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 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 11, 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, as was the case in the first quarter of 2009, the widespread nature of the current global economic contraction continues to create immediate challenges for most of our businesses and the markets in which they operate. Weak airline traffic and business jet production, declines in 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 11% in the second quarter of 2009, compared to the same period a year ago. The adverse impact of both foreign currency translation (5%) and net divestitures completed in the past year (1%) contributed to the remainder of the 17% contraction in total second quarter revenues year-over-year. The reduction in organic revenue reflects decreases in new equipment sales across all geographic regions at Otis and lower volume across all businesses at Carrier, led by declines in the higher margin transport refrigeration business. UTC Fire & Security's organic revenue contraction reflects declines in both the fire safety and electronic security businesses. As a result of continued weakness in construction and general manufacturing markets, Hamilton Sundstrand's industrial businesses saw organic revenue contraction year-over-year. Within the aerospace industry, weak airline traffic, the impact from capacity reductions and lower aircraft utilization has resulted in a related decrease in commercial aerospace aftermarket volume at both Pratt & Whitney and Hamilton Sundstrand. Low demand for business and general aviation aircraft has also adversely impacted Pratt & Whitney Canada (P&WC) engine shipments in the quarter. Continued government military spending and demand for military helicopters favorably impacted Sikorsky, which experienced 6% revenue growth in the second quarter of 2009 compared to the same period of 2008.

The decline in revenue contributed to a consolidated operating profit decline of 22% in the second quarter of 2009, as compared with the same period of 2008. This year-over-year decline also reflects the adverse impact of higher restructuring charges (10%) and the negative impact of foreign currency translation combined with currency hedges at P&WC (combined 7%). To help mitigate the impact of the global economic downturn and better position us for the future, we continue to focus on restructuring and cost reduction actions. During the second quarter of 2009, we incurred restructuring charges of $301 million for actions to help mitigate the volume declines and to reduce structural and overhead costs across all of the businesses. We expect full year restructuring costs to total approximately $750 million, including the $464 million of charges incurred in the first six months of 2009. However, no specific plans for significant other actions have been finalized at this time. In addition to savings from restructuring, we are seeing benefits from other cost reductions, in areas such as travel, furloughs, research and development and employee attrition. This continued focus on costs that are within our control, including restructuring, has resulted in approximately $550 million of discrete cost reductions in the first six months of 2009.

The year-over-year general strength of the U.S. dollar against certain currencies such as the Euro generated an adverse foreign currency impact of $.11 per share on our operational performance in the second quarter of 2009. This year-over-year impact is net of the beneficial impact of foreign currency translation and includes the 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 continued to adversely impact the commercial businesses to varying degrees with the most significant effects experienced at Carrier. The stronger U.S. dollar, weak 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 due to the tight credit markets, as well as a decline in orders year-over-year. Order trends remained weak in the quarter, although the rate of year-over-year decline showed signs of stabilization.

Within the Otis segment, revenues decreased 13% in the first half of 2009 as compared to 2008, reflecting lower volume (5%) and the unfavorable impact of foreign currency translation (9%). These declines were partially offset by a $52 million non-cash, non-taxable gain on the remeasurement to fair value of a previously held equity interest in a joint venture as a result of the purchase of a controlling interest. Difficult economic conditions have continued to adversely impact many commercial construction markets around the world resulting in the decline in new equipment sales. Cost reduction actions and continued strength in the contractual maintenance business helped mitigate the new equipment volume decline. During the first half of 2009, new equipment orders decreased 42% as compared to the same period in 2008.

The challenging global economy continues to have an immediate impact on Carrier's short cycle businesses, leading to a decline in organic revenue of 21% in the second quarter of 2009. Weak market conditions continue to impact all businesses at Carrier, particularly the higher margin transport refrigeration business. Organic revenues within the transport refrigeration business declined 42% in the second quarter of 2009 as compared to the same period of 2008. Ongoing weakness in the U.S. housing market led to a 16% contraction in organic revenues within the North American residential business consistent with the broader market decline. 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 to assist in mitigating the impact from the steep volume decline.

UTC Fire & Security experienced a 23% revenue decline in the second quarter of 2009, as compared to the same period of 2008, primarily attributable to the adverse impact of foreign currency translation (12%). Lower revenues in both the fire safety and electronic security businesses contributed to an 8% contraction in organic revenues in the second quarter, with particular weakness experienced in both the Americas and in the United Kingdom.

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 confronted by the global economic downturn and reduced air travel. Lower air traffic and the tight credit markets continue to impose a difficult operating environment for the airlines. As a result, airframers have seen lower levels of orders for aircraft compared to 2008. Due to the weak demand for business and general aviation aircraft, as corporations cut back on discretionary spending, business jet OEMs have seen lower levels of orders. Accordingly, business jet OEMs continue to make downward revisions to their production schedules, which has put additional pressure on P&WC. These factors have led to an approximately 25% decrease in second quarter year-over-year engine shipments at P&WC. In an effort to combat the impact of the current economic environment, 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. Continued 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 16% for the first half of 2009 as compared to the same period of 2008.

Second quarter revenues at Sikorsky increased 6%, as compared to the same period of 2008, driven largely by continued government spending on military helicopters. With the strong government demand, Sikorsky's military backlog remains very strong.

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 six months of 2009, we invested approximately $197 million in acquisitions, 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 $158 million in the first six months of 2009.

During the second quarter of 2009, Otis recorded a $52 million non-cash, non-taxable gain recognized on the remeasurement to fair value of a previously held equity interest in a joint venture as a result of the purchase of a controlling interest.

Carrier continues on the path of aggressive transformation, to a simpler, more focused, higher returns business. In July 2009, Carrier and Watsco, Inc (Watsco) formed Carrier Enterprise, LLC, a venture to distribute Carrier, Bryant, Payne and Totaline residential and light commercial heating, ventilating and air conditioning products in the U.S. Sunbelt region and selected territories in the Caribbean and Latin America. As part of the transaction, Carrier contributed its distribution businesses located in these regions into the new venture. In consideration of its contribution, Carrier received approximately 3 million shares of common stock of Watsco and a 40 percent non-controlling interest in the new venture, which included a business contributed by Watsco. Watsco will own a 60 percent interest in the venture with options to purchase an additional 20 percent interest from Carrier in future years.

We continue to expect to invest approximately $2 billion in acquisitions for 2009, including those investments during the first six months 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 six months of 2009.

                        RESULTS OF CONTINUING OPERATIONS

                                    Revenues



                              Quarter Ended June 30,                       Six Months Ended June 30,
(in millions of dollars)       2009            2008       % change           2009             2008        % change
Sales                      $     13,060    $     15,812      (17.4 )%    $      25,259    $      29,646      (14.8 )%
Other income, net                   136             132        3.0 %               186              256      (27.3 )%

Total revenues             $     13,196    $     15,944      (17.2 )%    $      25,445    $      29,902      (14.9 )%

The 17% revenue decline in the second quarter of 2009, as compared to the same period of 2008, reflects organic revenue contraction of 11%, the impact of net acquisitions and divestitures (1%), and the adverse impact from foreign currency translation (5%) resulting from the year-over-year 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 in all but our Sikorsky business, with particular weakness in our short cycle commercial businesses as a result of challenging global economic conditions. Depressed conditions in the business jet market, as corporations cut back on discretionary spending, has adversely impacted P&WC as they experienced an approximately 25% decrease in engine shipments for the second quarter of 2009, as compared to the same period of 2008. Continued weak air traffic and cash conservation measures at some airlines have resulted in corresponding declines in aerospace aftermarket revenues, primarily at Pratt & Whitney and Hamilton Sundstrand. 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. Military OEM revenue growth was driven largely by government demand for helicopters at Sikorsky.

The 15% revenue decline in the first six months of 2009, as compared to the same period of 2008, reflects organic revenue contraction of 8%, the impact of net acquisitions and divestitures (1%), and the adverse impact from foreign currency translation (5%) resulting from the year-over-year strength of the U.S. dollar relative to currencies such as the Euro. As with the second quarter decline, the six month revenue decline largely reflects decreases at most of our businesses as a result of challenging global economic conditions, with particular weakness in our short cycle commercial businesses, a decline in aerospace aftermarket revenues at both Pratt & Whitney and Hamilton Sundstrand and the adverse impact from a depressed business jet market. Similar to the second quarter of 2009, year to date revenues also reflect the adverse impact of maturing currency hedges at P&WC that were executed when the U.S. dollar was weaker.

Other income, net for the second quarter of 2009 includes a $52 million non-cash, non-taxable gain recognized at Otis on the remeasurement to fair value of a previously held equity interest in a joint venture as a result of the purchase of a controlling interest. The year-over-year impact on other income, net of the above mentioned gain was mostly offset by lower joint venture and royalty income across the businesses, higher restructuring and related charges, and the net year-over-year impact of various fixed asset disposals.

The decrease in other income, net in the first six months of 2009 is largely related to lower equity income at Carrier from a joint venture in Japan, lower royalty and interest income across the businesses, higher restructuring and related charges, and the net year-over-year impact of various fixed asset disposals. These reductions in other income, net were partially offset by a gain recognized at Otis in the second quarter of 2009 on the remeasurement to fair value of an interest in a joint venture as noted above.

                                  Gross Margin



                             Quarter Ended June 30,             Six Months Ended June 30,
(in millions of dollars)      2009              2008            2009                 2008
Gross margin               $     3,459        $  4,176      $      6,551         $      7,772
Percentage of sales               26.5 %          26.4 %            25.9 %               26.2 %

The 10 basis point increase in gross margin as a percentage of sales in the second quarter of 2009 as compared to 2008 is net of the adverse impact of higher year-over-year restructuring charges (70 basis points). Similarly, for the first six months of 2009, the year-over-year decrease in gross margin as a percentage of sales of 30 basis points includes higher year-over-year restructuring charges (70 basis points). Excluding the impact of restructuring charges, gross margin improved 80 basis points and 40 basis points, as compared to the second quarter and first six months of 2008, respectively. Continued focus on cost reduction, savings from previously initiated restructuring actions and net operational efficiencies 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 June 30,                             Six Months Ended June 30,
                                   2009                       2008                       2009                      2008
(in millions of dollars)    Amount    % of sales       Amount    % of sales      Amount    % of sales      Amount    % of sales
Company-funded             $    384          2.9 %    $    434          2.7 %    $   793          3.1 %    $   845          2.9 %
Customer-funded                 519          4.0 %         509          3.2 %      1,033          4.1 %      1,037          3.5 %

Total                      $    903          6.9 %    $    943          6.0 %    $ 1,826          7.2 %    $ 1,882          6.3 %

The decrease in company-funded research and development in the second quarter of 2009, compared to the same period in 2008, primarily reflects declines at Pratt & Whitney and Hamilton Sundstrand. The decrease at Pratt & Whitney was led by lower spend at P&WC, while the decrease at Hamilton Sundstrand reflected lower costs across various programs. The decrease in company-funded research and development for the first six months of 2009, compared to the same period of 2008, primarily reflects declines at Pratt & Whitney, driven by P&WC, and Carrier partially offset by higher costs at Sikorsky across various programs. Company-funded research and development spending for the full year 2009 is expected to decrease by at least $100 million from 2008 levels. Company-funded research and development spending is subject to the variable nature of program development schedules.

The increase in customer-funded research and development in the second quarter of 2009, compared to the same period of 2008, largely relates to increases at both Hamilton Sundstrand and Sikorsky. The increase at Hamilton Sundstrand reflects higher spending on various commercial and space programs partially offset by lower development spending on defense programs, while Sikorsky's increase is primarily attributable to higher development spending on the CH-53K program. The slight decrease in customer-funded research and development for the first six months of 2009, compared to the same period of 2008, largely reflects lower spending at Pratt & Whitney Rocketdyne and reduced spending at Pratt & Whitney on the JSF development program partially offset by increases at Hamilton Sundstrand on various commercial and space programs and at Sikorsky on higher development spending on the CH-53K program.

                      Selling, General and Administrative



                             Quarter Ended June 30,             Six Months Ended June 30,
(in millions of dollars)      2009              2008            2009                 2008
Total expenses             $     1,574        $  1,775      $      3,057         $      3,410
Percentage of sales               12.1 %          11.2 %            12.1 %               11.5 %

The decrease in selling, general and administrative expenses in the second quarter of 2009, as compared to the same period of 2008, 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 continuing adverse economic conditions. As a percentage of sales, selling, general and administrative expenses increased 90 basis points. This increase includes the adverse impact of higher restructuring costs (approximately 100 basis points) year-over-year, largely offset by the benefit from cost reduction actions in such areas as travel, furloughs and employee attrition and the favorable impact of foreign exchange.

Similar to the second quarter of 2009, the decrease in selling, general and administrative expenses for the first six months of 2009, as compared to the same period of 2008, is due primarily to a continued focus on cost reduction and the impact from restructuring and cost saving initiatives. As a percentage of sales, selling, general and administrative expenses increased 60 basis points. This increase includes the adverse impact of higher restructuring costs (approximately 70 basis points) year-over-year, largely offset by the benefit from reduced overhead costs and favorable impact of foreign exchange.

                                Interest Expense



                             Quarter Ended June 30,             Six Months Ended June 30,
(in millions of dollars)     2009              2008            2009                  2008
Interest expense           $     177         $     176      $       352           $       341
Average interest rate            5.8 %             5.8 %            5.9 %                 5.9 %

The increase in interest expense for the first six months of 2009 as compared to the same period of 2008 is primarily the 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% partially offset by the absence of interest expense associated with the redemption in February 2009 of our $500 million of Floating Rate Notes Due 2009 and the repayment in June 2009 of our $400 million of 6 1/2% Notes Due 2009. Interest expense also reflects the low cost associated with our commercial paper borrowings.

The effective tax rate for the quarter ended June 30, 2009 has decreased as compared to the same period of 2008 as a result of the non-taxability of a gain recognized in the quarter ended June 30, 2009 on the remeasurement to fair value of a previously held equity interest in an Otis joint venture due to the purchase of a controlling interest in the venture. The effective tax rate for . . .