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 the first quarter of 2009 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 2008 Annual Report, which is incorporated by reference in our 2008 Form 10-K. Certain reclassifications have been made to the 2008 amounts to conform to the current year presentation. These include the adoption of Statement of Financial Accounting Standard (SFAS) No. 160, "Noncontrolling Interests in Consolidated Financial Statements" (SFAS 160) and Emerging Issues Task Force (EITF) Issue No. 07-1, "Accounting for Collaborative Arrangements" (EITF 07-1). See discussion in Notes 9 and 12, respectively, to the Condensed Consolidated Financial Statements.

General

As worldwide businesses, our operations can be affected by global and regional industrial, economic and political factors. In order to limit the impact of any one industry or the economy of any single country on our consolidated operating results, our strategy has been, and continues to be, the maintenance of a balanced and diversified portfolio of businesses. Our businesses include both commercial and aerospace operations, original equipment manufacturing (OEM) businesses with extensive related aftermarket parts and services businesses, as well as shorter cycles in our commercial businesses, particularly Carrier, and longer cycles in our aerospace businesses. Our businesses include extensive geographic diversification that has evolved with the continued globalization of world economies.

However, the widespread nature of the current global economic contraction has created immediate challenges for most of our businesses and the markets in which they operate. Continuing volatility and financial disruption in the global markets, airline financial distress, softening business jet markets, weak commercial construction activity and depressed conditions in the transport refrigeration industries as well as domestic and certain international housing markets have adversely impacted aspects of our underlying businesses and are expected to continue to present challenges throughout 2009.

As a result of these adverse global economic conditions, total organic revenue declined 5% in the first quarter of 2009, compared to the same period a year ago. The adverse impact from both foreign currency translation (6%) and the impact of net divestitures completed in the past year (1%) contributed the remainder of the 12% contraction in total first quarter revenues year-over-year. The reduction in organic revenue growth reflects decreases in new equipment sales across all geographic regions at Otis, significantly lower volume for transport and commercial refrigeration products and continued weakness in the North American residential market at Carrier. UTC Fire & Security's revenue decline reflects softness in certain security markets, particularly in North America and Europe. Weakness in construction and general manufacturing markets also contributed to reduced revenues year-over-year within Hamilton Sundstrand's industrial business. Within the aerospace industry, declining passenger and cargo traffic, capacity reductions and lower aircraft utilization has resulted in a corresponding decrease in commercial aftermarket volume at both Pratt & Whitney and Hamilton Sundstrand. Continued government military spending and demand for military helicopters favorably impacted Sikorsky, which experienced 30% revenue growth in the first quarter of 2009 compared to the same period of 2008.

The decline in revenue contributed to a consolidated operating profit decline of 25%, as compared with the same period in 2008. The year-over-year decline also reflects the adverse impact of higher restructuring charges (8%) and the impact of foreign currency translation combined with currency hedges at Pratt & Whitney Canada (P&WC) (combined 6%). To help mitigate the impact of this challenging economic environment and better position us for 2010, we continue to focus on cost reduction. During the first quarter of 2009, we incurred restructuring charges of approximately $163 million to help mitigate the volume declines and to reduce structural and overhead costs across the businesses. We expect full year restructuring costs to total approximately $750 million, including the $163 million of charges incurred in the first quarter of 2009. However, with the exception of actions announced in April 2009, no specific plans for significant other actions have been finalized at this time.

The general strength of the U.S. dollar against certain currencies such as the Euro generated an adverse foreign currency impact of $.08 per share on our operational performance in the first quarter of 2009. This year-over-year impact is net of the beneficial impact of foreign currency translation and adverse impact of hedging at P&WC. The strength in the U.S. dollar benefits P&WC operating results, as the majority of P&WC's revenues are denominated in U.S. dollars, while a significant portion of its costs are incurred in local currencies. However, this benefit was more than offset by the adverse impact on revenues of maturing hedges that were executed when the U.S. dollar was weaker.

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 a number of external factors including fluctuations in residential and commercial construction activity, regulatory changes, interest rates, labor costs, foreign currency exchange rates, customer attrition, raw material and energy costs, tightening credit markets and other global and political factors. Carrier's financial performance can also be influenced by production and utilization of transport equipment, and for its residential business, weather conditions. To ensure adequate supply of Carrier products in the distribution channel, Carrier customarily offers its customers incentives to purchase products.

Global economic conditions have adversely impacted the commercial businesses to varying degrees with the most significant effects being experienced at Carrier. The strong U.S. dollar, weakening commercial construction, the deterioration of the U.S. housing market and weak demand in end markets have all posed operating challenges. Further, although we have not seen a significant increase in cancellations of orders in the commercial businesses to date, we have experienced an increase in delays as the underlying projects contend with financing issues, as a result of the tight credit markets, as well as a decline in orders year-over-year. Order trends were weak in the quarter, although we saw stabilization in the rate of year-over-year decline across most of our businesses in March.

Within the Otis segment, revenues decreased 13% in the first quarter of 2009 reflecting lower volume (3%) and the unfavorable impact of foreign currency translation (10%). Weak economic conditions have continued to adversely impact many commercial construction markets around the world, contributing to new equipment order declines at Otis of 43%, including the adverse impact of foreign currency translation, during the first quarter of 2009 as compared to the same period of 2008. Softness in global commercial construction markets is expected to persist in the near term, further impacting new equipment sales, orders and pricing throughout 2009.

The challenging global economy continues to have an immediate impact on Carrier's short cycle businesses, leading to a decline in organic revenue of 19%. Weak end markets continue to adversely impact the Refrigeration businesses, particularly transport refrigeration, and weakness in the U.S. housing market unfavorably impacted the North American Residential businesses. These adverse market conditions are expected to challenge Carrier throughout 2009. In response, Carrier continues to focus on implementing restructuring and other cost reduction initiatives.

UTC Fire & Security experienced a 20% revenue decline in the first quarter of 2009, primarily attributable to the adverse impact of foreign currency translation (16%). The decrease in organic revenue is primarily attributable to lower Security revenues as a result of weakness in security markets in North America and Europe, while the Fire Safety business was essentially flat year-over-year.

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. Revenue passenger miles (RPMs), U.S. government military and space spending, and the general economic health of airline carriers are all barometers for our aerospace businesses.

The global aerospace industry continues to be challenged by the deepening global economic slowdown and reduced air travel. As a result, airframers, including business jet OEMs have seen lower levels of orders for aircraft. Due to the weak demand for business and general aviation aircraft, business jet OEMs have continued to make downward revisions to their production schedules, which has put additional pressure on P&WC. To combat the impact of reduced air travel, airlines have reduced capacity by idling some aircraft and retiring older and less fuel efficient aircraft, and have delayed orders and deliveries of new planes. Declining passenger and cargo traffic, capacity reductions, lower aircraft utilization, and cash conservation measures at some airlines have led to a corresponding decrease in commercial aerospace aftermarket volume at both Pratt & Whitney and Hamilton Sundstrand and accordingly consolidated commercial aerospace aftermarket revenue declined approximately 17% year-over-year. As a result of further expected air traffic declines, RPMs are now projected to decrease about 4% worldwide in 2009, compared to the prior year.

Continued government military spending drove military revenues to increase approximately 13% compared to the same period in 2008, primarily as a result of military helicopter demand at Sikorsky. With the strong government demand, Sikorsky's military backlog remains near record levels.

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 three months of 2009, we invested approximately $122 million in acquisitions, which consisted primarily of additional investments in our commercial 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 $60 million in the first quarter of 2009.

We continue to expect to invest approximately $2 billion in acquisitions for 2009, including those investments during the first quarter of 2009, although this will depend upon the timing, availability and appropriate value of acquisition opportunities.

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.

Commercial airline financial distress/consolidation, global economic conditions, 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 2009. 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 2008 Annual Report, incorporated by reference in our 2008 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. There have been no significant changes in our critical accounting estimates during the first three months of 2009.

                        RESULTS OF CONTINUING OPERATIONS

                                    Revenues



                                             Quarter Ended
                                               March 31,          %
               (in millions of dollars)     2009       2008     change
               Sales                      $ 12,199   $ 13,834    (11.8 )%
               Other income, net                50        124    (59.7 )%

               Total revenues             $ 12,249   $ 13,958    (12.2 )%

The 12% revenue decline in the first quarter of 2009, as compared to the same period of 2008, reflects organic revenue contraction of 5%, the impact of net acquisitions and divestitures (1%), and the adverse impact from foreign currency translation (6%) resulting from the strength of the U.S. dollar relative to currencies such as the Euro. As discussed above in the "Business Overview" section, the revenue contraction reflects decreases at most of our businesses, with particular weakness in our short cycle commercial businesses as a result of challenging global economic conditions. Continued weak air traffic, particularly international and cargo traffic, and cash conservation measures at some airlines have resulted in a corresponding decline in aftermarket revenues at both Pratt & Whitney and Hamilton Sundstrand. Military OEM revenue growth was driven largely by government demand for helicopters at Sikorsky. Also contributing to the year-over-year revenue decline is the adverse impact of maturing currency hedges at P&WC that were executed when the U.S. dollar was weaker.

The decrease in Other income, net in the first quarter of 2009 is largely related to lower equity income at Carrier from a joint venture in Japan, and lower royalty, interest and other miscellaneous income across the businesses.

                                  Gross Margin



                                                  Quarter Ended
                                                    March 31,
                    (in millions of dollars)    2009        2008
                    Gross margin               $ 3,092     $ 3,596
                    Percentage of sales           25.3 %      26.0 %

Gross margin as a percentage of sales decreased 70 basis points primarily due to higher year-over-year restructuring costs across the businesses (60 basis points). Savings from previously initiated restructuring actions, net operational efficiencies and a continued focus on cost reduction helped to limit the impact of lower sales volumes, particularly in our higher margin aerospace aftermarket and transport refrigeration businesses.

                            Research and Development



                                               Quarter Ended March 31,
                                           2009                      2008
        (in millions of dollars)    Amount    % of sales      Amount    % of sales
        Company-funded             $    409          3.4 %   $    411          3.0 %
        Customer-funded                 514          4.2 %        528          3.8 %

        Total                      $    923          7.6 %   $    939          6.8 %

Company-funded research and development spending was essentially flat in the three months ended March 31, 2009 compared to the same period in 2008. This reflects higher spending at Hamilton Sundstrand and Sikorsky across various programs offset by declines at Pratt & Whitney and Carrier. Company-funded research and development spending for the full year 2009 is expected to decrease by approximately $100 million from 2008 levels. Company-funded research and development spending is subject to the variable nature of program development schedules. The decrease in customer-funded research and development largely relates to reduced effort at Pratt & Whitney on the Joint Strike Fighter development program as it nears completion, partially offset by increases at Hamilton Sundstrand on various commercial, energy, space and defense programs.

                      Selling, General and Administrative



                                                  Quarter Ended
                                                    March 31,
                    (in millions of dollars)    2009        2008
                    Total expenses             $ 1,483     $ 1,635
                    Percentage of sales           12.2 %      11.8 %

The decrease in selling, general and administrative expenses is due primarily to a continued focus on cost reduction and the impact from restructuring and cost saving initiatives undertaken in 2008 and 2009 in anticipation of adverse economic conditions. As a percentage of sales, selling, general and administrative expenses increased 40 basis points. This increase reflects approximately 60 basis points attributable to higher restructuring costs year-over-year partially offset by the benefit from reduced overhead costs.

                                Interest Expense



                                                 Quarter Ended
                                                   March 31,
                    (in millions of dollars)    2009        2008
                    Interest expense           $   175      $ 165
                    Average interest rate          5.9 %      6.0 %

Interest expense for the three months ended March 31, 2009 has increased as compared to the same period in 2008 primarily as a result of the issuances of $1.25 billion and $1.0 billion of long-term debt in December and May 2008, respectively, both bearing interest at 6.125%.

The effective tax rate for the first quarter of 2009 decreased as compared to the same period of 2008 as a result of a favorable tax impact of approximately $25 million related to the formation of a commercial venture. The effective tax rate for the balance of the year is expected to be approximately 28%, before the impacts of any discrete events.

                                   Net Income



                                                                 Quarter Ended
                                                                   March 31,
     (in millions of dollars, except per share amounts)         2009      2008
     Net income                                                $   799   $ 1,079
     Less: Noncontrolling interest in subsidiaries' earnings        77        79

     Net income attributable to common shareowners                 722     1,000

     Diluted earnings per share                                $  0.78   $  1.03

The general strength of the U.S. dollar against certain currencies, such as the Euro, in the first quarter of 2009, generated an adverse foreign currency impact on our operational results in the quarter of $.08 per share. This impact includes the net impacts of both foreign currency translation and hedging at P&WC. In the first quarter of 2009, positive foreign currency translation at P&WC of $.06 per share was more than offset by the adverse impact of hedging. At P&WC, the strength of the U.S. dollar in the first quarter of 2009 generated positive foreign currency translation impact as the majority of P&WC's revenues are denominated in U.S. dollars, while a significant portion of its costs are incurred in local currencies. To help mitigate the volatility of foreign currency exchange rates on our operating results, we maintain foreign currency hedging programs, the majority of which are entered into by P&WC. Due to the significant revenue growth at P&WC over the past few years, as well as the dramatic increase in the strength of the Canadian dollar to the U.S. dollar in early 2008, the hedges previously entered into generated an adverse foreign exchange impact as the U.S. dollar strengthened. As a result of hedging programs currently in place, P&WC's 2009 full year operating results will include the adverse impact of foreign currency translation, net of hedging, of approximately $100 million. For additional discussion of hedging, refer to Note 8 to the Condensed Consolidated Financial Statements. Diluted earnings per share for the first quarter of 2009 were also favorably impacted by approximately $.03 per share as a result of the shares repurchased since April 1, 2008 under our share repurchase program.

Restructuring and Related Costs

During the first three months of 2009, we recorded net pre-tax restructuring and
related charges totaling $163 million for new and ongoing restructuring actions
as follows:



                        (in millions of dollars)
                        Otis                         $  22
                        Carrier                         41
                        UTC Fire & Security             14
                        Pratt & Whitney                 64
                        Hamilton Sundstrand             19
                        Eliminations and other           2
                        General corporate expenses       1

                        Total                        $ 163

The net charges included $83 million in cost of sales, $75 million in selling, general and administrative expenses and $5 million in other income and, as described below, relate to actions initiated during 2009 and 2008 and trailing costs related to certain 2007 actions.

2009 Actions. During the first three months of 2009, we initiated restructuring actions relating to ongoing cost reduction efforts, including workforce reductions and the consolidation of administrative offices. We recorded net pre-tax restructuring and related charges totaling $151 million as follows: Otis $21 million, Carrier $35 million, UTC Fire & Security $13 million, Pratt & Whitney $59 million, Hamilton Sundstrand $19 million, Eliminations & Other $3 million and General corporate expenses $1 million. The charges included $74 million in cost of sales, $72 million in selling, general and administrative expenses and $5 million in other income. Those costs included $140 million for severance and related employee termination costs, $6 million for asset write-downs and $5 million for facility exit and lease termination costs.

We expect the 2009 actions that were initiated in the first three months to result in net workforce reductions of approximately 3,900 hourly and salaried employees, the exiting of approximately 300,000 net square feet of facilities and the disposal of assets associated with the exited facilities. As of March 31, 2009, we have completed net workforce reductions of approximately 1,900 employees. We are targeting the majority of the remaining workforce and all facility related cost reduction actions for completion during 2009 and 2010. Approximately 80% of the total pre-tax charge will require cash payments, which we will fund with cash generated from operations. During the first three months of 2009, we had cash outflows of approximately $14 million related to the 2009 actions. We expect to incur additional restructuring and related charges of $13 million to complete these actions. We expect recurring pre-tax savings to increase over the two-year period subsequent to initiating the actions to approximately $180 million annually.

2008 Actions. During the first three months of 2009, we recorded net pre-tax restructuring and related charges and reversals of $11 million for actions initiated in 2008. The 2008 actions relate to ongoing cost reduction efforts, including selling, general and administrative reductions and the consolidation of manufacturing facilities. We recorded the charges (reversals) for the first three months of 2009 as follows: Otis $1 million, Carrier $6 million, UTC Fire & Security $1 million, Pratt & Whitney $5 million, Hamilton Sundstrand ($1 million) and Eliminations & Other ($1 million). The charges and reversals included $8 million in cost of sales and $3 million in selling, general and administrative expenses. Those costs and reversals included $5 million for severance and related employee termination costs and $6 million for facility exit and lease termination costs.

We expect the 2008 actions to result in net workforce reductions of approximately 6,300 hourly and salaried employees, the exiting of approximately 1.2 million net square feet of facilities and the disposal of assets associated with the exited facilities. As of March 31, 2009, we have completed net workforce reductions of approximately 4,800 employees and exited 100,000 net square feet of facilities. We are targeting the majority of the remaining workforce and all facility related cost reduction actions for completion during 2009 and 2010. Approximately 80% of the total pre-tax charge will require cash payments, which we will fund with cash generated from operations. During the first three months of 2009, we had cash outflows of approximately $64 million related to the 2008 actions. We expect to incur additional restructuring and related charges of $48 million to complete these actions. We expect recurring pre-tax savings to increase over the two-year period subsequent to initiating the actions to approximately $400 million annually.

2007 Actions. During the first three months of 2009, we recorded net pre-tax restructuring and related charges of $1 million for actions initiated in 2007. . . .