Ombuds/DIALOG program
   In 1986 we created the Ombuds/DIALOG program, a worldwide confidential employee communication initiative. Ombuds/DIALOG allows employees alternative means of asking questions, making suggestions, registering complaints and reporting suspected wrongdoing. DIALOG is a confidential written reporting program, which is managed by 225 DIALOG program administrators worldwide to process employee inquiries. Four ombuds within UTC oversee the DIALOG program and also handle employee issues that tend to be more complex in nature. Since inception, the program has fielded more than 60,000 DIALOG employee inquiries and has handled more than 10,000 Ombuds cases. We have recently extended access to the DIALOG system with the launch of an Internet version called “eDIALOG.”

Issues resolution Ombuds/DIALOG Program Resulted in change Reviewed but no change No change requested 42% 36% 22% 17,564 Issues closed since Jan.1, 1998

   Each issue received through the Ombuds/DIALOG Program is carefully reviewed and tracked. Often management is able to make changes to policy or procedures as a result of employee input. We value and encourage this feedback. Since 1998, 42 percent of the issues reviewed have resulted in change, 36 percent have been reviewed but no change has been made, and 22 percent requested no change.

Research & Development
   For 75 years, the United Technologies Research Center (UTRC) has embodied the spirit of UTC’s commitment to pioneering innovation. UTRC employees generate innovative scientific and technical solutions developed and demonstrated by thorough modeling and prototyping. Ninety-three percent of UTRC’s core innovation staff holds advanced degrees; 66 percent are PhDs. Working in partnership with the UTC business units, UTRC anticipates and responds quickly to market opportunities, focusing on safe, healthful, green and quiet solutions, to ensure UTC’s competitive advantage. In 2004 65 percent of UTRC’s budget was dedicated to commercial programs and 35 percent to aerospace programs.

Significant Compliance Issues
   At UTC, we take our ethical commitments seriously. Our standards demand exemplary conduct from employees and immediate response from UTC in the event of an alleged violation. The following paragraphs describe the status of two current issues relating to accounting policy, internal management and oversight:

Pratt & Whitney and the U.S. Air Force’s Fighter Engine Competition (1983-1990)
   The U.S. Department of Justice has alleged in a civil suit that Pratt & Whitney defrauded the Air Force of more than $600 million by submitting false and incomplete cost and pricing data in support of its offer for a multi-year procurement of fighter aircraft engines in late 1983. We believe the allegations are without merit, and are defending the claim vigorously. Both parties completed the presentation of evidence at trial in December 2004. A decision will follow further briefing and final arguments scheduled to be completed in the first half of 2005.

Otis and the European Commission Collusion Investigation
   The European Commission (EC) is investigating possible unlawful collusive arrangements involving the elevator and escalator industry in Europe. Our own investigations lead us to believe that some Otis employees in limited European locations engaged in activities at a local level in violation of Otis and UTC policies, and may have violated applicable competition law. UTC is cooperating fully with the EC in this investigation.