation and profits received from employment at Tyco, repayment of all
loans fraudulently procured, with interest, damages for the harm caused to us,
and punitive damages. Discovery in this action has been stayed as a result of a
motion by the New York County District Attorney's Office to delay discovery
until after the completion of its prosecution of Mr. Belnick and other former
Tyco officers. The Judicial Panel on Multidistrict Litigation has transferred
this action to the United States District Court for the District of New
Hampshire.

TYCO INTERNATIONAL LTD. V. FRANK E. WALSH, JR., UNITED STATES DISTRICT
COURT, SOUTHERN DISTRICT OF NEW YORK, NO. 02-CV-4633, FILED JUNE 17, 2002. As
previously reported in our periodic filings, we have filed a civil complaint
against a former director for breach of fiduciary duty, inducing breaches of
fiduciary duty, and related wrongful conduct involving a $20 million payment in
connection with a 2001 acquisition by Tyco. The action alleges causes of action
for restitution, breach of fiduciary duty and inducing breach of fiduciary duty,
conversion, unjust enrichment, and a constructive trust, and seeks recovery for
all of the losses suffered by us as a result of the defendant director's
conduct. On December 17, 2002, Mr. Walsh paid $20 million in restitution to
Tyco, which was deposited by the Company in January 2003, as a result of a plea
bargain agreement with the New York County District Attorney. See "--Subpoenas
and document requests from Governmental Entities". Our claims against Mr. Walsh
are still pending. Discovery in this action has been stayed as a result of a
motion by the New York County District Attorney's Office. The Judicial Panel on
Multidistrict Litigation has transferred this action to the United States
District Court for the District of New Hampshire.

TYCO INTERNATIONAL LTD. V. L. DENNIS KOZLOWSKI, UNITED STATES DISTRICT
COURT, SOUTHERN DISTRICT OF NEW YORK, NO. 02-CV-7317, FILED SEPTEMBER 12, 2002,
AMENDED APRIL 1, 2003. As previously reported in our periodic filings, we have
filed a civil complaint against our former Chairman and Chief Executive Officer
for breach of fiduciary duty and other wrongful conduct. The Company amended
that complaint on April 1, 2003. The amended complaint alleges that the
defendant misappropriated millions of dollars from our Key Employee Loan Program
and relocation program; awarded millions of dollars in unauthorized bonuses to
himself and certain other Tyco employees; engaged in improper self-dealing real
estate transactions involving our assets; and conspired with certain other
former Tyco employees in committing these acts. The amended complaint alleges
causes of action for breach of fiduciary duty, fraud, unjust enrichment, breach
of contract, conversion, a constructive trust, and other wrongful conduct. The
amended complaint seeks recovery for all of the losses suffered by us as a
result of the

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former Chairman and Chief Executive Officer's conduct, and of all remuneration,
including restricted and unrestricted stock and options, obtained by
Mr. Kozlowski during the course of this conduct. Discovery in this action has
been stayed as a result of a motion by the New York County District Attorney's
Office. The Judicial Panel on Multidistrict Litigation transferred this action
to the United States District Court for the District of New Hampshire.

TYCO INTERNATIONAL LTD. V. MARK H. SWARTZ, UNITED STATES DISTRICT COURT,
SOUTHERN DISTRICT OF NEW YORK, NO. 03-CV-2247 (TPG), FILED APRIL 1, 2003. As
previously reported in our periodic filings, we filed an arbitration claim
against Mark H. Swartz, our former Chief Financial Officer and director, on
October 7, 2002. That arbitration claim alleged that Mr. Swartz breached his
fiduciary duty and otherwise engaged in wrongful conduct relating to his
employment by Tyco. As a consequence of Mr. Swartz's refusal to submit to the
jurisdiction of the American Arbitration Association, we filed a civil complaint
against him on April 1, 2003, for breach of fiduciary duty and other wrongful
conduct. The action alleges that the defendant misappropriated millions of
dollars from our Key Employee Loan Program and relocation program; approved and
implemented awards of millions of dollars in unauthorized bonuses to himself and
certain other Tyco employees; awarded millions of dollars in other unauthorized
payments to himself; engaged in improper self-dealing real estate transactions
involving our assets; and conspired with certain other former Tyco employees in
committing these acts. The complaint alleges causes of action for breach of
fiduciary duty, fraud, unjust enrichment, conversion, a constructive trust, and
other wrongful conduct. The action seeks recovery for all of the losses suffered
by us as a result of the former Chief Financial Officer and director's conduct,
and of all remuneration, including restricted and unrestricted stock and
options, obtained by Mr. Swartz during the course of this conduct. Mr. Swartz
must move, answer or otherwise respond to the complaint by May 30, 2003.

TYCO INTERNATIONAL, LTD. V. L. DENNIS KOZLOWSKI AND MARK H. SWARTZ, UNITED
STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK, NO. 02-CV-9705, FILED
DECEMBER 6, 2002. As previously disclosed in our periodic filings, we have filed
a civil complaint against our former Chairman and Chief Executive Officer and
our former Chief Financial Officer pursuant to Section 16(b) of the Securities
Exchange Act of 1934 for disgorgement of short-swing profits from prohibited
transactions in our common shares believed to exceed $40 million. The action
seeks disgorgement of profits, interest, attorneys' fees and costs. The Judicial
Panel on Multidistrict Litigation has transferred this action to the United
States District Court for the District of New Hampshire.

SUBPOENAS, DOCUMENT REQUESTS FROM GOVERNMENTAL ENTITIES AND CRIMINAL PROCEEDINGS
AGAINST FORMER MANAGEMENT

As previously disclosed in our periodic filings, we and others have received
various subpoenas and requests from the SEC, the District Attorney of New York
County, the U.S. Attorney for the District of New Hampshire and others seeking
the production of voluminous documents in connection with various investigations
into our governance, management, operations, accounting and related controls. We
are cooperating fully with these investigations and are complying with these
requests.

On October 23, 2002, we signed a consent agreement with the Bureau of
Securities Regulation of the State of New Hampshire that resolved the Bureau's
investigation into the conduct of Tyco's previous management. Under the terms of
the consent agreement, we will pay a total of $5 million as an administrative
settlement to the State of New Hampshire and have paid $100,000 to cover the
cost of the Bureau's investigation. We signed the consent agreement without
admitting any wrongdoing with respect to the Bureau's allegations.

On December 17, 2002, Frank E. Walsh, Jr., a former director of Tyco,
pleaded guilty to a felony violation of New York law in the Supreme Court of the
State of New York (New York County) and settled a civil action for violation of
federal securities laws brought by the Securities and Exchange Commission in
United States District Court for the Southern District of New York. Both the
felony

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charge and the civil action were brought against Mr. Walsh based on a
$20 million payment by Tyco, $10 million of which went to Mr. Walsh with the
balance going to a charity of which Mr. Walsh is trustee. The payment was
purportedly made for Mr. Walsh's assistance in arranging our acquisition of The
CIT Group, Inc. The felony charge accused Mr. Walsh of intentionally concealing
information concerning the payment from Tyco's directors and shareholders while
engaged in the sale of Tyco securities in the State of New York. The SEC action
alleged that Mr. Walsh knew that the registration statement covering the sale of
Tyco securities as part of the CIT acquisition contained a material
misrepresentation concerning fees payable in connection with the acquisition.
Pursuant to the plea, Mr. Walsh agreed to pay $20 million in restitution to Tyco
and to pay other fines to the State of New York. Pursuant to the settlement,
Mr. Walsh consented to an order permanently enjoining him from violating
provisions of the federal securities laws, requiring him to pay restitution to
Tyco and permanently barring him from serving as an officer or director of a
publicly held company. Tyco received Mr. Walsh's restitution payment of
$20 million.

On February 3, 2003, the New York County District Attorney announced a
superseding indictment against Mark Belnick. This new indictment added three
additional charges against Mr. Belnick, including grand larceny in the first
degree, a felony violation of New York State's securities law (the Martin Act),
and an additional charge of falsifying business records. The superseding
indictment includes the original six counts of falsifying business records which
had been included in the original indictment filed in September 2002. The new
grand larceny count charges Mr. Belnick with stealing $12 million from Tyco by
accepting payment of a special bonus, in addition to his salary and annual
bonus, that had not been approved by the Board of Directors. The Martin Act
count charges Mr. Belnick with participation in a scheme to defraud, whereby
Messrs. Belnick, Kozlowski, Swartz, and others knowingly made false
representations concerning Tyco's financial condition in order to obtain money
for themselves. There is no trial date yet scheduled for the criminal charges
against Mr. Belnick.

On February 19, 2003, a federal grand jury in Concord, New Hampshire
returned an indictment against Mark Swartz accusing him of failing to report a
bonus that he received from Tyco. In particular, Swartz allegedly received a
$12.5 million bonus in 1999, but did not include this bonus on his tax return.
Swartz has pleaded not guilty and a trial has been set for July 8, 2003.

INTELLECTUAL PROPERTY LITIGATION

Applied Medical Resources Corp. v. U.S. Surgical Corp. is a patent
infringement action in which U.S. Surgical Corp., a subsidiary of Tyco, is the
defendant. In February 2002, the U.S. District Court for the Central District of
California held that U.S. Surgical's Versaseal universal seal system, contained
in certain surgical trocar and access devices manufactured by U.S. Surgical,
infringed certain of the plaintiff's patents. The court entered a permanent
injunction against U.S. Surgical, based upon infringement of one of the three
patents involved in the suit, the appeal of which is pending in the U.S. Court
of Appeals for the Federal Circuit. A trial on invalidity of the other two
patents and on damages is currently scheduled for January 2004. If there is
ultimately a determination of liability, the amount of damages will be strongly
contested by us. We estimate that damages could range from $32 million to
$83 million, with the possibility of enhanced damages up to treble damages if
there is a finding of willful infringement. We currently do not expect, however,
to incur losses beyond what we have already accrued.

ENVIRONMENTAL INVESTIGATION

As previously reported in our periodic filings, we became aware in
June 2001 that the Office of the U.S. Attorney for the District of Connecticut
had initiated an investigation of one of the sites in our Electronics segment.
Subsequently, we were notified that the subsidiary was the target of a federal
Grand Jury investigation concerning alleged Clean Water Act violations. We
understand that the government investigation concerns manufacturing facilities
in Manchester and Stafford, Connecticut.

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We also understand that employees at these plants are subjects of the
investigation. A former supervisor at the subsidiary's Manchester plant (who is
no longer an employee) has pleaded guilty to a felony violation of the Clean
Water Act. We do not believe that the investigation will have a material impact
on the financial condition of Tyco and its subsidiaries, taken as a whole. We
are cooperating fully in the investigation.

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

The 2003 Annual General Meeting of Shareholders (the "Meeting") of the
Company was held on March 6, 2003. All company proposals submitted at the
Meeting were passed as described below. The following is a brief description of
each matter voted upon at the Meeting.

PROPOSAL 1. To elect the Board of Directors of the Company:

The following is a tabulation of the votes submitted in respect of Proposal
1. Proxies giving discretion to the chairman of the Meeting were voted in favor
of each candidate. There were zero broker non-votes.

PROPOSAL 2. A proposal of the Board of Directors to re-appoint
PricewaterhouseCoopers as the independent auditors and to authorize the Audit
Committee to fix the auditors' remuneration:

A total of 1,318,273,345 (75%) shares were voted for and 444,506,191 (25%)
shares were voted against this proposal. There were 12,848,909 abstentions and
zero broker non-votes.

PROPOSAL 3. A proposal of the Board of Directors to increase the number of
authorized common shares and to amend the Company's Bye-Laws to reflect such
increase.

A total of 1,526,037,974 (87%) shares were voted for and 237,012,565 (13%)
shares were voted against this proposal. There were 12,577,906 abstentions and
zero broker non-votes.

PROPOSAL 4. A shareholder proposal to adopt a policy of phasing out the
manufacture of PVC-containing or phthalate-containing medical supplies.

A total of 39,582,088 (3%) shares were voted for and 1,320,969,993 (97%)
shares were voted against this proposal. There were 58,025,694 abstentions and
357,050,670 broker non-votes.

PROPOSAL 5. A shareholder proposal that shareholder approval be required
for certain future severance agreements with senior executives.

A total of 807,262,255 (58%) shares were voted for and 590,972,310 (42%)
shares were voted against this proposal. There were 20,343,210 abstentions and
357,050,670 broker non-votes.

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PROPOSAL 6. A shareholder proposal to adopt an executive compensation
policy that all future stock option grants to senior executives have an option
exercise price indexed or linked to an industry peer group stock performance
index.

A total of 153,772,539 (11%) shares were voted for and 1,243,213,745 (89%)
shares were voted against this proposal. There were 21,591,491 abstentions and
357,050,670 broker non-votes.

PROPOSAL 7. A shareholder proposal to change the Company's jurisdiction of
incorporation from Bermuda to Delaware.

A total of 356,991,864 (26%) shares were voted for and 1,029,482,151 (74%)
shares were voted against this proposal. There were 32,103,760 abstentions and
357,050,670 broker non-votes.

PROPOSAL 8. A shareholder proposal to amend the Bye-Laws to require that,
effective upon the expiration of the CEO's existing employment agreement, an
independent director who has not served as CEO of the Company shall serve as
chairman of the Board of Directors.

A total of 418,716,566 (30%) shares were voted for and 976,029,048 (70%)
shares were voted against this proposal. There were 23,832,161 abstentions and
357,050,670 broker non-votes.

PROPOSAL 9. A shareholder proposal to adopt a policy that the Company will
obtain only audit services from the Company's independent accountants.

A total of 146,315,609 (10%) shares were voted for and 1,250,004,418 (90%)
shares were voted against this proposal. There were 22,257,748 abstentions and
357,050,670 broker non-votes.

ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

(b) Reports on Form 8-K

Current Report on Form 8-K furnished pursuant to Item 9 on January 6, 2003
to include, as an exhibit, the press release of Tyco International Ltd. dated
January 6, 2003 announcing that Tyco obtained commitment letters from various
banks for a new $1.5 billion credit facility, reaffirming

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guidance for the first quarter of fiscal 2003 and announcing the addition of
intercompany guarantees to support its credit rating.

Current Report on Form 8-K filed pursuant to Item 5 on January 9, 2003 to
include, as an exhibit, the press release of Tyco International Ltd. dated
January 9, 2003 announcing its intent to purchase, through its wholly-owned
subsidiary, Tyco International Group S.A., Tyco International Group's Zero
Coupon Convertible Debentures due February 12, 2021 with cash.

Current Report on Form 8-K filed pursuant to Item 5 on January 14, 2003 to
include, as an exhibit, the press release of Tyco International Ltd. dated
January 14, 2003 announcing that holders of Zero Coupon Convertible Debentures
due February 12, 2021 issued by its wholly-owned subsidiary, Tyco International
Group S.A., have the right to surrender their debentures for repurchase as of
this date.

Current Report on Form 8-K furnished pursuant to Item 9 on January 22, 2003
to include, as an exhibit, the press release of Tyco International Ltd. dated
January 22, 2003 announcing the Company's results for the first fiscal quarter.

Current Report on Form 8-K furnished pursuant to Item 9 on January 31, 2003
to include, as an exhibit, the press release of Tyco International Ltd. dated
January 31, 2003 announcing that Tyco International Group S.A., its wholly-owned
subsidiary, entered into a new 364-day unsecured revolving bank credit facility.

Current Report on Form 8-K filed pursuant to Item 5 on February 13, 2003 to
include, as an exhibit, the press release of Tyco International Ltd. dated
February 13, 2003 announcing the results of its offer to repurchase Zero Coupon
Convertible Debentures due February 12, 2021 issued by its wholly-owned
subsidiary, Tyco International Group S.A.

Current Report on Form 8-K filed pursuant to Item 5 on March 13, 2003 to
include, as an exhibit, the press release of Tyco International Ltd. dated
March 12, 2003 announcing that Tyco expects to take non-cash pre-tax charges
that are estimated to be between $265 million to $325 million, confirming the
Company's prior cash flow guidance and announcing a top management change at its
Fire and Security segment.

98

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

99

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Edward D. Breen, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Tyco
International Ltd.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;

b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):

a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

Date: May 15, 2003

100

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, David J. FitzPatrick, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Tyco
International Ltd.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;

b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):

a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

Date: May 15, 2003

101