MANAGEMENT'S DISCUSSION AND ANALYSIS

Management’s Discussion and Analysis of Results of Operations and Financial Position The Corporation’s operations are classified into four principal segments: Otis, Carrier, Pratt & Whitney and Flight Systems. Otis and Carrier serve customers in the commercial and residential property industries. Carrier also serves commercial and transport refrigeration customers. Pratt & Whitney and the Flight Systems segment, which includes Sikorsky Aircraft (“Sikorsky”) and Hamilton Sundstrand, primarily serve commercial and government customers in the aerospace industry. The Corporation’s segment operating results are discussed in the Segment Review and Note 15 of the Notes to Consolidated Financial Statements.

Business Environment As worldwide businesses, the Corporation’s operations are affected by global, regional and industry economic and political factors. However, the Corporation’s geographic and industry diversity has helped limit the impact of any one industry or the economy of any single country on the consolidated results. The downturn in the North American economy in 2001, including conditions
in the commercial airline industry, global refrigeration industry, and commercial heating, ventilating and air conditioning markets, had a negative impact on the Corporation’s consolidated results and will continue to present challenges to its businesses.
      The Corporation’s growth strategy contemplates acquisitions in its core businesses. The rate and extent to which acquired businesses are integrated and anticipated synergies or cost savings are achieved can affect the Corporation’s operations and results.
      Revenues from outside the U.S., including U.S. export sales, in dollars and as a percentage of total segment revenues, are as follows:

IN MILLIONS OF DOLLARS		2001		2000		1999		2001		2000		1999
Europe		$ 4,716		$  4,413		$  4,433		17%		17%		18%
Asia Pacific		3,420		3,319		2,615		12%		12%		11%
Other Foreign		2,785		2,820		2,472		10%		11%		10%
U.S. Exports		3,947		4,134		3,642		14%		15%		15%
International
Segment Revenues		$14,868		$14,686		$13,162		53%		55%		54%

      As part of its globalization strategy, the Corporation has invested in businesses in certain countries, including Brazil, the People’s Republic of China, Russia, Argentina, India and South Korea, which carry higher levels of currency, political and economic risk. At December 31, 2001, the Corporation’s net investment in any one of these countries was less than 5% of consolidated equity.
      During 2001, the strength of the U.S. dollar in relation to Asian and European currencies had a negative impact on the translation of foreign-denominated operating results into U.S. dollars. In the fourth quarter of 2001, the euro began to recover in relation to the U.S. dollar, which continued to strengthen in relation to Asian currencies.

OTIS is the world’s largest elevator and escalator manufacturing, installation and service company. It serves an international customer base, principally in commercial real estate. In 2001, 76% of its revenues were generated outside the U.S. Otis’ results can be impacted by various economic factors, including fluctuations in commercial construction (which can affect new equipment installations and service contract revenues), labor costs (which can impact service margins on installed elevators and escalators), interest rates, foreign currency exchange rates and raw material costs.
      During 2001, U.S. office building construction starts continued to decline from their 1998 peak, but remained at historically high levels. Construction order activity slowed and national office vacancy rates increased slightly, as market conditions softened.

CARRIER is the world’s largest manufacturer of commercial and residential heating, ventilating and air conditioning (“HVAC”) systems and equipment. Carrier is also a leading producer of commercial and transport refrigeration equipment and provides aftermarket services and components for its products and those of other manufacturers in both the HVAC and refrigeration industries. During 2001, 47% of Carrier’s revenues were generated outside the U.S. and by U.S. exports. Carrier’s results can be impacted by a number of external factors, including commercial and residential construction activity, production and utilization of transport equipment, weather conditions, fuel prices, interest rates and foreign currency exchange rates.
      During 2001, U.S. commercial construction starts decreased and investment in replacement refrigeration and HVAC equipment declined compared to 2000. The weakness in the North American transport refrigeration market continued in 2001, despite stabilizing fuel prices and favorable trends in interest rates. A warmer summer selling season in many regions of the U.S. and strength in housing starts favorably impacted North American residential operations during a portion of the year and international construction markets remained strong. Declines in economic activity following the September 2001 attacks are expected to continue this year’s trend of declining North American HVAC sales into 2002.

PRATT & WHITNEY and the FLIGHT SYSTEMS segments comprise the Corporation’s aerospace businesses and produce commercial and government aerospace and defense products. The financial performance of these segments is directly tied to the aerospace and defense industries. Traffic growth, load factors, worldwide airline profits, influenced in part by fuel prices and labor issues, and general economic activity have been reliable indicators for new aircraft and aftermarket orders. Spare part sales and aftermarket service trends can be impacted by many factors, including usage, pricing, regulatory changes and retirement of older aircraft. Performance in the general aviation sector has been closely tied to the overall health of the economy and is positively correlated to corporate profits.
      During 2001, airline operations were negatively impacted by the disruption caused by the September 2001 attacks and the downturn in the North American economy. These conditions have resulted in reduced flight schedules worldwide, an increased number of idle aircraft, workforce reductions and declining financial performance within the airline industry, as well as an industry-wide request for government financial assistance. The airlines and aircraft manufacturers have continued to reduce their supplier bases and seek lower cost packages. These conditions have resulted in decreased commercial aerospace volume and orders in the Corporation’s aerospace businesses in 2001, which is expected to continue into 2002.
      The Corporation’s total sales to the U.S. Government increased in 2001 to $3,798 million or 14% of total sales, compared with $2,875 million or 11% of total sales in 2000 and $3,342 million or 14% of total sales in 1999. The defense portion of the Corporation’s aerospace businesses is affected by changes in market demand and the global political environment. The U.S. and European defense industries continue to reduce costs and consolidate in response to continued evaluation of global defense spending. Customers have continued their efforts to review and reprioritize research and procurement initiatives and foreign military programs have been delayed.