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

FORM 10-K

001-13836
(Commission File Number)

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

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

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

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

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

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes ý    No o.

        The aggregate market value of voting common shares held by nonaffiliates of registrant was approximately $57,158,586,150 as of March 31, 2004.

        The number of common shares outstanding as of December 1, 2004 was 2,011,601,615.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the registrant's proxy statement filed within 120 days of the close of the registrant's fiscal year in connection with the registrant's 2005 annual general meeting of shareholders are incorporated by reference into Part III of this Form 10-K.

        See pages 76 to 79 for the exhibit index.

TABLE OF CONTENTS

PART I

Item 1.    Business

General

        Tyco International Ltd. ("we," "Tyco" or the "Company") is a diversified manufacturing and service company that, through its subsidiaries:

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designs, manufactures, installs, monitors and services electronic security and fire protection systems;



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designs, manufactures and distributes electrical and electronic components;



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designs, manufactures and distributes medical devices and supplies, imaging agents, pharmaceuticals and adult incontinence and infant care products;



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designs, manufactures, distributes and services engineered products, including industrial valves and controls as well as steel tubular goods, and provides environmental and other industrial consulting services; and



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designs, manufactures and distributes plastic products, adhesives and films.

        Unless otherwise indicated, references in this Annual Report to 2004, 2003 and 2002 are to Tyco's fiscal year ended September 30, 2004, 2003 and 2002, respectively.

Strategy

        Tyco's operating strategy is to be a high-quality, low-cost producer and provider in each of the markets we serve. We promote our leadership positions by investing in existing businesses and developing new markets. Our current business strategy focuses on enhancing internal growth and operational efficiency for existing Tyco businesses, and we plan to achieve this goal primarily through new product innovation, increased market share, increasing the service and repair components of our existing businesses and continued geographic expansion. We have implemented and will continue to implement additional Six Sigma initiatives across our business segments to achieve best-in-class operating practices. We strive to increase the value of our Company and our global portfolio of diversified brands by exceeding customers' expectations and by achieving market leadership and operating excellence in every segment. Leveraging the strengths of our existing operations, we seek to enhance value for our shareholders through operational excellence and maximization of cash flows. Additionally, we have strengthened our balance sheet by using our strong cash flow to reduce debt. We are also continuing to pursue the disposition of certain non-core businesses and may consider an appropriate acquisition should the opportunity arise. We are committed to being a leader in corporate governance so that we can continue to earn the respect and confidence of our shareholders, employees, suppliers and customers as well as the financial community.

Operating Segments

        See Note 23 to the Consolidated Financial Statements for certain segment and geographic financial data relating to our business.

I.    Fire and Security

        Tyco is the world's leading provider of both electronic security services and fire protection services. With 2004 net revenue of $11.5 billion, our Fire and Security businesses currently comprise 29% of our consolidated net revenue. In 2003 and 2002, net revenue totaled $10.9 billion or 30% of our consolidated net revenue and $10.2 billion or 29% of our consolidated net revenue, respectively. The group's products and services include:

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designing, manufacturing, installing, monitoring and servicing electronic security systems;

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designing, manufacturing, installing and servicing a broad line of fire detection systems and suppression systems, and manufacturing and servicing fire extinguishers and related products; and



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providing integrated systems for surveillance and control of public transportation systems, bridges, tunnels and other public works.

        Tyco Fire and Security consists of two reporting units: Electronic Security Services and Fire Protection Contracting and Services.

Electronic Security Services

        We are the world's leading provider of electronic security products and services and event monitoring, which includes the monitoring of burglar alarms, fire alarms, medical alert systems, such as our Personal Emergency Response Systems, and other activities where around-the-clock monitoring and response are required. We offer regular inspection and maintenance services to ensure that systems will function properly and can be upgraded as technology or risk profiles change. We are also a leading supplier of electronic security solutions to the retail, commercial and industrial marketplaces, offering anti-theft, video surveillance, access control, electronic asset protection and security management systems, products and services. These and other security services are provided principally through our ADT operating companies.

        Electronically monitored security systems are tailored to our customers' specific needs and involve the installation and use on a customer's premises of devices designed for intrusion detection and access control, as well as reaction to various occurrences or conditions, such as movement, fire, smoke, flooding, environmental conditions, industrial processes and other hazards. These detection devices are connected to microprocessor-based control panels, which communicate to a monitoring center (located remotely from the customer's premises) where alarm and supervisory signals are received and recorded. In most systems, control panels can identify the nature of the alarm and the areas within a building where the sensor was activated. Depending upon the type of service for which the subscriber has contracted, monitoring center personnel respond to alarms by relaying appropriate information to the local fire or police departments, notifying the customer or taking other appropriate action, such as dispatching employees to the customer's premises. In some instances, the customer may monitor the system at its own premises or the system may be connected to local fire or police departments.

        Whether systems are monitored by the customer at its premises or connected to one of our monitoring centers, we usually provide support and maintenance through service contracts. Systems installed at customers' premises may be owned by us or by our customers.

        We market our electronic security services to commercial and residential customers through both a direct sales force and an authorized dealer network. A separate national accounts sales force services large commercial customers. We also utilize advertising and direct mail to market our services.

        We provide residential electronic security services primarily in North America, Europe and South Africa, with a growing presence in the Asia-Pacific region. Our commercial customers include financial institutions, industrial and commercial businesses, federal, state and local governments, defense installations, and health care and educational facilities. Our customers are often prompted to purchase security systems by their insurance carriers, which may offer lower insurance premium rates if a security system is installed or require that a system be installed as a condition to coverage. It has been our experience that the majority of commercial and residential monitoring contracts are renewed after their initial terms. In general, relocations account for the largest number of residential discontinuances while business closures comprise the largest single factor impacting commercial contract attrition.

        We are the leader in anti-theft systems. The majority of the world's leading retailers use our systems to protect against shoplifting and employee theft. We manufacture these SENSORMATIC electronic article surveillance systems and generally sell them through our direct sales force in North and South America, Europe, Australia, Asia and South Africa. A growing trend in the loss protection

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industry is for security labels to be applied to goods at the point of manufacture. In most cases, we sell these labels directly to the manufacturers or their packaging agents. We also develop and distribute access control and video surveillance systems, which are sold through direct and distributor channels.

        We manufacture certain alarm, detection and activation devices and central monitoring station equipment both for installation by us and for sale to other installers, although we outsource some of the electronic components we install.

        The security business in North America is highly competitive, with a number of major firms and some 12,000 smaller regional and local companies. Similarly, Tyco competes with several national companies and several thousand regional and local companies in Europe, the Asia-Pacific region, Latin America and South Africa. Competition is based primarily on price in relation to quality of service. We believe that the quality of our electronic security service is higher than that of many of our competitors and, therefore, our prices may be higher than those charged by our competitors.

Fire Protection Contracting and Services

        We design, fabricate, install and service automatic fire sprinkler systems, fire alarm and detection systems and special hazard suppression systems in buildings, industrial plants and off-shore installations, as well as respiratory systems and other life-saving devices. Tyco's fire protection businesses utilize a worldwide network of sales offices, operating globally under various trade names including SIMPLEXGRINNELL, WORMALD, MATHER & PLATT, TOTAL WALTHER, DONG BANG, ZETTLER, ANSUL, SCOTT and TYCO.

        We install fire protection systems in both new and existing buildings. Our fire protection systems are purchased by owners, construction engineers and mechanical or general contractors. In recent years, the retrofitting of existing buildings has grown as a result of legislation mandating the installation of fire protection systems, especially in hotels, healthcare facilities, educational establishments and other buildings accessible to the general public. We continue to focus on system maintenance and inspection, which have become more significant parts of our business.

        The majority of the fire suppression systems installed by Tyco are water-based. However, we are also the world's leading provider of custom designed special hazard fire protection systems which incorporate specialized extinguishing agents such as foams, dry chemicals and gases, in addition to spill control products designed to absorb, neutralize and solidify spills of hazardous materials. These systems are often especially suited to fire protection in certain manufacturing, power generation, petrochemical, offshore oil exploration, transportation, data processing, telecommunications, commercial food preparation, mining and marine applications.

        We manufacture and distribute SCOTT and SABRE breathing systems for use by firefighters and other first responders and for industrial applications. Military forces from 25 countries use our breathing apparatus and more than half a million U.S. firefighters rely on our SCOTT AIR-PAKR brand of self-contained breathing apparatus. SCOTT and SABRE products are sold globally through a network of distributors. SCOTT is considered the world leader in respiratory protection innovation for first responders.

        In Asia, and to a lesser extent in Europe, Tyco designs, installs and maintains integrated systems which monitor and manage urban traffic control systems, as well as lighting, ventilation, fire detection, surveillance and traffic control for bridges, tunnels, railways and mines.

        The majority of the mechanical components (and, in North America, a high proportion of the pipe) used in our fire protection systems are manufactured by Tyco Engineered Products and Services. We use computer-aided-design technology that reduces the time required to design systems for specific applications and coordinates the fabrication and delivery of system components. We also have fabrication plants that cut, thread and weld pipe, which is then shipped with other prefabricated components to job sites for installation.

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        Competition in the fire protection contracting business varies by region. In North America, Tyco competes with hundreds of smaller contractors on a regional or local basis for the installation of fire protection, alarm and detection systems. In Europe, Tyco competes with many regional or local contractors on a country-by-country basis. In Australia, New Zealand and Asia, we compete with a few large fire protection contractors, as well as with many smaller regional or local companies. Tyco competes for fire protection systems contracts primarily on the basis of price, service and quality.

II.    Electronics

        Tyco is the world's leading supplier of passive electronic components. With 2004 net revenue of $11.8 billion, our Electronics businesses currently comprise 29% of our consolidated net revenue. In 2003 and 2002, net revenue totaled $10.5 billion or 29% of our consolidated net revenue and $10.6 billion or 31% of our consolidated net revenue, respectively. The group's products and services include:

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designing, engineering and manufacturing electronic/electrical connector systems, fiber optic components, wireless devices including private radio systems, heat shrink products, circuit protection devices, magnetic devices, wire and cable, relays, sensors, touch screens, smart card components, identification and labeling products, power systems and components, printed circuit boards and assemblies, electronic modules, application tooling, switches and battery assemblies.

        Tyco Electronics consists of six reporting units: Electronic Components, Wireless, Electrical Contracting Services, Power Systems, Printed Circuit Group and Submarine Telecommunications (formerly TyCom).

        With the exception of Submarine Telecommunications, these businesses design, manufacture and market a broad range of electronic, electrical and electro-optic passive and active devices and a number of interconnection systems and connector-intensive assemblies, as well as wireless products including radar sensors, global positioning satellite systems components, private radio systems, silicon and gallium arsenide semiconductors and microwave sub-systems. These products have potential uses wherever an electronic, electrical, computer or telecommunications system is involved. Tyco Electronics manufactures and sells more than 500,000 parts in over 750 global product lines, including power systems, terminals, fiber optic components, printed circuit boards, cable connectors and assemblies, cable and cabling systems, and related application tools and application tooling equipment. Products are sold under the AMP, AGASTAT, AXICOM, AUGAT, BUCHANAN, CRITCHLEY, DULMISON, ELO-TOUCH SYSTEMS, M/A-COM, POTTER & BRUMFIELD, RAYCHEM, SCHRACK and TYCO ELECTRONICS trade names, among others.

        Sales and marketing are done via direct sales and distributors to customers including original equipment manufacturers and their subcontractors, utilities, government agencies, value-added resellers and those who install, maintain and repair equipment. In 2004, the group's direct sales represented 86% of net revenue while the remaining net revenue was via distributors. Their customers are found in the automotive, communications equipment manufacturing, telecommunications service, computer, aerospace, military, household appliance, industrial machinery and equipment, instrumentation, consumer electronics, energy and networking industries. In total, these businesses serve over 250,000 customers located in over 55 countries and maintain a strong local presence in the geographic areas in which they operate, including the Americas, Europe and the Asia-Pacific region.

        Tyco Submarine Telecommunications is a leading provider of undersea fiber optic networks and services. Tyco Submarine Telecommunications' products and services include: designing, manufacturing and installing undersea cable communications systems and servicing and maintaining major undersea cable networks.

        Tyco Electronics operates in highly competitive markets. The competition experienced across product lines from other companies ranges in size from large, diversified manufacturers to small, highly

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specialized manufacturers. Competition is on the basis of breadth of product offering, product innovation, price, quality and service.

III.  Healthcare

        Tyco is a global leader in the medical products industry. With 2004 net revenue of $9.1 billion, our Healthcare businesses currently comprise 23% of our consolidated net revenue. In 2003 and 2002, net revenue totaled $8.4 billion or 23% of our total consolidated net revenue and $7.8 billion or 22% of our consolidated net revenue, respectively. The group's products include:

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a wide variety of medical devices and supplies, including laparoscopic instruments, sutures and surgical staplers, electro-surgical instruments, pulse oximeters, ventilators, needles and syringes, wound care products, incontinent care products, and products for vascular therapy;



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home use portable liquid oxygen systems, sleep disorder diagnostic and sleep therapy systems;



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imaging reagents, delivery systems, and nuclear diagnostic agents;



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bulk and unit dose pharmaceuticals; and



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retail brand adult incontinence care, infant care and feminine hygiene products.

        Tyco Healthcare consists of three reporting units: Medical Devices & Supplies, Pharmaceuticals and Retail.

Medical Devices & Supplies

        Medical Devices & Supplies consists of five primary divisions: Medical, Surgical, Respiratory, Imaging and International.

Medical

        The Medical Division manufactures and markets a broad range of wound care products; needles and syringes; sharps disposables; vascular therapy products; electrodes; operating room kits and trays; urological care products; enteral feeding products; incontinence care products; and nursing care products. These products are marketed via a combination of direct sales representatives and third-party distributors to hospitals, surgi-centers, alternate care facilities and homes worldwide.

        The Medical Division consists of many market-leading brands such as KERLIX and CURITY wound care dressings, WINGS adult incontinence products, SCD compression devices, T.E.D. anti-embolism stockings, MONOJECT MAGELLAN safety needles and syringes, KANGAROO enteral feedings systems, DEVON O.R. surgical kits, and MEDI-TRACE diagnostic and monitoring electrodes.

Surgical

        The Surgical Division develops, manufactures and markets a broad spectrum of widely recognized surgical products that are used around the world in operating rooms, emergency rooms, surgi-centers and physician offices.

        U.S. Surgical is a market leader in innovative wound closure products and advanced surgical devices. Its Auto Suture business offers a complete line of surgical devices and laparoscopic instruments for general and specialty procedures. The SYNETURE business is the evolution of U.S. Surgical/Davis & Geck from a product-driven suture organization to one focused on clinical solutions for wound closure with advanced suture and biosurgery therapies. Valleylab is a leading manufacturer and marketer of a wide array of electro-surgical, ultrasonic and radiation ablation devices. Among its leading brand names are VALLEY LAB, the FORCE FX electro-surgical generator, the LIGASURE vessel occlusion system and the COOL-TIP RF (radio frequency) system.

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Respiratory

        The Respiratory Division develops, manufactures and markets an extensive line of products and services that monitor oxygen saturation levels in the blood (pulse oximetry), help facilitate and monitor anesthesia, diagnose and treat respiratory disease, and provide life support for critically ill patients. These products are sold around the world under the NELLCOR and PURITAN BENNETT brands and are used in the hospital and the home.

        Nellcor continues to drive advancements in pulse oximetry technology with the introduction of the OXIMAX pulse oximetry system. For critically ill patients or for those undergoing surgery, the MALLINCKRODT endotracheal, and SHILEY tracheotomy tubes are industry leaders. Puritan Bennett is known around the world for its critical care ventilators, and the HELIOS portable liquid oxygen system for respiratory impaired patients.

Imaging

        The Imaging Division is devoted to improving the diagnostic sciences of X-ray, magnetic resonance imaging (MRI) and nuclear medicine. By developing, manufacturing, and marketing contrast agents, radiopharmaceuticals and delivery systems, Mallinckrodt Imaging helps enhance the utility and quality of images obtained via these procedures. Mallinckrodt's Imaging Division partners with radiologists, cardiologists and nuclear medicine physicians to improve the quality of diagnosis in multiple disease states through well known branded diagnostic pharmaceuticals, including OPTIRAY X-ray contrast media, OPTIMARK MRI contrast media, and thallium and TECHNESCAN MAG3 radiopharmaceutical. The MALLINCKRODT family of imaging products is sold into hospitals, radiopharmacies and alternate site imaging centers throughout the world.

International

        The International Division is responsible for the marketing, distribution and export of all Tyco Healthcare Group products (excluding Pharmaceuticals and Retail products) outside of the United States. The International Division markets directly to hospitals and medical professionals, as well as through independent distributors with a worldwide presence. Although the mix of product lines offered varies from country to country, its operations are organized primarily into four geographic regions: Europe/Middle East/Africa, Japan, the Asia-Pacific region and Latin America.

Pharmaceuticals

        The Mallinckrodt Pharmaceutical Division is comprised of three businesses—Bulk Pharmaceuticals (active pharmaceutical ingredients), Dosage Pharmaceuticals and Specialty Chemicals. The Bulk Pharmaceuticals business is the largest producer of both medicinal narcotics and acetaminophen worldwide. Ninety-five percent of these products are used within the pharmaceutical industry to manufacture dosage form drugs. The Dosage Pharmaceuticals business has four distinct divisions: generic narcotic pharmaceuticals, branded central nervous systems products, addiction treatment products and contract pharmaceutical manufacturing for third parties. These products are sold to major wholesalers and drug store chains primarily in the United States. The Specialty Chemicals business includes a wide array of specialty chemicals targeted at: research and development and analytical laboratories; process materials used to manufacture biopharmaceuticals; and specialty chemicals used to manufacture semiconductor chips, many of which are sold under the J.T. BAKER name in the United States.

Retail

        The Retail Division is the industry leader for retail brand adult incontinent care, infant care and feminine hygiene products within continental North America. This division develops, manufactures and markets a wide variety of retail brand products for the North American retail markets supplying a broad majority of retail mass merchandisers, food stores and drug stores. Through our "first-to-market"

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approach, the Retail Division helps retailers such as Wal-Mart, Target, Kroger, Albertson's, CVS, Loblaw, Dollar General and Family Dollar manage their categories and build their own store brand presence with the high-quality products consumers demand.

        Tyco Healthcare's competitors include Johnson & Johnson, Becton Dickinson and C.R. Bard, among others, and competition is based on breadth of product offerings, quality of product, service and price.

IV.    Engineered Products and Services

        Tyco is the world's leading manufacturer of industrial valves and controls. With 2004 net revenue of $6.0 billion, our Engineered Products and Services businesses currently comprise 15% of our consolidated net revenue. Net revenue in 2004 includes $739 million representing a change in how we classify certain sub-contract and other costs that are paid by Tyco Infrastructure Services and re-billed to their customers. These costs were historically treated as "pass through" and were therefore not included in reported revenue and cost of revenue of Tyco Infrastructure Services. Also see Note 1 to the Consolidated Financial Statements. In both 2003 and 2002, net revenue totaled $4.5 billion or 13% of our consolidated net revenue. The group's products and services include:

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manufacturing and servicing industrial, commercial, water and wastewater valves and related devices, as well as providing other engineered products solutions;



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manufacturing steel pipe and tubular goods, security fence products and electrical raceway products, including steel conduit, pre-wired armored cable, flexible conduit, steel support systems and fasteners, cable tray and cable ladder;



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providing a broad range of consulting, engineering and construction management and operating services for water, wastewater, environmental, transportation and infrastructure markets; and



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manufacturing and distributing fire sprinkler devices, valves, steel and plastic pipe and fittings and pipe couplings used in commercial, residential and industrial fire protection systems.

        Tyco Engineered Products and Services is comprised of three reporting units: Tyco Flow Control and Fire Products, Tyco Electrical & Metal Products and Tyco Infrastructure Services.

Flow Control and Fire Products

Tyco Flow Control

        Tyco Flow Control manufactures both standard and highly specialized valves in a wide variety of configurations, body types, materials, pressure ratings and sizes. It also manufactures related equipment, instrumentation and products such as valve actuators, gauges, positioners, valve control systems and vapor control products, as well as a full line of thermal heat tracing products, specialty heaters and related products and turnkey installation services. These products are manufactured in Tyco Flow Control's facilities located in North America, Europe, South America and the Asia-Pacific region. Tyco Flow Control's products are used in various applications including power generation, chemical, petrochemical, oil and gas, water distribution, wastewater, pulp and paper, commercial irrigation, mining, industrial process, food and beverage, plumbing and HVAC. Tyco Flow Control also provides engineering, design, inspection, maintenance, repair and commissioning services.

        Tyco's valves and related products are sold under many trade names, including, among others, KEYSTONE, GRINNELL, VANESSA, CROSBY, ANDERSON GREENWOOD, TYCO THERMAL CONTROLS and TRACER. Tyco Flow Control sells valves and related products in most geographic areas directly through its internal sales force and in some geographic areas through a network of independent distributors and manufacturers' representatives. The valve industry is highly fragmented and we compete against a number of international, national and local manufacturers as well as against specialized manufacturers on the basis of price, delivery, breadth of product line and specialized product capability.

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Tyco Fire & Building Products

        Tyco Fire & Building Products manufactures and sells a wide variety of products to fire protection contractors and fabricators of fire protection systems. These products include a complete line of fire sprinkler devices, specialty valves, plastic pipe and pipe fittings and ductile iron pipe couplings. Tyco Fire & Building Products manufactures these products in the United States, United Kingdom, Germany, China and Malaysia and sells them under the TYCO, GEM, STAR, CENTRAL, GRINNELL and CENTRAL SPRAYSAFE brand names. In North America, a complete line of steel sprinkler pipe is manufactured by Tyco Electrical & Metal Products (Allied Tube & Conduit), thus enabling Tyco to offer a complete line of fire protection systems and services. Tyco Fire & Building Products also produces a complete line of specialty fastening products for the building industry that are manufactured in the United Kingdom under the trade names of LINDAPTER and ANCON and metal framing and support products that are manufactured in the United Kingdom and Germany.

        Central Sprinkler maintains a network of company-owned distribution facilities in the United States that stock and sell a full line of fire protection products directly to contractors and installers. GEM Sprinkler and Star Sprinkler sell fire protection products through a network of independent distributors. In Canada, Central America, South America and the Asia-Pacific region, we sell fire protection products through independent distribution and in some cases directly to fire protection contractors. In Europe and the Middle East, we operate a number of company-owned distribution facilities which stock and sell a full line of fire protection, mechanical, building products and other flow control products. Competition for the sale of fire products is based on price, delivery, breadth of product line and specialized product capability. The principal competitors are specialty products manufacturing companies based in the United States, with other smaller competitors in Europe and Asia.

Electrical & Metal Products

        Tyco Electrical & Metal Products manufactures steel and related products in North America and Brazil. Its products include steel electrical conduit, pre-wired armored cable, flexible electrical conduit, metal framing systems, cable tray and cable ladder and related products utilized in the construction, industrial and original equipment markets. In North America, the Allied Tube & Conduit ("Allied") business is the leading manufacturer of steel electrical conduit, and our AFC Cable Systems division is the leading manufacturer of steel and aluminum pre-wired armored cable. The Georgia Pipe business manufactures plastic conduit. Allied manufactures metal framing and support systems and electrical cable tray and cable ladders in North America and sells them under the POWERSTRUT, UNISTRUT and T.J. COPE trade names. In addition, Allied manufactures and distributes welded steel tubular products in North America. In Brazil, tube is manufactured and sold under the trade names of FREFER and DINACO. These businesses serve a wide spectrum of customers and applications ranging from automotive, fire protection, security and safety containment, recreational equipment, commercial construction and traffic control systems. Products compete on the basis of price, availability and breadth of product line.

Infrastructure Services

        Tyco Infrastructure Services provides a broad range of environmental, consulting and engineering services through its EARTH TECH business. Earth Tech's principal services consist of a full-spectrum of water, wastewater, environmental and hazardous waste management services. Earth Tech also provides infrastructure and transportation design and construction services for institutional, civic, commercial and industrial clients; design, construction management, project financing and facility operating services for water and wastewater treatment facilities for municipal and industrial clients; and transportation engineering and consulting. Earth Tech operates through a network of offices in the United States, Canada, the United Kingdom, Ireland, Mexico, Germany, Sweden, China, Australia and

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Thailand. Earth Tech competes with a number of international, national, regional and local companies on the basis of price and the breadth and quality of services.

V.    Plastics and Adhesives

        With 2004 net revenue of $1.8 billion, our Plastics and Adhesives businesses currently comprise 4% of our consolidated net revenue. In both 2003 and 2002, net revenue totaled $1.7 billion or 5% of our consolidated net revenue. The group's products include:

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polyethylene film and film products such as flexible plastic packaging, plastic bags and sheeting, coated and laminated packaging materials, tapes and adhesives; and



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plastic garment hangers, disposable dinnerware, and pipeline coatings for the oil, gas and water distribution industries.

        Tyco Plastics and Adhesives consists of four reporting units: Tyco Plastics, Tyco Adhesives, A&E Products and Ludlow Coated Products.

Plastics

        Tyco Plastics manufactures polyethylene-based film, packaging products, bags and sheeting in a wide range of sizes, gauges, strengths, stretch capacities, clarities and colors. Tyco Plastics' products include: RUFFIES, a national brand consumer trash bag sold to mass merchants, grocery chains and other retail outlets, and FILM-GARD, a leading plastic sheeting product sold to consumers and professional contractors through Do-It-Yourself outlets, home improvement centers and hardware stores. FILM-GARD products are produced in various sizes for a variety of uses, including painting, renovation, construction, landscaping and agriculture. Additionally, in the United States, Tyco Plastics is one of the largest producers of stretch film, one of the largest producers of can liners for the away-from-home market, and a leading supplier of custom packaging products used for primary food packaging and the beverage industries. Tyco Plastics' Catering division manufactures and markets disposable dinnerware products to the retail and foodservice industries. The Catering division markets their many product lines under brand names including SCROLLWARE, PRESTIGE, LEGACY and OPULENCE. Tyco Plastics sells its products directly to retailers for resale, to distributors for resale or directly to end-users. Tyco Plastics competes with other nationally recognized brands as well as many smaller regional producers on the basis of product innovation, delivery, price, breadth of product line and specialized product capabilities. Manufacturing facilities are located throughout the United States, Canada and the United Kingdom to ensure superior customer service and competitive transportation costs.

Adhesives

        The Tyco Adhesives division manufactures and markets specialty adhesive products and tapes for industrial applications, including external corrosion protection products for oil, gas and water pipelines. Tyco Adhesives also produces duct, foil, strapping, packaging and electrical tapes and spray adhesives for industrial and consumer markets worldwide, and manufactures cloth and medical tapes for Tyco Healthcare and others. Products are sold under the MANULI tapes, POLYKEN, NASHUA tape, RAYCHEM, BETHAM, NATIONAL and PATCO brand names. Tyco Adhesives competes with both small and large manufacturers on the basis of price, service, and specialized product capabilities.

A&E Products

        A&E Products is a manufacturer of plastic garment hangers worldwide, operating from over 25 global locations and selling into over 50 countries. A&E Products also operates hanger-recycling facilities in the United States and Europe. The reused hangers are purchased from various retailers and then sorted, processed and packaged for sale back to the apparel market. A&E Products competes with many manufacturers on the basis of price, service, marketing coverage and design innovation.

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Ludlow Coated Products

        Ludlow Coated Products manufactures a variety of specialty laminates and coated products principally derived from paper, film, foil and fabrics. Many Ludlow products are key components in industrial, military, food and other specialty packaging applications. Ludlow's product line also includes housewraps, material handling slip sheets and flexible intermediate bulk containers. Ludlow markets its specialty laminates and coated products through its own sales force and through independent manufacturers' representatives. Ludlow competes with many large manufacturers of laminates and coated products on the basis of price, service, marketing coverage and custom application engineering, and sells its products to manufacturers, producers and converters. It has various specialized competitors in different markets.

Backlog

        See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for information relating to our backlog.

Research and Development

        The amounts expended for Tyco-sponsored research and development during 2004, 2003 and 2002 were $784 million, $667 million and $633 million, respectively.

        Tyco-sponsored research and development expense by segment for the years ended September 30, 2004, 2003 and 2002 is as follows ($ in millions):

        Approximately 5,800 full-time scientists, engineers and other technical personnel were engaged in our product research and development activities as of September 30, 2004.

        Research activity at Electronics focuses specifically on new product development and a continuous expansion of technical capabilities. Healthcare focuses on technologies to complement existing product lines and applying expertise to refine and successfully commercialize such products and technologies and on acquiring rights to new products. We anticipate that Healthcare's research and development spending will continue to increase during 2005. Research activity in Fire and Security relates mostly to the design of fire and intrusion alarm products and emergency alarm systems, as well as products related to electronic article surveillance. Engineered Products and Services focuses on improvements in hydraulic design, which controls the motion of fluids, resulting in new fire protection devices and flow control products. Plastics and Adhesives' research activities consist primarily of new and improved product development.

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Raw and Other Purchased Materials

        We are a large buyer of steel and resin in the United States. We are also a large buyer of copper, brass, gold, electronic components, chemicals and additives, thin and flexible copper clad materials, zinc, paper, ink, foil, adhesives, cloth, wax, pulp and cotton. Certain of the components used in the Fire Protection business, principally certain valves and fittings, are purchased for installation in fire protection systems or for distribution. Materials are purchased from a large number of independent sources around the world. There have been no shortages in materials which have had a material adverse effect on our businesses. However, significant increases in raw material costs may have an adverse impact on costs and operating margins. We enter into long-term supply contracts, using fixed or variable pricing to manage our exposure to potential supply disruptions.

Patents and Trademarks

        We own a portfolio of patents, which principally relate to electrical and electronic products, healthcare products, fire protection devices, electronic security systems, flow control products, tubing, building and cable products, and plastic and adhesive products. We also own a portfolio of trademarks and are a licensee of various patents and trademarks. Patents for individual products extend for varying periods according to the date of patent filing or grant and the legal term of patents in the various countries where patent protection is obtained. Trademark rights may potentially extend for longer periods of time and are dependent upon national laws and use of the marks. All capitalized product names throughout this document are trademarks owned by, or licensed to, the Company or its subsidiaries. Although these have been of value and are expected to continue to be of value in the future, in the opinion of management the loss of any single patent or trademark would not materially affect the conduct of the business in any of our segments.

Employees

        Tyco employed 258,400 people at September 30, 2004, of which 98,000 are employed in the United States and 160,400 are outside the United States. We have collective bargaining agreements with labor unions covering 43,100 employees at certain of our North American, European and Asia-Pacific businesses. We believe that our relations with the labor unions are generally good.

        In April 1994, following lengthy contract talks with the Road Sprinkler Fitters Local Union No. 669, our Grinnell subsidiary declared that negotiations were at an impasse and implemented its last best and final offer. Employees in those locations, representing 64% of Grinnell Fire Protection's North American union employees at the time (approximately 1,200 employees), went on strike. In January 2001, the United States Court of Appeals for the Fourth Circuit determined that while Grinnell had acted in good faith, the Company should not have declared an impasse. The court ordered the reinstatement of the terms of the 1994 collective bargaining agreement, instructed the Company to compensate any employees affected by the Company's decision to declare an impasse and ordered the parties to return to their negotiations. It was also in January 2001 that Tyco acquired Simplex Time Recorder Co. In January 2002, Grinnell Fire Protection and Simplex Time Recorder Co. began doing business as SimplexGrinnell LP (an indirect wholly-owned subsidiary of Tyco). As instructed by the court, SimplexGrinnell reinstated relevant terms of the 1994 collective bargaining agreement, made whole any affected employees (approximately 2% of SimplexGrinnell's employee population) and resumed negotiations with Local Union No. 669. Despite the Company's good faith attempts to continue negotiations, the Union called another strike in September 2003. This strike is ongoing and has not had any material effect on the Company's operations.

Environmental Matters

        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

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hazardous materials; emissions or discharges of substances into the environment; and the health and safety of our employees. The cost of compliance with environmental laws, however, has not had, and based on current information and applicable laws, is not expected to have, a material adverse effect upon our capital expenditures, earnings or competitive position.

        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. In addition to cleanup actions brought by governmental authorities, private parties could bring personal injury or other claims due to the presence of or exposure to hazardous substances. We have received notification from the United States Environmental Protection Agency, and from state environmental agencies, that conditions at a number of sites where we and others disposed of hazardous substances require cleanup and other possible remedial action and may require that we reimburse the government or otherwise pay for the cost of cleanup of those sites and/or for natural resource damages. We have projects underway at a number of current and former manufacturing facilities to investigate and remediate environmental contamination resulting from past operations.

        The ultimate cost of cleanup at disposal sites and manufacturing facilities is difficult to predict given uncertainties regarding the extent of the required cleanup, the interpretation of applicable laws and regulations and alternative cleanup methods. Based upon our experience, current information and applicable laws, we believe that it is probable that we would incur remedial costs in the range of approximately $167 million to $443 million. As of September 30, 2004, we believe that the best estimate within this range is approximately $265 million, of which $42 million is included in accrued expenses and other current liabilities and $223 million is included in other long-term liabilities on the Consolidated Balance Sheets. In view of our financial position and reserves for environmental matters of $265 million, we believe that any potential payment of such estimated amounts will not have a material adverse effect on our financial position, results of operations or cash flows.

Available Information

        Our Internet website is www.tyco.com. We make available free of charge on our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, reports filed pursuant to Section 16 and amendments to those reports as soon as reasonably practicable after we electronically file or furnish such materials to the Securities and Exchange Commission. In addition, we have posted the charters for our Audit Committee, Compensation and Human Resources Committee, and Nominating and Governance Committee, as well as our Board Governance Principles and Guide to Ethical Conduct, on our website under the heading "Our Commitment—Governance." These charters and principles are not incorporated in this report by reference. We will also provide a copy of these documents free of charge to shareholders upon request.

Item 2.    Properties

        Our operations are conducted in facilities throughout the world aggregating approximately 109 million square feet of floor space, of which approximately 59 million square feet are owned and approximately 50 million square feet are leased. These facilities house manufacturing, distribution and warehousing operations, as well as sales and marketing, engineering and administrative offices.

        Fire and Security operates through a network of offices located in North America, Central America, South America, Europe, the Middle East, the Asia-Pacific region and South Africa. Manufacturing facilities are located in North America, the United Kingdom, Germany, Australia, New Zealand, South Korea and Japan. The group occupies approximately 22 million square feet, of which 5 million square feet are owned and 17 million square feet are leased.

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        Electronics has manufacturing facilities in North America, Central and South America, Europe, Asia and Australia. The group occupies approximately 32 million square feet, of which 21 million square feet are owned and 11 million square feet are leased.

        Healthcare has manufacturing facilities in North America, Europe, the Middle East and Asia. The group occupies approximately 22 million square feet, of which 13 million square feet are owned and 9 million square feet are leased.

        Engineered Products and Services has manufacturing facilities, warehouses and distribution centers throughout North America, Europe, the Asia-Pacific region and Central and South America. The group occupies approximately 23 million square feet, of which 13 million square feet are owned and 10 million square feet are leased.

        Plastics and Adhesives has manufacturing facilities in North America, Europe and Asia. The group occupies approximately 10 million square feet, of which 7 million square feet are owned and 3 million square feet are leased.

        In the opinion of management, our properties and equipment are in good operating condition and are adequate for our present needs. We do not anticipate difficulty in renewing existing leases as they expire or in finding alternative facilities. See Note 18 to Consolidated Financial Statements for a description of our lease obligations.

Item 3.    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. Most 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 eight 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 In Re Tyco International Securities Litigation, a Consolidated Securities Class Action Complaint against certain of our former directors and officers, our former auditors and Tyco in the United States District Court for the District of New Hampshire. 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 shares; 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. On October 14, 2004, the Court granted Tyco's motion, in part, and denied it in part. The Court granted Tyco's motion to dismiss Count II of the Consolidated Amended Complaint alleging a violation of Section 14(a) of the Securities Exchange Act of 1934 and Rule 14a-9 promulgated thereunder against all defendants. The Court denied Tyco's

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motion to dismiss Count I alleging a violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, as well as Counts V and VI alleging violations of Sections 11 and 12(a)(2) of the Securities Act of 1933. In addition, the Court granted former director Michael Ashcroft's motion to dismiss Count I alleging a violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, Counts III and IV alleging a violation of Sections 20(a) and 20A of the Securities Exchange Act of 1934, respectively, and Count VII alleging a violation of Section 14 of the Securities Act of 1933.

        A class action complaint was filed in the United States District Court for the Southern District of Florida, Ezra Charitable Trust v. Tyco International Ltd., on May 28, 2003, plaintiff purports to represent a class of purchasers of Tyco securities between December 30, 2002 and March 12, 2003. Plaintiff names as defendants Tyco and Edward D. Breen, Tyco's current Chairman and Chief Executive Officer. The complaint asserts a cause of action under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder against both defendants. As against defendant Breen, the complaint asserts a cause of action under Section 20(a) of the Securities Exchange Act of 1934. The complaint alleges that defendants violated the securities laws by making materially false and misleading statements and omissions concerning, among other things, Tyco's financial and operating condition and financial prospects for Tyco and its ADT business segment and the results of its investigation of its former management. The Judicial Panel on Multidistrict Litigation has transferred this action to the United States District Court for the District of New Hampshire. The Company has moved to dismiss the complaint, which remains pending before the court.

        On June 3, 2004, an action was filed in the Superior Court of the State of California for the County of Los Angeles, Hess v. Tyco International Ltd., et al. Plaintiffs name as additional defendants PricewaterhouseCoopers LLP, L. Dennis Koslowski, Mark H. Schwartz, Mark Belnick, Lord Michael A. Ashcroft, Joshua M. Berman, Richard S. Bodman, John F. Fort, Steven W. Foss, Wendy E. Lane, James S. Passman, W. Peter Slusser and Joseph F. Welch. Plaintiffs' complaint asserts claims of fraud, negligent representation, aiding and abetting, breach of fiduciary duty, tortious interference with fiduciary relationship and conspiracy arising out of an underlying settlement of litigation brought by shareholders in Progressive Angioplasty Systems, Inc. where the plaintiffs received Tyco stock as consideration. On September 27, 2004, the Company entered into a stipulation with the plaintiffs staying the litigation during the pendancy of plaintiffs' National Association of Securities Dealers, Inc. arbitration to which Tyco is not a party.

        Four plaintiffs filed a civil complaint in the United States District Court for the Eastern District of Michigan in Wilson v. Tyco International Ltd., et al. on June 3, 2003. Plaintiffs named as defendants Tyco International Ltd., Tyco International (US), Tyco Acquisition Corp. VII and Earth Tech EMS Holdings Inc., d/b/a Earth Tech. The complaint asserts causes of action for breach of contract, negligent misrepresentation, fraudulent misrepresentation and exemplary damages. Plaintiffs allege that during the course of negotiations for the acquisition of two companies by Earth Tech, a division of Tyco, defendants made material misrepresentations to plaintiffs and that after the contracts of sale had been finalized, breached material terms of the contracts. Plaintiffs also allege that defendants engaged in accounting manipulations that caused significant harm to the two companies and that, as a result, plaintiffs were denied fair payment for their companies, which lost fair market value. The Judicial Panel on Multidistrict Litigation conditionally transferred this action to the United States District Court for the District of New Hampshire. On December 9, 2003, however, the Judicial Panel on Multidistrict Litigation vacated the conditional transfer order and remanded this action to the United States District Court for the Eastern District of Michigan.

        A class action was filed on July 28, 2003 in the United States District Court for the District of New Jersey, Stumpf v. Tyco International, Ltd. et al. Plaintiff purports to represent a class of purchasers of TyCom, LTD ("TyCom") securities between July 26, 2000 and October 19, 2001. Plaintiff names as defendants Tyco, TyCom, Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith, Citigroup and

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certain former Tyco and TyCom executives. The complaint asserts causes of action under Sections 11 and 15 of the Securities Act of 1933 and under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder against Tyco, TyCom, and certain former executives. The complaint alleges the TyCom registration statement and prospectus was inaccurate, misleading and failed to disclose facts necessary to make the registration statement and prospectus not misleading. Further, the complaint alleges the defendants violated securities laws by making materially false and misleading statements and omissions concerning, among other things, executive compensation and Tyco's and TyCom's finances and business prospects. On November 10, 2003, the District Court of New Jersey granted one plaintiff's motion for appointment as lead plaintiff and consolidated the action with O'Loughlin v. Tyco International, Inc. et al., described below. The Judicial Panel on Multidistrict Litigation has transferred this action to the United States District Court for the District of New Hampshire.

        A class action was filed on September 26, 2003 in the United States District Court for the District of New Jersey, O'Loughlin v. Tyco International, Ltd. et al., purporting to represent a class of purchasers of TyCom securities between July 26, 2000 to October 19, 2001. Plaintiffs name as defendants Tyco, TyCom, Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith, Citigroup and certain former Tyco and TyCom executives. The complaint asserts causes of action under Sections 11 and 15 of the Securities Act of 1933 and under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder against Tyco, TyCom, and certain former executives. The complaint alleges the TyCom registration statement and prospectus was inaccurate, misleading and failed to disclose facts necessary to make the registration statement and prospectus not misleading. Further, the complaint alleges the defendants violated securities laws by making materially false and misleading statements and omissions concerning, among other things, executive compensation and Tyco's and TyCom's finances and business prospects. The Judicial Panel on Multidistrict Litigation has transfered this action to the United States District Court for the District of New Hampshire.

        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, New Jersey v. Tyco, in the United States District Court for the District of New Jersey against Tyco, our former 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 former auditors, and certain of the individual defendants for violation of, aiding and abetting violation of, and conspiracy to violate the New Jersey RICO Statute. Finally, claims are asserted against the individual defendants and our former 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

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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. 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. The Judicial Panel on Multidistrict Litigation has transferred the action to the United States District Court for the District of New Hampshire. Plaintiff has moved to have the action remanded to the Florida state court.

        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 former 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. Plaintiffs in these actions have moved to have their cases remanded to the Florida state court.

        The Hromyak complaint purports to bring suit on behalf of persons who exchanged their United States Surgical Corporation ("U.S. Surgical") stock for shares of Tyco in connection with our acquisition of U.S. Surgical in or about October of 1998. The complaint alleges that the registration statement filed in connection with the U.S. 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 shares for shares of Tyco in connection with our acquisition of TyCom in or about December 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

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Scott acquisition contained false and misleading statements concerning, among other things, financial disclosures concerning certain of our mergers and acquisitions and accounting therefor.

        As previously reported in our periodic filings, in January 2003, an additional class action complaint was filed in the Circuit Court for Palm Beach County, Florida, Mandel v. Tyco International Ltd., asserting causes of action against Tyco and certain of our former officers and directors. The complaint purports to bring suit on behalf of persons who exchanged their Mallinckrodt, Inc. ("Mallinckrodt") stock for shares of Tyco in connection with our acquisition of Mallinckrodt in October 2000. The complaint alleges that the registration statement filed in connection with the Mallinckrodt acquisition contained false and misleading statements concerning, among other things, financial disclosures concerning certain of our mergers and acquisitions and accounting therefor. The Judicial Panel on Multidistrict Litigation has transferred this action to the United States District Court for the District of New Hampshire. Plaintiff has moved to have the action remanded to the Florida state court.

        A class action was filed in the Circuit Court of Cook County, Illinois in June 2002, Brazen v. Tyco International Ltd., et al. Plaintiff asserts claims under the Securities Act of 1933, and seeks class certification, compensatory damages and attorneys' fees and expenses. Plaintiff purports to bring suit on behalf of persons who exchanged their Mallinckrodt Inc. stock for shares of Tyco in connection with the October 17, 2000 merger of the two companies. The complaint alleges that the registration statement filed in connection with the Mallinckrodt acquisition contained false and misleading statements concerning, among other things, financial disclosures concerning certain of our mergers and acquisitions and accounting therefor. The defendants removed the action from Illinois state court to the United States District Court for the Northern District of Illinois. The plaintiff moved to have his action remanded to the Illinois state court. In December 2002, the Judicial Panel on Multidistrict Litigation transferred the action to the United States District Court for the District of New Hampshire. On August 7, 2003, plaintiff renewed his motion for remand, and on August 25, 2003, Tyco opposed the motion. The motion is pending before the Court.

        On June 21, 2004 the United States District Court for the District of New Hampshire granted plaintiffs' motion in Brazen v. Tyco International Ltd., Hromyak v. Tyco International Ltd., Goldfarb v. Tyco International Ltd., Mandel v. Tyco International Ltd., Myers v. Tyco International Ltd., Rappold v. Tyco International Ltd., and Schuldt v. Tyco International Ltd., which were consolidated for pretrial proceedings in the district court, to remand their cases to the state courts in which they were originally filed. The Company has appealed to the United States Court of Appeals for the First Circuit the district court's decision to remand Brazen to the Cook County Circuit Court and Hromayk, Goldfarb, Mandel, Myers, Rappold and Schuldt to the Palm Beach Circuit Court.

        On January 31, 2003 a civil action was filed in the United States District Court for the District of New Jersey, Cirella v. Tyco International et al. Plaintiff names as defendants Tyco International Ltd., Dennis Kozlowski, Mark H. Swartz and Mark A. Belnick. 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 Rule 10b-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 share 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 transferred the action to the United States District Court for the District of New Hampshire.

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        An action was filed on January 20, 2004 in the United States District Court for the Southern District of New York, Ballard v. Tyco International Ltd., et al. Plaintiffs are former AMP shareholders who received Tyco stock in connection with Tyco's merger with AMP. Plaintiffs name as defendants Tyco International Ltd., PricewaterhouseCoopers LLP, former officers L. Dennis Kozlowski, Mark Swartz, Mark Belnick and former directors Frank Walsh and Michael Ashcroft. The complaint asserts causes of action under Sections 10(b), 14(a) and 20(a) of the Securities Exchange Act of 1934, Sections 11 and 12 (a)(2) of the Securities Act of 1933, common law fraud and negligent misrepresentation. The complaint seeks an award of compensatory and exemplary damages. Tyco has requested the Judicial Panel on Multidistrict Litigation transfer the action to the United States District Court for the District of New Hampshire. The Company has moved to dismiss the complaint, which remains pending before the court.

        A class action was filed on December 9, 2003, in the Circuit Court of Cook County, Illinois, Davis v. Kozlowski, et al. purporting to represent a class of persons who held Tyco securities prior to December 13, 1999 through June 3, 2002. Plaintiff names as defendants L. Dennis Kozlowski, Mark Swartz, Mark Belnick, Frank Walsh, Michael Ashcroft, PricewaterhouseCoopers LLP, Phua Young and Merrill Lynch, Pierce, Fenner & Smith Incorporated. The complaint asserts claims of common law fraud against all defendants, breach of fiduciary duties against individual defendants, negligent misrepresentation against PricewaterhouseCoopers and aiding and abetting a breach of fiduciary duty against PricewaterhouseCoopers and Merrill Lynch, Pierce, Fenner & Smith. The Company has removed the complaint to the United States District Court for the Northern District of Illinois and the Judicial Panel on Multidistrict Litigation has transfered the action to the United States District Court for the District of New Hampshire. The plaintiff has moved to remand the case to the Circuit Court of Cook County, Illinois, which motion remains pending before the court.

        On September 30, 2003, a complaint, Sciallo v. Tyco International Ltd., et al., was filed in the United States District Court for the Southern District of New York. The plaintiffs purport to be former executives of U.S. Surgical who traded their U.S. Surgical stock options for Tyco International, Ltd. stock options when Tyco acquired U.S. Surgical on October 1, 1998. Plaintiffs name as defendants Tyco International Ltd. and certain former Tyco directors and executives. The 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 and negligence, and violation of New York General Business Law Section 349, which prohibits deceptive acts and practices in the conduct of any business. The complaint alleges that defendants made materially false and misleading statements and omissions concerning, among other things, Tyco's financial condition and accounting practices. The Judicial Panel on Multidistrict Litigation has transferred this action to the United States District Court for the District of New Hampshire.

        On September 2, 2004, a complaint was filed in the Court of Common Pleas for Dauphin County, Pennsylvania, Jasin v. Tyco International Ltd., et. al. This pro se plaintiff named as additional defendants Tyco International (US) Inc., L. Dennis Kozlowski, our former Chairman and Chief Executive Officer, Mark H. Swartz, our former Chief Financial Officer and Juergen W. Gromer, currently President of Tyco Electronics. Plaintiff's complaint asserts causes of action under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, as well as Section 11 of the Securities Act of 1933. Claims against Messrs. Kozlowski, Swartz and Gromer are also asserted under Section 14(a) of the Securities Exchange Act of 1934 and Rule 14a-9 promulgated thereunder and Section 20A of the Securities Exchange Act of 1934, as well as Sections 11, 12(a)(2) and 15 of the Securities Act of 1933. Plaintiff also asserts common law fraud, negligent misrepresentation, unfair trade practice, breach of contract, breach of the duty of good faith and fair dealing and violation of Section 1-402 of the Pennsylvania Securities Act of 1972. Tyco has removed the complaint to the United States District Court for the Middle District of Pennsylvania. The Judicial Panel on Multidistrict Litigation has transferred this action to the United States District Court for the District of New Hampshire. The plaintiff has moved to vacate the conditional transfer order.

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        On September 27, 2004, an amended action was filed in the United States District Court for the Middle District of North Carolina, Hall v. Tyco International Ltd., et. al. This pro se plaintiff names as additional defendants, Tyco International (US) Inc., Tyco Electronics, AMP, Inc. and The Retirement Committee of Tyco International (US) Inc. Plaintiff's complaint asserts claims of breach of contract and securities fraud. 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, numerous 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. Three such actions were pending as of the filing of our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004, all of which have since been dismissed as discussed below.

        On June 18, 2002, an action, Shelley Evans v. L. Dennis Kozlowski, et al., was filed in the United States District Court for the District of New Hampshire, alleging that the individually named defendants breached their fiduciary duties and committed waste and mismanagement in connection with the compensation of certain board members and their use of corporate assets for their own benefit. Plaintiff sought money damages, declaratory relief, and the removal and replacement of the director defendants. The court dismissed this action in its entirety against all defendants on October 14, 2004.

        On June 21, 2002, an action, Joan L. Weisberg v. L. Dennis Kozlowski, et al., was filed in the United States District Court for the Southern District of New York, alleging that the individually named defendants breached their fiduciary duties and committed waste in connection with Tyco's accounting practices, individual board members' use of funds, and the compensation of certain board members. Plaintiff sought money damages, injunctive relief, and an equitable accounting. Defendants requested that the Judicial Panel on Multidistrict Litigation treat this as a related action and transfer the suit to the District of New Hampshire for coordinated or consolidated pretrial proceedings. The court dismissed this action in its entirety against all defendants on October 14, 2004.

        On August 2, 2002, an action, Paul Manko v. L. Dennis Kozlowski, et al., was filed in the United States District Court for the District of New Hampshire, alleging that the individually-named defendants breached their fiduciary duties and committed waste and mismanagement in connection with Tyco's accounting practices, individual board members' use of funds, and the Company's financial disclosures. Plaintiffs sought summary damages. The court dismissed this action in its entirety against all defendants on October 14, 2004.

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 ("the Plans") and the participants therein.

        Two of the actions, Peterson v. Tyco International Ltd. and Swanson v. Tyco International Ltd., were filed in the United States District Court for the District of New Hampshire, and the six remaining actions, Overby v. Tyco, Dunne v. Tyco, Jepson v. Tyco, Gordon v. Tyco, Konyn v. Tyco and Johnson v. Tyco, 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, Overby v. Tyco, asserting causes of action under ERISA. That complaint named as defendants Tyco and certain of its

19

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 shares 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. On November 6, 2003, the plaintiffs filed a motion seeking to add eleven current and former employees as defendants. On December 2, 2004, the United States District Court for the District of New Hampshire granted Tyco's motion, in part, and denied it in part. The court granted Tyco's motion to dismiss two employee defendants, all former directors of Tyco International Ltd. and the former officers of Tyco International Ltd., other than the former Chief Executive Officer, as defendants in the case. The court also dismissed Count II asserting negligent misrepresentation claims against Tyco International Ltd. and its former Chief Executive Officer. The court denied Tyco's motion to dismiss Count I alleging breach of fiduciary duty against Tyco International Ltd., Tyco International (US) Inc., the Board of Directors of Tyco International (US) Inc., the Tyco (US) Retirement Committee and the former Chief Executive Officer of Tyco International Ltd, as well as Count II alleging negligent misrepresentation against Tyco International (US) Inc., the Tyco (US) Retirement Committee and the Board of Directors of Tyco International (US) Inc.

        In addition, Tyco 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 shares. 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 share bonuses without Board approval; took interest-free loans from our relocation program without Board approval; failed to disclose to the Board and to the Securities and Exchange Commission ("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

20

damages. The Judicial Panel on Multidistrict Litigation has transferred this action to the United States District Court for the District of New Hampshire.

        On October 21, 2002, in a related proceeding, Mark Belnick has commenced an arbitration proceeding in New York County, New York seeking to enforce the terms of an alleged executive retention agreement with the Company and to recover unspecified damages. The Company has not filed an answer to the statement of claim.

        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 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. 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 former Chairman and Chief Executive Officer's conduct, and of all remuneration, including restricted and unrestricted shares 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,

21

including restricted and unrestricted shares and options, obtained by Mr. Swartz during the course of this conduct. The Judicial Panel on Multidistrict Litigation has transferred this action to the United States District Court for the District of New Hampshire. Mr. Swartz moved to dismiss Tyco's complaint and to compel arbitration of the parties' respective claims. The court denied Swartz' motion and he has appealed the court's decision to the United States Court of Appeals for the First Circuit.

        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 and Document Requests From Governmental Entities

        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 with these investigations and are complying with these requests.

        Certain current and former employees in Fire and Security received subpoenas from the SEC's Division of Enforcement seeking testimony related to past accounting practices for the ADT dealer connect fees. As previously reported in our periodic filings, these practices have been discontinued.

        The United States Department of Labor served document subpoenas on Tyco and Fidelity Management Trust Company for documents concerning the administration of the Tyco International (US) Inc. Retirement Savings and Investment Plans. The current focus of the Department's inquiry remains the 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. The Company is continuing to cooperate with the Department's investigation.

        In November 2004, we received an order from the SEC to report facts and circumstances involving our participation, if any, in the United Nations Oil for Food Program governing sales of Iraqi oil. We are gathering information responsive to the order and will fully cooperate in ongoing investigations.

Intellectual Property Litigation

        Mallinckrodt, Inc. ("Mallinckrodt") and Nellcor Puritan Bennett, Inc. ("Nellcor"), plaintiffs/counter-defendants v. Masimo Corporation ("Masimo") et al., defendants/counter-claimants, is a consolidated patent infringement action in the United States District Court for the Central District of California. Nellcor alleges that Masimo infringed one Nellcor patent related to pulse oximeters, which are medical devices used to measure blood oxygen levels in patients, and Masimo alleges that Nellcor infringed four Masimo patents related to pulse oximeters. Trial in the action commenced on February 18, 2004. On March 16, 2004, the jury returned a liability finding that Nellcor willfully infringed the four Masimo patents and that Masimo did not infringe the one Nellcor patent. On March 26, 2004, the jury awarded Masimo $134.5 million in damages for Nellcor's alleged infringement through December 31, 2003. After hearing post-trial motions, the district court issued an order on July 14, 2004 which (i) denied Masimo's request to impose an injunction on the sale of pulse oximeters; (ii) reversed the jury finding of patent infringement for one of the four patents at issue; (iii) ruled that a second patent was unenforceable due to Masimo's inequitable conduct in seeking the patent; and (iv) overturned the jury finding that the infringement was "willful." On August 6, 2004, the district court entered final judgment

22

that included additional damages of $29.5 million for Nellcor's alleged infringement from January 1, 2004 through May 31, 2004. Nellcor is appealing the jury's infringement finding on the remaining two Masimo patents to the United States Court of Appeals for the Federal Circuit. The briefing for the appeal is scheduled to be completed by February 28, 2005. The Court of Appeals has not yet scheduled oral argument for the appeal. Tyco has assessed the status of this matter and has concluded that it is more likely than not that the jury's decision will be overturned and, further, Tyco intends to vigorously pursue all available means to achieve such reversal. Accordingly, no provision has been made in Tyco's Consolidated Financial Statements with respect to this damage award.

        Masimo Corporation v. Tyco Healthcare Group LP ("Tyco Healthcare") and Mallinckrodt, Inc. is a separate lawsuit also pending in the United States District Court for the Central District of California. Tyco Healthcare and Mallinckrodt are subsidiaries of Tyco. In this lawsuit, Masimo alleges violations of antitrust laws against Tyco Healthcare and Mallinckrodt in the markets for pulse oximeter products. Masimo alleges that Tyco Healthcare and Mallinckrodt used their market position to prevent hospitals from purchasing Masimo's pulse oximetry products. Masimo seeks injunctive relief and monetary damages, including treble damages. Trial is scheduled to begin on February 22, 2005. At this time, Tyco cannot predict the outcome of the antitrust case and, therefore, it is not possible to estimate the amount of loss or the range of potential losses that might result from an adverse judgment or settlement in this matter. It is possible that Tyco will be required to pay an award of damages in the antitrust lawsuit.

        Applied Medical Resources Corp. ("Applied Medical") v. United States Surgical ("U.S. Surgical") is a patent infringement action in which U.S. Surgical, a subsidiary of Tyco, is the defendant. In February 2002, the United States 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 district court entered a permanent injunction against U.S. Surgical based upon infringement of one of the three patents involved in the suit. The United States Court of Appeals for the Federal Circuit affirmed the district court's permanent injunction ruling in September 2003 for the VERSASEAL product, which is no longer on the market. In October 2003, the district court ruled in U.S. Surgical's favor, holding that two other patents involved in the case were invalid. A trial on damages for the earlier infringement ruling in the district court concluded on July 27, 2004. The jury awarded Applied Medical $43.5 million in damages and returned a finding that the earlier infringement was willful, giving the district court discretion to enhance those damages to up to treble the damages awarded to Applied Medical by the jury. On October 1, 2004, the district court issued post-trial rulings that (i) denied U.S. Surgical's motion to set aside the jury's finding on willfulness; and (ii) granted Applied Medical's motion for enhanced damages, enhancing the jury's damages award by 25%, or $11 million. The district court will also consider during post trial proceedings what pre-judgment interest, if any, should be awarded, and whether Applied Medical is entitled to an award of attorneys' fees. After the proceedings are completed at the district court, U.S. Surgical will appeal the damages award and the willfulness finding to the court of appeals. Tyco has recorded a liability related to this matter and does not expect to incur material losses beyond what has already been accrued.

        On July 31, 2003, Applied Medical filed another patent infringement suit against U.S. Surgical in the United States District Court for the Central District of California. The complaint alleges that U.S. Surgical's VERSASEAL Plus trocar product infringes Applied Medical's U.S. Patent No. 5,385,533. Applied Medical seeks injunctive relief and unspecified monetary damages, including enhanced damages for alleged willful infringement. Applied Medical filed a motion for a preliminary injunction, which the district court denied on December 23, 2003. Trial is currently scheduled to commence in March 2005. At this time, Tyco cannot predict the outcome of this patent infringement case and, therefore, it is not possible to estimate the amount of loss or range of potential losses that might result from an adverse judgment or settlement in this matter.

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Environmental Litigation

        On August 17, 2004, Tyco Printed Circuit Group, Limited Partnership ("TPCG"), a business within our Electronics segment, was sentenced for Clean Water Act violations at three of its manufacturing facilities in Connecticut, pursuant to which it has paid a $6 million fine and an additional $4 million to fund environmental projects designed to improve the environment for Connecticut residents. TPCG will also implement an environmental compliance plan at all TPCG printed circuit board manufacturing locations in the United States to supplement existing environmental compliance programs and engage an independent third party to conduct an environmental audit of two TPCG manufacturing facilities in Connecticut. The United States Attorney's Office for the District of Connecticut has stated in a publicly filed court submission that there was no concrete evidence of environmental harm as a result of these violations and that no one above the position of environmental health and safety manager at TPCG at its Connecticut facilities knew of, or was involved in, these violations.

        In September 2004, the Connecticut State Superior Court in Hartford, Connecticut entered a stipulated judgment executed by and among TPCG, the Connecticut Commissioner of the Department of Environmental Protection (the "DEP") and the Connecticut Attorney General's Office with respect to a civil suit against TPCG, which suit alleged violations of Connecticut environmental statutes and regulations arising out of the conduct investigated by the federal authorities at these same three facilities. Pursuant to this stipulated judgment, TPCG paid a $2 million civil penalty to the DEP in October 2004, and will implement capital improvements to reduce the volume of wastewater discharged from its manufacturing facilities in Connecticut.

        On certain dates in 2002 and 2003, a business within our Engineered Products and Services segment reported purportedly incorrect data relating to landfill gas monitoring at four landfill sites in Ohio. Our business is the contractor providing landfill gas monitoring and operations services at those sites. The reporting of this purportedly incorrect data may form the basis for potential violations of the Clean Air Act and related state laws and regulations. To our knowledge, no action or proceeding has been filed by any state or federal authority in this matter to date. We have disclosed this matter to our clients involved and to the City of Toledo, the Ohio Environmental Protection Agency and the United States Environmental Protection Agency.

        On July 8, 2003, a fire accidentally ignited inside an oil storage tank that our Earth Tech subsidiary was demolishing at a power plant in Moss Landing, California. No injuries resulted from the fire. Earth Tech has settled a civil enforcement action commenced by the Monterey County District Attorney's Office and has paid a total amount of $900,000 in civil penalties and restitution. Additionally, as part of this civil settlement, Earth Tech has agreed to spend a minimum of $300,000 on employee education, training and compliance related to safety, health and environmental requirements and procedures.

Commercial Litigation

        Sensormatic v. Winner and Bagnara, Inc. is a franchise dispute for which Sensormatic originally filed a complaint in 1999 in the United States District Court for the Western District of Pennsylvania seeking declaratory relief. On June 28, 2004, the district court entered a stipulated judgment fixing the amount of the defendant's past damages and commissions for royalties allegedly owed under the franchise agreement in the amount of $28 million, plus $5 million in pre-judgment interest, and the entry of an injunction requiring Sensormatic to tender the franchise to the defendant. The judgment stays the imposition and payment of these damages and injunctive relief until resolution of an appeal of the district court's underlying rulings on liability to the United States Court of Appeals for the Third Circuit. In the event the district court's rulings are affirmed, Sensormatic will be required to pay the amount of stipulated damages and tender the franchise. On June 29, 2004, Sensormatic filed its Notice of Appeal to the court of appeals. Tyco intends to vigorously pursue all available means to achieve a reversal. The company does not expect to incur material losses beyond what has already been accrued.

Item 4.    Submission of Matters to a Vote of Security Holders

        None.

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PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
        Purchases of Equity Securities

        The number of registered holders of Tyco's common shares at December 7, 2004 was 48,788.

        Tyco common shares are listed and traded on the New York Stock Exchange ("NYSE") and the Bermuda Stock Exchange under the symbol "TYC." The following table sets forth the high and low closing sales prices of Tyco common shares as reported by the NYSE, and the dividends paid on Tyco common shares, for the quarterly periods presented below.

Dividend Policy

        We may from time to time enter into financing agreements that contain financial covenants and restrictions, some of which may limit the ability of Tyco to pay dividends. Future dividends on our common shares, if any, will be at the discretion of Tyco's Board of Directors and will depend on, among other things, our results of operations, cash requirements and surplus, financial condition, contractual restrictions and other factors that the Board of Directors may deem relevant. On December 9, 2004, the Board of Directors approved an increase in the quarterly dividend on our common shares from $0.0125 to $0.10 per share. The dividend is payable on February 1, 2005 to shareholders of record as of January 3, 2005.

Issuer Purchase of Equity Securities

⁽¹⁾

Transactions represent the purchase of restricted shares from employees to satisfy tax withholding requirements on such equity-based transactions. None of these transactions were made in the open market. The average price paid per share is based upon the high and low closing sales prices on the NYSE on the date of the transaction.

⁽²⁾

Transactions represent the repurchase of a portion of the Company's outstanding convertible debt prior to its scheduled maturity. (See Note 15 to the Consolidated Financial Statements). The average price paid per share is calculated by dividing the total cash paid for the debt by the number of underlying shares of the debt.

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Item 6.    Selected Financial Data

        The following table sets forth selected consolidated financial data of Tyco. This data is derived from Tyco's consolidated financial statements for the five years ended September 30, 2004. This selected financial data should be read in conjunction with Tyco's Consolidated Financial Statements and related notes included elsewhere in this Annual Report as well as the section of this Annual Report titled Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

⁽¹⁾

Income from continuing operations for the year ended September 30, 2004 includes net restructuring charges of $256 million, charges for the impairment of long-lived assets of $99 million, a loss of $284 million related to the retirement of debt and a charge of $116 million related to divestitures. Net income also includes a $3 million loss, net of income taxes, from discontinued operations and a $123 million loss on sale of discontinued operations, net of income taxes.

⁽²⁾

In 2003, Tyco consolidated variable interest entities in accordance with the transition provisions of FIN 46, as more fully described in Note 9 to the Consolidated Financial Statements. As a result, Tyco recorded a cumulative effect adjustment of $75 million, net of income taxes.

⁽³⁾

Income from continuing operations for the year ended September 30, 2003 includes charges for the impairment of long-lived assets of $815 million, charges for changes in estimates of $389 million which arose from the Company's intensified internal audits and detailed controls and operating reviews (includes net restructuring credits of $72 million and charges for the impairment of long-lived assets of $10 million), other charges of $148 million, charges for the impairment of goodwill of $278 million, a net loss related to the retirement of debt of $128 million, a charge of $91 million for a retroactive incremental premium on prior period directors and officers insurance, a charge of $12 million relating to the write-down of investments, other interest expense of $2 million, other interest income of $19 million, and net restructuring credits of $12 million. Net income also includes $20 million of income, net of income taxes, from discontinued operations.

⁽⁴⁾

Loss from continuing operations for the year ended September 30, 2002 includes net restructuring and other charges of $1,872 million, charges of $3,310 million for the impairment of long-lived assets, goodwill impairment charges of $1,344 million, and a charge for the write-off of purchased research and development

26

of $18 million. In addition, loss from continuing operations for the year ended September 30, 2002 includes a loss on investments of $271 million, a net gain on divestiture of $24 million and $30 million of income relating to the retirement of debt. Net loss also includes a $6,270 million loss, net of income taxes, from discontinued operations and a $59 million loss on sale of discontinued operations for the year ended September 30, 2002.

⁽⁵⁾

In 2001, Tyco changed its revenue recognition accounting policy to conform to the requirements of Staff Accounting Bulletin No. 101 issued by the Staff of the Securities and Exchange Commission. As a result, Tyco recorded a cumulative effect adjustment of $654 million, net of income taxes. Pro forma amounts for 2000 have not been presented since the effect of the change in accounting principles for that period could not be reasonably determined. In 2001, Tyco also recorded a cumulative effect adjustment of $29 million, net of income taxes, in accordance with the transition provisions of Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities."

⁽⁶⁾

Income from continuing operations for the year ended September 30, 2001 includes a net charge of $585 million for restructuring and other charges, a charge for the write-off of purchased in-process research and development of $184 million and charges of $120 million for the impairment of long-lived assets. Income from continuing operations for the year ended September 30, 2001 also includes a net gain on sale of businesses of $410 million, a loss on investments of $134 million, a loss of $26 million relating to the retirement of debt and a net gain on the sale of common shares of a subsidiary of $25 million. Net income includes $280 million of income, net of income taxes, from discontinued operations for the year ended September 30, 2001.

⁽⁷⁾

The increase in assets in 2001 is primarily attributable to the acquisition of The CIT Group, Inc. ("CIT") which increased assets by $11 billion, as well as a $12 billion increase in goodwill related to acquisition activity during the year.

⁽⁸⁾

Income from continuing operations for the year ended September 30, 2000 includes a net charge of $176 million for restructuring and other charges, and charges of $99 million for the impairment of long-lived assets. Income from continuing operations for the year ended September 30, 2000 also includes a pretax gain of $1,760 million related to the sale by a subsidiary of its common shares. Net income also includes $46 million of income, net of income taxes, from discontinued operations for the year ended September 30, 2000.

⁽⁹⁾

Income from continuing operations includes goodwill amortization of $532 million and $338 million for the years ended September 30, 2001 and 2000, respectively. Effective October 1, 2001, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets," under which goodwill is no longer amortized.

⁽¹⁰⁾

Tyco has paid a quarterly cash dividend of $0.0125 per common share for all periods presented. On December 9, 2004, the Board of Directors approved an increase in the quarterly dividend on our common shares from $0.0125 to $0.10 per share. The payment of dividends by Tyco in the future will depend on business conditions, Tyco's financial condition and earnings and other factors.

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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

        The following discussion and analysis of our financial condition and results of operations should be read together with the Selected Financial Data and our Consolidated Financial Statements and the related notes included elsewhere in this Annual Report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those under the headings "Risk Factors" and "Forward-Looking Information."

Introduction

        The Consolidated Financial Statements include the consolidated accounts of Tyco International Ltd., a company organized under the laws of Bermuda, and its subsidiaries (Tyco and all its subsidiaries, hereinafter collectively referred to as "we," the "Company" or "Tyco") and have been prepared in United States dollars, and in accordance with Generally Accepted Accounting Principles in the United States ("GAAP").

        The Company operates in the following business segments:

•

Fire and Security designs, manufactures, installs, monitors and services electronic security and fire protection systems.



•

Electronics designs, manufactures and distributes electrical and electronic components.



•

Healthcare designs, manufactures and distributes medical devices and supplies, imaging agents, pharmaceuticals and adult incontinence and infant care products.



•

Engineered Products and Services designs, manufactures, distributes and services engineered products, including industrial valves and controls, as well as steel tubular goods, and provides environmental and other industrial consulting services.



•

Plastics and Adhesives designs, manufactures and distributes plastic products, adhesives and films.

        Unless otherwise indicated, references in this Annual Report to 2004, 2003 and 2002 are to Tyco's fiscal year ended September 30, 2004, 2003 and 2002, respectively.

Overview

        Our business strategy focuses on enhancing internal growth and operational efficiency for existing Tyco businesses. We achieve this goal primarily through new product innovation, increased market share, increasing the service and repair components of our existing businesses and continued geographic expansion. We have implemented and continue to implement additional Six Sigma initiatives across our business segments.

        The Company has engaged in a series of restructuring programs through which we have made our operations more efficient by exiting certain non-core businesses or business lines, or streamlining general operations. The restructuring program announced in November 2003, designed to improve our cost structure primarily in Fire and Security, but also in Plastics and Adhesives and Engineered Products and Services, was substantially completed in 2004. The impact of these restructuring programs on the operations of the Company are discussed in "Operating Results" and "Segment Results." Additionally, the details related to the Company's divestiture program and the related discontinued operations are discussed in "Divestitures and Discontinued Operations."

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        References to Tyco are to the Company's continuing operations and prior year amounts have been reclassified to exclude the results of discontinued operations. During 2004, Tyco's Precision Interconnect business was transferred from Healthcare to Electronics. During 2003, the Company finalized its plan to sell the Tyco Global Network ("TGN") and, as a result, reorganized its reporting structure such that the results of the TGN business held for sale are presented within Corporate and Other. Also during 2003, the Company changed its internal reporting structure such that the operations of Tyco's plastics and adhesives businesses (previously reported within Healthcare and Specialty Products) now comprise the Plastics and Adhesives reportable segment. The Company has conformed its segment reporting accordingly and has reclassified comparative prior period information to reflect these changes.

Operating Results

        The following table details net revenue and earnings for the years ended September 30, 2004, 2003 and 2002 ($ in millions):

        The Company made significant progress in 2004 towards meeting our strategic objectives. As described more fully in Segment Results below, over the course of 2004 we experienced solid revenue growth in Electronics, Healthcare, Engineered Products and Services, and to a lesser extent Fire and Security. We also expanded operating margins due in large part to the momentum and strong results from our operational intensity programs. In addition to the strong operating performance, favorable foreign currency exchange rates contributed positively to net revenue and operating income growth in 2004, as well as in 2003.

        Net revenue increased 11.6% during 2004 to $40.2 billion from $36.0 billion in 2003. Net revenue increased 3.3% during 2003 as compared to $34.8 billion in 2002. Tyco had income from continuing operations of $3,005 million in 2004, compared to $1,035 million in 2003, and a loss from continuing operations of $2,851 million in 2002.

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        The effect of changes in foreign exchange rates for 2004 compared to 2003 was an increase in net revenue and operating income of $1,685 million and $230 million, respectively. The effect of changes in foreign exchange rates for 2003 compared to 2002 was an increase in net revenue and operating income of $1,508 million and $191 million, respectively. The 2004 and 2003 impact of foreign currency was primarily due to the strengthening of the Euro against the U.S. Dollar.

        Income from continuing operations for 2004 included net charges totaling $755 million ($564 million after tax), consisting of the following: (i) charges for the impairment of long-lived assets of $99 million, of which $34 million is attributable to machinery and equipment impairments at Fire and Security; (ii) net restructuring and other charges of $256 million, of which charges of $7 million are included in cost of sales; (iii) net losses and impairments on divestitures totaling $116 million; (iv) a loss of $284 million associated with the retirement of debt; and (v) a $5 million write-down of investments.

        Income from continuing operations for 2003 included net charges totaling $1,832 million ($1,566 million after-tax) consisting of the following: (i) charges for the impairment of long-lived assets of $815 million; (ii) charges recorded for changes in estimates of $389 million which arose from the Company's intensified internal audits and detailed controls and operating reviews (includes net restructuring credits of $72 million, of which credits of $12 million are included in costs of sales, charges for the impairment of long-lived assets of $10 million, charges of $243 million included in selling, general and administrative expenses, charges of $123 million included in cost of sales, a charge of $76 million relating to the write-down of investments and other expense of $9 million, both of which are included in other (expenses) income, net); (iii) charges for the impairment of goodwill of $278 million; (iv) other net loss of $128 million related to the retirement of debt; (v) other charges of $148 million, of which $34 million is included in cost of sales related primarily to product warranty reserves and the dismantlement of customers' ADT security systems, and $114 million is included in selling, general and administrative expenses related primarily to uncollectible accounts receivable, internal investigation fees, as well as severance and facility closures, slightly offset by a credit for changes in estimates of charges recorded in prior periods; (vi) a charge of $91 million for a retroactive, incremental premium on prior period directors and officers insurance included in selling, general and administrative expenses; (vii) a charge of $12 million relating to the write-down of investments; (viii) other interest expense of $2 million; (ix) other interest income of $19 million; and (x) net restructuring credits of $12 million, of which charges of $2 million are included in cost of sales.

        Loss from continuing operations for 2002 included a net charge totaling $6,759 million ($6,091 million after-tax), consisting of the following: (i) goodwill impairment charge of $1,344 million relating to continuing operations; (ii) charges for the impairment of long-lived assets of $3,310 million primarily related to the write-down of the TGN; (iii) net restructuring and other charges of $1,872 million, of which $636 million is included in cost of sales and $115 million related to a bad debt provision is included in selling, general and administrative expenses; (iv) a write-off of purchased in-process research and development of $18 million; (v) a loss on the write-off of investments of $271 million; (vi) a gain on divestiture of $24 million; and (vii) gain from the retirement of debt of $30 million.

Segment Results

        The segment discussions that follow describe the significant factors contributing to the changes in results for each segment. During 2004, divestitures impacted certain of our segments as we implemented a divestiture program in early 2004. During 2003 and 2002, acquisitions were a significant element of our growth strategy and, therefore, were a significant component of our results. See further details in "Divestitures and Discontinued Operations" and "Acquisitions" below.

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Fire and Security

        The following table sets forth net revenue and operating income and margin for Fire and Security for the years ended September 30, 2004, 2003 and 2002 ($ in millions):

        Net revenue for Fire and Security increased 5.7% in 2004 as compared to 2003, including a 9.2% increase in product revenue and a 2.8% increase in service revenue. Revenue from product sales include sales and installation of security, fire protection and other systems. The increase in net revenue was primarily due to favorable currency exchange rates ($526 million) slightly offset by the effects of divestitures ($82 million). To a lesser extent, the increase in net revenue was due to stronger sales to retailers within worldwide security and higher sales volume of breathing systems and video and access control products at Tyco Safety Products. This increase was partially offset by weakness in the worldwide fire service business and Continental Europe Security.

        Operating income and margin increased significantly in 2004 as compared to 2003 due partially to total charges of $512 million which were recorded during 2003, discussed below. Additionally, the increase in operating income and margin was due to improvements within worldwide security related primarily to the combined impact of a stronger retailer market environment and cost reductions. Also contributing to the increase, to a lesser extent, were improvements within Continental Europe Security as a result of cost saving initiatives and a changing business model and Tyco Safety Products due primarily to increased volumes. The cost savings partly reflect the benefits of the restructuring activities described below. Operating income for 2004 also includes charges totaling $264 million, consisting primarily of restructuring ($175 million, of which $4 million is included in cost of sales), impairment ($34 million) and divestiture ($55 million) charges, substantially all of which are associated with the comprehensive cost reduction measures that began during 2003.

        Attrition rates for customers in our global electronic security services business decreased to an average of 15.1% on a trailing twelve-month basis for 2004, as compared to 15.9% for 2003.

        Net revenue for Fire and Security increased 6.1% in 2003 as compared to 2002, including a 3.4% increase in product revenue and an 8.5% increase in service revenue. The increase in net revenue was due to favorable changes in foreign currency exchange rates ($459 million) and 2002 acquisitions ($214 million calculated in the manner described below in "Acquisitions"). Acquisitions included SBC/Smith Alarm Systems, DSC Group ("DSC") and Sensormatic Electronics Corporation ("Sensormatic") in early 2002, and all other acquisitions with a purchase price of $10 million or more. In addition, an increase in net revenues due to customer contracts purchased through the ADT dealer program ($371 million) and generated through our internal sales force offset a decline in net revenue due to increased attrition rates in worldwide security. The overall increase was also partially offset by a decline in net revenue at the worldwide fire protection business due to softness in the commercial construction market.

        Operating income and margin decreased significantly in 2003 as compared to 2002 due to charges totaling $512 million recorded during 2003. Included within the $512 million are charges of $266 million (includes charges of $128 million primarily related to adjustments to liabilities such as workers' compensation, professional fees, and environmental exposure, a charge of $98 million primarily due to adjusting allowances for doubtful accounts and slow and non-moving inventory, as well

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as a write-off of subscriber systems, charges of $34 million for other adjustments primarily related to deferred commissions, and charges of $6 million related to reconciling items in the current period) recorded in connection with the Company's intensified internal audits, detailed controls and operating reviews performed during the year. Also included within the $512 million are impairment charges of $143 million primarily related to the impairment of intangible assets associated with the ADT dealer program mostly as a result of increased attrition rates (discussed below), and to the impairment of property, plant and equipment of subscriber systems and other fixed assets; net restructuring and other charges of $10 million, of which charges of $4 million are included in cost of sales and $3 million is for the write-off of non-current assets, related to streamlining the business; and other charges of $93 million, of which $34 million is included in cost of sales and $59 million is included in selling, general and administrative expenses, primarily related to uncollectible receivables, product warranty and the dismantlement of customers' ADT security systems. Included within the $143 million impairment charge and the $10 million net restructuring charge is a charge of $10 million and a credit of $2 million, respectively, also related to changes in estimates recorded during the quarter ended March 31, 2003. The decrease in operating income and margins 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 2002; decline in operating income in the Continental European Security business; and a weaker worldwide fire and contracting environment.

        Attrition rates for customers in our global electronic security services business averaged 15.9% on a trailing twelve-month basis for 2003, as compared to 13.2% for 2002. This increase relates to attrition in customer accounts acquired through our worldwide dealer program, as well as internally generated commercial customer accounts in continental Europe and internally generated residential customer accounts in the United States (both of which were partly driven by increased management and control of delinquent accounts). For those account pools experiencing increased attrition, prior lifing studies were re-examined. The Company concluded that existing amortization methods and asset lives continue to be appropriate given the observed actual attrition data for these pools.

        Operating income and margin in 2002 include a net restructuring and other charge of $95 million. The net $95 million charge includes charges of $113 million, of which inventory write-downs of $19 million are reflected in cost of sales. These charges are primarily related to severance and facility exit costs associated with streamlining the business, slightly offset by a credit of $18 million relating to current and prior years' restructuring charges. Also included within operating income in 2002 is a charge of $18 million for the write-off of purchased in-process research and development associated with the acquisitions of Sensormatic and DSC and a charge of $115 million for the impairment of property, plant and equipment resulting primarily from the termination of a software development project and, to a lesser extent, from the curtailment, and in certain markets, the termination of the ADT dealer program in certain non-U.S. markets.

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Electronics

        The following table sets forth net revenue and operating income and margin for Electronics for the years ended September 30, 2004, 2003 and 2002 ($ in millions):

        Net revenue for Electronics increased 12.7% in 2004 as compared to 2003, including a 13.1% increase in product revenue and a 2.3% increase in service revenue. The increase in net revenue was primarily a result of growth in our existing businesses, specifically, the automotive, computer, consumer electronics, communications and industrial and commercial markets. However, we continue to experience a decrease in sales of Power Systems products in North America and in our Electrical Contracting Services, which was divested in September 2004. To a lesser extent, the increase in net revenue resulted from favorable changes in foreign currency exchange rates ($560 million).

        The 40.9% increase in operating income and the 3.0% increase in margin in 2004 as compared to 2003 were primarily due to the revenue growth discussed above, cost saving initiatives that were executed in 2003, the positive impact of foreign currency ($90 million) and fewer charges recorded in 2004 as compared to 2003. These increases in operating income were partially offset by an 80 basis point impact of increased metal prices for copper and gold. Operating income for 2004 includes net restructuring, divestiture and impairment charges totaling $22 million. These net charges include a $52 million charge related to the divestiture of the Electrical Contracting Services business, partially offset by $33 million of net restructuring credits related to changes in estimates of severance, facility exit costs, distributor and supplier cancellation fees recorded in prior periods and the impact of the sale of assets that were impaired in prior years for amounts greater than originally anticipated. These net charges also include a $3 million charge related to the impairment of property, plant and equipment.

        Net revenue for Electronics decreased slightly in 2003 as compared to 2002. Net revenue at the electronic components group increased $442 million, or 4.5% due primarily to the favorable impact of foreign currency exchange rates. Net revenue for the submarine telecommunications business declined $542 million, or 79.9%, due to completion of third-party undersea fiber optic system installations in 2002. Overall, the decrease in net revenue for the submarine telecommunications business more than offset the increase in total net revenue due to favorable changes in foreign currency exchange rates of $524 million, and $69 million (calculated in the manner described below in "Acquisitions") due to the acquisitions of Transpower Technologies in November 2001, Communications Instruments, Inc. in January 2002, and all other acquisitions with a purchase price of $10 million or more.

        The increase in operating income and margin in 2003 as compared to 2002 was due to operating losses in the prior year, primarily as a result of charges totaling $1,965 million (discussed below) that were recorded in 2002. Operating income and margin for 2003 include net charges totaling $236 million. The $236 million consists primarily of charges for the impairment of goodwill of $278 million in Power Systems, Electrical Contracting Services and the Printed Circuit Group, restructuring credits of $72 million, of which $20 million is included in cost of sales, related primarily to changes in estimates of severance and facility exit costs recorded in prior years and charges for the impairment of long-lived assets of $1 million. The net restructuring credit of $72 million includes $55 million of credits, which were changes in estimates recorded in connection with the Company's intensified internal audits and detailed controls and operating reviews performed during 2003. Also

33

included within the $236 million are charges of $14 million related to adjusting asset reserves, $6 million related to the adjustments to accrual balances, $9 million of reconciliation and other accounting adjustments, which were also recorded in connection with the Company's intensified internal audits and detailed controls and operating reviews performed during 2003.

        The operating loss in 2002 was primarily due to restructuring and other charges as well as the impairment of long lived assets and goodwill in addition to the decrease in revenue. In the electronic components business, the overall decrease in demand resulted in much lower manufacturing volumes across all business units, which increased per unit costs. In the Submarine Telecommunications business, margin was impacted significantly by a significant reduction in third party system builds.

        Operating loss and margin for 2002 include net restructuring and other charges of $1,115 million. The $1,115 million net charge includes charges totaling $1,141 million, of which inventory reserves of $609 million are included in cost of sales. These charges primarily relate to initiatives taken to reduce fixed costs, due to the significant downturn in the telecommunications business and certain electronics end markets, including facility closures, headcount reductions, inventory reserves and purchase commitment cancellations. These charges were slightly offset by a restructuring credit of $26 million primarily relating to a revision in estimates of current and prior years' severance and facilities charges. Total inventory charges of $833 million include $609 million of inventory write-downs and $212 million of supplier contract termination fees. In 2002, $20 million was originally included in the inventory written down and was recorded as a restructuring credit to cost of sales in 2003. Also included within operating loss and margins for 2002 are charges of $569 million for the impairment of long lived assets, and goodwill impairment charges of $281 million related to Tyco Submarine Telecommunications.

Healthcare

        The following table sets forth net revenue and operating income and margin for Healthcare for the years ended September 30, 2004, 2003 and 2002 ($ in millions):

        Net revenue for Healthcare increased 8.2% in 2004 as compared to 2003. The increase in net revenue resulted primarily from growth in our existing businesses and favorable foreign currency exchange rates ($292 million). Growth in Healthcare's underlying businesses was primarily a result of increased net revenue within Medical Devices & Supplies, and to a lesser extent, at Pharmaceuticals. The increase at Medical Devices & Supplies was largely driven by higher sales volume within our International division, particularly in Europe, due to benefits realized from the sales force investment, back order recovery, growth in Spain and Italy and the absence of an unfavorable $47 million contractual adjustment recorded in 2003. Also contributing to the increase in Medical Devices and Supplies were higher sales within the Medical division resulting primarily from new SharpSafety product launches and gain in market share within the wound care market.

        The 12.4% increase in operating income in 2004 as compared to 2003 was due primarily to the favorable margin impact of the increased sales discussed above, favorable foreign currency exchange rates and a continued focus on maximizing operating efficiencies. Operating income was adversely impacted by a $29 million increase in legal liabilities for an ongoing patent infringement suit, and a $59 million increase in research and development costs. Additionally, 2004 operating income includes

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net restructuring, divestiture and impairment charges of $18 million, composed of: (i) restructuring charges of $13 million related to the closure of various facilities offset by a credit of $2 million due to costs being less than anticipated; (ii) a $4 million divestiture charge resulting from a loss on the sale of a business and (iii) $3 million of impairment charges related to the closure of various facilities.

        Net revenue for Healthcare increased 8.4% in 2003 as compared to 2002, including an 8.5% increase in product revenue and a 7.0% increase in service revenue. The increase in net revenue resulted primarily from growth in our existing businesses and favorable foreign currency exchange rates and, to a lesser extent, acquisitions, net of divestitures. Growth in our existing businesses was due to the following: increases in the Surgical division concurrent with the award of a major contract and continued organic growth within certain surgical stapling lines; increases in the Medical division resulting from the award of a significant wound care contract, coupled with the exit of a major competitor from the traditional wound care business; new product launches and higher demand in the ultrasound market; increases in Pharmaceuticals and Imaging due to higher volumes and increased market share; and, strong sales within the Respiratory division. These sales increases were partially offset by a decrease in the diaper product segment of the Retail business largely resulting from the adverse impact of the industry-wide down-count issues, and a decline in the International division due to lower sales in continental Europe and Latin America. The increase in net revenue also resulted from favorable changes in foreign exchange rates ($268 million) and incremental revenue generated from the acquisition of Paragon Trade Brands ("Paragon") in January 2002 ($124 million calculated in the manner described below in "Acquisitions"), slightly offset by a decline in revenue ($48 million) related to the divestiture of Surgical Dynamics, Inc. in July 2002.

        The 14.8% increase in operating income and increase in margin in 2003 as compared to 2002 were due primarily to favorable margin impact as a result of higher sales and favorable manufacturing variances as a result of increased production volumes, a shift to a more favorable product mix, and cost savings as a result of the closure of certain Paragon facilities, back office consolidations and our continued focus on optimizing operating expenses. Slightly offsetting the effect of those items were increased legal fees, insurance and pension expense, and higher sales and marketing expense as a result of program development aimed at supporting organic growth initiatives. Also contributing to the increase in operating income and margins were favorable fluctuations in foreign currency exchange rates and the impact of acquisitions and divestitures. During 2003, we recorded net credits totaling $2 million, including restructuring credits of $8 million due to actual costs being less than anticipated, and a credit of $7 million related to an insurance reimbursement for certain legal fees associated with product liability cases. These credits were largely offset by charges of $12 million related to asset reserves for inventory and charges of $1 million for adjustments to accrual balances related to workers' compensation, which were changes in estimates recorded in connection with the Company's intensified internal audits, detailed controls and operating reviews and as a result of applying management's judgments and estimates.

        Operating income and margin for 2002 reflect net restructuring and other charges of $45 million. The $45 million net charge includes charges of $49 million, of which inventory write-downs of $1 million are included in cost of sales. These charges primarily relate to severance associated with the consolidation of operations and facility related costs due to exiting certain business lines, and are partially offset by a credit of $4 million relating to current and prior years' restructuring charges. Operating income and margin for 2002 also include a charge for the impairment of long-lived assets of $2 million.

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Engineered Products and Services

        The following table sets forth net revenue and operating income and margin for Engineered Products and Services for the years ended September 30, 2004, 2003 and 2002 ($ in millions):

        Net revenue for Engineered Products and Services increased $1,509 million or 33.5% in 2004 as compared to 2003, of which $739 million, or 16.4%, represents a change in how we classify certain sub-contract and other costs that are paid by Infrastructure Services and re-billed to their customers. These costs have historically been treated as "pass through" and were therefore not included in reported revenue and cost of revenue of Infrastructure Services. For the year ended September 30, 2004, the Company began reflecting these sub-contract costs in both revenue and cost of revenue of Infrastructure Services. The Company has not adjusted revenue or cost of revenue for the years ended September 30, 2003 and 2002 as such change was not material. Further, such adjustment would have no impact on previously reported operating income, net income (loss) or cash flow.

        The remaining increase in net revenue resulted primarily from increased demand and higher selling prices at Electrical & Metal Products and at Tyco Fire & Building Products and favorable foreign currency exchange rates in all businesses ($298 million). Further contributing to the increase, although to a much lesser extent, were improved business conditions at Infrastructure Services due primarily to an improved construction market and continued market share growth. Sales remained flat at Flow Control as the impact of lower levels of non-residential construction and industrial capital spending, primarily in North America, were offset by improved activity in other end markets and geographic regions.

        The 71.3% increase in operating income and the 2.3% increase in margin in 2004 as compared to 2003 were due primarily to increased net revenue discussed above, the impact of cost reduction programs initiated in prior periods and the positive impact of foreign currency ($31 million). These favorable increases were partly offset by the impact of higher raw material costs. Additionally, operating income includes net restructuring, impairment and divestiture charges of $62 million in 2004 compared to $56 million (discussed below) in 2003. Included in the $62 million charge is $53 million of restructuring and $4 million of impairment charges related to the consolidation of manufacturing, distribution and office locations and activities at Flow Control and Infrastructure Services. The remaining $5 million divestiture charge primarily relates to an impairment of goodwill related to the sale of a business. The revenue reclassification at Infrastructure Services discussed above had no impact on operating income for 2004; however, this adjustment lowered 2004 operating margin by 1.5 percentage points.

        Net revenue for Engineered Products and Services slightly decreased in 2003 as compared to 2002, including a 1.6% decrease in product revenue partially offset by a 4.5% increase in service revenue. Net revenue decreased year over year, as the increase in net revenue due to favorable changes in foreign currency exchange rates ($219 million) and the effect of acquisitions ($41 million calculated in a manner described below in "Acquisitions") was more than offset by weak conditions in major markets at Flow Control and Electrical & Metal Products, most notably in non-residential construction. Also contributing to the overall decrease were lower levels of capital spending and increased pricing pressure, resulting in lower selling prices. The $41 million effect from acquisitions included Century

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Tube Corporation in October 2001, Water & Power Technologies in November 2001, Clean Air Systems in February 2002 and all other acquisitions with a purchase price of $10 million or more.

        The 44.2% increase in operating income and the increase in margin in 2003 compared to 2002 was due to lower than usual operating income in the prior year period as a result of recording charges of $377 million (discussed below). During 2003, we recorded charges totaling $56 million, which includes charges of $32 million related to changes in estimates recorded in connection with the Company's intensified internal audits, detailed controls and operating reviews, and as a result of applying management's judgments and estimates (including $19 million related to adjustments to workers' compensation and $13 million associated with asset reserves). These charges also include charges of $8 million, of which a $6 million charge is included in cost of sales, for 2003 restructuring plans partially offset by changes in estimates due to actual costs being less than originally anticipated, charges for the impairment of long-lived assets of $2 million relating to manufacturing and distribution consolidation at Flow Control and cost reduction projects, and other costs of $14 million included within selling, general and administrative expenses primarily related to the reorganization and consolidation of a manufacturing facility and certain business offices. Operating income and margin were also negatively impacted by the lower sales discussed above, competitive conditions in major markets for valves and controls, thermal controls, and electrical and metal products, and increased raw material costs, primarily steel.

        Operating income and margin for 2002 reflect $377 million of restructuring and other charges consisting of $48 million, of which inventory write-downs of $6 million are included in cost of sales, primarily related to severance and facility exit costs associated with streamlining the business. Also included are charges of $10 million for the impairment of property, plant and equipment associated with the closure of facilities, and goodwill impairment charges of $319 million relating to Tyco Infrastructure Services.

Plastics and Adhesives

        The following table sets forth net revenue and operating income and margin for Plastics and Adhesives for the years ended September 30, 2004, 2003 and 2002 ($ in millions):

        Net revenue increased slightly in 2004 as compared to 2003 primarily due to an increase in price ($44 million) and volume ($4 million) in Plastics. Additionally, foreign currency had a positive impact of $9 million on net revenue, and increased volume in Ludlow Coated Products ($5 million) from its building products and flexible packaging business also contributed to the overall increase. These increases were largely offset by softness in A&E Products ($49 million), particularly in the Americas Hangers business, in Asia and in the Catering business and a slight decline in Adhesives sales volume in the Corrosion Protection business.

        The significant decreases in operating income and operating margin in 2004 as compared to 2003 were primarily due to impairment ($47 million) and restructuring charges ($44 million) incurred during 2004 totaling $91 million associated with the closure of various facilities. The decreases in net revenue discussed above and margin declines at A&E Products due to lower volumes and pricing pressure also contributed to the decrease in operating income and margin. Operating income and margin for 2003 includes a net credit of $1 million discussed below.

        Net revenue at Tyco Plastics and Adhesives increased slightly in 2003 as compared to 2002 due to the effect of favorable changes in foreign currency exchange rates ($38 million) and acquisitions

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($21 million calculated in the manner described below in "Acquisitions"), which included LINQ Industrial Fabrics, Inc. in December 2001 and all other acquisitions with a purchase price of $10 million or more. 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, and a strong residential construction market for Ludlow Coated Products. These increases were more than offset by increased competition and decreases in our Corrosion Protection business, which had been negatively impacted by a slow down in the oil and gas pipeline construction markets created by uncertainty in the Middle East and Venezuela, and a decline in hanger sales due to weak demand in the retail garment industry.

        The significant decrease in operating income and decrease in operating margin in 2003 as compared to 2002 were primarily due to increased raw material costs (primarily polyethylene) and increased pricing competition driven by excess production capacity and an increase in lower priced imported goods. During 2003, Tyco Plastics and Adhesives recorded net credits totaling $1 million. These credits include charges of $6 million related to changes in estimates recorded in connection with the Company's intensified internal audits, detailed controls and operating reviews and as a result of applying management's judgments and estimates (including $3 million for adjustments to accrual balances, and $3 million related to asset reserves for inventory), restructuring credits of $1 million due to costs being less than anticipated and a credit of $6 million related to the settlement of a lawsuit.

        Operating income and margin for 2002 reflect net restructuring and other charges of $10 million, of which inventory write-downs of $1 million are included in cost of sales. These charges primarily relate to severance associated with the consolidation of operations and facility related costs due to exiting certain business lines. Operating income and margins for 2002 also include a charge for the write-off of long-lived assets of $3 million primarily related to the impairment of long-lived assets.

Corporate and Other

        Corporate net revenue of $25 million, $14 million and $8 million in 2004, 2003 and 2002, respectively, relates to the TGN business, which is classified as held for sale. Corporate expense was $385 million, $1,161 million and $3,510 million in 2004, 2003 and 2002, respectively, which includes operating losses of $73 million, $760 million and $3,090 million in 2004, 2003 and 2002, respectively, related to the TGN business held for sale.

        Corporate expense for 2004 includes net charges of $14 million, which consists of charges for the impairment of long-lived assets of $8 million and net restructuring charges of $6 million primarily attributable to severance related to the relocation of the corporate headquarters.

        Corporate expense for 2003 includes charges totaling $824 million. Included within the $824 million is a charge of $91 million for an incremental increase in directors and officers insurance and charges of $39 million related to internal investigation fees. Also included is a charge of $20 million primarily related to severance and benefits for corporate employees and a restructuring credit of $11 million due to actual costs being less than anticipated, both of which were changes in estimates recorded in connection with the Company's intensified internal audits, detailed controls and operating reviews and as a result of applying management's judgments and estimates. Also included within the $824 million are net restructuring credits of $10 million, other net charges of $16 million included in selling, general and administrative expenses, and charges for the impairment of long-lived assets of $679 million primarily related to the TGN business held for sale and, to a lesser extent, the closure and relocation of corporate offices and related severance and benefits.

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        Corporate expense in 2002 includes net restructuring, impairment and other charges of $3,914 million including $2,582 million related to the impairment of the TGN, $29 million related to the impairment of certain properties associated with the consolidation of corporate headquarters, $744 million related to goodwill impairment within the TGN business held for sale, and net restructuring and other charges of $559 million primarily related to charges within the TGN business held for sale and, to a lesser extent, the write-off of investment banking fees and other deal costs associated with the terminated breakup plan and certain acquisitions that were not completed, costs incurred for the internal investigation, and severance.

        The significant restructuring charges recorded in 2002 were primarily related to the restructuring of the TGN business held for sale to address the significant overcapacity in the market and resulting lack of demand for new system construction. In the fourth quarter of 2002, management decided to focus the business for the foreseeable future on maintenance revenue and capacity sales on the TGN, to discontinue future additions to the TGN, and to limit construction activities to small projects that were cash flow positive with at least breakeven earnings. As a result of this strategy, management devised a plan to significantly downsize the manufacturing footprint, decrease project management staffing, reduce the research and development function and minimize staffing and expense in all other administrative areas of the business to decrease cash outflows and losses to the maximum extent possible. This plan was carefully crafted to ensure that both the technical and construction competencies of the business would be preserved in the event industry conditions improve.

Results by Geographic Area

        Net revenue by geographic area for the years ended September 30, 2004, 2003 and 2002 is as follows ($ in millions):

⁽¹⁾

Revenue from external customers are attributed to individual countries based on the reporting entity that records the transaction.

Interest Income and Expense

        Interest income was $91 million in 2004, as compared to $107 million and $117 million in 2003 and 2002, respectively.

        Interest expense was $963 million in 2004, as compared to $1,148 million in 2003 and $1,076 million in 2002. The decrease in interest expense in 2004 as compared to 2003 is primarily the result of a lower average debt balance in 2004 and the favorable impact of interest rate swap agreements executed during the year. The increase in interest expense in 2003 over 2002 is primarily the result of the benefit from the cancellation of certain swaps in 2002 and a decrease in capitalized interest due to the completion of the TGN, partially offset by a lower average outstanding debt balance during 2003. The weighted-average rates of interest on total debt outstanding during 2004, 2003 and 2002 were 5.4%, 4.9% and 4.5%, respectively. The weighted-average interest rate during 2004 increased due to the retirement of lower interest rate debt.

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Other Expense, Net

        During 2004, net other expense of $286 million consisted primarily of a $284 million loss related to the repurchase of a portion of its outstanding convertible debt prior to its scheduled maturity. See Note 15 to the Consolidated Financial Statements for details regarding debt repurchases.

        During 2003, net other expense of $223 million consisted primarily of a net loss on the retirement of debt of $128 million. See Note 15 to the Consolidated Financial Statements for details regarding debt repurchases. Additionally, net other expense included an $87 million loss relating to the write-down of various investments when it became evident that the declines in the fair value of the investments were other than temporary, predominately due to the continuing depressed economic conditions, specifically within the telecommunications industry.

        During 2002, net other expense of $217 million consisted primarily of a $271 million loss on various investments, mainly related to its investments in FLAG Telecom Holdings Ltd. ("FLAG") when it became evident that the declines in the fair value of FLAG and other investments were other than temporary. This loss was partially offset by a gain of $30 million related to the retirement of debt and a net gain on divestiture of $24 million (see "Divestitures and Discontinued Operations" below).

Income Taxes

        Our effective income tax rate was 27.4%, 42.2% and (7.6)% for 2004, 2003 and 2002, respectively. The decline in the effective rate from 2003 to 2004 is principally the result of increased profitability in operations primarily in jurisdictions with lower tax rates and a decrease in nondeductible charges. The change in the effective tax rate from 2002 to 2003 is primarily the result of a decrease in impairment and other charges which did not provide a tax benefit and a decrease in other non-deductible charges.

        During 2004, the Company made substantial changes to its tax reporting and compliance processes, including preparation of amended U.S. federal income tax returns, hiring and training of additional tax personnel and the completion of a comprehensive review, analysis and reconciliation of its deferred tax assets and liabilities as of September 30, 2003 and September 30, 2004. The presentation of deferred tax assets and liabilities as of September 30, 2003 has been reclassified for comparability purposes as a result of this comprehensive deferred tax analysis.

        The valuation allowance for deferred tax assets of $1,992 million and $1,879 million at September 30, 2004 and 2003, respectively, relates principally to the uncertainty of the utilization of certain deferred tax assets, primarily tax loss and credit carryforwards in various jurisdictions. We believe that we will generate sufficient future taxable income to realize the tax benefits related to the remaining net deferred tax assets on our Consolidated Balance Sheets. The valuation allowance was calculated in accordance with the provisions of SFAS No. 109 which requires a valuation allowance be established or maintained when it is "more likely than not" that all or a portion of deferred tax assets will not be realized.

        The Company and its subsidiaries' income tax returns are periodically examined by various tax authorities. The Company is currently under audit by the Internal Revenue Service ("IRS") for the years 1997 to 2000. In connection with such examinations, certain tax authorities, including the IRS, have raised issues and proposed tax deficiencies. The Company is reviewing the issues raised by the tax authorities and is contesting certain proposed tax deficiencies. Amounts related to these tax deficiencies and other tax contingencies that management has assessed as probable and estimable have been recorded through the income tax provision.

        The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions across our global operations. We recognize potential liabilities and record tax liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due.

40

These tax liabilities are reflected net of related tax loss carryforwards. We adjust these reserves in light of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. Further, management has reviewed with tax counsel the issues raised by these taxing authorities and the adequacy of these recorded amounts. Substantially all of these potential tax liabilities are recorded in other liabilities on the Consolidated Balance Sheets as payment is not expected within one year.

        In connection with the IRS audits for the years 1997-2000, the Company prepared proposed amendments to these prior period U.S. federal income tax returns resulting in a reduction in the taxable income previously reported. The IRS is currently reviewing the proposed amendments. The Company has not recorded the impact of the proposed amendments, pending the completion of the IRS review. The proposed amendments, if accepted, will result in receipt of refunds or credits and a corresponding reduction to the deferred tax assets and liabilities. The Company may prepare proposed amendments to prior period U.S. federal income tax returns for additional periods. The proposed amendments are not expected to have a material adverse impact on our financial condition, results of operations or cash flows.

        Except for earnings that are currently distributed, no additional provision has been made for U.S. or non-U.S. income taxes on the undistributed earnings of subsidiaries or for unrecognized deferred tax liabilities for temporary differences related to investments in subsidiaries, as such earnings are expected to be permanently reinvested, the investments are essentially permanent in duration, or the Company has concluded that no additional tax liability will arise as a result of distribution of such earnings. A liability could arise if amounts are distributed by such subsidiaries or if such subsidiaries are ultimately disposed. It is not practicable to estimate the additional income taxes related to permanently reinvested earnings or the basis differences related to investments in subsidiaries.

Divestitures and Discontinued Operations

        During 2003, we conducted a comprehensive review of our core businesses, and as a result, implemented a divestiture program in early 2004. This strategy is intended to sharpen our focus on core businesses, simplify operations and improve cost structure. This divestiture program is designed to increase the focus on our core operations by exiting certain operations that do not meet our criteria for strategic fit or financial returns. In November 2003, we estimated that the potential proceeds excluding the proceeds from the sale of the TGN could be at least $400 million once the program is completed. Cumulative proceeds through the date of this filing are approximately $412 million. As part of this program, we planned to sell the TGN, our undersea fiber optic telecommunications network. The market for the TGN is challenged by significant overcapacity and severe pricing pressure and the industry is in need of consolidation. However, we plan to retain ownership of the telecommunications systems supply business which provides maintenance and undersea cable construction. In November 2004, we agreed to sell the TGN to one of India's telephone and internet service providers for $130 million. As discussed in Note 3, the entire value of the TGN has been written-off. The sale is subject to governmental approval in the United States, India and other countries.

2004 Activity

        During 2004, the Company recorded net losses and impairments of divestitures of $116 million in continuing operations in connection with the divestiture or write-down to fair value of certain held for sale businesses. In addition, the Company also recorded losses on the sale of discontinued operations of $132 million ($123 million after tax) to write the carrying value of such assets down to their estimated fair value.

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        In connection with the divestiture program announced in November 2003, the Company divested twenty-one and liquidated four non-core businesses across all business segments, except Plastics and Adhesives and primarily within Fire and Security, for aggregate proceeds of $252 million in cash, of which $16 million of the proceeds are currently held in escrow. Total assets and total liabilities of the divested businesses were $445 million and $115 million, respectively. Total assets include cash retained by the businesses sold of $13 million. Subsequent to September 30, 2004, the Company divested an additional seven non-core businesses realizing aggregate proceeds of approximately $160 million.

        Net revenue and net loss for 2004 through the date of disposition were $460 million and $43 million, respectively, for divested companies that did not meet the criteria for discontinued operations. Net revenue and net income for the year ended September 30, 2003 were $587 million and $24 million, respectively, for divested companies that did not meet the criteria for discontinued operations.

        Net revenue of 2004 discontinued operations for the years ended September 30, 2004, 2003 and 2002 were $889 million, $815 million and $766 million, respectively. Pretax (loss) income of these discontinued operations for the years ended September 30, 2004, 2003 and 2002 were $(135) million, $7 million and $19 million, respectively.

        The following table presents balance sheet information for discontinued operations and other businesses held for sale at September 30, 2004 and 2003 ($ in millions):

2003 Activity

        During 2003, Tyco recorded income from discontinued operations of $20 million for a restitution payment made by Frank E. Walsh Jr., a former director (see Note 14 to the Consolidated Financial Statements).

2002 Activity

        During 2002, the Company sold certain of its businesses for net proceeds of $139 million in cash that consisted primarily of businesses within Healthcare and Fire and Security. In connection with these dispositions, the Company recorded a net gain of $24 million, which is included in other expense, net in the Consolidated Statement of Operations.

        On July 8, 2002, the Company divested Tyco Capital (CIT Group Inc.) through the sale of 100% of the common shares of CIT Group Inc. ("CIT"), its principal operating subsidiary, in an initial public offering ("IPO"). Accordingly, the results of Tyco Capital are presented as discontinued operations. Operating results from the discontinued operations of Tyco Capital from October 1, 2001 through July 8, 2002 were $3.3 billion of finance income, $6.0 billion of pre-tax loss and $6.3 billion of net loss. The net loss includes a goodwill impairment charge of $6,638 million.

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        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 developed 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 No. 142, "Goodwill and Other Intangible Assets," first step impairment analysis as of March 31, 2002 and concluded that an impairment charge was warranted at that time.

        Management's objective in performing the first step goodwill impairment 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. As a result, the Company recorded a $4,513 million impairment charge as of March 31, 2002, which is included in discontinued operations.

        A second step goodwill impairment analysis is required whenever a reporting unit's book value exceeds estimated fair value. This analysis required the Company to estimate the fair value of the reporting unit's individual assets and liabilities to complete the analysis of goodwill as of March 31, 2002. The Company completed this second step analysis for CIT during the quarter ended June 30, 2002 and, as a result, recorded an additional goodwill impairment charge of $132 million. During the June 30, 2002 quarter, CIT experienced further credit downgrades and the business environment and other factors continued to negatively impact the likely proceeds of the IPO. As a result, the Company performed another first step and second step analysis as of June 30, 2002 in a manner consistent with the March 2002 process described above. Each of these analyses was based upon updated market data at June 30, 2002 and through the period immediately following the IPO, including the IPO proceeds. These analyses resulted in a goodwill impairment of $1,867 million. Tyco also recorded an additional impairment charge of $126 million in order to write-down its investment in CIT to fair value for a total CIT goodwill impairment of $2,125 million. This write-down was based upon net IPO proceeds of approximately $4.4 billion, after deducting estimated out-of-pocket expenses, and is included in the $6,283 million loss from discontinued operations. During the fourth quarter of 2002, Tyco recorded a loss on the sale of Tyco Capital of $59 million.

Acquisitions

        Prior to 2003, acquisitions were a significant element of our growth strategy. When we acquired a business, we began to integrate the acquired company with our existing operations immediately, and, consequently, we were generally unable to separately identify the post-acquisition financial results of acquired companies. The revenue growth or decline attributable to such acquisitions, which are included in segment discussions for 2003 and 2002, were estimates calculated by assuming the acquisitions were made at the beginning of the relevant year by adding back pre-acquisition revenue of the acquired companies for both periods. These calculations included all acquisitions with a purchase price of $10 million or more and did 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 2003 and 2002. These smaller acquisitions represent approximately 6% of the total purchase price for all acquisitions during 2003 and 2002. Since these estimates are based on pre-acquisition revenue, they are not necessarily indicative of post-acquisition results. This calculation is similar to the method used in calculating the acquisition related pro forma

43

results of operations in Note 5 to the Consolidated Financial Statements pursuant to SFAS No. 141, "Business Combinations."

Cumulative Effect of Accounting Change

        As discussed in Note 9 to the Consolidated Financial Statements, the Company has three synthetic lease programs 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 Submarine Telecommunications. During 2003, the Company adopted Financial Accounting Standards Board Interpretation ("FIN") No. 46, "Consolidation of Variable Interest Entities," (revised December 2003 as FIN No. 46R) and, accordingly, restructured one of the synthetic leases to meet the requirements of FIN 46 for off-balance sheet accounting. The Company reclassified the remaining two leases as capital leases and, consequently, recorded a $75 million after-tax loss ($115 million pretax) cumulative effect adjustment. In addition, total debt increased by $498 million at the time of consolidation, July 1, 2003.

        In 2003 in conjunction with adopting FIN 46, the Company also evaluated other investments and concluded that four joint ventures that were previously accounted for under the equity method of accounting within Tyco Infrastructure Services, in which we own a minority interest, met the consolidation criteria set forth in FIN 46. Accordingly, these ventures were consolidated onto the Company's balance sheet effective July 1, 2003. The assets and liabilities of these joint ventures included on the Company's balance sheet at that time were $112 million and $96 million, respectively.

        Subsequently, these four joint ventures were deconsolidated as of March 31, 2004 with the adoption of FIN 46R. The assets and liabilities of these joint ventures included in the Company's balance sheet at September 30, 2003 were $96 million and $69 million, respectively.

Change in Fiscal Year

        On November 4, 2004, the Board of Directors approved the change in our fiscal year end from a calendar fiscal year ending September 30 to a "52-53 week" year ending on the Friday nearest September 30, such that each quarterly period will be 13 weeks in length. Once every seven years, starting in 2011, the fourth quarter reporting period will be 14 weeks. In addition, certain of our subsidiaries have consistently closed their books up to one month prior to our fiscal period end. We plan to report results for these subsidiaries using the same period as the reported results of the consolidated Company. While the expected December holiday-related slow-down in certain customer sales is expected to shift from the second fiscal quarter to the first fiscal quarter, the impact of this change is not expected to be material to the Consolidated Financial Statements. This change is also consistent with our ongoing efforts to enhance controls and improve the transparency of its reporting, as this change better aligns our external reporting with our internal operational processes. This change will be effective for our first fiscal quarter ending December 31, 2004. The results for the transition period related to this change will be reported as an adjustment within Shareholders' Equity. No transition report is required for these changes.

Critical Accounting Policies

        The preparation of Consolidated Financial Statements in conformity with Generally Accepted Accounting Principles in the United States ("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 revenue 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.

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        Depreciation and Amortization Method for Security Monitoring Systems—Tyco generally considers its electronic security assets in three asset pools: internally generated residential systems, internally generated commercial systems and customer accounts acquired through the ADT dealer program. 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. If the attrition rates were to rise, Tyco may be required to accelerate the depreciation and amortization.

        With respect to Tyco's depreciation policy for 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 internally generated commercial account customers (collectively "subscriber systems"), and generally depreciated over ten to fourteen years. Tyco concluded that for residential and commercial account pools the straight-line method of depreciation over a ten to fourteen-year period continues to be appropriate given the observed actual attrition data for these pools.

        Tyco purchases residential security monitoring contracts from an external network of independent dealers who operate under the ADT dealer program. The purchase price of these customer contracts is recorded as an intangible asset (i.e., contracts and related customer relationships).

        Intangible assets arising from the ADT dealer program are amortized in pools determined by the month of contract acquisition on an accelerated basis over the period and pattern of economic benefit that is expected to be obtained from the customer relationship. Tyco believes that 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 for the remaining four years of the estimated relationship period. Actual attrition data is regularly reviewed in order to assess the continued applicability of the accelerated method of amortization described above.

        Attrition rates for customers in our Global Electronic Security Services business were 15.1%, 15.9% and 13.2% on a trailing 12-month basis as of September 30, 2004, 2003 and 2002, respectively.

        Goodwill—In performing the annual goodwill 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.

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

        Disruptions to our business such as end market conditions and protracted economic weakness, unexpected significant declines in operating results of reporting units, the divestiture of a significant component of a reporting unit and market capitalization declines may result in our having to perform a SFAS No. 142 first step valuation analysis for some or all of our reporting units prior to the required annual assessment. These types of events and the resulting analysis could result in goodwill impairment charges in the future.

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        During 2004, the Company recorded goodwill impairments of $60 million of which $48 million related to divested businesses and $12 million related to businesses classified as held for sale, respectively. The Company also recorded goodwill impairments of $278 million and $1,344 million in 2003 and 2002, respectively.

        Revenue Recognition—Contract sales for the installation of fire protection systems, large security intruder systems, undersea cable systems and other construction related projects are recorded primarily 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 determinable. If estimates are inaccurate, there is risk that our revenue and profits for the period may be overstated or understated.

        Income Taxes—In determining income (loss) for financial statement purposes, we must make certain estimates and judgments. These estimates and judgments affect the calculation of certain tax liabilities and the determination of the recoverability of certain of the deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenue and expense. Deferred tax assets are also reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods.

        In evaluating our ability to recover our deferred tax assets we consider all available positive and negative evidence including our past operating results, the existence of cumulative losses in the most recent years and our forecast of future taxable income. In estimating future taxable income, we develop assumptions including the amount of future state, federal and international pretax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses.

        We currently have recorded significant valuation allowances that we intend to maintain until it is more likely than not the deferred tax assets will be realized. Our income tax expense recorded in the future will be reduced to the extent of decreases in our valuation allowances. The realization of our remaining deferred tax assets is primarily dependent on future taxable income. Any reduction in future taxable income including but not limited to any future restructuring activities may require that we record an additional valuation allowance against our deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in such period and could have a significant impact on our future earnings. If a change in a valuation allowance occurs, which was established in connection with an acquisition, such adjustment may impact goodwill rather than the income tax provision.

        In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions across our global operations. We recognize potential liabilities and record tax liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. These tax liabilities are reflected net of related tax loss carryforwards. We adjust these reserves in light of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. If our estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. If the tax

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liabilities relate to tax uncertainties existing at the date of the acquisition of a business, the adjustment of such tax liabilities will result in an adjustment to the goodwill recorded at the date of acquisition.

        Long-Lived Assets—Assets held and used by the Company, including property, plant and equipment and intangible assets, are reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of evaluating the recoverability of long-lived assets to be held and used, a recoverability test is performed based on assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates, reflecting varying degrees of perceived risk. Impairments to long-lived assets to be disposed of are recorded based upon the fair value of the applicable assets. Since judgment is involved in determining the fair value and useful lives of long-lived assets, there is a risk that the carrying value of our long-lived assets may be overstated or understated.

Liquidity and Capital Resources

        The following table summarizes the sources of our cash flow from operating activities and the use of a portion of that cash in our operations for the years ended September 30, 2004, 2003 and 2002 ($ in millions):

⁽¹⁾

This amount is the sum of depreciation ($1,478 million, $1,459 million and $1,454 million in 2004, 2003 and 2002, respectively) and amortization of intangible assets ($698 million, $724 million and $619 million in 2004, 2003 and 2002, respectively).

⁽²⁾

This amount includes the add back of net losses on the retirement of debt of $284 million and $128 million in 2004 and 2003, respectively, and income from the retirement of debt of $33 million in 2002.

⁽³⁾

This includes net proceeds of $141 million, $124 million and $166 million received for the sale/disposition of property, plant and equipment in 2004, 2003 and 2002, respectively. It also includes proceeds of $30 million received in sale-leaseback transactions in 2002.

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        The following table shows cash flow from operating activities and other cash flow items by segment for the year ended September 30, 2004 ($ in millions):

⁽¹⁾

This amount includes the add back of $284 million related to a loss on the retirement of debt.

⁽²⁾

Fire and Security and Electronics include $91 million and $21 million, respectively, related to Corporate programs.

        The net change in total working capital, net of the effects of divestitures and acquisitions, was a cash decrease of $906 million in 2004, including cash paid for restructuring and other charges of $266 million. The components of this change are set forth in detail in our Consolidated Statements of Cash Flows. The significant changes in working capital included a $225 million increase in inventories and a $153 million increase in accounts receivable, offset by an increase of $406 million in income taxes payable. Also, during 2004 we significantly decreased our participation in our sale of accounts receivable programs resulting in an additional $929 million increase in accounts receivable. We strive to maximize our cash flow by minimizing the working capital employed in our businesses.

        During 2004, 2003 and 2002 we paid out $266 million, $503 million and $518 million, respectively, in cash related to restructuring activities. See Note 2 to our Consolidated Financial Statements for further information regarding our restructuring activities.

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        During 2004, 2003 and 2002, Tyco paid $254 million, $597 million and $1,138 million of cash, respectively, to acquire 0.3 million, 0.6 million and 1.4 million customer contracts for electronic security services through the ADT dealer program.

        During 2004, 2003 and 2002, we paid $107 million, $272 million and $625 million, respectively, in cash for purchase accounting and holdback/earn-out liabilities. 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.

        At September 30, 2004, the acquisition liabilities on our Consolidated Balance Sheets were $123 million, of which $29 million is included in accrued and other current liabilities and $94 million is included in other liabilities. In addition, holdback/earn-out liabilities on our Consolidated Balance Sheets were $167 million, of which $59 million are included in accrued and other current liabilities and $108 million are included in other liabilities.

        As previously discussed, during 2003, we conducted a comprehensive review of Tyco's core businesses, and as a result, implemented a divestiture program in early 2004. In November 2003 we estimated that the potential proceeds, excluding the proceeds from the sale of the TGN, could be at least $400 million once the program is completed. Cumulative proceeds through the date of this filing are approximately $412 million. As part of this program, we planned to sell the TGN, our undersea fiber optic telecommunications network. In November 2004, we agreed to sell the TGN to one of India's telephone and internet service providers for $130 million. As discussed in Note 3, the entire value of the TGN has been written-off. The sale is subject to governmental approval in the United States, India and other countries.

        We continue to fund capital expenditures to improve the cost structure of our businesses, to invest in new processes and technology, and to maintain high quality production standards. During 2003 and 2002, we spent $113 million and $1.1 billion, respectively, on construction of the TGN. Construction of the TGN was completed during 2003. Consequently, the level of capital expenditures in Electronics decreased in 2004. The level of capital expenditures in the other segments is not expected to exceed depreciation in 2005 and is expected to increase slightly relative to the level of spending in 2004.

        The provision for income taxes relating to continuing operations in the Consolidated Statement of Operations for 2004 was $1,140 million, and the amount of income taxes paid, net of refunds, during the year was $550 million. The difference is due to timing differences, as well as net operating loss carryforward and carryback utilization.

Capitalization

        Shareholders' equity was $30.3 billion at September 30, 2004, compared to $26.4 billion at September 30, 2003. This increase was due primarily to net income of $2.9 billion and foreign currency translation of $704 million.

        At September 30, 2004, total debt decreased $4.2 billion to $16.7 billion, as compared to $21.0 billion at September 30, 2003. Total debt as a percentage of total capitalization (total debt and shareholders' equity) was 36% at September 30, 2004 and 44% at September 30, 2003. The decrease in debt resulted principally from the repayments of debt detailed below partially offset by the issuance of $1.0 billion 6.0% notes due 2013 by Tyco International Group S.A. ("TIGSA") in November 2003. Our cash balance increased to $4,467 million at September 30, 2004, as compared to $4,186 million at September 30, 2003.

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        In November 2003, TIGSA issued $1.0 billion 6.0% notes due 2013 in a private placement offering. The notes are fully and unconditionally guaranteed by Tyco. The net proceeds of approximately $988 million were used to repay a portion of the $2.0 billion outstanding under the 5-year revolving credit facility due 2006. These notes were subsequently exchanged for registered notes with substantially identical terms in an exchange offer that expired on May 3, 2004.

        In November 2003, holders of principal amount at maturity of $3,197 million of zero coupon convertible debentures due 2020 notified Tyco that they had exercised their option to require Tyco to repurchase their debentures at a price of $775.66 per $1,000 principal at maturity, representing the accreted value of the debentures on that date. On November 18, 2003, Tyco purchased these debentures for cash of $2,480 million.

        In December 2003, TIGSA entered into a $1.0 billion 364-day revolving bank credit facility, which includes a one year term-out option, and a $1.5 billion 3-year revolving bank credit facility. These facilities have a variable interest rate based on LIBOR. The margin over LIBOR payable by TIGSA can vary based on changes in its credit rating. These new facilities replaced the $1.5 billion undrawn 364-day revolving credit facility, which had been due to expire in January 2004, and the $2.0 billion drawn 5-year revolving credit facility, which had been due to expire in February 2006. As of September 30, 2004, there were no outstanding borrowings under either facility. The $1.0 billion 364-day revolving credit facility expires on December 20, 2004, and we expect that the facility will be replaced by a $1.0 billion 5-year revolving credit facility prior to its expiration. The $1.5 billion 3-year revolving credit facility expires on December 22, 2006.

        In June 2004, the Company purchased $303 million of its 8.2% notes due 2008 for cash of $341 million, which resulted in a $38 million loss, including unamortized debt issuance costs, on the retirement of debt.

        In the fourth quarter of 2004, the Company repurchased $517 million of its outstanding 2.75% convertible senior debentures with a 2008 put option. The total purchase price paid was $750 million and the repurchase resulted in a $241 million loss on the retirement of debt, including the write-off of unamortized debt issuance costs.

        Our bank credit agreements contain a number of financial covenants, such as a limit on the ratio of debt to earnings before interest, taxes, depreciation, and amortization and minimum levels of net worth, and other covenants that limit our ability to pledge assets and to make substantial payments in connection with our capital shares. At September 30, 2004, we had three synthetic lease facilities, of which one has since expired on December 10, 2004, with other covenants, including interest coverage and leverage ratios. Our outstanding indentures contain customary covenants including limits on negative pledges, subsidiary debt and sale/leaseback transactions. None of these covenants is presently considered restrictive to our operations. We are currently in compliance with all of our debt covenants.

        In 2004, we made voluntary contributions to our pension plans totaling approximately $575 million.

        The above transactions support Tyco's previously discussed strategy to strengthen its balance sheet by using a portion of its excess cash to reduce debt.

        We plan to use available cash to continue to fund internal growth and cost reduction opportunities within our businesses. Additionally, we believe that our cash flow generation capability will allow us to continue to strengthen the balance sheet and return capital to shareholders. While debt reduction remains our focus in the near term, we may consider an appropriate acquisition should the opportunity arise. On December 9, 2004, the Board of Directors approved an increase in the quarterly dividend on our common shares from $0.0125 to $0.10 per share.

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        The following table details the trend of our debt ratings:

        During 2004, Fitch upgraded our rating on the senior unsecured debt of the Company, as well as on the unconditionally guaranteed debt of TIGSA, to BBB+ from BB, and raised our commercial paper rating to F2 from B. Standard and Poor's upgraded our corporate credit and senior unsecured ratings to BBB from BBB- and our short term corporate credit and commercial paper ratings to A2 from A3. Moody's upgraded our long term rating to Baa3 from Ba2, as well as our short term rating to Prime-3 from Not Prime.

        The security ratings set forth above are not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal by the assigning rating organization. Each rating should be evaluated independently of any other rating.

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Commitments and Contingencies

Contractual Obligations

        A summary of our contractual obligations and commitments for debt, minimum lease payment obligations under non-cancelable operating leases and other obligations at September 30, 2004 is as follows ($ in millions):

⁽¹⁾

Includes capital lease obligations and excludes interest.

⁽²⁾

Includes obligations under an off-balance sheet leasing arrangement under which a subsidiary of the Company has the option to buy five cable laying sea vessels (see Note 18 to the Consolidated Financial Statements).

⁽³⁾

Purchase obligations consist of commitments for purchases of good and services.

⁽⁴⁾

Minimum pension funding requirements are not included as such amounts have not been determined for all periods presented. The minimum required contributions to our pension plans are expected to be approximately $194 million in 2005.

        At September 30, 2004, the Company had outstanding letters of credit and letters of guarantee in the amount of $1.6 billion.

        At September 30, 2004, TIGSA had unsecured credit facilities of $1.0 billion due December 20, 2004, and $1.5 billion due December 22, 2006, both of which were undrawn and available (see Note 15 to the Consolidated Financial Statements). We expect that the existing $1.0 billion facility will be replaced by a $1.0 billion 5-year revolving credit facility prior to its expiration. In addition, certain of the Company's operating subsidiaries have overdraft and similar types of facilities, which total $434 million, of which $326 million was undrawn and available at September 30, 2004. These facilities expire at various dates through the year 2013, most of which are renewable and are established primarily within our international operations.

        At September 30, 2004, the Company had a contingent liability of $80 million related to the 2001 acquisition of Com-Net by Electronics. This represents 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. No provision has been made in the Consolidated Financial Statements, as the outcome of this contingency cannot be reasonably determined.

        In June 2004, TIGSA entered into a $500 million 3-year unsecured letter of credit facility. The facility provides for the issuance of letters of credit, supported by a related line of credit facility. TIGSA may only borrow under the line of credit agreement to reimburse the bank for obligations with respect to letters of credit issued under this facility. The covenants under this facility are substantially similar to TIGSA's bank credit facilities entered into during December 2003 and the indenture related to TIGSA's 6% notes due 2013 issued in November 2003. TIGSA would pay interest on any outstanding borrowings at a variable interest rate, based on the bank's base rate or the Eurodollar rate, as defined. Upon the occurrence of certain credit events, the interest rate on the outstanding borrowings becomes fixed. The issuance of letters of credit under this facility during 2004 enabled the

52

Company to release approximately $480 million of restricted cash and investments. As of September 30, 2004, there were no outstanding borrowings under this facility.

        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 cash flows.

Legal Matters

Class Actions

        For a detailed discussion of contingencies related to Tyco's securities class actions, shareholder derivative litigation, ERISA litigation and investigation, and litigation against our former senior management, see Item 3. Legal Proceedings. We are generally obligated to indemnify our directors and officers and our former directors and officers who are named as defendants in some or all of these matters to the extent required 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. We are unable at this time to estimate what our ultimate liability in these matters may be, and it is possible that we will be required to pay judgments or settlements and incur expenses, in excess of any insurance coverage, in aggregate amounts that would have a material adverse effect on our financial position, results of operations or cash flows. At this time, it is not possible to estimate the amount of loss or probable losses, if any, that might result from an adverse resolution of these matters.

Investigation

        For a detailed discussion of contingencies related to governmental investigations related to Tyco see Item 3. Legal Proceedings—Subpoenas and Document Requests From Governmental Entities. 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 (which in turn could negatively impact our business with non-governmental customers) or suffer other penalties, each of which could have a material adverse effect on our business. It is not possible to estimate the amount of loss, or range of possible loss, if any, that might result from an adverse resolution of these matters.

Intellectual Property Litigation

        For a detailed discussion of contingencies related to Tyco's intellectual property litigation, see Item 3. Legal Proceedings—Intellectual Property Litigation.

Environmental Matters

        For a detailed discussion of contingencies related to Tyco's environmental matters, see Item 1. Business—Environmental Matters.

Asbestos Matters

        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 Healthcare and Engineered Products and Services. A limited number of the cases allege premises liability, based on claims that individuals were exposed to asbestos while on a subsidiary's property. A majority of the cases involve product liability claims, based principally on allegations of past distribution

53

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. We will continue to vigorously defend these lawsuits and 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. As of September 30, 2004, there were approximately 14,500 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 recorded for potential settlements and adverse 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 financial position, results of operations or cash flows.

Income Tax Matters

        Tyco and its subsidiaries' income tax returns are periodically examined by various regulatory tax authorities. In connection with such examinations, tax authorities, including the IRS, have raised issues and proposed tax deficiencies. We are reviewing the issues raised by the tax authorities and are contesting certain of the proposed tax deficiencies. Amounts related to these tax deficiencies and other tax contingencies that management has assessed as probable and estimable have been recorded through the income tax provision. We cannot provide assurance that the ultimate resolution of these tax deficiencies and contingencies will not have a material adverse effect on our financial condition, results of operations or cash flows.

        The American Jobs Creation Act of 2004 (the "AJCA"), signed into law in October 2004, replaces an export incentive with a deduction from domestic manufacturing income. It is not expected that the AJCA will have a material impact on the Company's income tax provision. The AJCA also allows the Company to repatriate up to $500 million of permanently reinvested foreign earnings in 2005 or 2006 at an effective tax rate of 5.25%. The Company is currently reviewing whether to take advantage of this new provision of the AJCA.

Other Matters

        The Company is a defendant in a number of other pending legal proceedings incidental to present and former operations, acquisitions and dispositions. The Company does not expect the outcome of these proceedings, either individually or in the aggregate, to have a material adverse effect on its financial position, results of operations or cash flows.

        As new internal controls and procedures are implemented, any reported allegations or violations of our guide to ethical conduct are investigated and appropriate disciplinary and remedial measures are taken. An allegation was brought to our attention that during the period from 1999 through 2003 certain improper payments were made by a non-U.S. subsidiary of Tyco with 2004 revenue of

54

$40 million. With the assistance of outside counsel, we conducted an internal investigation into these allegations and whether certain payments were correctly recorded in the books and records of the subsidiary. We have taken remedial steps and have reported the results of our investigation to the Department of Justice and the SEC and are cooperating with their inquiry. We do not believe this matter will have a material adverse effect on our financial position, results of operations or cash flows.

Backlog

        At September 30, 2004, we had a backlog of unfilled orders of $13.2 billion, compared to a backlog of $11.3 billion at September 30, 2003. We expect that approximately 80% of our backlog at September 30, 2004 will be filled during 2005. Backlog by reportable industry segment at September 30 is as follows ($ in millions):

⁽¹⁾

During the first quarter of 2004, our Precision Interconnect business was transferred from Healthcare to Electronics. In addition, the results of the TGN business held for sale are presented within Corporate and Other. The Company has conformed its segment reporting accordingly and has reclassified comparative prior period information to reflect these changes.

        Within Fire and Security, backlog decreased primarily as a result of the sale of Sonitrol by ADT Security in the second quarter of 2004. Backlog for Fire and Security includes recurring revenue-in-force, which represents twelve months' fees for monitoring and maintenance services under contract in the security business. The amount of recurring revenue-in-force at September 30, 2004 and September 30, 2003 was $3,559 million and $3,607 million, respectively. Within Engineered Products and Services, backlog increased primarily as a result of a $1.4 billion adjustment related to a change in how we classify sub-contract costs that are paid by Infrastructure Services and re-billed to their customers. These costs have historically been treated as "pass through" and were therefore not previously included in reported revenue and cost of revenue of Infrastructure Services. During 2004, the Company began reflecting these subcontract costs in both revenue and cost of revenue of Infrastructure Services. Within Electronics, backlog increased primarily due to stronger orders resulting from an overall improvement in business conditions across the vast majority of its end markets. Backlog in Healthcare and Plastics and Adhesives represents unfilled orders, which, in the nature of the businesses, are normally shipped shortly after purchase orders are received. We do not view backlog in Healthcare and Plastics and Adhesives to be a significant indicator of the level of future sales activity.

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Off-Balance Sheet Arrangements

Sale of Accounts Receivable

        Tyco has several programs under which it may sell participating interests in accounts receivable to investors who, in turn, purchase and receive ownership and security interests in those receivables. As collections reduce accounts receivable included in the pool, the Company sells new receivables. The Company has the risk of credit loss on the receivables and, accordingly, the full amount of the reserve has been retained on the Consolidated Balance Sheets. The proceeds from the sales were used to repay short-term and long-term borrowings and for working capital and other corporate purposes and are reported as operating cash flows in the Consolidated Statements of Cash Flows. The sale proceeds are less than the face amount of accounts receivable sold by an amount that approximates the cost that would be incurred if commercial paper were issued backed by these accounts receivable. The discount from the face amount is accounted for as a loss on the sale of receivables and has been included in selling, general and administrative expenses in the Consolidated Statements of Operations. Such discount aggregated $18 million, $29 million, and $17 million, or 3.1%, 3.5%, and 2.7% of the weighted-average balance of the receivables outstanding, during 2004, 2003 and 2002, respectively. The Company retains collection and administrative responsibilities for the participating interests in the defined pool. During 2004, the Company reduced outstanding balances under its accounts receivable programs by $929 million, of which $812 million relates to three of its corporate accounts receivable programs. At September 30, 2004 and 2003, the availability under corporate programs was $625 million and $1,025 million, respectively. Subsequent to September 30, 2004, the Company further reduced the availability under these programs to $550 million. At September 30, 2004 and 2003, the amounts utilized under these programs was zero and $803 million, respectively. The remaining reduction related to certain of our international businesses selling fewer accounts receivable as a short-term financing mechanism. These transactions qualify as true sales. The aggregate amount outstanding under these arrangements was $99 million and $202 million at September 30, 2004 and 2003, respectively.

Variable Interest Entities

        The Company has programs under which it sells machinery and equipment to investors 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 where the investors 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 have been evaluated for potential consolidation under FIN 46.

        As previously discussed, during 2003 the Company restructured one of the synthetic leases to meet the requirements of FIN 46 for off-balance sheet accounting. In 2003 in conjunction with adopting FIN 46, the Company also evaluated other investments and concluded that four joint ventures that were previously accounted for under the equity method of accounting within Tyco Infrastructure Services, in which we own a minority interest, met the consolidation criteria set forth in FIN 46. Accordingly, these ventures were consolidated onto the Company's balance sheet effective July 1, 2003, and were subsequently deconsolidated as of March 31, 2004 upon the adoption of FIN 46R. The assets and liabilities of these joint ventures included in the Company's Consolidated Balance Sheets at September 30, 2003 were $96 million and $69 million, respectively.

Guarantees

        Certain of the Company's business segments have guaranteed the performance of third-parties and provided financial guarantees for uncompleted work and financial commitments. The terms of these guarantees vary with end dates ranging from 2005 through the completion of such transactions. The guarantees would be triggered in the event of nonperformance and the potential exposure for

56

nonperformance under the guarantees would not have a material effect on the Company's financial position, results of operations or cash flows.

        In disposing of assets or businesses, the Company 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 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, annual results of operations or cash flows.

        The Company has recorded liabilities for known indemnifications included as part of environmental liabilities. See Item I. Business—Environmental Matters for a discussion of these liabilities.

        The Company has guaranteed the fair value of certain vessels not to exceed $235 million, and as of September 30, 2004 expects the obligation to be $54 million, which is recorded in the accompanying Consolidated Balance Sheets, based on its estimate of fair value of the vessels (see "Liquidity and Capital Resources—Contractual Obligations" above).

        As a result of exiting certain facilities as part of restructuring and acquisition plans, or otherwise, the Company continues to lease certain properties which it has vacated but has sub-let to third parties. In the event the 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 not material, individually and in the aggregate, to the Company's financial position, results of operations or cash flows.

        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 cash flows.

        The Company generally records estimated product warranty costs at the time of sale. For further information on estimated product warranty, see Notes 1 and 16 to the Consolidated Financial Statements.

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Accounting Pronouncements

        In November 2003, the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board ("FASB") reached a consensus on EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments." EITF 03-1 provides guidance on determining other-than-temporary impairments and its application to marketable equity securities and debt securities accounted for under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." In September 2004, the FASB issued FASB Staff Position ("FSP") EITF Issue 03-1-1 which delayed the effective date for the measurement and recognition guidance contained in the EITF 03-1 pending finalization of the draft FSP EITF Issue 03-1-a, "Implementation Guidance for the Application of Paragraph 16 of EITF 03-1." The disclosure requirements of EITF 03-1 remain in effect. The Company adopted the disclosure requirement of EITF 03-1 as of September 30, 2004. The adoption of the recognition and measurement provisions of EITF 03-1 are not expected to have a material impact on our results of operations, financial position or cash flows.

        In December 2003, the FASB issued FIN 46 (revised December 2003 as FIN 46R). FIN 46R further explains how to identify Variable Interest Entities ("VIE") and how to determine when a business enterprise should include the assets, liabilities, noncontrolling interest and results of VIE in its financial statements. The Company adopted FIN 46R as of March 31, 2004. As a result, the joint ventures that were previously consolidated under FIN 46 were deconsolidated effective March 31, 2004. See Note 9 of the Consolidated Financial Statements for further discussion of the impact of FIN 46R.

        In December 2003, the FASB issued a revision to SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," to improve financial statement disclosure for defined benefit plans. This statement requires additional disclosures about the assets (including plan assets by category), obligations and cash flows of defined pension plans and other defined benefit postretirement plans. It also requires reporting of various elements of pension and other postretirement benefit costs on a quarterly basis. Generally, the disclosure requirements are effective for interim periods beginning after December 15, 2003; however, information about foreign plans is effective for fiscal years ending after June 15, 2004. Tyco adopted the revised SFAS No. 132 during the quarter ended March 31, 2004. See Note 19 of the Consolidated Financial Statements for further discussion of retirement plans.

        In December 2003, the SEC issued Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition," which supercedes SAB 101, "Revenue Recognition in Financial Statements." SAB 104's primary purpose is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superceded as a result of the issuance of EITF 00-21, "Revenue Arrangements with Multiple Deliverables." The issuance of SAB 104 reflects the concepts contained in EITF 00-21. The other revenue recognition concepts contained in SAB 101 remain largely unchanged. The issuance of SAB 104 did not have a material impact on our results of operations, financial position or cash flows.

        In May 2004, the FASB issued FSP No. 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003." FSP No. 106-2 provides guidance on the accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act") on postretirement health care plans that provide prescription drug benefits. FSP No. 106-2 also requires certain disclosures regarding the effect of the federal subsidy provided by the Act. FSP No. 106-2 is effective for Tyco in the fourth quarter of 2004. The adoption of FSP No. 106-2 did not have a material impact on our results of operations, financial position or cash flows.

        In September 2004, the EITF reached a consensus on EITF Issue No. 04-8 "The Effect of Contingently Convertible Instruments on Diluted Earnings per Share." This EITF requires that contingently convertible debt securities with a market price trigger be included in diluted earnings per share, regardless of whether the market price trigger has been met. EITF 04-8 is effective for all

58

periods ending after December 15, 2004 and requires retroactive restatement of previously reported earnings per share. Any contingently convertible instrument that is settled in cash before December 31, 2004 would not be reflected in the retroactive restatement. The adoption of this EITF is not expected to have a material impact on our results of operations, financial position or cash flows.

        In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4." SFAS No. 151 amends Accounting Research Bulletin ("ARB") No. 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current-period charges. In addition, SFAS No. 151 requires that allocation of fixed production overhead to inventory be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company is currently assessing the impact that SFAS No. 151 will have on the results of operations, financial position or cash flows.

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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 Actions of Tyco's Former Senior Corporate Management

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, former members of our Board of Directors and our current Chief Executive Officer are named defendants in a number of purported class actions alleging violations of the disclosure provisions of the federal securities laws. 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 class actions. In addition, Tyco and some members of our former senior corporate management are subject to an SEC inquiry, and 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. The findings and outcomes of the prosecutions and the SEC civil action may affect the course of the purported securities class actions and ERISA class actions pending against Tyco. We are generally obligated to indemnify our directors and officers and our former directors and officers who are also named as defendants in some or all of these matters to the extent required 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. We are unable at this time to estimate what our ultimate liability in these matters may be, and it is possible that we will be required to pay judgments or settlements and incur expenses, in excess of any insurance coverage, in aggregate amounts that would have a material adverse effect on our financial position, results of operations or cash flows. At this time, it is not possible to estimate the amount of loss or probable losses, if any, that might result from an adverse resolution of these matters.

Continued scrutiny resulting from ongoing governmental investigations may have an adverse effect on our business.

        We and others have received subpoenas and requests from the SEC's Division of Enforcement, the District Attorney of New York County, the Department of Labor and others seeking the production of voluminous documents in connection with various investigations into our governance, management, operations, accounting and related controls. Certain current and former employees in Fire and Security received subpoenas from the SEC's Division of Enforcement seeking testimony related to past accounting practices regarding the ADT dealer connect fees. As previously reported in our periodic filings, these practices have been discontinued. The Department of Labor is investigating Tyco and the administrators of certain of our benefit plans. 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 (which in turn could negatively impact our business with non-governmental customers) or suffer other penalties, each of which could have a material adverse effect on our business. We cannot provide assurance that the effects and results of these or other investigations will not be material and adverse to our business, financial condition, results of operations or cash flows.

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Examinations and audits by tax authorities, including the IRS, could result in additional tax payments for prior periods.

        Tyco and our subsidiaries' income tax returns are periodically examined by various tax authorities. Tyco is currently under audit by the IRS for the years 1997 to 2000. In connection with such examinations, tax authorities, including the IRS, have raised issues and proposed tax deficiencies. We are reviewing the issues raised by the tax authorities and are contesting certain of the proposed tax 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. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions across our global operations. We recognize potential liabilities and record tax liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. These tax liabilities are reflected net of related tax loss carryforwards. We adjust these reserves in light of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities.

        In connection with the IRS audits for the years 1997-2000, the Company prepared proposed adjustments to these prior period U.S. federal income tax returns. The proposed amendments are currently being reviewed by the IRS and if accepted will result in receipt of refunds or credits and a corresponding reduction to our deferred tax assets and liabilities. The Company may prepare proposed amendments to prior period U.S. federal income tax returns for additional periods.

Ongoing SEC inquiries may require us to further amend or restate our public disclosures.

        We are subject to inquiries by the SEC's Division of Enforcement. We cannot provide assurance that the resolution of the Division of Enforcement's inquiries will not necessitate further amendments or restatements to our previously-filed periodic reports or lead to some enforcement proceedings against Tyco. The SEC's Division of Enforcement has not completed its review of prior management's actions and our accounting, including the matters covered by the Company's Current Report on Form 8-K filed on December 30, 2002.

Further instances of breakdowns in our internal controls and procedures could have an adverse effect on us.

        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 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.

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While we have implemented new procedures, we cannot provide assurance that we will not discover that there have been further instances of breakdowns in our internal controls and procedures.

Material adverse legal judgments, fines, penalties or settlements could adversely affect our financial health and prevent us from fulfilling our obligations under our outstanding indebtedness.

        We estimate that our available cash and our cash flow from operations will be adequate to fund our operations and service our debt for the forseeable future. In making this estimate, we have not assumed the need to make any material payments in connection with our pending litigation or investigations. Any material adverse legal judgments, fines, penalties or settlements arising from our pending investigations and litigation could require additional funding. If such developments require us to obtain additional funding, we cannot provide assurance that we will be able to obtain the additional funding that we need on commercially reasonable terms or at all, which could have a material adverse effect on our results of operations and cash flows.

        Such an outcome 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, including debt reduction or dividend payments;



•

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 our outstanding indebtedness; and



•

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