We conduct our business through six principal segments: Otis, Carrier, UTC Fire & Security, Pratt & Whitney, Hamilton Sundstrand and Sikorsky. Otis, Carrier and UTC Fire & Security are collectively referred to as the "commercial businesses," while Pratt & Whitney, Hamilton Sundstrand and Sikorsky are collectively referred to as the "aerospace businesses." The current status of significant factors impacting our business environment in 2008 is discussed below. For additional discussion, refer to the "Business Overview" section in Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2007 Annual Report to Shareowners, incorporated by reference in our 2007 Form 10-K (2007 Form 10-K).

General

As worldwide businesses, our operations can be affected by global and regional industrial, economic and political factors. However, our geographic and industry diversity, as well as the diversity of our product sales and services, has helped limit the impact of any one industry or economy of any single country on our consolidated results.

Total third quarter revenues increased 7% year over year, as compared to the same period in 2007, despite an increasingly challenging economic environment. The recent extreme volatility and disruption of financial markets in the United States, Europe and Asia, continuing airline financial distress, and depressed conditions in the domestic housing market have all contributed to weakening worldwide economic conditions. Some of these factors have had an impact on aspects of our underlying businesses, as discussed further below, while other markets and businesses have continued to perform strongly.

Organic growth for the quarter was 4% as compared with the 6% seen in the second quarter of 2008. The favorable impact of foreign currency translation (3%) contributed the remainder of the 7% total growth in third quarter revenues year over year. Although reduced, organic growth continues to reflect the global infrastructure investments that are benefiting our commercial businesses, notwithstanding the moderation of orders in commercial construction activity at Otis and strong opening order backlogs entering 2008. On a global basis, Otis's new equipment orders were flat year over year for the third quarter, and up 15% for the first nine months of 2008 when compared to the same period of 2007. Conversely, Carrier's commercial heating, ventilating, and air conditioning (HVAC) new equipment orders grew approximately 12% worldwide in the third quarter of 2008, as compared with the same period of 2007. Although commercial HVAC revenue grew in the quarter, the commercial refrigeration and residential international businesses in Europe declined as a result of the current economic conditions. As with prior quarters, the ongoing weakness in the U.S. residential market continued to affect Carrier's North American residential business, although shipments were stronger than those reflected in comparable reported market data. UTC Fire & Security's organic revenue growth of 5% in the quarter was driven by strength in the Fire Safety businesses serving the oil & gas and marine industries.

Although the price of oil has retreated from record prices seen only a few months ago, the commercial aerospace industry continues its plan of capacity reductions to help offset volatile fuel prices. Revenue passenger miles (RPMs) are projected to increase worldwide in 2008, although at a rate lower than initially expected, in part due to volatile fuel prices and slower global economic growth. Consistent with expectations, we saw a 6% decline in Pratt & Whitney's commercial aerospace aftermarket business in the third quarter of 2008 when compared to the same period of 2007. However, we continue to experience growth in the commercial aerospace original equipment manufacturer (OEM) markets, both at Pratt & Whitney and Hamilton Sundstrand, and continued strong demand for military helicopters at Sikorsky. The increase in revenues in the third quarter of 2008 was accompanied by continued improvements in operational efficiencies, including savings from previously initiated restructuring actions and cost containment efforts.

Operating profit improvements across all businesses were partially offset by the adverse impact of higher restructuring costs to generate a 9% increase in consolidated operating profit in the third quarter of 2008 as compared with the same period in 2007. In anticipation of a slower growth environment, we have initiated further cost reduction actions, particularly at Pratt & Whitney and Carrier, and expect full year restructuring costs of around $300 million. Although lower than the previous quarter, commodity prices still adversely impacted operating results. After a partial recovery through pricing, the net impact to earnings, excluding energy, was approximately $40 million in the third quarter of 2008. We expect the full year gross commodity cost impact, excluding energy, to be over $300 million, with pricing expected to offset a little more than half the impact. The favorable impact of foreign currency translation (2%) and the net impact from acquisitions and divestitures completed in the past year (1%) were offset by increased restructuring charges (3%).

As previously disclosed, operating profit for the first nine months of 2007 was adversely impacted by a civil fine, net of existing reserves, of $216 million levied against Otis recorded in the first three months of 2007. The European Commission's Competition Directorate assessed a civil fine of approximately $300 million (EU Fine) against Otis, its relevant local entities and UTC, as a result of certain Otis subsidiaries in Europe violating European Union competition rules. Gains from the sale of marketable securities and certain non-core assets and lower restructuring charges in the first three months of 2007 helped to offset the adverse impact of this fine.

Weakness of the U.S. dollar against certain currencies such as the Euro, when compared to prior year rates, generated a positive foreign currency translation impact in the third quarter of 2008, which was partially offset by the adverse impact of foreign exchange on Pratt & Whitney Canada's results. The weakness of the U.S. dollar has adversely impacted Pratt & Whitney Canada's operating profits as the majority of its revenues are denominated in U.S. dollars, while a significant portion of its costs are incurred in local currencies. Including the adverse impact on Pratt & Whitney Canada's costs, foreign currency translation contributed $.03 and $.02 per share in the third quarter of 2008 and 2007, respectively. Although, currency markets cannot be predicted with certainty, any significant fluctuations in foreign exchange rates could negatively affect our results of operations.

Commercial Businesses

Our commercial businesses generally serve customers in the worldwide commercial and residential property industries, although Carrier also serves customers in the commercial and transport refrigeration industries. Revenues in the commercial businesses are influenced by residential and commercial construction activity, domestic and world gross domestic product growth levels, overall global economic conditions and, for Carrier, seasonal weather conditions. To ensure adequate supply of Carrier products in the distribution channel, Carrier customarily offers its customers incentives to purchase products.

Despite a general slowdown in retail-related markets, Carrier experienced overall revenue growth of 5% in the third quarter of 2008. Weak economic conditions in Europe have adversely impacted both the commercial refrigeration and international residential businesses. The favorable foreign currency translation impact from a weak U.S. dollar, and growth in its other businesses combined to help offset the declines in the commercial refrigeration and international residential businesses. In response to the current economic environment and expected slower worldwide growth, Carrier continues to focus on implementing restructuring and other cost reduction initiatives.

Within the Otis segment, revenue increased 14% in the first nine months of 2008 with organic growth of 7%, compared to the same period of 2007. New equipment orders were flat in the quarter, but still remained up 15% through the first nine months of the year, or 8% excluding the favorable impact of foreign currency translation. During the third quarter, Otis saw continued double digit new equipment order growth in Asia, offset by a significant decline in North America, influenced by a single large project cancellation in Las Vegas. Order growth in China remained strong in the quarter, up approximately 30%, or about 20% excluding the favorable impact of foreign currency translation, which is consistent with the first half of the year.

UTC Fire & Security's third quarter revenue increased 10% with organic growth of 5%. Organic revenue growth was driven primarily by growth in the North American and European Fire Safety businesses with a solid presence in the petroleum, oil & gas and marine industries. During the quarter, UTC Fire & Security completed its sale of the Australian guarding and mobile patrol businesses.

Aerospace Businesses

The aerospace businesses serve both commercial and government aerospace customers. In addition, elements of Pratt & Whitney and Hamilton Sundstrand also serve customers in the industrial markets. RPMs, U.S. government military and space spending, corporate profits, production levels at airframe manufacturers and the general economic health of airline carriers are all barometers for our aerospace businesses. Volatile fuel prices continue to adversely impact the commercial aerospace industry as some larger domestic airline carriers have implemented plans to reduce service and capacity in response to high oil prices, including retiring their older and less fuel efficient aircraft, and cutting payroll costs; while several smaller carriers have either declared bankruptcy or shut down altogether. Announced service and capacity reductions are not expected to have a significant impact on our 2008 full year results, although there have been year over year declines in Pratt & Whitney's large commercial spares orders in each quarter this year with similar challenges expected in the fourth quarter of 2008 and into 2009 as airlines reduce capacity. Total commercial aerospace aftermarket revenues declined 3% in the third quarter of 2008 compared to the same period in 2007, reflecting a 6% decline at Pratt & Whitney partially offset by increases at both Hamilton Sundstrand and Sikorsky. Hamilton Sundstrand's aftermarket revenues increased in both the quarter and year to date due to provisioning by the airlines and due to product content on a broad spectrum of aircraft.

Despite the airline industry adversity, the continued strong production levels at the airframe manufacturers generated commercial aerospace OEM growth in the third quarter of 2008 as compared with the same period in 2007 as airframe manufacturers continued delivering on their record backlogs. The current machinist strike at Boeing Co. has not had a significant adverse impact on us to date and is not expected to have a significant impact to our 2008 full year results. Government military spending is also driving helicopter demand and, as a result, Sikorsky's military backlog remains very strong. Across all segments, military OEM volume increased 8% in the third quarter as compared to the same period in 2007, led by Sikorsky. Contributing to the growth in revenues at Sikorsky were increased large aircraft shipments and a favorable military configuration shift to the new Black Hawk variant. The UH-60M helicopter is the latest and most modern in a series of Black Hawk variants that Sikorsky has been delivering to the U.S. Army since 1978 and requires significant additional assembly hours relative to the previous variants.

At times, the aerospace businesses enter into firm, fixed-price development contracts, which may require us to bear cost overruns related to unforeseen technical and design challenges that arise during the development stage of a particular program. Sikorsky is developing the CH-148 for the Canadian government under an approximately $3 billion

firm, fixed-price contract, which provides for the development, production, and logistical support of 28 helicopters. The CH-148 is a derivative of the H-92, a military variant of the S-92. This is the largest and most expansive fixed-price development contract in Sikorsky's history, including 20 years of service and support requirements. As previously disclosed, it is expected that delivery of the initial aircraft will be delayed approximately 24 months, until approximately the fourth quarter of 2010. Sikorsky is currently in discussions with the Canadian government concerning a potential re-baselining of the program.

Overall economic conditions are also affecting the cost and availability of raw materials, such as titanium and nickel, as industry demand outpaces current capacity. The availability and pricing of these materials are expected to continue to affect aerospace performance and could have a further adverse impact on future performance depending on market conditions.

Acquisition Activity

Our growth strategy contemplates acquisitions. The rate and extent to which appropriate acquisition opportunities are available, acquired businesses are effectively integrated and anticipated synergies or cost savings are achieved, can affect our operations and results. During the first nine months of 2008, our investment in businesses was $721 million, including debt assumed of $13 million, which consisted primarily of a number of small acquisitions in both our commercial and aerospace businesses. We recorded the excess of the purchase price over the estimated fair value of the assets acquired as an increase in goodwill. As a result of acquisition activity and the finalization of purchase accounting, goodwill increased approximately $545 million in the first nine months of 2008.

Including acquisitions made during the first nine months of 2008, we now expect to invest approximately $1 billion in acquisitions for 2008, compared with the $2 billion disclosed in prior quarters. The total amount of investments in any given year depends upon the timing, availability and appropriate value of acquisition opportunities. We have withdrawn our previously disclosed offer to acquire all of the outstanding shares of Diebold, Incorporated. With the expected investment in acquisitions for 2008, we have increased the projected repurchase of our common stock in 2008 from $2 billion to around $3 billion.

Other

Government legislation, policies and regulations can have a negative impact on our worldwide operations. Government regulation of refrigerants and energy efficiency standards, elevator safety codes and fire protection regulations are important to our commercial businesses. Government and market-driven safety and performance regulations, restrictions on aircraft engine noise and emissions and government procurement practices can impact our aerospace and defense businesses.

Global economic conditions, commercial airline financial distress/consolidation, changes in raw material and commodity prices, interest rates, foreign currency exchange rates and energy costs create uncertainties that could impact our earnings outlook for the remainder of 2008. See Part II, Item 1A, "Risk Factors" in this Form 10-Q for further discussion.

Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. We believe the most complex and sensitive judgments, because of their significance to the Consolidated Financial Statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Management's Discussion and Analysis and Note 1 to the Consolidated Financial Statements in our 2007 Form 10-K, describe the significant accounting estimates and policies used in preparation of the Consolidated Financial Statements. Actual results in these areas could differ from management's estimates. As discussed below and in Note 11 to the Condensed Consolidated Financial Statements, we have adopted SFAS 157 as of January 1, 2008, with the exception of the application of the statement to nonrecurring nonfinancial assets and nonfinancial liabilities, the deferral of which was permitted under FSP 157-2. Other than this change, there have been no significant changes in our critical accounting estimates during the first nine months of 2008.

Substantially all of our financial assets and liabilities are measured at fair value based upon Level 1 or Level 2 inputs, as defined under SFAS 157. We use quoted market prices in active markets to measure and record the fair value of available for sale securities. For our derivative assets and liabilities, we use observable inputs such as forward rates and interest rates to measure and record their fair value.

                        RESULTS OF CONTINUING OPERATIONS

                                    Revenues



                                           Quarter Ended                      Nine Months Ended
                                           September 30,                        September 30,
(in millions of dollars)                  2008       2007     % change         2008        2007     % change
Sales                                   $ 14,702   $ 13,718        7.2 %    $   43,814   $ 39,420       11.1 %
Other income, net                            112        145      (22.8 )%          368        625      (41.1 )%

Total revenues                          $ 14,814   $ 13,863        6.9 %    $   44,182   $ 40,045       10.3 %

Revenue growth in the third quarter of 2008 reflects organic growth of 4% and the favorable impact from foreign currency translation of 3% resulting from the weakness of the U.S. dollar relative to currencies such as the Euro. The organic revenue growth reflects the strong opening new equipment backlog at Otis, demand for military helicopters at Sikorsky, strength in commercial aerospace OEM at Hamilton Sundstrand and Pratt & Whitney and growth in the Fire Safety businesses at UTC Fire & Security. This growth was partially offset by declines in Pratt & Whitney's large commercial spares business and weakness in Carrier's commercial refrigeration and residential international businesses, as discussed previously in the "Business Overview" section.

The decrease in other income in the third quarter of 2008, as compared to 2007, reflects the absence of approximately $28 million of pretax interest income related to the completion of an IRS examination for tax years 2000 through 2003 recorded in the third quarter of 2007. The remainder of the year over year decrease reflects increased hedging costs on our cash management activities. Other income in the third quarter of 2008 includes an approximately $37 million non-cash gain recognized on the sale of a partial investment at Pratt & Whitney.

The nine month revenue increase of 10% consists of organic growth of 6% and the favorable impact of foreign currency translation of 4%. The net impact of acquisitions and divestitures (2%) was offset by a decrease in other income. The nine month revenue growth is due largely to strong new equipment backlog entering the year at Otis, the strength in the commercial aerospace OEM markets and the demand for military helicopters. The decrease in other income in the first nine months of 2008, as compared with 2007, is largely related to the absence of gains reflected in 2007, which included approximately $150 million related to the sale of certain marketable securities and an $84 million gain recognized on the sale of land by Otis. Also contributing to the year over year decrease is the absence of $28 million of pre-tax interest income related to the completion of an IRS examination for tax years 2000 through 2003 recorded in 2007, and increased hedging costs on our cash management activities. As noted above, other income in 2008 includes an approximately $37 million non-cash gain recognized on the sale of a partial investment at Pratt & Whitney.

                                  Gross Margin



                                        Quarter Ended          Nine Months Ended
                                        September 30,            September 30,
          (in millions of dollars)    2008        2007         2008          2007
          Gross margin               $ 4,038     $ 3,650     $  11,810     $ 10,227
          Percentage of sales           27.5 %      26.6 %        27.0 %       25.9 %

For the third quarter of 2008, gross margin as a percentage of sales increased by 90 basis points, as compared to the same period of 2007. This improvement is largely attributable to savings from previously initiated restructuring actions and continued net operational efficiencies. The net benefits from several contract related negotiations at Hamilton Sundstrand and a favorable resolution of a legal dispute at Pratt & Whitney were offset by the adverse impact of higher commodity costs. After a partial recovery through pricing, the net adverse impact to earnings of higher commodity costs, net of pricing, was approximately $40 million in the third quarter and approximately $95 million for the nine months ended September 30, 2008. These benefits were partially offset by higher restructuring costs. Restructuring costs, as a component of cost of sales, increased $30 million for the third quarter of the year when compared to the same period of 2007.

For the first nine months of 2008, gross margin as a percentage of sales increased by 110 basis points, as compared to the same period of 2007. This improvement is primarily due to the absence of the first quarter 2007 EU Fine, net of reserves (approximately 50 basis points). The net benefits from several contract related negotiations at Hamilton Sundstrand and a favorable resolution of a legal dispute at Pratt & Whitney (approximately 10 basis points combined) was more than offset by higher commodity costs, net of pricing (approximately 20 basis points). The benefit from higher volumes, savings from previously initiated restructuring actions and net operational efficiencies, partially offset by the impact of foreign exchange at Pratt & Whitney Canada contributed to the remainder of the year over year change.

                            Research and Development



                                     Quarter Ended September 30,                      Nine Months Ended September 30,
                                   2008                      2007                      2008                     2007
(in millions of dollars)    Amount    % of Sales      Amount    % of Sales     Amount    % of Sales     Amount    % of Sales
Company-funded             $    436          3.0 %   $    399          2.9 %   $ 1,281          2.9 %   $ 1,197          3.0 %
Customer-funded                 488          3.3 %        484          3.5 %     1,525          3.5 %     1,369          3.5 %

Total                      $    924          6.3 %   $    883          6.4 %   $ 2,806          6.4 %   $ 2,566          6.5 %

The increase in company-funded research and development in the third quarter and first nine months of 2008, compared to the same periods in 2007, was led by continued efforts on Pratt & Whitney's next generation product family, which includes the Geared TurbofanTM (GTF) engine as well as general increases across the businesses. Company-funded research and development spending for the full year 2008 is expected to increase by approximately $150 million from 2007 levels, led by Pratt & Whitney's engineering investments on aerospace programs such as the GTF. Company funded research and development spending is subject to the variable nature of program development schedules. The increase in customer-funded research and development spending for the first nine months of 2008, as compared to the same period of 2007, relates largely to increased engineering effort in the J-2X propulsion program at Pratt & Whitney Rocketdyne and military and space programs at Hamilton Sundstrand.

                      Selling, General and Administrative



                                        Quarter Ended          Nine Months Ended
                                        September 30,            September 30,
          (in millions of dollars)    2008        2007          2008         2007
          Total expenses             $ 1,665     $ 1,508     $    5,075     $ 4,398
          Percentage of sales           11.3 %      11.0 %         11.6 %      11.2 %

The increase in selling, general and administrative expenses for the quarter and nine months ended September 30, 2008, compared to the same periods of 2007, is due primarily to general increases across the businesses in support of volume, higher restructuring charges, and the adverse impact of foreign currency translation. Restructuring costs as a component of selling, general and administrative expenses increased $20 million and $86 million for the third quarter and first nine months of the year, respectively, when compared to the same periods of 2007.

                                Interest Expense



                                        Quarter Ended          Nine Months Ended
                                        September 30,            September 30,
           (in millions of dollars)    2008        2007        2008           2007
           Interest expense           $   177      $ 179     $     518       $  492
           Average interest rate          5.9 %      6.3 %         5.9 %        6.2 %

Interest expense for the nine months ended September 30, 2008, as compared to the same periods in 2007, has increased primarily as a result of the issuances of $1.0 billion of long-term debt in December 2007 bearing interest at 5.375% and $1.0 billion of long-term debt in May 2008 bearing interest at 6.125%. The overall average interest rate declined as these debt issuances were at interest rates lower than the existing debt levels. While full year interest expense has increased, the expense in the third quarter of 2008 benefited from lower charges on the deferred compensation plan.

The effective tax rate for the third quarter of 2008 increased, as compared to the third quarter of 2007, due to the absence of discrete items which favorably impacted the third quarter of 2007. The effective tax rate for the third quarter of 2007 was favorably impacted by approximately $50 million relating to a re-evaluation of our liabilities and contingencies based on global examination activity in the quarter, including completion of our review of the 2000 to 2003 IRS audit report and our protest filing and the development of claims for research and development credits, net of charges associated with tax law changes enacted in the quarter. As a result of international transactions now . . .