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233503

April 21,2005

via Federal Express

Mr. Brad W. Bradley EPA Project Coordinator U.S. Environmental Protection Agency Region V, Mailcode SR-6J 77 W. Jackson Boulevard , IL 60604

W Re: In the Matter of Little Mississinewa Site CERCLA Docket No. V-W-'05-C-812

Dear Mr. Bradley:

I. Introduction

On or about April 4, 2005, the Environmental Protection Agency, Region V ("EPA"), issued an Administrative Order for Remedial Action (Docket No. V-W-'05-C-812) (the "Order" or "Unilateral Order") to Inc. ("Viacom") and United Technologies Corporation on behalf of Lear Corporation Automotive Systems ("UTC") (collectively, "Respondents"), directing those parties to implement the approved remedial design for the Little Mississinewa Site in Union , City, Indiana (the "Site"). The purposes of this letter are: (1) to advise EPA, pursuant to Section XXIV of the Order, of Respondents' intention to comply with the terms of the Order to the extent such compliance is required under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C. §§9601, et seq., and its implementing regulations, namely the National Oil and Hazardous Substances Pollution Contingency Plan ("NCP"), 40 C.F.R. Part 300; and (2) to outline several objections and defenses that Respondents have to the Order, as issued.

II. General Objections and Reservation of Rights

As an initial matter, it should be noted that by setting forth any objections or defenses in this letter, or by submitting this letter at all, Respondents do not waive, and hereby specifically reserve their rights to raise additional or different objections and defenses to the Order at some later time, or to provide additional information and evidence in support of any position that they may respectively or collectively take in Mr. Brad W. Bradley U.S. Environmental Protection Agency April 21,2005 Page 2 the future. Without in any way limiting the generality of the foregoing reservation, Respondents specifically reserve and do not, by providing notice at this time, waive their respective and collective rights to assert any arguments, defenses, objections, positions, or claims that would demonstrate sufficient cause for noncompliance with all or portions of the Order pursuant to Sections 106 and/or 107 of CERCLA, 42 U.S.C. §§ 9606 and/or 9607, or that would support their belief that all or portions of the Order are arbitrary and capricious, not supported by the Administrative Record or otherwise not in accordance with law. Moreover, neither this notice nor any information contained herein shall constitute an admission by Viacom or UTC with respect to the Site for any purpose, including third party claims or future enforcement proceedings, and Viacom and UTC incorporate by reference as if restated herein all prior objections and defenses raised in this matter with respect to the Remedial 'investigation/Feasibility Study ("RI/FS"), Record of Decision ("ROD") and Remedial Design ("RD"), and Respondents reserve all rights, claims, and defenses they may have, have had, or will have in the future regarding the matters addressed under the Order or related to the Site, whether under CERCLA or any other law. Respondents also specifically reserve any affirmative rights and claims they may have to seek reimbursement from EPA pursuant to Section 106(b) of CERCLA, 42 U.S.C. §9606(b), and Respondents' right to file claims against the Superfund under Section 112 of CERCLA, 42 U.S.C. §9612, and to pursue any other claims they may have under CERCLA, the United States Constitution, the Administrative Procedure Act, and the Federal Tort Claims Act, or any other law. Finally, by not specifically objecting to each finding or determination in the Order, neither Viacom nor UTC are admitting or conceding such findings or determinations, which Viacom and UTC specifically reserve the right to challenge in any future proceeding.

III. Notice of Intent to Comply

Subject to the reservations set forth above, and the objections, defenses, and other qualifications identified herein, Respondents hereby provide timely notification to EPA of their intention to comply with the terms of the subject Order to the extent required under CERCLA and the NCP.1

1 Respondents note that nothing in CERCLA requires a "notice of intent" to be submitted upon issuance of an Order, let alone that such notice be "unequivocal" as suggested in Paragraph 83 of the Order. Although Respondents have expressed their intention to comply with all legally applicable provisions of the Order, such compliance is not intended to, and does not waive the substantial defenses, objections, and clarifications Respondents set forth herein. Mr. Brad W. Bradley U.S. Environmental Protection Agency April 21,2005 Page 3

IV. Advance Notice of Project Coordinator

Pursuant to Section XV of the Order, Respondents designate as their Project Coordinator:

Bradley A. Barquest, R.G. Project Coordinator SECOR International Incorporated 4463 White Bear Parkway, Suite 106 White Bear Lake, MN 55110 Phone: 651-653-9112 Fax: 651-653-1751 E-mail: [email protected]

V. Statement of Certain Objections and Defenses

A. Introduction

No provision of CERCLA requires a Section 106 Order Respondent to outline its "sufficient cause" defenses at the time an Order is issued. Paragraph 85 of the Order permits Respondents to provide comments to the Order, but then attempts to limit the scope of any "sufficient cause" defenses asserted by Respondents to "facts that exist on or prior to the Effective Date of this Order." Paragraph 85. As explained in greater detail in Section II above, by setting forth certain objections to the Order and "sufficient cause" defenses under Sections 106 and 107 of CERCLA herein, Respondents do not waive, and expressly reserve their respective rights to raise additional or different defenses to the Order at some later time, and hereby preserve all defenses and objections to the Order and to liability under CERCLA and other applicable laws, whether or not they are specifically set forth in this document, or whether they did or did not exist upon the Effective Date of this Order.

B. EPA's Purported Jurisdictional Basis and Authority

Respondents object to EPA's alleged Jurisdictional basis to issue the Order to Respondents. Respondents deny that there is an actual or threatened release of hazardous substances from the Site which may pose an imminent and substantial endangerment to public health, welfare, or the environment, or that the actions required by the Order are necessary to protect the public health or welfare or the environment, are in the public interest and are consistent with CERCLA. Respondents reserve their respective rights to challenge EPA's authority to issue the subject Order. Mr Brad \V. Bradle> U.S. Environmental Protection Agenc> April :i. 2005 Pase4

More fundamentally. Seenm Iu6 of CERCLA. 42 U.S.C. $9606 violates the Due Proce— Clause »f the F;:ih Amendment of the United States Constitution, both on its face and as administered b> EPA tits "pattern and practice"). The combination of the absence of pre-enfi-rcement review and massive penalties for non-compliance "imposes a classic and unconstitutional Hobson's choice." GE vs. EPA. 360 F3d 1SS .D.C. Or. 2004..:

C. Several Requirements of the Order May be Arbitrary and Capricious. Not Supported by the Administrative Record and Not in Accordance with CERCLA and Other Laws

In review :ng the scope of the .-ubiect Order. Respondents note several provisions that may be inconsistent u ith CERCLA and/'or its implementing regulations, or that may not be covered b\ CERCLA at all. thereby rendering all or portions of this Order unenforceable as to Viacom and LTC. The following points highlight Respondents" belief that the Order may. in certain contexts, be arbitrary, capricious, not supported by the Administrative Record and otherwise not in accord with CERCLA or other laws and. therefore, may be unenforceable. By raising the following examples, however. Respondents do not mean to imply that ihis is an exhaustive list of their objections and defenses :n this regard.

1. EPA's Determinations Are Not Accurate

Many of EPA" s Determinations, set out in Section IV of the Order, are simply not accurate. To the extent these are EPA's determinations, and not facmal determinations agreed to in a Consent Order or determined by a neutral fact finder. Respondents merely object and note that nothing herein is to be construed as an admission of any fact or law by Respondents. That being said. Respondents specifically object to the statement that the PRPs' Baseline Risk Assessment did not conform to all applicable EPA guidance < Paragraph 20) because that statement is inaccurate and misleading. The same objection is raised with respect to the statements that there is a threat of a future release from either of Respondents' facilities (Paragraph 26L or that the Site poses an imminent and substantial endangerment (Paragraph 2~>. These statements are not true following the extensive work done to cut off all contaminated se'.>. ers and other sources that might continue to release PCBs to the Site and the extensive, multi-million dollar Removal Actions that previously conducted b\ the Respondents under the direction of EPA and the Indiana Department of En-, ironmental Management.

" Or. : errand. :hc District C _r. .-. :.-.e •• urn man judgment on GE's "pattern - r and practice" claim and alic -A-J j;;c.: .er. -. :ha; :!_:rr. : ;.• : r.'.;>jd. GE :<. 5:ep' .en L Johnson. No. •A--:if? • D C Dist. Ct . Marcr. ; . :•>."? Mr. Brad W. Bradley U.S. Environmental Protection Agency April 21,2005 Page 5

2. EPA's Review of Submissions

The provisions of the Order that relate to EPA's review of submissions submitted by Respondents (e.g., Paragraph 32) are objectionable because they do not specify the standards which EPA will apply in reviewing and approving such submissions. Rather, these provisions attempt to provide EPA with the absolute power and authority to approve, disapprove, or modify submissions, regardless of applicable law. EPA's decisions in reviewing submissions are subject to the standards in CERCLA, the NCP, and other relevant statutes and regulations. Respondents reserve their rights to object to EPA's actions with respect to any submission to the extent that they exceed EPA's authority, or are not adequately supported by law or fact, or are not cost-effective. Respondents' objections extend to all provisions of the Order which require submissions to EPA.

Moreover, several provisions of the Order purport to require Respondents to unquestioningly incorporate any modifications, comments or other changes that EPA may have to Respondents' submissions. See, e.g., Paragraph 32 ("Respondents shall amend the workplan or other deliverable to incorporate only those comments or modifications required by U.S. EPA"). Such a requirement has no authority under CERCLA or other applicable law, and Respondents specifically reserve their rights to object to the inclusion of such comments or changes to the extent necessary in the future. As discussed in greater detail in Section 8 below, Respondents also specifically object to any provision of the Order that suggests that failure to incorporate such changes constitutes noncompliance with the Order.

3. Financial Assurance and Insurance Respondents object to Paragraphs 59.a and 59.b of the Order which require Respondents to provide to EPA financial assurance that they can perform the Work and a certification of insurance coverage. These requirements exceed EPA's authority under Sections 104(e) and 106(a) of CERCLA, 42 U.S.C. §§9604(e) and 9606(a); therefore, there is no legal basis for EPA's demand. Also, to the extent that Respondents would incur additional costs to comply with this requirement of the Order, the provision is tantamount to a tax imposed by the Executive Branch and not the Legislative Branch as required by Article 2, Section 7 of the United States Constitution and, as such, is unenforceable.

As EPA is fully aware, Respondents are both Fortune 100 companies whose shares are publicly traded. As public companies, audited information concerning Viacom's and UTC's financial positions is regularly submitted to the Securities and Exchange Commission and the public. If EPA has significant doubts about Respondents' respective financial ability to perform the Work, it should not have issued the Order. See 42 U.S.C. §9604(a)(l). EPA does not Mr. Brad \V. Bradley L'.S. Environmental Protection Agency April: 1.2005 Pase6 have the authonty to require a performance bond, letter of credit, or inist under Section 106

Similarly. Paragraph 5l>.a of the Order requires Respondents to submit a certification of their contractors' or subcontractors' insurance coverage before any Work commences. Again, this requirement exceeds the authority granted to EPA under Section 106. as it is not specified in the statute, nor is it necessary to protect human health and the environment. Notwithstanding this objection, and preserving their respective rights to object to this provision in the future. Respondents will, as a counesy. provide EPA with information concerning their contractors" insurance poor to commencing field work at the Site.

4. Reimbursement of Response Costs

Section XIX of the Order purports to require Respondents to reimburse EPA. upon written demand, for all 'Future Response Costs" incurred by the United States in overseeing Respondents implementation of the requirements of the Order. "Future Response Costs" is then broadly defined in Paragraph 5.d of the Order to include virtually any costs, including "indirect" costs EPA incurs in overseeing the Order, limited only to the extent such costs are "not inconsistent with the NCP." Several other provisions in the Order similarly require Respondents to reimburse EPA for its costs if.e.. Paragraph 44: Paragraph 61 K Respondents object to each and even of these requirements insofar as Section 106(a) of CERCLA does not authorize EPA to be reimbursed for su:h costs. Certainly, reimbursing EPA for its time and costs for looking over Respondents' shoulder is not necessary to protect human health or the environment, nor are such costs required to mitigate an "imminent and substantial endangerment.' the touchstones of EPA's Section 106(a) authonty. To the extent that such costs are recoverable at all (which Respondents specifically dispute). EPA s statutory authority to seek such reimbursement is pursuant to Section I0~ia> of CERCLA. not Section 106(ai (the authority pursuant to which the present Order has been issued).

Notwithstanding the fact that EPA has no authority under the Order to require Respondents to reimburse any claimed "Future Response Costs." Respondents are willing to evaluate any such written claims when and if made by EPA. Of course, any such claims will need to be substantiated with adequate documentation so that Respondents can determine if such costs are reasonable, free of Mr. Brad W. Bradley U.S. Environmental Protection Agency April 21,2005 Page 7 accounting errors, attributable to the Site, and not inconsistent with the NCP. To the extent that such documentation is provided on a timely basis, Respondents may consider making a payment to EPA so as to avoid the potential of future litigation on this issue. Respondents' willingness to consider such claims is without prejudice to any and all rights and defenses they may have in this respect.

5. Several Provisions of the Order Require More Information to be Provided or Reported than is Authorized Under CERCLA

Respondents object to any provision of the Order that purports to provide EPA with rights to information that are beyond those established under CERCLA. Without limiting the generality of this objection, Respondents specifically object to Paragraph 63 which requires Respondents to submit a "certification to U.S. EPA that they have not altered, mutilated, discarded, destroyed, or otherwise disposed of any records, documents or other information relating to their potential liability with regard to the Site since the time of their notification of liability by U.S. EPA or the State." Nothing in CERCLA requires that such a certification be made, and it certainly is not required to accomplish any legitimate purpose under Section 106 of CERCLA (i.e., to protect public health and the environment). Although Respondents are submitting the declarations attached hereto as Appendix B, they do so without prejudice to all defenses and objections they may have on this issue now and in the future. In addition, more generally, Respondents reserve the right to object, as appropriate, to the disclosure and/or retention of information under Sections XVI, XVII, and any other provision of the Order to the extent that EPA's request exceeds its statutory right to acquire information under Section 104(e) of CERCLA, 42 U.S.C. §9604(e).

6. The Provisions Pertaining to Contractor Approval by EPA are Unenforceable

Section XV of the Order appears to endow EPA with unilateral and unrestrained authority to disapprove of all contractors, supervisory personnel and other persons who will perform activities under the Order. As they have from the outset of this project, Respondents fully intend to retain competent and experienced contractors and other personnel to conduct the work. However, Respondents object to EPA's assertion of unfettered authority to disapprove of contractors and/or personnel without the imposition of rational, objective standards. Any disapproval of a contractor or personnel which Respondents propose to use must be based upon a rational evaluation of the ability of the contractor or personnel to perform the work in a manner sufficient to protect public health and the environment, and Respondents reserve their rights and defenses to the extent that EPA's decisions regarding the Mr. Brad W. Bradley U.S. Environmental Protection Agency April 21.2005 PaseS selection of contractors are based upon considerations other than that of addressing conditions identified in the Order.

7. The Order is Unlawful!) Broad and Vague to the Extent that it Purports to Require Respondents to Implement Unspecified or Ill-Defined \Vork

Respondents object 10 any and all provisions of the Order that purport to provide EPA u ith the authority to require Respondents to perform additional unspecified uork (the so-called "blank check" provisionsi. For example. Section IX of the Order purports to allov. EPA to unilaterally modify the Order without any reference to justification or scope. Similarly. Paragraph 32 requires Respondents to incorporate all EP.A-mandated modifications to the work, irrespective of whether such modifications are required or are consistent with law. and Paragraph 41 purports to require Respondents to do any additional work that may be deemed necessary by an EPA Periodic Review i which reviews may be conducted for years into the future).

In order for Respondents to determine whether a request for additional work is justified or. alternatively, whether Respondents have sufficient cause to refuse to perform additional or modified work under this Order, such work must be defined. In the absence of such definition, it is impossible to determine whether the work 111 is necessary to protect human health, welfare, or the environment, i2i is necessary to address an imminent and substantial endangerment. (3) is feasible and cost effective, and or <4i is otherwise consistent with CERCLA and the NCP. EPA's guidance recognizes that a "specifically identified response action is required . . . for the order to be legally enforceable." See Guidance on CERCLA 106

8. EPA Has No Authority to Make Binding Determinations Regarding Respondents' Liability or Noncompliance With the Order

In several provisions of the Order, EPA purports to unilaterally make determinations regarding the Respondents' liability or their compliance with the Order (see, e.g., Paragraphs 32, 43). Should issues relating to liability and compliance with the Order be raised in the future, such determinations necessarily will be made by a court or other impartial fact finder, not EPA. Accordingly, such attempted determinations by EPA in the Order have no effect and are unenforceable.

Similarly, in several provisions of the Order, EPA purports to make legal conclusions that are inappropriate, inaccurate, and unauthorized. See, e.g., Paragraph 3 (contractors and subcontractors shall be "deemed" related by contract to the Respondents for purposes of Section 107(b)(3)); Paragraph 11 (that Respondents "arranged" for disposal or treatment of "hazardous substances" at the Site); Paragraph 25 (that "hazardous substances" have been and are being "released" from the "Facility"), etc. All legal conclusions made by EPA in the Order have been reached unilaterally, and without the benefit of an impartial fact finder, and, as such, are unauthorized and unenforceable. Respondents reserve all their rights to object to these and all other legal conclusions EPA has included in this Order.

9. Delay in Performance

Respondents object to the provisions of Section XVIII, which purport to allow EPA to unilaterally determine what constitutes compliance with or failure to comply with the Order and if a delay is justified. Respondents' compliance with the Order is determined by operation of law, not by EPA's unilateral view of compliance. The Order fails to provide any standards for evaluating delays, their impacts, and the process for reestablishing a schedule. Under the terms of the Order, any inability to meet the schedules set by EPA, regardless of the cause, may be considered by EPA to be a violation of the Order. As a matter of due process, Respondents' inability to meet deadlines or schedules under the Order by reason of force majeure or because meeting those deadlines or schedules might result in a violation of law or be inconsistent with CERCLA or the NCP, ought to be explicitly recognized as a defense to a charge that the "failure to perform" is a violation of the Order.

Moreover, Section XVIII of the Order establishes an unreasonably short notification period for any delay or anticipated delay in achieving compliance with the Order. Respondents and EPA have developed a good working relationship relative to the Site over the years, and Respondents will endeavor to take all reasonable steps to keep EPA personnel informed about activities at the Site in the Mr. Brad \V. Bradley U.S. Environmental Protection Agency April: 1.2005 Pase 10 future. Nonetheless. Respondents resene their respective rights to object to EPA's unreasonable enforcement of the subject Order and its purported time limitations.

Also, the Order as written does not adequately provide for delays due to EPA actions or omissions. Respondents' inability to meet deadlines or schedules under the Order by reason of EPA's and/or IDEM's actions or omissions, by requirements of lau. or forn' rnajeurt events must be specifically recognized, and EPA cannot purport to unilaterally make the determination of what constitutes a force majeure event, what constitutes compliance or failure to comply, or what is justified or not in a delay of performance.

Finally. Respondents object to Paragraph 69 to the extent that it purports to limit the scope of justifiable dela> s under the Order. Respondents believe that economic impracticality if.?.. increased costs or expenses) could, in certain circumstances, be a legitimate basis for delay m performance, and EPA has no jurisdiction under Section 106 of CERCLA or otherwise to limit Respondents' defenses in this regard.

10. Lack of Due Process to Raise Objections to the Order

EPA has not provided for a hearing or other opportunity- to comment on the provisions of the Order or to raise objections to the Order as is required by the Due Process Clause of the Constitution of the United States. \Vhile Section XXVI authorizes a conference, it also states:

The purpose and scope of the conference shall be linuted to issues involving the implementation of the response actions required by this Order and the extent to which each Respondent intends to comply with this Order. This conference is not an evidentiary hearing and does not constitute a proceeding to challenge this Order. It does not give Respondents a right to seek review of this Order or to seek resolution of potential liability. No record of the conference ie.g.. stenographic, tape, or other physical records i will be made.

Accordingly. EPA has provided no meaningful hearing for Respondents to raise legitimate challenges to the provisions of the Order. EPA's failure to provide Respondents with a fair and objecti'. e forum to raise their objections violates the Due Process Clause of the United States Constitution, the Administrative Procedures Act. and CERCLA. Mr. Brad W. Bradley U.S. Environmental Protection Agency April 21,2005 Page 11

11. EPA's Effort to Impose Joint and Several Liability Under the Order is Inconsistent with Existing Law and is Unenforceable

In Paragraph 2 of the Order, EPA purports to determine that Respondents are jointly and severally liable for carrying out the provisions of the Order. Such determination is in direct contravention with existing case law that indicates that liability under a Section 106(a) Order is not joint and several. See United States v. Stringfellow, 20 ERC 1905, 1910 (C.D. Calif. 1984) (there is no role under Section 106(a) of CERCLA for joint and several liability to abate). Although Viacom and UTC currently have agreed to implement the approved Remedial Design work under the legally applicable provisions of the Order, Respondents reserve all defenses they may have with respect to EPA's effort to impose joint and several liability under the Order in the future.

12. The Time Periods Established Under the Order are Arbitrary and Capricious Many of the deadlines established under the Order are unreasonably short. For example, Paragraph 34 requires a draft RA Workplan to be submitted within 45 days of the latter of RD approval or the Effective Date of the Order. Such a deadline ignores the commercial realities associated with the bidding and contracting process, and unreasonably forces Respondents to either risk compromising the quality and efficiencies of the Work, or run the risk of threatened fines and penalties. Respondents will exercise their best efforts to address the scope of work identified in the Order in a competent, professional, and timely manner, but they reserve all defenses they may have available to them if EPA refuses to be flexible in setting and enforcing deadlines under the Order.

13. The Order is Unlawful to the Extent it Attempts to Bind Parties that are Not Covered by Section 107 of CERCLA Respondents object to Paragraph 2 of the Order to the extent that it purports to make the Order apply and be binding upon the Respondents' successors and assigns. EPA has no factual or legal basis for imposing liability on any of these persons or entities. Consequently, those persons and entities are not appropriately bound by the Order.

Respondents further object to the provisions of Paragraph 3 of the Order that purport to require a copy of the Order be given in advance to any parties who acquire a controlling interest in Respondents' assets or stock. Respondents are both large publicly traded corporations. They have no way of knowing in advance who is acquiring their stock or how much is to be acquired. Mr. Brad \V. Bradley U.S. Environmental Protection Agency April 21.2005 Paae 12

Moreover, to the extent LTC is operating here "on behalf of Lear Corporation Automotive Systems." it has no ability to control the sale of that company's stock or assets.

Also, the requirement of Paragraph 4 to provide EPA with the transfer documents 30 days in advance of the closing on the sale of or transfer by Respondents of any real property included within the Site ignores commerciaJ realities, and is unauthorized under CERCLA

14. Compliance \Vith the Order Should be Deemed to be Achievement of the Performance Standards

Paragraph 36 of the Order states that full performance of the RD/RA may not achieve the performance >tandards set forth in the ROD and final RD. With ail of the additional work provisions contained in me Order, many of which are themselves objectionable, satisfactory completion of the Work required by the Order should be deemed to be achievement of the Performance Standards. Moreover, satisfactory completion of the Work required by the Order should resolve Respondents' liability, if any. with respect to the Site (see Paragraph ~S).

15. EPA's Reservation of Rights are Overly Broad

EPA's purported reservation of rights in Section XXI of the Order are one-sided, overly broad, and seek to create rights where none now currently exist. As noted above. Respondents reserve all defenses, rights, arguments, and claims they currently possess or may possess at any time in the future.

16. Termination Criteria is Impermissibly Vague and Subjective

Respondents object to Paragraph S2 of the Order because it does not specify or reference any objective criteria or standards for termination, but rather allows EPA to subjectively decide to continue or terminate the Order depending upon EPA's interpretation of the Order and the Performance Standards. The obligations of Respondents will terminate when they are. in fact, satisfied, or by operation of law. Neither EPA's view as to when that event occurs nor its written confirmation of that view has any bearing upon Respondents' obligations under the Order. There is no clear objective description in the Order of when the Work or other activities are considered fulfilled. Mr. Brad W. Bradley U.S. Environmental Protection Agency April 21,2005 Page 13

D. Designation of the Administrative Record is Incomplete and Ineffective

EPA attempts to identify an "Administrative Record" that purports to include all documents considered or relied upon by EPA in preparation of the Order. See Paragraph 5.p.; Appendix B. Respondents note that this "Administrative Record" was prepared unilaterally by EPA without any input from Respondents. Moreover, it appears that said "Administrative Record" does not include many documents that Respondents have submitted to EPA over the years, and includes others that Respondents have never seen. As such, the so-called "Administrative Record" for this Order is incomplete and ineffective, and Respondents object to any effort by EPA, now or in the future, to limit the documentation or information that may be considered by an independent fact finder in any subsequent proceedings relating to this Site. Respondents hereby reserve their rights to provide additions, deletions, modifications, or to otherwise comment upon the Administrative Record for this Site as appropriate.

VI. Conclusion

As indicated in Section III of this letter, subject to the reservations, objections, defenses, and other qualifications identified herein, Respondents currently intend to comply with the terms of the subject Order to the extent required under CERCLA. Respondents are hopeful that a good working relationship will continue between them and EPA so that the issues identified in the Order can be responsibly addressed.

Respectfully submitted,

David W. Nunn Linds Howard Counsel for United Counsel r Viacom Inc. Technologies Corporation

Enclosures: Appendix A: Viacom Inc. 2004 Form lOK/United Technologies Corporation 2004 Annual Report Appendix B: Viacom Inc. and United Technologies Corporation Document Preservation Certifications cc: Peter M. Felitti, Esq. (w/encs) APPENDIX A

Viacom Inc. 2004 Form 10K

United Technologies Corporation 2004 Annual Report SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K 0 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2004 OR D TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 001-09553 VIACOM INC. (Exact name of registrant as specified in its charter) DELAWARE 04-2949533 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number)

1515 Broadway , NY 10036 (212) 258-6000 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)

Securities Registered Pursuant to Section 12(b) of the Act: Name of Each Exchange on Title of Each Class Which Registered Class A Common Stock, $0.01 par value New York Stock Exchange Class B Common Stock, $0.01 par value New York Stock Exchange 7.75% Senior Notes due 2005 American Stock Exchange 7.625% Senior Debentures due 2016 American Stock Exchange 725% Senior Notes due 2051 New York Stock Exchange Securities Registered Pursuant to Section 12(g) of the Act: None (Title Of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (x) No D Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. D Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [Xl No D As of June 30, 2004, which was the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of the shares of Viacom Inc. Gass A Common Stock, $0.01 par value ("Qass A Common Stock"), held by non-affiliates was approximately $1396,419,601 (based upon the closing price of $3635 per share as reported by the New York Stock Exchange on that date) and the aggregate market value of the shares of the Viacom Inc. Qass B Common Stock, $0.01 par value ("Class B Common Stock"), held by non-affiliates was approximately $53,132^58,671 (based upon the closing price of $35.72 per share as reported by the New York Stock Exchange on that date). As of March 1, 2005,131,502,564 shares of Class A Common Stock and 1,496,205,286 shares of Class B Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of Viacom Inc.'s Notice of 2005 Annual Meeting of Stockholders and Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended (the "Proxy Statement") (Part HI). PARTI Item 1. Business. RECENT DEVELOPMENTS On March 16, 2005, Viacom announced that it has been exploring the possible division of its businesses into separate publicly-traded companies, one of which would highlight Viacom's high-growth businesses such as MTV Networks and would be operated by , and one of which would combine its leading CBS broadcast businesses, growing outdoor business and high free cash flow operations such as radio, which would be operated by Leslie Moonves. Viacom expects to announce further details regarding the possible separation in the second quarter of 2005. No assurance can be given that any transaction wfll be consummated.

BACKGROUND Viacom Inc. (together with its consolidated subsidiaries unless the context otherwise requires, the "Company" or "Viacom") is a diversified worldwide entertainment company with operations in the following segments: • CABLE NETWORKS: The Cable Networks segment consists of MTV Music Television*, *, *, VH1*, MTV2™, TV Land*, Spike TV*, CMT*: Television™, *, BET*, BET Jazz™, and Showtime*, among other program services. • TELEVISION: The Television segment consists of the CBS* and UPN* Television Networks, the Company's 39 owned broadcast television stations, and its television production and syndication business, including King World* Productions and Television™. • RADIO: The Radio segment owns and operates 183 radio stations in 41 United States markets through Infinity Radio*. • OUTDOOR: The Outdoor segment through Viacom Outdoor* displays on media, including billboards, transit shelters, buses, rail systems (in-car, station platforms and terminals), mall kiosks and stadium signage. • ENTERTAINMENT: The Entertainment segment includes *, which produces and distributes theatrical motion pictures; Simon & Schuster, which publishes and distributes consumer books under imprints such as Simon & Schuster*, *, Scribner* and The ™; *, which is principally engaged in the ownership and operation of five theme parks and a themed attraction in the United States and Canada; and and music publishing operations. For the year ended December 31, 2004, contributions to the Company's consolidated revenues from its segments were as follows: Cable Networks 29%, Television 38%, Radio 9%, Outdoor 8% and Entertainment 18%. Intercompany revenue eliminations, as a percentage of total revenues, were 2% for the year ended December 31,2004. The Company generated approximately 16% of its total revenues from international regions in 2004. For the year ended December 31,2004, approximately 60% and 23% of total international revenues of $3.7 billion were generated in Europe and Canada, respectively. During 2004, the Company announced that it would pursue the tax-free split-off of Viacom's approximately 81.5% interest in Blockbuster Inc. ("Blockbuster") (NYSE: BBI) through an exchange offer. In 2004, the Company completed the exchange offer under which Viacom accepted 27,961,165 shares of Viacom common stock in exchange for the 144 million shares of Blockbuster that Viacom owned. Each share of Viacom Class A and Class B Common Stock accepted for exchange by Viacom was exchanged for 5.15 shares of Blockbuster common stock, consisting of 2.575 shares of Blockbuster class A common stock and 2.575 shares of Blockbuster class B common stock. Blockbuster is presented as a discontinued operation for all periods presented herein.

1-1 During 2004, the Company acquired 97.8% of VTVA Media AC, a youth entertainment media company based in Germany, for a total purchase price of S393.6 million. In December 2004, the Company acquired a 10% interest in Spanish Broadcasting System, Inc. ("SBS") and warrants for approximately another 5% interest in SBS, in exchange for the Company's 933 FM radio station serving the market Abo, in December 2004. the Company announced its agreement to purchase CBS Sacramento, affiliate, KOVR-TV 13, for $285 million, subject to regulatory approval. For additional information about significant acquisitions see Note 5 to the Consolidated Financial Statements. As technologies for delivering content and services evolve, the Company is pursuing opportunities to distribute content to consumers through various media including the Internet, mobile devices, video-on-demand. interactive television and video games. In December 2004, the Company acquired the remaining outstanding interest that it did not already own in SportsLine.com, Ino, a leading online sports media company, and, in January 2005, announced its strategic partnership with Microsoft to extend the reach of MTV Music Television, VHI, CMT: Country Music Television and Comedy Central across a number of digital entertainment products and platforms. The Company competes with many different entities and media in various markets worldwide. In addition to competition in each business, the Company competes for opportunities in the entertainment business with other diversified international entertainment companies such as Time Warner, Corporation, Sony Corporation, dear Channel Communications, The Walt Disney Company and NBC Universal. As of March 1, 2005, , Inc. ("NAT), a dosery held corporation that owns and operates approximately 1,425 movie screens in the United States ("U.S."), the ("UJC"), South America and and manages 21 movie screens in the U.S. and the UJC, beneficially owned Class A Common Stock of the Company representing approximately 71 % of the voting power of ail classes of the Company's Common Stock, and approximately 12% of the Company's Class A Common Stock and Class B Common Stock on a combined basis. Owners of the Company's Class A Common Stock are entitled to one vote per share. The Company's Class B Common Stock does not have voting rights. NAI is not subject to the reporting requirements of the Securities Exchange Act of 1934, as amended. Simmer M. Redstone, the controlling shareholder of NAI, is the Chairman of the Board and Chief Executive Officer of the Company. The Company was organized in Delaware in 1986 for the purpose of acquiring the stock of a predecessor. The Company's principal offices are located at 1515 Broadway, New York, New York 10036 (telephone 212/258-6000).

VIACOM BUSINESS SEGMENTS CaMe Networks (29%. 27% and 25% of the Company's consolidated revenues in 2004, 2003 and 2002, respectively) The Company owns and operates advertiser-supported basic cable television program services through MTV Networks ("MTVTsn and Black Entertainment Television ("BET") and premium subscription television program services through Inc. ("SN1") in the U.S. and internationally. Generally, the Company's cable networks, which target various demographics, are offered for a fee to cable television operators, distributors of dircct-to-home satellite services ("DTH") and other multichannel distributors. Cable television and DTH are currently the predominant means of distribution of the Company's program services in the U.S. Internationally, distribution technology varies region by region.

1-2 MTV Networks. In the U.S., MTVN's owned and operated program services include MTV Music Television ("MTV"), MTV2, Nickelodeon, Nick at Nite, TV Land, VH1, Spike TV ("Spike"), CMT: Country Music Television ("CMT"), Comedy Central and MTV 17™, among others. Subscriber numbers for MTVN are based on Nielsen Media Research* reports. MTVN derives revenues principally from two sources: the sale of time on its own networks to advertisers and the receipt of subscription fees from cable television operators, DTK and other distributors. The sale of MTVN advertising time is affected by viewer demographics, viewer ratings and market conditions for advertising time. Adverse changes to any of these factors could have ah adverse effect on revenues (see "Viacom Business Segments-Cable Networks Competition"). MTVN programming is comprised of programs that are acquired or originally produced by the Company. programming consists of youth-oriented programs including music videos, music-based programming, music and .general lifestyle information, reality-based programming, comedy and dramatic series, animated programs, news specials, interviews and documentaries. Recent programming highlights include The MTV Video Music Awards, Real World and Punk'd. At December 31, 2004, MTV reached approximately 87.5 million domestic subscriber households. MTV2, a spin-off of MTV, features music videos from a broad range of musical genres. At December 31, 2004, MTV2 reached approximately 53.8 million domestic subscriber households. MTVN also operates "The Suite from MTV Networks" ("The Suite"), a package containing MTV2 and several digital television program services, including VH1 Classic and other music-related services including two Spanish-language music services. The Suite is available through DTH distributors and cable operators offering digital technology. VH1 presents music programming including music videos, long form programming, live music events, reality series, documentaries and other pop culture and lifestyle programming. At December 31, 2004, VH1 reached approximately 86.9 million domestic subscriber households. CMT presents country music-related original programming, live concerts and events, as well as country music videos. At December 31, 2004, CMT reached approximately 76.5 million domestic subscriber households. MTV U offers to students on U.S. college campuses a blend of music, news, sports and college-specific programming. Nickelodeon programming consists primarily of originally produced programs appealing to audiences ages 2 to 11, which includes Nick Jr*, a program block designed for 2 to 5 year olds, and popular shows such as , The Fairfy OddParents and SpongeBob SquarePants. Nick at Nite is telecast in the evening and night-time hours, appeals primarily to audiences ages 18 to 49 and offers mostly situation comedies from various eras and original programming. At December 31, 2004, each of Nickelodeon and Nick at Nite reached approximately 88.5 million domestic subscriber households. Nickelodeon licenses its brands and characters for and in connection with merchandise, home video and publishing worldwide. Comedy Central features comedy programming including with Jon Stewart and Chappelle's Show. At December 31, 2004, Comedy Central reached approximately 86.3 million domestic subscriber households. TV Land is comprised of a broad range of well-known television programs including comedies, dramas, westerns, variety, other formats from the 50s through today and original programming. At December 31, 2004, TV Land reached approximately 84.9 million domestic subscriber households. Spike is the first entertainment network for men, appealing primarily to male audiences with a focus on original series, sports entertainment and animated series. At December 31, 2004, Spike reached approximately 88.1 million domestic subscriber households. In 2005, the Company plans to launch LOGO™, a gay and lesbian themed network, and MTV World™, a domestic program service with channels comprised of programming that is originally produced and programming derived from MTVs international program services. MTV Films* and ™ produce and acquire the rights to feature films, all of which were released by Paramount Pictures during 2004. Generally, Paramount Pictures incurs the production and marketing costs of films produced by MTV Films or Nickelodeon Movies and released by Paramount Pictures. MTV Films or Nickelodeon Movies receives a participation based on the performance of these films and producer fees.

1-3 Internationally, MTVN owns and operates, participates in as a joint venturer, and licenses third parties to operate, approximately 80 MTVN program services inducting A/TV VH1, Nickelodeon, Spike, Paramount Comedy**, The Bat", CMT, ™. Viva™, TMF" and TV Land. These program services reach audiences in Canada, Asia, Europe, Australia. Latin America, the Caribbean and Africa. Most of the MTV international program services are regionally customized for the particular youth viewers through the inclusion of local musk, programming and on-air personalities, and use of the local language. A/TV Networks Europe is Europe's most widely distributed cable and satellite network comprising 49 individual music, kids and comedy channels. As of November 2004, the leading MTVN program services reached more than 151 million households and 144 million households in Europe and Asia, respectively, and approximately 121 miOion households in the rest of the world (including the U.S.) through a combination of DTH, cable, and terrestrial distribution. The Company actively pursues the development or acquisition of program services in international markets. During 2004, the Company acquired 97.8% of Viva Media AC. a German-based television company with six channels across Europe; launched VH1 in Latin America, and Nickelodeon in Italy, expanded MTVs and Nickelodeon's presence in China; and, in February 2005, launched MTV bast"", a pan-African music . MTVN, in exchange for cash and advertising time or for promotional consideration only, licenses from record companies musk videos for exhibition on A/TV MTV2, VH1, CMT and other MTVN programming services. MTVN has entered into global musk video licensing agreements with certain major record companies. MTVN also has entered into global or regional license agreements with certain independent record companies. MTVN expects to renew or initiate additional global or regional license agreements with these and other record companies. However, there can be no assurance that such renewals or agreements can be concluded and, if so, on favorable terms. MTVN operates Internet sites that appeal to the current audiences of its various television program services, as wen as to other online audiences, including numerous musk Web site destinations around the world. These Web sites provide entertainment and information and serve as an additional outlet for sales of Company-licensed and third-party merchandise. In January 2005, MTVN's Web sites attracted over 17.8 minion U.S. monthly unique visitors according to Comscore Media Metrix, a leading online audience research measurement service. These Internet sites derive revenue from a combination of advertising and sponsorships, subscription servkes and e-commerce. MTVN currently obtains much of its Web site content from record labels, musk publishers and artists. Certain of these providers have started charging fees for their content. If providers charge significant fees for their content, or otherwise alter or discontinue their relationship with MTVN's Web sites, then the respective Web site's content offering and business could be adversely affected In 2005. the Company plans to launch a digital musk service that may offer permanent digital downloads, interactive subscription radio, conditional downloads and en-demand streaming, among other features. BET: Bluet E*tataimmta* IHtrcno*. BETs owned and operated cable program services include BET and BET Jazz", and its digital services include BET Gospel9 and BET Hip Hop9. BET targets the African-American viewing audience by providing a broad mix of musk, entertainment, sports, religious, news and publk affairs programming, consisting of both original and acquired programs including 705 A Park: BET Top Ten Live and Club Comic View. BET Jazz, the only U.S. cable network devoted solely to jazz musk, includes programming that consists of a mixture of in-studio performances, festivals, concerts, celebrity interviews and documentaries such as Journey With Jazz At Lmcom Center. BET derives its revenue from the sale of advertising time on the networks and from subscription fees generated by license of the network to cable television operators, DTH and other distributors. As of December 31, 2004, according to the Nielsen Media Research report, BET reached approximately 79.4 million domestic subscriber households. BET Jazz derives its revenue principally from subscription fees generated by license of its network to cable television operators, DTH and other distributors. As of December 31. 2004. BETJa^. bilkd approximately 9.7 million domestic subscriber households. Certain of

1-4 BET and BET Jazz distribution agreements expired at the end of 2004. BET expects all of these agreements to be renewed or extended through multi-year carriage deals in 2005. If agreement renewals are not completed, BET and/or BET Jazz could lose subscribers. BET Gospel and BET Hip Hop are BET's digital services. BET Gospel features gospel music programming, gospel artist performances and interviews, religious ministries, family programming and programming fare designed to provide spiritual fulfillment. BET Hip Hop features hip-hop and rap music videos, artists and performances. BET Event Productions* produces special musical events and festivals featuring various music genres. Its services include event management, venue selection, talent recruitment and sound, light and stage production including supporting the production needs of BET Jazz. BET Books, BET's book publishing division, publishes romance, inspirational and mainstream fiction books targeted to the African-American market. Its revenues are generated by book sales through a subscriber book club, retail outlets, discount stores and online book merchants. BET has an approximately 42% interest in BET Interactive, LLC, a company which, through its Web site, BET.com, offers users content and interactive features for news, entertainment, community and other areas tailored to the unique interests and issues of African Americans. BET.com also provides program schedules for BET and BET Jazz, the latest music news, artist information, music offerings and interactive entertainment for BET's programs. In 2004, BET.com attracted approximately 750,000 U.S. monthly unique visitors, according to Nielsen/NetRatings. Showtime Networks Inc. SNI owns and operates three commercial-free, premium subscription television program services in the U.S.: Showtime, offering recently released theatrical feature films, original series, original motion pictures, documentaries, boxing, concerts and other special events; ™ offering recently released theatrical feature films and related programming; and Flix*, offering theatrical feature films primarily from the 70s, 80s and 90s, as well as selected other titles. At December 31, 2004, Showtime, The Movie Channel and Flix, in the aggregate, had approximately 39-5 million subscriptions in the 50 states, certain U.S. territories and Bermuda. Sundance Channel9, a venture among SNI, which owns a 30% interest, an affiliate of Robert Redford and NBC Universal, is a commercial-free premium subscription television program service in the U.S., dedicated to independent film, featuring original programming, American independent films, documentaries, foreign and classic art films, shorts and animation, with an emphasis on recently released titles. SNI also owns and operates several different channels of Showtime and The Movie Channel in the U.S. which offer more and varied programming choices. In addition, SNI transmits high definition television feeds of Showtime and The Movie Channel and also makes versions of Showtime and The Movie Channel available on demand, enabling subscribers to watch individual programs at their convenience. SNI also fe^ provides special events, such as high-profile boxing events, to licensees on a pay-per-view basis through Showtime PPV™. SNI also operates Web site SHO.com which promotes Showtime, The Movie Channel, and Flix programming, and provides information and entertainment and other services. SNI derives revenue principally from the license of its networks to cable television operators, DTH and other distributors. The costs of acquiring premium television rights to programming and producing original motion pictures and series are the principal expenses of SNI. SNI enters into commitments to acquire rights, with an emphasis on acquiring exclusive rights for Showtime and The Movie Channel, from major or independent motion picture producers and other distributors typically covering the U.S. and Bermuda for varying durations. For example, for Paramount Pictures' feature films theatrically released beginning January 1, 1998, SNI has had the exclusive U.S. premium subscription television rights for certain windows (see "Viacom Business Segments-Entertainment"). SNI also arranges for the development, production and acquisition of original programs, series, documentaries and motion pictures. SNI's original series include Huff, Fat Actress and The L Word, among others. SNI has entered into and may from time to time enter into co-financing, co-production and/or co-distribution arrangements with other parties to reduce the net cost to SNI for its original programming. In addition, SNI has established a distribution arm to maximize revenue from the rights it retains in certain of its original programming.

1-5 kfTV Nttvorts. MTVN competes for advertising revenue with other basic cable and broadcast tekvisioa uetwotks. radio, online and print media. For basic cable television networks such as the MTVN services, advertising revenues derived by each program service depend on the number of households subscribing to the service through local cable operators and other distributors, in addition to household and demographic viewership as determined by research companies such as Nielsen Media Research. MTVN's strategy is generally to differentiate its services to provide advertising buyers with an efficient way to reach viewers in particular demographic categories. For example, Nickelodeon generally provides advertisers with an efficient way to reach viewers 2 to 11 years old. MTVN services compete with other cable services and broadcast television for the acquisition of popular programming. For example, programming blocks for children exhibited on broadcast television uetwoiks. ffK*Hfotg "Fox Kids," "Kids' WB," a Saturday morning block on ABC, and cable television program services specifically providing children-oriented programming, induding the Cartoon Network, Disney Channel and ABC Family Channel all compete with Nickelodeon for advertising revenue. In addition. Nickelodeon competes internationally with other television program services and blocks targeted at children for distribution over-tbe-air or by cable, DTH and other systems, and for distribution license fees and advertising revenue. MTVN services compete for carriage by cable television operators, DTH and other distributors with other program services, as weO as other uses of bandwidth, such as retransmission of free over-the-air broadcast networks, telephony and data transmission. A principal focus of competition is for distribution of MTVN's services that are not already distributed within a particular cable or DTH system. For such piognui services, distributors make decisions on the use of bandwidth based on various considerations, including amounts paid by programmers for launches, subscription fees payable by distributors, and appeal to the distributors' subscribers. Certain major record companies that supply music content to various MTVN program services also operate musk-based program services, including Viewsk, which is owned by Sony Music Japan. The Universal Musk Group has announced its intention to launch three musk channels in 2005 to be carried on the EchoStar direct broadcast satellite platform. These musk-based program services, as well as general entertainment and other program services, compete with MTVN's program services for distribution by cable, DTH and other systems, and for distribution license fees and advertising revenues. BEE Bluet Fmtuttimmtmt Tetevino*. BET properties generally race competition for advertising revenue from other African-American targeted media, induding other cable networks that target BETs African-American audience such as TV One, African-American-oriented radio stations, magazines such as Ebony, Black Enterprise, Jet and Essence, and African-American-oriented broadcast television as well as with other media, generally. In addition, BET, BET Jazz, BET Gospel and BET Hip Hop compete with other cable programming services for available channel space as well as other uses of bandwidth and for subsciibci fees from cable. DTH and other distributors. For 2004, according to information from the Nielsen Media Research report (December 28, 2003-December 26, 2004), the Company's basic cable networks had the following percentage shares in the total day ad supported cable networks category: approximately 42% (for viewers ages 2-24), 36% (for viewers ages 2-34), 30% (for viewers ages 12-34) and 21% (for viewers ages 18-49).

1-6 . Showtime Networks Inc. Competition'among premium subscription television program services in the U.S. is primarily dependent on: (i) the acquisition and packaging of an adequate number of recently released theatrical motion pictures and the production, acquisition and packaging of original series, original motion pictures and other original programs; and (ii) the offering of prices, marketing';and advertising support and other incentives to cable, DTH and other distributors for carriage so as to favorably position and package SNI's premium subscription .television program services to subscribers. Home Box Office, Inc. is the dominant company in the U.S. premium subscription television category, offering two premium subscription television program services, HBO and Cinemax. SNI competes with Home Box Office, Inc. but has a significantly smaller share of the premium subscription television' category. Starz Entertainment Group, L.L.C owns Starz!, another premium subscription television program service, which features recently released theatrical motion pictures and competes with SNI's and Home Box Office, Inc.'s premium program services. The terms .and favorable renewal of agreements with distributors for the distribution of the Company's basic and premium cable networks are important to the Company. Consolidation among multichannel video programming distributors makes it more difficult to reach favorable terms and could have an adverse effect on revenues. In addition, consolidation among distributors has.^ increased the intensity of competition among program suppliers for carriage.at favorable rates, terms and conditions. Companies that are vertically integrated (and accordingly, own- both cable programming networks and multichannel video program distributors, such as Time Warner,, Comcast Corporation and , among others) may put the Company in a competitively disadvantaged position with respect to distributing the Company's cable networks, particularly regarding subscriber fees, channel placement or availability, and marketing and promotional activities, which can have an adverse impact on revenues. These companies can use their distribution platforms to immediately establish market presence for their own programming. Television (38%, 37% and 39% of the Company's consolidated revenues in 2004, 2003 and 2002, respectively) The Television segment consists of the CBS and UPN Television Networks, the Company's ownedj broadcast television stations, and its television production and syndication businesses, Television Networks. The CBS Television Network™ through CBS Entertainment™, CBS News™ and CBS Sports™ distributes a comprehensive schedule of news and public affairs broadcasts, sports and entertainment programming, and feature films to more than 200 domestic affiliates reaching throughout the U.S., including 20 of the Company's owned and operated television stations, and to certain overseas affiliated stations. The CBS Television Network primarily derives revenues from the sales of advertising time for its network broadcasts. CBS Entertainment is responsible for acquiring or developing,and scheduling the entertainment programming presented on the CBS Television Network, which includes primetime comedy and drama series, reality-based programming, made-for-television movies and miniseries, theatrical films, specials, children's programs, daytime dramas, game shows' and late-night programs. CBS News operates a worldwide news organization, providing the CBS Television Network and the CBS Radio Network™ with regularly scheduled news and public affairs broadcasts, including and The Earfy Show, as well as special reports. CBS News Productions, the off-network production company created by CBS News, produces original nonfiction programming for domestic and international outlets, including the CBS and UPN Television Networks, cable television, home video, CD-ROM, audio-book and in-flight markets, as well as schools and libraries. CBS News also provides CBS Newspath, a television news syndication service that offers daily news coverage, sports highlights and news features to CBS affiliates and other subscribers worldwide. CBS News also produces BET Nightfy News for BET and news inserts for MTV U, MTVs college network. CBS Sports broadcasts include The NFL Today, certain NCAA championships, including the Final Four, golf, including the Masters Tournament and the PGA Championship, the U.S. Open Tennis Championships, regular-season golf and and basketball line-ups on network television, in

1-7 addition to the NFL's American Football Conference regular season schedule, the Post Season Divisional Playoff games and the AFC championship game. In November 2004, CBS Sports entered into a six-year rights extension with the NFL to broadcast the AFC beginning in 2006 and including two Super Bowls. Extending its franchises off the field and court, CBS Sports has activated hs marketing rights for the 2003-2013 NCAA Championships, including coordination of licensing, merchandismg, related multimedia and television, and other related business opportunities. At December 31, 2004, the UPN Television Network provided to Hs affiliates 13 hours of programming a week. UPN*s programming is provided to its affiliates in 182 U.S. television markets which comprise approximately 962% of aO U.S. television households, including secondary affiliates. Eighteen of the Company's owned television stations are affiliates of UPN. Through CBS.com and CBSNews.com, the Company operates Web sites that coBectivery received more than 1.5 billion pageviews hi 2004 and. according to Nielsen/NetRatings, attracted an average audience of 7.7 million U.S. monthly unique viators. CBS.com produces Web sites for CBS Entertainment programs and is responsible for the CBS Television Network's promotional Web sites, online subscription services, fantasy leagues and interactive voting technology. CBSNews.com is a multimedia provider of continuous, in-depth news and information and produces Web sites for all CBS News programs. Both sites provide links to CBS.SporoLinf.com, a provider of online sports content, services and merchandise on a domestic and international basis, operated by SportsLine.com, Ine, which was acquired by the Company in December 2004. These Company Internet sites derive revenue from a combination of advertising and > sponsorships, subscription services and e-commerce. Tttrr\iitm Station. The Company owns 39 broadcast television stations, all of which operate under licenses granted by the Federal Communications Commission ("FCC") pursuant to the Communications Act of 1934, as amended (the "Communications .Act"). The licenses are renewable every eight years. The Company's television stations are located in the 7 largest, and 15 of the top 20, television markets in the U.S. The Company owns two television stations within the same designated market area in eight major markets. Such duopolies are in: (market #2), (market #4), (market #5), San Francisco-Oakland-San Jose (market #6), -Fort Worth (market #7), (market #10), (market #17) and (market #22). The stations produce news and broadcast public affairs, sports and other programming to serve their local markets and offer CBS or UPN Television Network and syndicated programming. Many of the Company's television stations currently operate Web sites, which promote the stations' programming, and provide news, information and entertainment, as weD as other services. In December 2004, the Company announced that it agreed to purchase, subject to regulatory approval, CBS affiliate, KOVR-TV in Sacramento, California, which, along with hs owned UPN affiliate in that market, KMAX-TY would create its ninth duopoly. In February 2005, the Company announced the sale of Hs UPN affiliates, WNDY-TV. serving Indianapolis, Indiana, and WWHO-TV, serving Columbus, Ohio, subject to regulatory approval. The Company's owned and operated television stations reach approximately 45% of all U.S. television households and approximately 39% of U.S. television households as measured by the FCC's television national audience reach limitation under which a VHF television station is deemed to reach 100% of the television households in its market and a UHF television station is deemed to reach 50% of the television households in Hs market. The FCC's ownership rules limit the Company's national audience reach to 39% of all U.S. television households- (See "Viacom Business Segments-Regulation-BroadcasUng-Ownership Regulation").

1-8 Television Stations The table below sets forth the broadcast television stations owned by the Company as of March 1, 2005.

Market Type/ Network Station and Metropolitan Area Served (1) Rank (2) Channel Affiliation WCBS-TV ; 1 VHF/2 CBS New York, New York KCAL-TV 2 VHF/9 Independent Los Angeles, CA KCBS-TV j 2 VHF/2 CBS Los Angeles, CA ' WBBM-TV : 3 VHF/2 CBS Chicago, IL KYW-TV 4 VHF/3 CBS Philadelphia, PA WPSG-TV 4 UHF/57 UPN Philadelphia, PA WBZ-TV 5 VHF/4 CBS W Boston, MA WSBK-TV 5 UHF/38 UPN Boston, MA KPIX-TV , 6 VHF/5 CBS San Francisco-Oakland-San Jose, CA KBHK-TV 6 UHF/44 UPN San Francisco-Oakland-San Jose, CA KTVT-TV 7 VHF/11 CBS Dallas-Fort Worth, TX KTXA-TV 7 UHF/21 UPN Dallas-Fort Worth, TX WUPA-TV 9 UHF/69 UPN Atlanta, GA WKBD-TV 10 UHF/50 UPN Detroit, MI WWJ-TV 10 UHF/62 CBS ^ . Detroit, MI W KSTW-TV 12 VHF/11 UPN -Tacoma, WA WTOG-TV 13 UHF/44 UPN Tampa-St. Petersburg-Sarasota, FL WCCO-TV 14 VHF/4 CBS -St. Paul, MN Satellites: KCCO-TV(3) CBS Alexandria, MN KCCW-TV(4) CBS Walker, MN WFOR-TV 17 VHF/4 CBS Miami-Ft. Lauderdale, FL WBFS-TV 17 UHF/33 UPN Miami-Ft. Lauderdale, FL

1-9 Ana Served (1) KCNC-TV 18 VHF/4 CBS , CO KMAX-TV 19 UHF/31 UPN Sacramento-Stocktoo-Modesto, CA KDKA-TV 22 VHF/2 CBS Pittsburgh, PA WNPATV 22 UHF/19 UPN Pittsburgh, PA WJZTV 23 VHF/13 CBS , MD WNDY-TV 25 UHF/23 UPN Indianapolis, EN WWHO-TV 34 UHF/53 UPN/WB(5) Columbus, OH KUTV-TV 36 VHF/2 CBS San Lake City, UT SatdKte: KUSG-TV(6) CBS > St. George. UT WTVX-TV 39 UHF/3 UPN/WB(7) West Pahn Beacb-Ft. Pierce, FL WGNTTV 41 UHF/27 UPN NorfoOc-Portsmoutb-Newport News, VA WUPL-TV 43 UHF/54 UPN New Orleans, LA KAUTTV 45 UHF/43 UPN OUaboma Cry, OK WLWC-TV 49 UHF/28 UPN/WB(8) Providence, RI-New Bedford, MA KEYE-TV 54 UHF/42 CBS Austin, TX WFRV-TV 69 VHF/5 CBS Green Bay-Applelon, Wl

WJMN-TV(9) 180 CBS " Escanaba. MI

(1) Meuopuliua Area Served o Nkfaen Media Bacardi's Designated Market Area. (2) Market Ranfcmp bated CM Nkfaea Suuoo Inda—DesignMed Mutet Area Market and Duuaf^Ut. Rank, September 2004. (3) KTCOTV is operated as a saieftle Hanoi of WCOOTV (4) KCCW-TV B operaied as a t-e*le tuoom of WCCO-TV. (5) WWHO-TVJ pnmarr afHuuuo a widi UPN. Tbe statxm has a secoodarr »«5K«tin«i wioi die WB uetmaL (6) KUSG-TV is operated as a safdbtt sanon of KUTV-TV' (T) WTVX TVs pranaiy atBiaooa B w«i UPN. Tbe station has a secondary afBiatioB with the WB netvotk. (S) WLWC-TVs primary »ffifc»^~ D with UPN. Tbe station has a secoodarr ««BKtin-i wjdrtke WB •etwort. (9) WIMNTV a operated as a sateOle staooo of WFRVTV 1Uenaa» Pntluttitm mmd Syndication. The Company, through CBS Enterprises (including ). CBS Paramount International Television, Paramount lelevision and *, produces, acquires and or distributes programming worldwide, including series, specials and made-for-television movies. Such programming is produced primarily for broadcast on network television

1-10 and exhibition on basic cable and premium subscription services. The Company also produces and/or distributes first-run and off-network syndicated programming. First-run syndicated programming is programming produced or co-produced for initial sale to individual .television stations without prior exhibition on a network. Off-network syndicated programming is programming exhibited on television stations or cable networks which has already been exhibited on a network, basic cable or premium subscription service. Programming that was produced or co-produced by the Company's production and syndication group and is broadcast on network television includes CSI: Crime Scene Investigation (CBS), Medium (NBC) and 7th Heaven (WB). Generally, a network will license a specified number of episodes for exhibition on the network in the U.S. during a license period. Remaining distribution rights, including foreign and/or off-network syndication rights, are typically retained by the Company. The episodic network license fee is normally less than the costs of producing each series episode; however, the Company's objective is to recoup its costs and earn a profit through domestic syndication of episodes after their network runs and/or by obtaining international sales through its licensing operations. International sales are generally made within one year of U.S. network runs. Generally, a series must have a network run of at least three or four years to be successfully sold in domestic syndication. In off-network syndication, the Company distributes series such as Everybody Loves Raymond and CSI. The Company also distributes a library of older television programs. The Company produces and/or distributes programming for first-run syndication that it sells directly to television stations in the U.S. on a market-by-market basis. The Company's first-run syndicated programming includes shows such as Jeopardy!, and The Oprah Winfrey Show. The Company also distributes syndicated programming internationally. The recognition of revenues for license fees for completed television programming in syndication and cable is recorded as revenue in the period that programming is available for exhibition which, among other reasons, may cause substantial fluctuation in the Television segment's operating results. At December 31, 2004, the unrecognized revenues attributable to such television program license agreements were approximately $734.4 million, compared to approximately $634.9 million at December 31, 2003, including intercompany revenues of $176.3 million and $345.2 million, respectively. Television Competition. The television broadcast environment is highly competitive. The principal methods of competition in broadcast television are the development and acquisition of popular programming and the development of audience interest through programming and promotion, in order to sell advertising at profitable rates. Broadcast networks like CBS and UPN compete for audience, advertising revenues and programming with other broadcast networks such as ABC, FOX, NBC and WB, independent television stations, basic cable program services as well as other media, including DTH television services, videocassettes, DVDs, print and the Internet. In addition, the CBS and UPN Television Networks compete with the other broadcast networks to secure affiliations with independently owned television stations in markets across the country, which are necessary to ensure the effective distribution of network programming to a nationwide audience. According to Nielsen Media Research, for the broadcast television primetime daypart for the period September 20, 2004 to March 6, 2005, the CBS Television Network secured the #1 position for total viewers and for key adult viewers ages 25-54 and 18-49 (with respect to 18-49, tied with Fox). Television stations compete for programming, audiences and advertising revenues with other stations and cable networks in their respective coverage areas and, in some cases, with respect to programming, with other station groups, and, in the case of advertising revenues, with other local and national media. The owned and operated television stations' competitive position is largely influenced by (i) the strength of the CBS and UPN Television Networks and, in particular, with respect to those that are CBS affiliated television stations, the viewership of the CBS Television Network in the time period immediately prior to the late evening news; (ii) the quality of the syndicated programs and local news programs in time periods not programmed by the network; and (iii) in some cases, by the quality of the broadcast signal.

Ml Because conversion to digital televisioa broadcasting has begun, current and future technological and regulatory developments may affect competition within the television marketplace (see "Viacom Business Segments- Regulation- Broadcasting"). As a producer and distributor of programming, the Company competes with studios, television production groups, and independent producers and syndicators such as Disney, Sony, NBC Universal and Warner Bros, to sell programming both domestically and overseas. The Company also competes to obtain creative talent and story properties which are essential to the success of aO the Company's entertainment

Radi* (9%, 10% and 11% of the Company's consolidated revenues in 2004, 2003 and 2002, respectively) The Company's business operates through Infinity Radio, which owns and operates 183 radio stations serving 41 U.S. markets. It is one of the largest operators of radio stations in the U.S. Approximately 91% of the Company's radio stations are located in the SO largest U.S. radio markets and approximately 58% in the 25 largest U.S. radio markets. The Company's growth strategy generally is to operate and acquire radio stations in the largest markets and take advantage of the Company's ability to sefl across multiple markets and formats. The Company believes that rt is favorably impacted by offering both radio and outdoor advertising properties in large markets. The Radio Stations and Outdoor Advertising Displays table below includes information with regard to the Company's radio stations in the top 25 U.S. radio markets. Radio seeks to maintain substantial diversity among its radio stations. The geographically wide-ranging stations serve diverse target demographics through a broad range of programming formats, such as rock, , news/talk, adult contemporary, sports/talk and country, and Infinity Radio has established leading franchises in news, sports, and personality programming. This diversity provides advertisers with the convenience to select stations to reach a targeted demographic group or to select groups of stations to reach broad groups of consumers within and across markets. This diversity also reduces Radio's dependence on any single station, local economy, format or advertiser. Radio's general programming strategies induce employing popular on-air talent, syndicating shows of some of these talent nationally and acquiring the rights to broadcast sports franchises and news content for its radio stations. These strategies, in addition to developing loyal audiences for its radio stations, create the opportunity to obtain additional revenues from syndicating such programming elements to other radio stations. Howard Stem, on-air talent responsible for programming approximately 20 hours per week on 27 Infinity Radio stations and, in non-Infinity Radio markets, programming on radio stations from which Infinity Radio shares in syndication revenues, has announced that he wfl] provide programming to Sinus Satellite Radio beginning January 1, 2006. There can be no assurance that any replacement programming wfll generate the revenues or profitability associated with Mr. Stern's show. The substantial majority of Radio's advertising revenues are generated from the sale of local, regional ^/ and national advertising. The major categories of radio advertisers include: automotive, retafl, healthcare, telecommunications, fast food, beverage, movies, entertainment and services. Infinity Radio is able to use the reach, diversity and branding of its 183 radio stations to create unique corporate-wide marketing and promotional initiatives for major national advertisers for products and services. The success and reputation of Infinity Radio and its stations allow the Company to attract the participation of major artists in these national campaigns. Revenue fluctuations are common in the radio industry and are primarily the result of fluctuations in advertising expenditures by retailers. The Company also owns the CBS Radio Network, which is managed by , Inc. As of March I, 2005, Infinity owns approximately 17% of the common stock of Westwood One, Inc., which it manages pursuant to a management agreement. Westwood One is a leading producer and distributor of syndicated and network radio programming in the U.S. and distributes syndicated and network radio programming, including traffic and weather information, to many of the Company's radio stations as well as to the Company's competitors. Westwood One does not own or operate radio stations. In December 2004, Infinity Radio acquired a 10°c interest in Spanish Broadcasting System, Inc. expanding the Company's commitment to Hispanic consumers.

1-12 Radio Competition. The Company's radio stations compete for audience, advertising revenues and programming directly with other radio stations such as those licensed to and operated by ABC Radio, Clear Channel Communications, Cox Radio, Emmis Communications, Entercom and Radio One as well as with other media, such as broadcast television, newspapers, magazines, cable television and DTK, the Internet and direct mail, within their respective markets. The growth of could result in increased competition. The radio industry is also subject to competition from two satellite-delivered audio programming services, Sinus Satellite Radio and XM Satellite Radio, each providing over 100 channels of pay digital audio services. While these services primarily rely on subscription revenues, XM and Sinus currently sell advertising time on some of then: channels. XM and Sinus are also competing with the radio industry for programming. Unlike broadcast television, the radio industry is just beginning the process of converting from analog to digital broadcasts. Currently, approximately 500 radio stations are broadcasting in the U.S. using digital technology. The Company recently joined 20 other broadcast radio groups to commit to accelerate the conversion of an additional 2,000 AM and FM stations to digital radio technology over the next several years, including the conversion of approximately 120 of the Company's radio stations. The Company believes that digital transmissions will provide listeners with improved sound quality and should facilitate the convergence of radio with other digital media. It is too early to predict the full effect that the conversion to digital will have on the Company's radio businesses or on competition generally. Radio's aggregate spot advertising sales revenues for its radio stations for 2004 in each of the top five U.S. markets by metro area population were ranked either #1 or #2, according to the 2004 Market Total Spot Performance Summary of Miller, Kaplan, Arase & Co., T.T.P (for the New York, Los Angeles, Chicago, San Francisco and Dallas-Fort Worth markets).

1-13 RatB» Stetioas umd Outdoor Admtisiag Displays .. The foOowing table sets forth information with regard to the Company's radio stations and outdoor advertising displays as of March 1, 2005 in the top 25 U.S. radio markets:

AMffM WCBS-fM FM Okto BM.BMSbeken.R4 WCBS AM New. WTAN AM Sport. -Spectaoalv Stnife.- WINS AM Mem *n, FbMen. Mai ft WNEW FM Adah CoMaapaniy WXRI FM Alterable Rock to»A»»lri. CA KCBS-FM FM OuBcRoct BB. BB Sbehen. Kiosks. KFWB AM Newt .WA.Fbslen.MaO USX FM HatTOk KNX AM KROQ-FM FM DCTH-FM FM Okfeet KTWV FM Soootk Juz

WBSM-FM FM BBS. BM Sbeten. Rai, WBBM AM Newt . Posun. MaD Posten, WCKG FM Hollk wna. FM Ottes WSCR AM Spoftt WUSN FM WXRT-FM FM Adw*

S*a franco. CA KCBS AM New BB. BB Sbehen. Rafl, Cable KFRC-FM FM Oldies Can. Bdfetias. WaHs. Poaen, KFRC AM CHdiet KITS FM KLLC FM Modem Adcfc KYCY AM

M.I Tial Won*. TX KLUV-FM FM Oldks WUb. Bwlenot. MU Posten KOMI FM Snootb J«zz KJKK FM Add Hm KR1D AM rvn. FM KLU FM HofErik

PA. PTti .AM Newt BB Sbeken. Rat BnUetim. WIP AM Spore Md Fasten »XXH. FM Oldies »THT AM lift WYS? FM Actne Rock

TX KHJZ.FM FM Smooth Jazz MalPbaers K1KK .AM Hoi lift KIU-FM FM KJU AM Sports

.DC WAKW FM OatsicRoct BB. Rafl. MaB Posten, «Ub WLZL FM SpawfcTropical FM Hoilak WPGC-FM FM Rbntenc G HaRadb WPGC .AM Gospel

1-14 2004 Mattel Rank Radio Qpldoor By Metr* Ana Mattel PopulatknU) Stations AM/FM Format Boston, MA . . . 9 WBCN FM Alternative Rock Bus, Rail, Subway, Mall Posters WBMX FM Hot Aduh Contemporary WBZ AM News WODS FM Oldies WZLX FM

Detroit, MI .... 10 WKRK-FM FM HotTSJk Bus, Bulletins, Posters, MaD WOMC FM Oldies Posters WVMV FM Smooth Jazz WWJ AM News WXYT AM Sports WYCD FM Country

Atlanta, GA . . 11 WAOK AM Black News/Ialk Bus, Bus Shelters, Rail. WVEE FM Bulletins, Posters, Mall Posters WZGC FM Adult Album Alternative

Miami-Ft. Lauderdale, FL 12 Bulletins, Bus, Rail, Mall Posters, Kiosks w Puerto Rico 13 — — — Bulletins, Posters Seattle-Tacoma, WA 14 KBKS-FM FM Bus, Bulletins, MaD Posters KMPS-FM FM Country KPTK AM Progressive Talk KRQI-FM FM Classic Alternative KZOK-FM FM Classic Rock

Phoenix, AZ . 15 KOOL-FM FM Oldies Bus Shelters, Bulletins, Posters, KZON FM Alternative Rock Man Posters, Benches, Walls KMLE FM Country

Minneapolis. MN 16 WCCO AM News/Ialk/Sports Bus, Rafl, Bulletins, MaD WLTE FM Aduh Contemporary Posters WXPT FM Hot Adult Contemporary

San Diego, CA 17 KPLN FM Classic Rock Bus, Bus Shelters, Bulletins, KYXY FM Adult Contemporary Posters, Mall Posters

Nassau-Suffolk, NY(2) 18 Bus, Bulletins

St. Louis, MO 19 KEZK-FM FM Adult Contemporary Bulletins, Posters, Mall Posters KMOX AM News/Talk W KYKY FM Hot Adult Contemporary

Baltimore, MD 20 WBGR AM Gospel Mall Posters, Bus Shelters WBMD AM Gospel WJFK AM Sports WLIF FM Soft Adult Contemporary WQSR FM Oldies WWMX FM Hot Adult Contemporary WHFS FM Hot Talk/Alternative Rock

lampa-SL Petersburg, FL 21 WLLD FM Contemporary Hit Radio Bulletins, Mall Posters WQYK-FM FM Country WBZZ AM Hot Talk WYUU FM Country WRBQ-FM FM Oldies WSJT FM Smooth Jazz

Denver, CO 22 KDJM FM Rhythmic Oldies Bus Shelters, Benches, KJMN FM Hot Adult Contemporary Bulletins, Posters, Mall Posters KXKL-FM FM Oldies

1-15 MaBFtaten

OK 24 KVMX FM 8te Hm Bdetn. Mai Paten. Wife, KJNK. FM Aduk Aim Ahcnatiie Fttten 1QJM FM Adall Cuutmvmmj KUFO-FM FM Rock KUPL-FM FM Cum*i, KCDM AM Comedy

OH 25 WNOC FM Oaok Rock Bo. BaflettB, MaB Postm, WDOR FM Soft Adofe CoMeovoray Rag WOAL FM Hot Adah Comcaponrf WXTM FM Ahenutive Rock

(I) ttaku Rait hned am Frf 30M Ratio Market Swwy Scfaedole and PdpobdoB Ratbags « provided by Art*n» tec. (7) Sat ••!£« of New Vort Or Radrt Ne« York Cfy r»dbo JUOOB save N«a»o-S«Salk_

OatdMr (8%, 8% and 9% of the Company's consolidated revenue in 2004, 2003 and 2002, respectively) W

The Company sells, through Viacom Outdoor, advertising space on various media, including biOboards, transit shelters, buses, rail systems (in-car, station platform and terminal), mall kiosks and stadium signage. It has outdoor advertising operations in more than 90 markets in North America, including aO 50 of the largest metropolitan markets in the U.S., 14 of the 15 largest metropolitan markets in Canada and all of the 45 largest metropolitan markets in . Additionally, Viacom Outdoor has the exclusive rights to manage advertising space within the Underground and on more than 90% of the buses in London and the U.IC, has the exclusive rights to public transit advertising in the Republic of Ireland and parts of Northern Ireland, and has a variety of outdoor advertising displays in the Netherlands, France, Italy, , Finland and Puerto Rico. The Radio Stations and Outdoor Advertising Displays table above includes information with regard to the Company's outdoor advertising properties in the top 25 U.S. radio markets.

The substantial majority of Viacom Outdoors revenues are generated from the sale of local, regional and national advertising. Advertising rates are based on supply and demand for the particular locations, which are influenced by a particular display's exposure known as "impressions" delivered in relation to the demographics of the particular market and its location within that market Nielsen Media Research and ^^ Arbkroo Inc. are testing the market for measuring these impressions. The Company cannot predict the impact, if any, on the Outdoor business should measuring impressions become widespread. The major categories of out-of-bome advertisers include: automotive, retail, healthcare, telecommunications, fast food, beverage, media, entertainment and services. Out-of-bome media industry advertising expenditures by retailers and the entertainment industry fluctuate, which has an effect on Viacom Outdoors revenues.

Viacom Outdoor generally operates in the billboard, transit and street furniture advertising markets. Viacom Outdoor primarily operates two types of billboard advertising displays, commonly referred to as "buDetins" and "posters." Bulletin space and poster space are generally sold for periods ranging from 30 days to 12 months. Billboards are generally mounted on structures owned or leased by Viacom Outdoor. Lease agreements are negotiated with both public and private landowners for varying terms ranging from mootb-to-month to year-to-year and can be for terms of 10 years or longer, and many provide for renewal options. There is no significant concentration of displays under any one lease or subject to negotiation with anyone landlord

1-16 • ••. Transit advertising includes advertising on or in transit systems, including the interiors and exteriois of buses, trains, trams and at rail stations. Transit advertising contracts are negotiated with public transit authorities and private transit operators and generally provide for payment to the transit authority of a percentage of the revenues, a fixed payment, or the greater of a percentage of the revenues or a fixed payment. Where revenues are lower than anticipated, the minimum amount required to be paid to a transit authority may exceed, or be a high percentage of, the advertising revenues received by Outdoor under that advertising contract. ..:: ::'"•'. ,.r., Street furniture displays, the most common of which are bus shelters, reach both vehicular and pedestrian audiences. Bus shelters are usually constructed; installed and maintained by Outdoor.-Most of Outdoors bus shelter contracts include revenue-sharing arrangements with a municipality or transit authority and often include minimum required payments. Street furniture contracts usually involve a competitive bidding process and contracts typically are for a term of between 10 to 20 years. Contracts are awarded on the basis of projected revenues to the municipality, including minimum payments, and Viacom Outdoors willingness to construct public facilities, such as bus shelters, public toilets and information kiosks. In both its transit and street furniture negotiations, Outdoor seeks to reduce minimum payment obligations on new agreements and on renewal of existing agreements. This position may make it more difficult to enter into new agreements or to renew certain existing agreements. "> ' " . .Viacom Outdoors business strategy involves expanding its presence in major selected markets, to grow its revenues and cash flow by being a leading provider of out of home advertising services in the markets it serves, controlling costs and developing and entering into new markets. In addition, the Company purchases outdoor advertising assets within its existing markets or in contiguous markets. During 2004, Viacom Outdoor acquired new properties and entered into new markets and ventures, including'the acquisition of advertising rights and billboards at the Oakland-Alameda County Cohseum Complex in California. The Company believes that there will be continuing opportunities for implementing its acquisition and development strategies given the outdoor advertising industry's fragmentation. This is particularly true in the international markets, where Viacom Outdoors presence offers opportunities to increase profitability both from existing1 operations and from future acquisitions. Outdoor Competition. The outdoor advertising industry is fragmented, consisting of several large companies involved in outdoor advertising such as Clear Channel Communications and Lamar Advertising as well as hundreds of smaller and local companies operating a limited number of structures in a single or a few local markets. The Company also competes with other media, including broadcast and cable television, radio, print media, the Internet and direct mail marketers, within their respective markets. In addition, it competes with a wide variety of out-of-home media, including advertising in shopping centers, airports, movie theaters, supermarkets and taxis. Advertisers compare relative costs of available media and cost-per-thousand impressions, particularly when delivering a message to customers with distinct demographic characteristics. In competing with other media, the outdoor advertising industry relies on its relative cost efficiency and its ability to reach a broad segment in a specific market or to target a particular geographic area or population with a particular demographic within that market. New technologies for outdoor advertising displays, such as animated billboards, continue to develop. The Company keeps apprised of new technologies and endeavors to remain competitive in this regard. If these new technologies prove desirable to Viacom Outdoor's customers, the Company's costs could increase. The Company believes that its strong emphasis in sales and customer service and its position as a leading provider of advertising services in each of its primary markets as well as its nationwide inventory enables it to compete effectively with the other outdoor advertising companies, as well as-other media, within those markets.

1-17 (18%. 20% and 19% of the Company's consolidated revenues in 2004,2003 and 2002, respectively) The Entertainment segment's principal businesses are Paramount Pictures, which produces and distributes theatrical motion pictures; Simon & Schuster, which publishes and distributes consumer books; Paramount Parks, which is principally engaged in the ownership and operation of five regional theme parks and a themed attraction in the U.S. and Canada; ™, which operates movie theaters in Canada; and Famous MUSK*, which is involved in musk publishing.

TktatricmJ Motion Pietum. Through Paramount Pictures, the Company produces, finances and distributes feature motion pictures. Each picture is a separate and distinct product with its financial success dependent upon many factors, among which cost and public response are of fundamental importance. In general, motion pictures produced or acquired for distribution by Paramount Pictures are exhibited in U.S. and foreign theaters followed by DVDs and videocassettes, pay-per-view television, premium subscription television, network television and bask cable and syndicated television exploitation. During 2004, Paramount Pictures produced, co-produced or acquired, and theatrically released, 16 feature motion pictures, including Mean Girts, Collateral, The SpongeBob StjuarrPants Movie and Lemony Snicket'sA Series Of Unfortunate Events. Paramount Pictures currently plans to release approximately IS films in 2005 including Coach Carter, produced by MTV Films and released in the first quarter of 2005. Generally, Paramount Pictures incurs the production and marketing costs of films produced by MTV Films or .^ Nickelodeon Movies and released by Paramount Pictures. MTV Films or Nickelodeon Movies receives a participation based on the performance of these films and producer fees. Paramount Classics*, a division of Paramount Pictures established to handle the distribution of specialized firm product, released 10 films in 2004 and currently plans to release approximately 9 titles in 2005. Release plans for firms may change due to a variety of factors. In seeking to limit Paramount Pictures' financial exposure, the Company has pursued a strategy of eutetiug into agreements to share the financing of certain films with other parties. The parties to these arrangements include studio and non-studio entities, both domestic and foreign. In various of these arrangements, other parties control certain distribution and/or other ownership rights. Paramount Pictures generally distributes its motion pictures for theatrical release outside the U.S. and Canada through United International Pictures ("UIP"), a company owned by the Company and an affiliate of Universal Studios, Inc. Pursuant to their agreement, UIP will continue to distribute each studio's films through 2006. Paramount Pictures distributes its motion pictures on DVDs and videocassettes in the U.S. and Canada through Paramount Home Entertainment1* and outside the U.S. and Canada, generally through Paramount Home Entertainment International. Paramount Pictures' feature films initially theatrically released in the U.S. on or after January I, 1998 have been exhibited exdusrvery to U.S. ^ premium subscription television on SNI program services for certain windows. Paramount Pictures also distributes its motion pictures for premium subscription, free and bask cable television release outside the U.S. and licenses its motion pictures to residential and hotel/motel pay-per-view, airlines, schools and universities. License fees for exiubrtion on broadcast and/or cable television are generally collected in installments. License fees for television exhibition (including international and U.S. premium television and bask cable television) are recorded as revenue in the period that licensed films are available for such exhibition, which, among other reasons, may cause substantial fluctuation in Paramount Pictures' operating results. At December 31. 2004 and December 31, 2003, the unrecognized revenues attributable to such licensing of completed firms from Paramount Pictures' license agreements were approximately $1.2 billion, inctoding intercompany revenues of J287.4 million and S281.1 million, respectively. At December 31, 2004, Paramount Pictures had approximately 1,100 motion pictures in its library. The Company also has a library of additional motion picture titles, most of whkh comprise the Spelling Entertainment™ library. These libraries consist of titles for whkh Paramount Pictures and the Company control rights for various media and territories and for varying terms.

1-18 Publishing; Simon & Schuster publishes and distributes adult and children's consumer books in the U.S. and internationally. Simon & Schuster's major adult imprints include Simon & Schuster, Pocket Books, Scribner and Simon Spotlight Entertainment™. Simon & Schuster's major children's imprints include Simon Spotlight9, ™ and Simon & Schuster Books For Young Readers'"'. Simon & Schuster also develops special imprints and publishes titles based on MTVN, Paramount Pictures and Showtime products as well as that of third parties and distributes products for other publishers. Simon & Schuster distributes its products directly and through third parties. Simon & Schuster also delivers content and promotes its products on Internet sites operated by various imprints or linked to individual tides. International publishing includes the international distribution of English-language titles through Simon & Schuster UK, Simon & Schuster Canada and Simon & Schuster Australia and other distributors, as. well as the publication of local titles by Simon & Schuster UK. In 2004, Simon & Schuster published 100 titles that were New York Tunes bestsellers, including 17 New York Times number one bestsellers. Best-selling titles in 2004 include "Angels & Demons" by Dan Brown, "He's Just Not That Into You" by Greg Behrendt and Liz Tuccfllo, "Family First" by Dr. Phil McGraw and several series featuring characters from popular Nickelodeon programs. Simon & Schuster Online™, through SimonSays.com, publishes original content, builds reader communities and promotes and sells Simon & Schuster's books over the Internet. The consumer publishing marketplace is subject to increased periods of demand in the summer months and during the end-of-year holiday season. Major new title releases represent a significant portion of Simon & Schuster's sales throughout the year. Simon & Schuster's top 10 accounts drive a significant portion of its annual revenue. Consumer books are generally sold on a fully returnable basis, resulting in the return of unsold books. In the domestic and international markets, the Company is subject to global trends and local economic conditions. Parks. Paramount Parks owns and operates five regional theme parks and a themed attraction in the U.S. and Canada: Paramount's *, in Charlotte, North Carolina, Paramount's Great America™, in Santa Clara, California, Paramount's ™, located near Richmond, Virginia, Paramount's ™, located near , Ohio, Paramount Canada's Wonderland*, located near Toronto, Ontario, and the themed attraction, : The Experience*, at the Hilton, a futuristic, interactive environment based on the popular television and movie series. Each of the theme parks features attractions, products and live shows based on various intellectual properties of the Company. In addition, Paramount Parks manages and operates Bonfante Gardens, a family-oriented garden theme park in Gilroy, California. The Company has received unsolicited interest in Paramount Parks and is exploring its options. A substantial amount of Paramount Parks' income is generated during its seasonal operating period. Factors such as local economic conditions, competitors and their actions, and weather conditions during the operating season may impact the business' performance. Theatrical Exhibition. The Company's movie theater operations include Famous Players in Canada. At December 31, 2004, Famous Players operated approximately 771 screens in 78 theaters across Canada. The Company is in the process of soliciting offers to purchase Famous Players. In the fourth quarter of 2004, entities affiliated with the Company and Vivendi Universal sold their respective 50% equity interests in United Cinema International. Affiliates of the Company and Vivendi Universal continue to each own a 50% interest in entities which operated approximately 122 screens in 12 theaters in the U.K., Brazil and Argentina at December 31, 2004, which are subject to proposed sale transactions. The Company also owns a 50% interest in two entities which operate approximately 123 screens in 20 theaters under the name Mann Theatres, the substantial majority of which are located in California. The Company and its joint venture partner are in the process of soliciting offers to purchase the Mann Theatres.

1-19 The Famous Musk publishing companies own, control and/or administer ail or a portion of the copyrights to more than 125,000 musical works (songs, scores, cues). These rights include the right to license and exploit such works, as well as the right to coOect income generated by such licensing and exploitation and are principally derived from (i) agreements entered into by Paramount Pictures, , Spelling Television, CBS Broadcasting, MTVN and various other divisions of the Company respecting certam motion pictures, television programs and other properties produced by such units and (ii) agreements entered into directly by Famous Musk with songwriters and musk publishers, including exclusive songwriting agreements, musk administration agreements and catalog purchases.

Cmpetitioa. Tktatricml Motion Piamns. The Company competes with other major studios such as Disney, DreamWorks, Fox, MGM, Sony, Universal and Warner Bros, and independent fihn producers in the production and distribution of motion pictures, DVDs and videocassettes. Paramount Pictures' competitive position primarily depends on the quality of the product produced, its distribution and marketing success, and publk response. The Company also competes to obtain creative talent and story properties which are essential to the success of all of the Company's entertainment businesses.

The consumer publishing business is highly competitive and has been affected over the years by consolidation trends. Significant mergers have occurred among the leading consumer publishers. The book superstore remains a significant factor in the industry contributing tq the general trend toward^./ consolidation in the retail channel. There have also been a number of mergers completed in the distribution channel. The Company must compete with other larger publishers such as , and Harper CoOins for the rights to works by authors. Competition is particularly strong for weD-known authors and public personalities.

ftrfa. The Company competes with other highly-capitalized, multi-park entertainment corporations. In order to compete effectively, the Company must differentiate its products through its access to entertainment intellectual property and brands and by investing capital to attract repeat customers. The Company believes thai its intellectual properties enhance existing attractions and facilitate the development of new attractions, which encourage visitors to the Paramount Parks theme parks. The Company's theme parks also compete with other forms of leisure entertainment and with smaller operations in its regions and with other forms of entertainment.

REGULATION The Company's businesses are either subject to or affected by regulations of federal, state and local governmental authorities. The ruks, regulations, policies and procedures affecting these businesses are .^ constantly subject to change. The descriptions which follow are summaries and should be read in conjunction with the texts of the statutes, rules and regulations described herein. The descriptions do not purport to describe all present and proposed statutes, rules and regulations affecting the Company's businesses.

bteOectaaf Property Laws affecting intellectual property are of significant importance to the Company (see "Intellectual Property" on page 1-27).

Copyright Law and Content In the U.S.. the copyright term for authored works is life of the author pros 70 years and 95 years for works-made-for-hire.

Pttr-to-PetT Piracy. Unauthorized distribution of copyrighted material over the Internet such as through so-called peer-to-peer services is a threat to copyright owners' ability to protect and exploit their property. The Company is engaged in enforcement and other activities to protect its intellectual

1-20 property and is an active in various industry-wide litigations, education and public relations programs and legislative activity on a worldwide basis. The U.S. Supreme Court is expected to decide, in its current term, the extent to which operators of services that facilitate infringement, such as peer-to-peer services, may be held liable for copyright infringement carried out on their services. Broadcast Flag. Effective July 1, 2005, all devices with television tuners must be able to recognize a Broadcast Flag which prevents programs from being uploaded to the Internet or other digital networks for redistribution without authorization. The FCC imposed this requirement to prevent unauthorized redistribution on the Internet of programming digitally broadcast by free-over-the-air broadcasters and to prevent the migration of high value programming from free broadcast to subscription delivery systems. Content distributed over cable and DTH systems is already protected by those services' conditional access systems. The FCC's rules have been appealed to the U.S. Court of Appeals for the D.C. Circuit.

Cable Networks Online Music Royalties. MTVN, on behalf of its Web sites, and BET Interactive, LLC, on behalf of BET.com, currently obtain much of their Web site content from record labels, music publishers and artists. MTVN and BET Interactive also obtain certain rights to some of their Web site content, such as performance rights of song composers and non-interactive rights to digital transmission of recordings, pursuant to statutory compulsory licenses established by the Digital Millennium Copyright Act. The royalties payable for such licenses are established periodically by Copyright Arbitration Royalty Panels. A la Carte. Several policymakers maintain that cable operators should be required to offer programming to subscribers on a network by network basis. Unbundling packages of program services may lead to reduced viewership and increased marketing expenses, and may affect a cable network's ability to compete for or attract the same level of advertising dollars: In addition, the decline in subscribers could lead to a loss in cable operators' local advertising revenue. Children's Programming. Federal legislation and FCC rules limit the amount of commercial matter that may be shown on cable channels during programming designed for children 12 years of age and younger. The FCC recently issued new rules that would, as of January 1, 2006, classify promotions on a channel for programs aired on that channel as commercial matter unless the programs being promoted are educational and informational as defined under FCC rules. The Company and several other companies have asked the FCC to reconsider this rule. If not modified, this rule could have an adverse impact on the Company's children's program services. In addition, the FCC issued a rule, also effective January 1, 2006, that would limit promotions during children's cable programming of Web sites associated with children's program services. This rule, if not modified, could have an adverse impact on the Company's Web sites for children. In October 2004, the Company entered into a Consent Decree with the FCC to dismiss with prejudice alleged violations of the commercial limits during children's programming on Nickelodeon. The Company agreed to make a voluntary contribution to the U.S. Treasury in the amount of $1 million and to prospectively reduce the amount of commercial matter aired on Nickelodeon representing the excess of the minutes-per-hour limitations Nickelodeon allegedly aired during the period of inquiry. The Consent Decree also obligated the Company to provide training with respect to the children's television rules and to implement other measures to reduce the risk of exceeding the commercial limits.

Broadcasting General Television and radio broadcasting are subject to the jurisdiction of the FCC under the Communications Act. The Communications Act empowers the FCC, among other actions, to: issue, renew, revoke and modify broadcasting licenses; determine stations' frequencies, locations and operating power;

1-21 regulate some of the equipment used by stations; adopt other regulations to cany out the provisions of the Communications Act and other laws, including requirements affecting the content of broadcasts; and to impose penalties for violation of its regulations, including monetary forfeitures, short-term renewal of licenses and, in egregious cases, license revocation or denial of license renewals. Under the Communications Act, the FCC also regulates certain aspects of the operation of cable and DTH systems and other electronic media that compete with broadcast stations. Indecency Regulation. The FCC's rules prohibit the broadcast of obscene material at any time and indecent material between the hours of 6 am and 10 pm. Broadcasters risk violating the prohibition against broadcasting indecent material because of the vagueness of the FCC*s definition of indecent material, coupled whh the spontaneity of bve programming. The FCC in the last few years has stepped up its enforcement activities as they apply to indecency, and has threatened to initiate license revocation proceedings against broadcast licensees for "serious" indecency violations. Legislation has also been introduced in Congress that would increase the penalties for broadcasting indecent programming and potentially increase the exposure of broadcasters to license revocation, renewal or qualifications proceedings in the event that they broadcast indecent material. In 2004, the FCC notified the Company of apparent liability for a $550,000 forfeiture relating to the broadcast of the half-time show by the Company's CBS broadcast television station affiliates and the CBS Television Network. The FCC had also previously initiated enforcement proceedings in response to allegations that several of the Company's radio stations had broadcast indecent material. In November 2004, the Company entered into a Consent*^ Decree with the FCC pursuant to which all of these proceedings, other than the Super Bowl proceeding, were dismissed with prejudice and the Company agreed to make a voluntary contribution to the U.S. Treasury in the amount of $3.5 mObon when the Consent Decree becomes a "final order." The Company is defending the Consent Decree, which is being challenged by a third party, and is contesting the Super Bowl forfeiture. The Consent Decree also obligated the Company to provide training with respect to FCC indecency regulation to programming-reiated personnel at its broadcast radio and television operations and to implement other measures, such as audio and video delay mechanisms and editorial controls, to reduce the risk of broadcasting indecent material. Modifications to the Company's programming to reduce the risk of indecency violations could have an adverse effect on the competitive position of the Company's radio and television stations and the CBS Television Network. License Renewals. Radio and television broadcast licenses are granted for a term of eight years. The Communications Act requires the FCC to renew a broadcast bcense if the FCC finds that the station has served the public interest, convenience and necessity and with respect to the station, there have been no serious violations by the licensee of either the Communications Act or the FCC's rules and regulations and there have been no other violations by the licensee of the Communications Act or the FCC's rules and regulations that, taken together, constitute a pattern of abuse. The Company has pending and wu1 file '**' renewal applications for a number of its radio and television station licenses in 2005 and 2006, two of which have been opposed by third parties, and other renewal applications may be so opposed in the future.

License Assignments. The Communications Act requires prior FCC approval for the assignment of a bcense or transfer of control of an FCC licensee. Third parties may oppose the Company's applications to acquire additional broadcast bcenses. Ownership Regulation. The Communications Act and FCC rules and regulations limit the ability of individuals and entities to have an official position or ownership interest, known as an "attributable" interest, above specific levels in broadcast stations as well as in other specified mass media entities. In seeking FCC approval for the acquisition of a broadcast radio or television station bcense, the acquiring person or entity must demonstrate that the acquisition complies with the FCC's ownership rules or that a waiver of the rules is in the public interest.

1-22 In 2003, the FCC completed a comprehensive review of all of its broadcast ownership rules (the "Omnibus Ownership Review"), including the local radio ownership rule, the local television ownership rule, the television national audience reach limitation, the dual network rule, the newspaper-broadcast cross-ownership rule and the radio-television cross-ownership rule, and adopted revised rules. Under the new rules, the Company would be permitted to expand its television and radio station holdings in a number of markets. Several parties, however, appealed the FCC's decision to the U.S. Court of Appeals for the Third Circuit. In January 2004, Congress passed legislation establishing a national television audience reach limitation of 39%. This legislation superseded the FCC's decision in the Omnibus Ownership Review to raise the limitation to 45%. In June 2004, the Third Circuit remanded most of the other revised rules to the FCC for additional justification or modification, including new cross-media limits the FCC had established and certain revisions to the local radio and television ownership rules. Pending the Third Circuit's subsequent review of the FCC's decision on remand, a stay of the new broadcast ownership rules, except for the new local radio ownership rules, will remain in effect. The Company has joined with others in asking the U.S. Supreme Court to review the Third Circuit's decision. The FCC's ownership rules, as currently in effect, and the new rules that remain subject to the court's stay, are briefly summarized below. Local Radio Ownership. One party may own up to eight radio stations in the largest markets, no fc, 4 more than five of which may be either AM or FM. With a few exceptions, the rule permits the common ownership of eight radio stations in the top 50 markets, where Radio has significant holdings. In the Omnibus Ownership Review, the FCC changed its method of defining local radio markets and counting the number of stations in a particular market, but not the numeric limits. As a result of the change in the method used for defining and counting the number of stations in a local radio market, the Company's radio portfolio exceeds the FCC's numeric limit in two markets. While the new rule does not require the divestiture of any existing radio ownership combinations, the Company is not permitted to transfer its radio portfolios in those two markets intact, except to qualified small businesses. Local Television Ownership. Under the FCC's local television ownership rule as currently in effect, one party may own up to two television stations in the same market, referred to as a designated market area ("DMA"), so long as at least one of the two stations is not among the top four-ranked stations in the market based on audience share as of the date an application for approval of an acquisition is filed with the FCC, and at least eight independently owned and operating full-power television stations remain in the market following the acquisition. Further, without regard to numbers of remaining or independently owned TV stations, the rule as in effect permits the ownership of two ^gp television stations within the same DMA so long as certain signal contours of the stations involved do not overlap. The new rule would eliminate the exception for non-overlapping stations and the requirement for a minimum of eight independently owned and operated stations in a DMA. Under the new rule, one party could own up to 3 television stations in DMAs with 18 or more television station; and up to 2 television stations in DMAs with fewer than 18 television stations. The FCC, however, retained the prohibition of ownership of two top four-ranked stations, with limited exceptions. Television National Audience Reach Limitation. Under the national television ownership rule, as modified by Congress in 2004, one party may not own television stations which reach more than 39% of all U.S. television households. For purposes of calculating the total number of television households reached by a station, the FCC attributes a UHF television station with only 50% of the television households in its market. The Company currently owns and operates television stations that have an aggregate television national audience reach for purposes of the national ownership limitation of approximately 38%, after

1-23 taking the UHF discount and the pending acquisition of KOVR-TV and divtj>titmcj> of WNDY-TV and WWHO-TV into account. Radio-Tdeviaon Cross-Ownership Rule. The radio-television cross-ownership rule as currently in effect limits the common ownership of radio and television stations in the same market The numeric limit varies according to the number of independent media voices in the market The Company owns combinations of radio and television stations in the Los Angeles and Baltimore markets in rw« of the limit currently in effect and would own a radio-television combination in the Sacramento market in excess of the limit following the acquisition of KOVR-TV. With respect to the Los Angeles market the Company has an application pending before the FCC that if granted would bring the Company into compliance with the rule. The Company has also entered into an agreement to seO the necessary radio stations in Baltimore to comply with the rule. In order to acquire KOVR-TV, the Company is required to divest one of its radio stations that serves the Sacramento market under the FCC's radio-television cross-ownership role.

New Cross-Media Limits. The FCC repealed the radio-television cross-ownership rule in the Omnibus Ownership Review and replaced it, as well as the newspaper-broadcast cross-ownership rule, with new cross-media limits. Under the new cross-media limits, there would be no cross-media limits in DMAs with nine or more television stations. In DMAs with between four and eight television stations, radio and television cross-ownership would be permitted without any limitation, so long as**/ there is no common ownership of a dairy newspaper. The new rale would prohibit radio and television station cross-ownership only in markets with three or fewer television stations. The Company's radio and television portfolio complies with the new cross-media limits assuming that they go into effect without modifications.

Dual Network Rule. The dual network rule prohibits any of the four major networks, ABC, CBS, FOX and NBC from combining. The FCC made no change to this rule in the Omnibus Ownership Review.

Attribution of Ownership. Under the FCC's attribution rules, a direct or indirect purchaser of various types of securities of an entity which holds FCC licenses, such as the Company, could violate the foregoing FCC ownership regulations or policies if that purchaser owned or acquired an "attributable'' interest in other media properties. Under the PCC*s rules, an "attributable" interest for pui poses of the FCCs broadcast ownership rules generally includes: equity and debt interests which combined exceed 33% of a licensee's total assets, if the interest holder supplies more than 15% of the licensee's total weekly programming, or has an attributable same-market media interest, whether television, radio, cable or newspaper; a 5% or greater direct or indirect voting stock interest, including^^ certain interests held in trust, unless the bolder is a qualified passive investor in which case the threshold is a 2O% or greater voting stock interest; any equity interest in a (muted Habflrty company or a partnership, induding a limited partnership, unless propcily "insulated" from management activities; and any position as an officer or director of a licensee or of its direct or indirect parent. The FCC is currently reviewing its single majority voting shareholder attribution exemption which renders as non-attributable voting interests up to 49% in a licensee controlled by a single majority voting shareholder. The Company has a single majority voting shareholder.

ASen Ownership. The Company periodkaDy surveys its public shareholders to ascertain compliance with this statute. The Communications Act limits the ability of foreign entities or indrvidnab to own or bold interests in broadcast licenses.

Digital Television Service. The FCC has taken a number of steps to implement digital television broadcasting service in the US. The FCC has attempted to provide digital television coverage areas that are comparable to stations' existing service areas and has provided afl licensed television stations with a

1-24 second channel on which to broadcast a digital television signal. Licensees are permitted to use their digital channels for a wide variety of services such as high definition, multiple channels of standard definition television programming, audio, data, and other types of communications, subject to the requirement that each broadcaster provide at least one free over-the-air video program signal at least comparable in resolution to the station's analog programming transmissions. The FCC required all commercial television stations to begin broadcasting a digital signal by May 1, 2002. With the exception of its UPN-affiliated stations in Pittsburgh, Oklahoma City and Providence, all of the Company's stations are transmitting digital broadcasts that comply with the FCC's requirements. Two of these three UPN-affiliated stations are not broadcasting a digital signal because of FCC proceedings involving changes in their assigned digital channels, while the third station has experienced difficulties obtaining required local building permits. Beginning April 1,2005, the Company's television stations which are transmitting a digital signal will be required to transmit a digital signal 100% of the time they are transmitting an analog signal. The FCC's plan conditionally calls for the digital television transition period to end in the year 2006, at which time current rules would require television broadcasters to cease non-digital broadcasting and return one of their two channels to the government, allowing that spectrum to be recovered for other uses. As provided by statute, however, the FCC is required to extend the end of the transition at the request of individual broadcast licensees on a market-by-market basis if one or more of the four largest network '*"•*' stations or affiliates is not broadcasting in digital, digital-to-analog converter technology is not generally available, or 15% or more television households are not receiving a digital signal. The FCC has recently initiated the process of assigning a final digital channel to all television stations. This process will not be completed until late 2006 at the earliest. The Company has incurred considerable costs in the conversion to digital television and is unable to predict the extent or timing of consumer demand for digital television services and the resulting impact on the Company's viewership. Cable and Satellite Carriage of Television Broadcast Stations. The 1992 Cable Act and implementing FCC regulations govern the retransmission of commercial television stations by cable television operators. Every three years, each station must elect, with respect to cable systems within its DMA, either "must carry" status, pursuant to which the cable system's carriage of the station is mandatory, or "retransmission consent," pursuant to which the station gives up its right to mandatory carriage in order to negotiate consideration in return for consenting to carriage. In general, the Company's stations have elected the retransmission consent option for cable carriage for the three-year period that began January 1,2003. The Company is still in the process of negotiating retransmission consent agreements with some cable operators, but in all cases the cable systems continue to cany the stations' signals. The next election . . between the must-carry and retransmission consent options must be made by October 1, 2005 for the "^ three-year period beginning January 1, 2006. The Satellite Home Viewer Improvement Act permits DTH carriers such as DirecTV and EchoStar to retransmit a local television station's signal into its local market without copyright liability, subject to the consent of the local broadcaster. Until the end of 2009, the DTH carrier may retransmit distant analog and digital network signals to certain households not served by local network affiliates, under the Satellite Home Viewer Extension and Reauthorization Act of 2004. Since January 1, 2002, DTH carriers have been required to carry the signals of all local television broadcast stations requesting carriage in local markets in which the DTH carrier carries at least one signal under the local-to-local compulsory license. Every three years, each station must elect "must carry" or "retransmission consent" status, in a manner similar to that described above with respect to cable systems. Almost all of the Company's owned and operated television stations are being transmitted into their local markets by the two major DTH carriers, either through retransmission consent agreements or mandatory carriage elections. The foregoing relates to cable and satellite carriage of analog television broadcast stations. Although a single programming stream transmitted by each digital television station will be required to be carried on

1-25 both distribution platforms after the cod of the digital television transition period, the FCC in February 2005 affirmed that rt wffl not require cable operators either to carry both a station's analog and digital signab during the transition period or, after the conversion to digital, to cany more than a station's primary video programming channel. However, the Company has agreements with a number of multiple system operators that require carriage of the digital and analog signals of the Company-owned television stations during the transition (including multiple streams of digital programming). Digital Radio. For a number of years, the FCC has been developing rules that would permit existing AM and FM radio broadcast stations to broadcast digitally in order both to iiupiove sound quality and to provide speUiuui for enhanced data services to complement the muring programming service and provide new business opportunities for radio broadcasters. In 2002, the FCC authorized FM radio stations (on a fnO-time basis) and AM radio stations (on a daytime only basis) to broadcast digital signals using excess spectrum in the same channel used for analog transmissions. The FCC is stiD developing final rules for the conversion of radio stations to digital, and has not mandated use of the technology or established any timetable for conversion to digital. Despite the lack of such a mandate, the Company has recently committed to converting 131 of its 183 radio stations to digital broadcasting technology over the next several years. Approximately 20 other broadcasters have made similar commitments that will result in more than 2^00 AM and FM stations converting to digital technology nationwide, including in each of the top 100 radio markets.

The outdoor advertising industry is subject to extensive governmental regulation at the federal, state and local levels in the U.S. and to national, regional and local restrictions in foreign countries. These regulations can affect the operation of advertising displays and include restrictions on the construction, repair, upgrading, height, size and location of outdoor advertising structures and, in some instances, content of advertising copy being displayed on these structures. In addition, in recent years, outdoor advertising has become the subject of targeted state and municipal taxes. These laws may affect competitive conditions in various markets in various ways. For example, such laws may reduce the Company's expansion opportunities, or may reduce competitive pressuie from others. No assurance can be given that existing or future laws or regulations will not materially and adversely affect the Outdoor business. Under U.S. law, principally the Highway Beautification Act of 1965 (the "HBA*), outdoor advertising is controlled on primary and interstate highways built with federal finanriai assistance. As a condition to federal highway assistance, the HBA requires states to restrict billboards on such highways to commercial and industrial areas, and imposes certain additional size, spacing and other requirements associated with the installation and operation of billboards. All states have passed laws and adopted regulations at least as> restrictive as the federal requirements, including the obligation on the part of the billboard owner to remove, at the owner's expense and without compensation, any signs on such highways that do not comply with such requirements. Outdoor does not believe that the number of its bulboards that may be subject to removal under these regulations b material No state in which Outdoor operates has banned billboards, but some have adopted standards more restrictive than the federal requirements. Municipal and county governments generally abo have sign controls as part of their zoning laws and building codes. Some state and local governments prohibit construction of new billboards and some aDow new construction only to replace existing structures, although most allow construction of billboards subject to restrictions on zones, size, spacing, height and type of construction. In some cases, the construction of new bulboards or the relocation or modification of existing bulboards is prohibited. A number of cities including , Los Angeles and Miami have implemented or initiated legislative bulboard controls, including imposing taxes, fees and registration requirements in an effort to decrease or restrict the number of outdoor signs. The Company contests such laws and regulations that it believes unlawfully restrict its constitutional or other legal rights and may adversely impact the growth of the outdoor advertising business.

1-26 U.S. law does not require removal of existing lawful billboards, but it does require payment of compensation if a state or political subdivision compels the removal of a lawful billboard along a primary or interstate highway that was built with federal financial assistance. State governments have purchased and removed legal billboards for beautification in the past using federal funding for transportation enhancement programs, and may do so in the future. State government authorities from time, to time use the power of eminent domain to remove billboards. Thus far, Outdoor has been able to obtain satisfactory compensation for its billboards purchased or removed as a result of this type of governmental action, although there is no assurance that this will continue to be the case in the future. Local governments do not generally purchase billboards for beautification, but some have attempted to force removal of legal but nonconforming billboards (billboards which conformed with applicable zoning regulations when built but which do not conform to current zoning regulations) after a period of years under a concept called amortization. Under this concept the governmental body asserts that just compensation is earned by continued operation of the billboard over time. Although there is some question as to the legality of amortization under federal and many state laws, amortization has been upheld in some instances. Outdoor generally has been successful in negotiating settlements with municipalities for billboards required to be removed. Restrictive regulations also limit Outdoors ability to rebuild or replace nonconforming billboards. As the owner or operator of various real properties and facilities in outdoor advertising operations, the Company must comply with various U.S. federal, state and local and foreign environmental, health, safety and land use laws and regulations. Viacom Outdoor and its properties are subject to such laws and regulations relating to the use, storage, disposal, emission and release of hazardous and non-hazardous substances and employee health and safety, as well as zoning and other land use restrictions which may affect, among other things, the hours of operation and as well as methods and conditions of maintenance of facilities and advertising installation. Historically, the Company has not incurred significant expenditures to comply with these laws. However, future laws or a finding of a violation of or liability under existing laws could require the Company to make significant expenditures and otherwise limit or restrict its ability to use or operate some of its displays. Out-of-court settlements between the major U.S. tobacco companies and all 50 states include a ban on the outdoor advertising of tobacco products. State and local governments continue to initiate proposals designed to limit outdoor advertising of alcohol. Other products and services may be targeted in the future. Legislation regulating alcohol-related advertising due to content-related restrictions could cause a reduction in Outdoor's direct revenue from such advertisements and a simultaneous increase in the available space on the existing inventory of billboards in the outdoor advertising industry.

INTELLECTUAL PROPERTY The Company is a leader in the creation, ownership and distribution of intellectual property worldwide. It is the Company's practice to protect its theatrical and television product, characters, publications and its other original and acquired works and software. The following logos and trademarks and related trademark families are among those strongly identified with the product lines they represent and are significant assets of the Company: Viacom*, CBS*, CBS Entertainment™, CBS News'", CBS Sports™, VPN*, Infinity Radio*, Viacom Outdoor*, BET*, Comedy Central*, CMT*: Country Music Television™, MTV Music Television9, MTV U™, Nick at Nite*, Nickelodeon*, Spike TV*, TV Land*, VH1*, Paramount*, Paramount Pictures*, *, Spelling Television*, Big Ticket Television*, Viacom Productions*, King World*, Paramount Parks*, Entertainment Tonight*, Star Trek*, Showtime*, The Movie Channel™, Flix*, Simon & Schuster* and Pocket Books*. As a result, domestic and foreign laws protecting intellectual property rights are important to the Company and the Company actively enforces its intellectual property rights against infringements.

1-27 EMPLOYEES AND LABOR MATTERS At December 31, 2004, the Company employed approximately 38350 people including full-time and part-time salaried employees.

FINANCIAL INFORMATION ABOUT SEGMENTS AND FOREIGN AND DOMESTIC OPERATIONS Financial and other information by segment and relating to foreign and domestic operations for each of the last three years ending December 31 is set forth in Note 14 to the Consolidated Financial Statements.

AVAILABLE INFORMATION Viacom Inc's Web site address is www.viacom.com. Viacom Inc. makes available free of charge on or through the Shareholder Info section of its Web site its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. Such material is made available through the Company's Web she as soon as reasonably practicable after such material is electronically filed with or farnisbed to the Securities and Exchange Commission. On June 16, 2004, the Company submitted to the New York Stock Exchange the Annual CEO Certification required by Section 303A 12(a) of the New York Stock Exchange Listing Manual. The Company filed with the Securities and Excbanr Commission the certifications required under Section 302 of the Sarbanes-Oxley Act of 2002 as Exhibited 31(a) and 31(b) to its Annual Report on Form 10-K for the year ended December 31, 2003.

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS This document and the documents incorporated by reference into this Annual Report on Form 10-K, indoding "Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition," contain both historical and forward-looking statements. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934. These forward-looking statements are not based on historical facts, but rather reflect the Company's current concerning future results and events. These forward-looking statements generally can be identified by the use of statements that include phrases such as "believe," "expect," "anticipate," "intend," "plan," "foresee," "likely," "wflT or odier similar words or phrases. Similarly, statements that describe the Company's objectives, plans or goals are or may be forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors that are difficult to predict and which may cause UK actual results, performance or achievements of the Company to be different fronr any future results, performance and achievements expressed or implied by these statements. information about these risks, uncertainties and other factors is set forth on pages 11-28 to 11-30 of "Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition." There may be additional risks, uncertainties and factors that the Company does not currently view as material or that are not necessarily known. The forward-looking statements included in this document are only made as of the date of this document and the Company does not have any obligation to pubbdy update any forward- looking statements to reflect subsequent events or circumstances. item 2. Pnftrtia. The Company maintains its work) headquarters at 1515 Broadway, New York, New York, where it rents approximately 13 million square feet for executive offices and certain of its operating divisions. The lease for the majority of the space runs to 2010. with four renewal options for five years each thereafter. The Company also leases the following major facilities in New York City for certain of its operating divisions: (a) approximately 548.000 square feet of office space at 1633 Broadway, New York, New York,

1-28 which lease runs to 2010, and (b) approximately 237,000 square feet of office space at 1230 Avenue of the Americas, New York, New York, which lease runs to 2009. The Company owns the building located at 51 West , New York, New York, containing approximately 900,000 square feet which is principally leased to third parties and houses approximately 200,000 square feet of office space used by the Company, and the CBS Broadcast Center complex located on approximately 3.7 acres at 524 West , New York, New York and consists of approximately 860,000 square feet. The Company also owns three studio facilities in California: (a) the Paramount Pictures studio at 5555 Melrose Avenue, Los Angeles, California, located on approximately 62 acres, (b) the CBS Studio Center at 4204 Radford Avenue, Studio City, California, located on approximately 40 acres, and (c) CBS at 7800 Beverly Boulevard, Los Angeles, California, located on approximately 11 acres. Paramount Parks' operations in the U.S. include approximately 1,950 acres owned and 108 acres leased and in Canada include approximately 380 acres owned. The Company also owns and leases office, studio, retail and warehouse space, broadcast, antenna and satellite transmission facilities and outdoor advertising properties throughout the U.S., Canada and several countries around the world for its businesses. The Company considers its properties adequate for its present needs.

Item 3. Legal Proceedings. Asbestos and Environmental. The Company is a defendan' ' t in lawsuits claiming various personal injuries related to asbestos and other materials, which allegedly occurred principally as a result of exposure caused by various products manufactured by Westinghouse, a predecessor, generally prior to the early 1970s. Westinghouse was neither a producer nor a manufacturer of asbestos. The Company is typically named as one of a large number of defendants in both state and federal cases. In the majority of asbestos lawsuits, the plaintiffs have not identified which of the Company's products is the basis of a claim. Claims against the Company in which a product has been identified principally relate to exposures allegedly caused by asbestos-containing insulating material in turbines sold for power-generation, industrial and marine use, or by asbestos-containing grades of decorative micarta, a laminate used in commercial ships. Claims are frequently filed and/or settled in large groups, which may make the amount and timing of settlements, and the number of pending claims, subject to significant fluctuation from period to period. The Company does not report as pending those claims on inactive, stayed, deferred or similar dockets which some jurisdictions have established for claimants who allege minimal or .no impairment. As of December 31, 2004, the Company had pending approximately 112,140 asbestos claims, as compared with approximately 112,280 as of December 31, 2003 and approximately 103,800 as of December 31, 2002. Of the claims pending as of December 31, 2004, approximately 82370 were pending in state courts, 27,180 in federal courts and approximately 2,590 were third party claims. During 2004, the Company received approximately 16,060 new claims and closed or moved to an inactive docket approximately 16,200 claims. The Company reports claims as closed when it becomes aware that a dismissal order has been entered by a court or when the Company has reached agreement with the claimants on the material terms of a settlement. Settlement costs depend dn the seriousness of the injuries that form the basis of the claim, the quality of evidence supporting the claims and other factors. To date, the Company has not been liable for any third party claims. The Company's total costs (recovery) for the years 2004 and 2003 for settlement and defense of asbestos claims after insurance recoveries and net of tax benefits were approximately $58.4 million and $(8.7) million, respectively. A portion of such costs relates to claims settled in prior years. If proceeds received in 2003 from an insurance commutation were excluded from the Company's total costs in 2003, the Company's total costs after insurance recoveries and net of tax benefits would have been $56.6 million. The Company's costs for settlement and defense of asbestos claims may vary year to year as insurance proceeds are not always recovered in the same period as the insured portion of the expenses.

1-29 Filings include daims for individuals suffering from mesotbeubma, a rare cancer, the risk of which is allegedly increased primarily by exposure to asbestos; lung cancer, a cancer which may be caused by various factors, one of which is alleged to be asbestos exposure; other cancers, and conditions that are substantially less serious, indodmg daims brought on behalf of individuak who are asymptomatic as to an allegedly asbestos-related disease. Claims identified as cancer remain a small percentage of asbestos claims pending at December 31, 2004. In a substantial number of the pending daims, the plaintiff has not yet identified the daimed injury. The Company believes that its reserves and insurance are adequate to cover its asbestos habitities and that these asbestos liabilities are not likely to have a material adverse effect on its results of operations, finanriai position or cash flows. The Company from time to time receives daims from federal and state environmental regulatory and other entities asserting that it is or may be liable for environmental cleanup costs and related damages principally relating to discontinued operations conducted by companies acquired by the Company. In addition, the Company from time to time receives personal injury daims including toxic tort and product liability daims arising from historical operations of the Company and its predecessors. Antitrust. In Jury 2002, judgment was entered in favor of the Company, Blockbuster, Paramount Home Entertainment and other major motion picture studios and their home video subsidiaries with respect to a complaint filed in the United States District Court for the District of Texas. The complaint included federal antitrust and California state law daims. In August 2003, the Fifth Ciror Court of Appeals affirmed the federal court judgment The Supreme Court of the United States refuse**^ plaintiffs' petition for writ of certiorari in March 2004. In February 2003, a similar complaint that had been filed in a Los Angeles County Superior Court was also dismissed with prejudice. The plaintiffs have appealed the California state court dismissal, as well as a prior denial of class certification. As a result of the spot-off of Blockbuster in 2004, any judgment in this matter adverse to the Company, Blockbuster and/or Paramount Home Entertainment will be allocated 3333% to Blockbuster and 66.67% to the Company. The Company bebeves that the plaintiffs' positions in these litigations are without merit and intends to continue to vigorously defend itself in the litigations. Litigation is inherently uncertain and always difficult to predict. However, based on its understanding and evaluation of the relevant facts and circumstances, the Company bebeves that afl of the above- described legal matters and other litigation to which it is a party are not likely, in the aggregate, to have a material adverse effect on its results of operations, financial position or cash flows. (See "Item 7. Management's Discussion and Analysis of Results of Operations and Finanriai Condition.")

Hem 4. Smkminia* of Maltttt torn Vale of Security Holder*. Not Applicable

1-30 EXECUTIVE OFFICERS OF THE COMPANY Set forth below is certain information concerning the executive officers of the Company as of March 10, 2005.

Name Age Title Stunner M. Redstone ... 81 Chairman of the Board of Directors and Chief Executive Officer Thomas E. Freston 59 Co-President and Co-Chief Operating Officer Leslie Moonves 55 Co-President and Co-Chief Operating Officer Richard J. Bressler 47 Senior Executive Vice President and Chief Financial Officer Carl D. Folta 47 Executive Vice President, Corporate Relations Michael D. Fricklas .... 45 Executive Vice President, General Counsel and Secretary Susan C. Gordon 51 Senior Vice President, Controller and Chief Accounting Officer Carol A. Melton 50 Executive Vice President, Government Relations William A. Roskin 62 Executive Vice President, Human Resources and Administration Martin M. Shea 61 Executive Vice President, Investor Relations None of the executive officers of the Company is related to any other executive officer or director by blood, marriage or adoption except that , a Director of the Company, is the daughter of Sumner M. Redstone. Mr. Redstone has been Chairman of the Board of the Company since 1987 and Chief Executive Officer since 1996. Mr. Redstone has also served as Chairman of the Board of NAI since 1986 and Chief Executive Officer of NAI since 1967. He served as President of NAI from 1967 through 1999. Mr. Redstone served as the first Chairman of the Board of the National Association of Theatre Owners and is currently a member of its Executive Committee. Since 1982, Mr. Redstone has been a member of the faculty of Law School, where he has lectured on entertainment law, and, since 1994, he has been a Visiting Professor at Brandeis University. He has also been a frequent lecturer at colleges, including Harvard Law School. Mr. Redstone graduated from Harvard University in 1944 and received a LJLB. from Harvard University School of Law in 1947. Upon graduation, Mr. Redstone served as Law Secretary with the United States Court of Appeals and then as a Special Assistant to the United States Attorney General. Mr. Redstone served in the Military Intelligence Division during World War II. While a student at Harvard, he was selected to join a special intelligence group whose mission was to break Japan's high-level military and diplomatic codes. Mr. Redstone received, among other honors, two commendations from the Military Intelligence Division in recognition of his service, contribution and devotion to duty. He is also a recipient of the Army Commendation Award. He served as a Director of Infinity Broadcasting until the merger of Infinity into Viacom in 2001. Mr. Redstone has been a Director of Viacom since 1986. Mr. Freston has been Co-President and Co-Chief Operating Officer of Viacom since June 2004. Prior to that, he served as Chairman and Chief Executive Officer of MTV Networks since 1987. Mr. Freston joined MTV Networks' predecessor company in 1980 and was one of the founding members of the team that launched MTV: Music Television. Mr. Moonves has been Co-President and Co-Chief Operating Officer of Viacom since June 2004. Prior to that, he served as Chairman and Chief Executive Officer of CBS since 2003 and as President and Chief Executive Officer of CBS since 1998. Mr. Moonves joined CBS in 1995 as President, CBS Entertainment. Prior to that, Mr. Moonves was President of Warner Bros. Television since Jury 1993. Mr. Bressler has been Senior Executive Vice President and Chief Financial Officer of the Company since May 2001. Before joining the Company, Mr. Bressler was Executive Vice President of AOL Time Warner Inc. and Chief Executive Officer of AOL Time Warner Investments. Prior to that, Mr. Bressler served in various capacities with Time Warner Inc., including as Chairman and Chief Executive Officer of Time Warner Digital Media. He also served as Executive Vice President and Chief Financial Officer of Time Warner Inc. from March 1995 to June 1999. Mr. Bressler serves on the National Advisory Committee

1-31 of JPMorgan Chase. As previously announced, Mr. Bressler notified the Company that he wffl not renew his employment agreement and will depart from the Company no later than June 30, 2005. Mr. Foha has been Executive Vice President, Corporate Relations of the Company since November 2004. Prior to that, be served as Senior Vice President, Corporate Relations of the Company from November 1994 to November 2004. and Vice President, Corporate Relations of the Company from April 1994 to November 1994. Mr. Folia held various communications positions at Paramount Communications Inc. from 1984 until joining the Company in April 1994. Mr. Fricklas has been Executive Vice President, General Counsel and Secretary of the Company since May 2000. From October 1998 to May 2000. he served as Senior Vice President, General Counsel and Secretary of the Company. From Jury 1993. he served as Vice President, Deputy General Counsel of the Company and assumed the additional title of Senior Vice President in July 1994. Ms. Gordon has been Senior Vice President, Controller and Chief Accounting Officer of the Company since May 2002. Prior to that she served as Vice President, Controller and Chief Accounting Officer of the Company from April 1995 to May 2002 and as Vice President, Internal Audit from October 1986 to April 1995. From June 1985 to October 1986, Ms. Gordon served as Controller of Viacom Broadcasting. She joined the Company in 1981 and held various positions in the corporate finance area. Ms. Mehon has been Executive Vice President, Government Relations of the Company sin^ November 2004. Prior to that, she served as Senior Vice President, Government Affairs of the Company, beginning in May 1997. Before joining the Company, Ms. Melton served most recently as Vice President, Law and Public Policy at Time Warner IDC., having joined Warner Communications Inc. in 1987. Prior to that, Ms. Mehon served as Legal Advisor to the Chairman of the Federal Communications Commission and as Assistant General Counsel for the National Cable and Telecommunications Association. Mr. Raskin has been Executive Vice President, Human Resources and Administration of the Company since November 2004. He has been an executive officer of the Company since April 1988 when be became Vice President, Human Resources and Administration- In Jury 1992, Mr. Roskin was elected Senior Vice President, Human Resources and Administration of the Company. From May 1986 to April 1988, be was Senior Vice President, Human Resources at Coleco Industries, Inc. From 1976 to 1986, he held various executive positions at Warner Communications bxx, serving most recently as Vice President, Industrial and Labor Relations. Mr. Shea has been Executive Vice President, Investor Relations of the Company since November 2004. Prior to that, be served as Senior Vice President, Investor Relations of the Company, beginning in January 1998. From Jury 1994 to May 1995 and from November 1995 to December 1997, he was Senior Vice President, Corporation Communications for Triarc Companies, Inc. From June through October 1995. be served as Managing Director of Edelman Worldwide. From 1977 until July 1994, Mr. Shea held various Investor Relations positions at Paramount Communications Inc., serving most recently as Vice President. Investor Relations.

1-32 Item 5. Market for Viacom Inc.'s Common Equity, Related Stockholder Matters and Purchases of Equity Securities. Viacom Inc. voting Class A Common Stock and Viacom Inc. non-voting Class B Common Stock are listed and traded on the New York Stock Exchange ("NYSE") under the symbols "VIA" and "VIAB", respectively. The following table sets forth, for the calendar periods indicated, the per share range of high and low sales prices for Viacom Inc.'s Class A Common Stock and Class B Common Stock, as reported on the NYSE.

Voting Class A Non-Voting Class B Common Stock Common Stock High Low High Low 2004 1st quarter $45.10 $36.76 $45.05 $36.35 2nd quarter 42.32 35.80 42.15 35.08 3rd quarter 36.74 32.56 35.94 31.90 4th quarter 37.60 34.00 37.27 33.42 2003 1st quarter $43.95 $33.26 $43.96 $33.11 2nd quarter 48.13 36.53 49.75 36.16 3rd quarter 46.93 37.79 46.95 37.72 4th quarter 44.67 36.98 44.62 36.87

Viacom declared a quarterly cash dividend on its common stock during the first three quarters of 2004 of $.06 per share and during the fourth quarter of 2004 of $.07 per share. During the third and fourth quarters of 2003, Viacom declared a quarterly cash dividend of $.06 per share. As of March 1, 2005, there were 4,793 record holders of Viacom Inc. Class A Common Stock and 59497 record holders of Viacom Inc. Class B Common Stock. Information required by this item is also contained in the Viacom Inc. Proxy Statement for the Company's 2005 Annual Meeting of Stockholders under the heading "Equity Compensation Plan Information", which information is incorporated herein by reference. Below is a summary of Viacom Inc.'s purchases of its Class B Common Stock during the three months w ended December 31, 2004 under its $8 billion stock purchase program publicly announced on October 28, 2004 under which the Company is authorized to acquire from time to time up to $8 billion in Viacom Class A Common Stock and non-voting Class B Common Stock. This program succeeded and replaced the Company's $3 billion stock purchase program announced in 2002.

Total Number of Shares Average Price Total Cost Remaining (In millions, except per share amounts) Purchased Per Share of Purchase Authorization October 1, 2004-October 31, 2004 3.1 $36.25 $ 110.7 $7,889.3 November 1, 2004-November 30, 2004 39.1 $36.03 $1,408.6 $6,480.7 December 1, 2004-December 31, 2004 12.4 $35.74 $ 444.7 $6,036.0 Total 54.6 $35.97 $1,964.0

In connection with the exchange offer for the split-off of Blockbuster Inc., Viacom accepted 0.6 million shares of Viacom Class A and 27.4 million shares of Viacom Class B Common Stock in exchange for the 144 million shares of Blockbuster Inc. that Viacom owned.

II-l Heat. SekttaJ

VIACOM INC AND SUBSIDIARIES (1m •OHMS, except per share

fear Eiricd December 3l,(a) l»M

(a) In 2004, the exchange offer for the spot-off of Btockboster was cnnyirtrd and Blockbuster is presented as i operation. Al phor periods have been irtlnufWfl to conform to tins presentation. (b) SFAS Ma 142, -Good** and Other htfaapbfc Anew" ("SFAS 142") was adopted in 2002. hi 2004, as a result of the nonal goud»a •apanDeat test, a Don-cask charge of SlgjO liJirai. or $10.43 per oBnted share, was recorded to reduce the cjiiying aooom of Rjdto and Outdoor goodwfl and iuuiiybhj to their mpmiin. rannatrd fair values. (c) As a reaak of the nntial adoption of Emerpng Issues Task Force Topic No. D-10B "Use of Residoal Method to Value AcojBRd Assets Othet than GooowV. the OxnpM* recorded an after-tax charge of $13 bnoav, or $.77 per ddoled share, as ^ : effect of in unming cbange, to reduce the intangMe haUncrt anributable to tticvaion stations FCC licenses. (d) As a resak of the adopoon of Statement of Ptaition 00-2, " by Prodncen or Distributors of Rims", the recoided a noo-cash after-tax charge of W52-3 anffion as a ia effect of accoanting change. (e) On May 4. 2000. CBS Corporadoa merged with and into Vocom Inc, and effective from that date, its results of opeijouns are indaded in the mimliriitrd finxnccal results of the Company. (0 The Company jnmwrrrl a qvarterh; cash dividend of S.06 per share on its <-""B~» stock daring the first three quarters of 2004 and a cash dividend of 1.07 per share in the fourth quarter of 2004. A quarterly cash dividend of $.06 per share was declared during the third and fourth quarter of 2003

11-2 Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition. (Tabular dollars in millions)

Management's discussion and analysis of the results of operations and financial condition should be read in conjunction with the Consolidated Financial Statements and related Notes. Descriptions of all documents incorporated by reference herein or included as exhibits hereto are qualified in their entirety by reference to the full text of such documents so incorporated or included.

Recent Developments On March 16, 2005, Viacom announced that it has been exploring the possible division of its businesses into separate publicly-traded companies, one of which would highlight Viacom's high-growth businesses such as MTV Networks and would be operated by Tom Freston, and one of which would combine its leading CBS broadcast television businesses, growing outdoor business and high free cash flow operations such as radio, which would be operated by Leslie Moonves. Viacom expects to announce further details regarding the possible separation in the second quarter of 2005. No assurance can be given that any transaction will be consummated.

^ ^ Overview Viacom Inc., together with its consolidated subsidiaries ("Viacom" or the "Company") is a diversified worldwide entertainment company. Revenues for 2004 increased $1.7 billion, or 8%, to $22.5 billion from $20.8 billion in 2003. Advertising revenues increased $1.4 billion, or 11%, led by growth of 21% in Cable Networks and 11% in Television. Viacom reported an operating loss of $13.0 billion versus operating income of $4.5 billion in the prior year. Full year 2004 net loss from continuing operations was $15.1 billion, or a loss of $8.78 per diluted share, compared with net earnings from continuing operations of $2.2 billion, or $1.27 per diluted share, for 2003. Full year 2004 results included a non-cash impairment charge of $18.0 billion, or $10.43 per diluted share, to reduce the carrying amount of Radio and Outdoor goodwill and intangibles to their respective estimated fair value in accordance with Statement of Financial Accounting Standards ("SFAS") 142 "Goodwill and Other Intangible Assets" ("SFAS 142"). Full year 2004 results also included a second quarter severance charge of $56.2 million, or $.02 per diluted share, due to management changes, and the recognition of a tax benefit of $205.4 million, or $.12 per diluted share, principally from the resolution of income tax audits. , . For all periods presented, Blockbuster Inc. has been reported as a discontinued operation as the exchange offer for its split-off from the Company was completed in 2004. Prior period information has been reclassified to conform to this new presentation. Viacom operates with the following segments: • CABLE NETWORKS: The Cable Networks segment consists of MTV Music Television, Nickelodeon, NickAtNite, VH1, MTV2, TV Land, Spike TV,CMT: Country Music Television, Comedy Central, BET, BET Jazz, and Showtime, among other program services. Cable Networks revenues are generated primarily from advertising sales and affiliate fees. Cable Networks contributed 29%, 27% and 25%, respectively, to consolidated revenues for the years ended December 31,2004, 2003 and 2002. • TELEVISION: The Television segment consists of the CBS and UPN Television Networks, the Company's 39 owned broadcast television stations, and its television production and syndication business, including King World Productions and Paramount Television. Television revenues are generated primarily from advertising sales and television license fees. Television contributed 38%, 37% and 39%, respectively, to consolidated revenues for the years ended December 31, 2004,2003 and 2002.

II-3 RADIO: The Radio segment owns and operates 183 radio stations in 41 U.S. markets through Infinity Radio. Radio revenues are generated primarily from advertising sales. Radio contributed 9%, 10% and 11%, respectively, to consolidated revenues for the years ended December 31, 2004, 2003 and 2002. OUTDOOR: The Outdoor segment through Viacom Outdoor displays advertising on media including billboards, transit shelters, buses, rail systems (in-car, station platforms and terminals), maO kiosks and stadium signage. Outdoor revenues are generated primarily from advertising sales. Outdoor contributed 8% to consolidated revenues for the years ended December 31, 2004 and 2003 and 9% for the year ended December 31, 2002. ENTERTAINMENT: The Entertainment segment includes Paramount Pictures, which produces and distributes theatrical motion pictures; Simon & Schuster, which publishes and distributes consumer books under imprints such as Simon A Schuster; Pocket Books, Scribner and The Free Press; Paramount Parks, which is principally engaged in the ownership and operation of five theme parks and a themed attraction in the U.S. and Canada; and movie theater and musk publishing operations. Entertainment revenues are generated primarily from feature fihn exploitation, publishing, theme park operations and movie theaters. Entertainment contributed 18%, 20% and 19%, respectively, to consolidated revenues for the years ended December 31,2004,2003 and 2002.

ResaHs of Opentio**—2004 rs. 2*3 aad 2M3 TS. 2*2 ~ Revenues The tables below present the Company's consolidated revenues by type, net of intercompany ehmmatioos, for each of the years ended December 31, 2004, 2003 and 2002.

2M4 2M3 vs. 2M2 Advertising sales $13,441.6 $12,088.6 $1353.0 11% $11,2284 $ 859.7 8% Affiliate fees 2,634.8 2,407.7 227.1 9 2499.0 208.7 9 2^05.6 2347.0 3463 17 TVbceme fees 1.402J 13143 (1122) (7) 423 3 750.7 693.4 573 8 6753 3 Parks operations 409.9 375.8 34.1 9 374.0 1.8 Other 1,681.0 1,400.6 280.4 20 1,2363 1643 13 IhtalRmMcs $22325.9 $20327.6 $1,6983 8% $19,186.8 $1,640.8 9%

tor ElricriDtcc^btr31. fovatoft «f Rrraacs by tfft MM 2M3 2M2 Advertising sales 60% 58% 59% Affiliate fees 12 12 11 Feature fihn exploitation 10 11 10 TV license fees 6 7 8 Publishing 3 3 4 Parks operations 2 2 2 Other 7 7 6 Total 100% 100% 100%

Advertising sales, which represented 60% of the Company's consolidated revenues for 2004, increased 11% in 2004 to $13.4 billion reflecting growth primarily in Cable Networks, Television and Outdoor segments. Cable Networks advertising revenues increased 21%.led by double-digit growth at MTV

II-4 International, Comedy Central, Nickelodeon, VH1, TV Land, Spike TV and BET. Television's advertising revenues benefited from the 2004 telecast of Super Bowl XXXVIII, increased political advertising and increases in CBS and UPN Networks primetime and sports. Outdoor advertising growth reflected 14% higher revenues from European properties, driven in part by favorable foreign exchange rates, and a 4% increase in North American properties. Advertising sales increased 8% to $12.1 billion in 2003 reflecting growth in Cable Networks, Television, Radio and Outdoor. Affiliate fees increased 9% to $2.6 billion in 2004 and increased 9% to $2.4 billion in 2003 versus the comparable prior-year periods. The increases were primarily driven by domestic rate increases and subscriber growth at MTV Networks and BET. The acquisition of Comedy Central in May 2003 contributed to the growth in both periods. Feature film exploitation revenues, which includes all revenue sources from the exhibition of motion pictures, decreased 6% to $2.2 billion in 2004 primarily reflecting 11% lower home entertainment revenues. For 2003, feature film revenues increased 17% to $2.3 billion primarily reflecting 29% higher home entertainment revenues and contributions from increased syndication, theatrical and pay television revenues, partially offset by lower network revenues. Television license fees decreased 7% to $1.4 billion in 2004 principally reflecting lower network revenues for shows no longer in production. Television license fees increased 3% to $1.5 billion in 2003 principally reflecting increased syndication revenues from The Dr. Phil Show in 2003 versus 2002. Publishing revenues increased 8% to $750.7 million in 2004 and increased 3% to $693.4 million in 2003 versus the comparable prior-year periods. The increases were primarily driven by the success of top selling titles. Parks operations revenues increased 9% to $409.9 million in 2004 primarily due to increased attendance partially offset by decreased average per capita spending and the benefit of favorable foreign currency translation. Parks operations revenues were relatively flat in 2003 versus prior year period. Other revenues, which include revenues from movie theaters, consumer products and home entertainment from television and cable product sales, increased 20% to $1.7 billion in 2004 primarily reflecting growth in home entertainment revenues to $472.2 million in 2004 from $263.1 million in 2003 and higher Nickelodeon consumer products and licensing. For 2003, other revenues increased 13% to $1.4 billion primarily reflecting higher Nickelodeon consumer products revenues as well as higher theaters revenues from favorable foreign currency translation, higher admission prices and increased per capita spending.

International Revenues The Company generated approximately 16% of its total revenues from international regions in 2004 and 2003 and 15% in 2002.

Percentage of Percentage of Percentage of Year Ended December 31, 2004 Tbtal 2003 Total 2002 Tbtal United Kingdom $ 910.1 24% $ 706.1 21% $ 647.3 23% Other Europe 1,323.5 36 1,182.0 36 972.2 34 Canada 853.5 23 770.6 23 659.0 23 All other 626.8 17 681.0 20 578.0 20 Tbtal International Revenues $3,713.9 100% $3,339.7 100% $2,856.5 100%

II-5 Operating Expenses

The table below presents the Company's consolidated operating expenses by type:

31, 2M4 2M3 2tM is. 2M3 2N2 2M3vs.2MZ Production and program $ 8,058.7 J 7,6534 $4052 5% $ 6385.6 $ 767.9 11% Distribution 1,458.6 1,446.7 11.9 1 1305.6 141.1 11 Other 3,0284 2,779.6 248.9 9 24443 2353 9 IMal Operatmg Expemscs $12445.8 $11,879.8 $666.0 6% $10,7354 $1,1443 11%

Far 2004, operating expenses of $12.5 billion increased 6% over 2003. For 2003, operating expenses of $115 btOion increased 11% over 2002. The major components and changes in operating expenses were as follows:

• Production and program expenses represented approximately 64% of total operating expenses in 2004, 2003 and 2002, and reflect the costs and amortization of television and theatrical inventory, mdadmg direct production costs, residuals and participation expenses, production overhead and acquisition costs as well as costs attributable to television and radio programming expens^^ including on-air talent and other production costs, and costs and amortization of acquired rights of programs exhibited on the broadcast networks, cable networks and broadcast stations. Production and program expenses increased 5% to $8.1 billion in 2004 and increased 11% to $7.7 bOlion in 2003. For both years, the increases were led by 18% and 22% respective increases at Cable Networks associated with new and existing programming mainly at MTV Networks. Also 2004 reflected higher program rights expenses for sports events and primetime series at the broadcast networks. These increases were partially offset by fewer network series produced in 2004. Also contributing to the increase in 2003 were higher sports rights expenses at Radio and higher feature film amortization.

• Distribution expenses, which represented approximately 12% of total operating expenses in 2004, 2003 and 2002, reflect advertising and other distribution costs incurred primarily with respect to theatrical and television product. Distribution expenses for 2004 increased 1% to $1.5 billion primarily reflecting higher television distribution costs due to additional volume of DVD releases of the Star Trek series, partially offset by lower feature fihn distribution costs for home video releases. Distribution expenses for 2003 increased 11% to $1.4 billion principally reflecting higher print and advertising costs for feature fflms in theatrical release.

• Other operating expenses, which primarily include expenses incurred for Outdoor, Publishing, Parks and Theater operations, increased 9% to $3.0 bflbon in 2004 over 2003, primarily reflecting higher Outdoor expenses of 9% from higher transit and biuboard lease costs and the impact of foreign exchange rates. In 2004. the increase also reflected higher costs associated with Publishing, Parks and Theater operations. Other operating expenses for 2003 increased 9% to $2.8 billion over 2002, which reflected an increase in Outdoor expenses of 7% from higher billboard lease costs.

Setting, General and Administrative Expenses

Selling, general and administrative expenses, which include expenses incurred for selling and marketing costs, occupancy and back office support increased $409.8 million, or 11%, to $4.1 billion in 2004, primarily reflecting higher employee compensation and commissions, second quarter 2004 severance charges of $56.2 million due to management changes, as well as twelve months of expenses for Comedy Central, acquired in May 2003. and the absence of a 2003 pre-tax gain of $40 million from the settlement of

II-6 a physical damage and business interruption claim. These increases were partially offset by a gain on the" sale of assets in 2004 and a decrease in pension and postretiremen! costs. Advertising expenses of $410.6 million included in selling, general and administrative expenses, increased 10% reflecting increased spending primarily at Radio and Cable Networks. For 2003, selling, general and administrative expenses increased $233.7 million, or 7%, to $3.7 billion reflecting expenses associated with Comedy Central, increased employee-related expenses and higher directors' and officers' insurance premiums and professional fees, partially offset by a pre-tax gain of $40 million. In 2003, advertising expenses of $372.2 million included in selling, general and administrative. expenses, increased 3%. Selling, general and administrative expenses as a percentage of revenues were 18% for the years ended December 31, 2004, 2003 and 2002.

Impairment Charge SFAS 142 requires the Company to perform an annual fair value-based impairment test of goodwill. The first step of the test examines whether or not the book value of. each of the Company's reporting units exceeds its fair value. If the book value for a reporting unit exceeds its fair value, the second step of the test compares the implied fair value of that reporting unit's goodwill with the book value of that goodwill. The Company's reporting units are generally consistent with the operating segments underlying the reportable segments. As a result of the impairment test, the -Company recorded an impairment charge of $18.0 billion in the fourth quarter of 2004. The $18.0 billion reflects charges to reduce the carrying value of goodwill at the Radio segment of $10.9 billion and the Outdoor segment of $7.1 billion as well as a reduction of the carrying value of intangibles of $27.8 million related to the FCC licenses at the Radio segment. The Company performs its impairment test concurrently with its annual budgeting process which begins in the fourth quarter of each year. Several factors have led to a reduction in forecasted cash flows and long-term growth rates for both the Radio and Outdoor segments. Radio and Outdoor fell short of budgeted revenue and operating income growth targets in 2004. Competition from other advertising media, including internet advertising and cable and broadcast television has reduced Radio and: Outdoor growth rates. Also, the emergence of new competitors and technologies has necessitated a shift in management's strategy for the Radio and Outdoor businesses, including changes in composition of the sales force and operating management as well as increased levels of investment in marketing and promotion. The estimated fair values of the Radio and Outdoor reporting units were computed principally based upon the present value of future cash flows (Discounted Cash Flow Method) and prices of comparable businesses (Market Comparable Method). The discounted Cash Flow Method and Market Comparable Method were weighted equally and resulted in substantially equal fair values.

Depreciation and Amortization For 2004, depreciation and amortization increased 9% to $809.9 million from $741.9 million primarily reflecting increases related to leasehold improvements, equipment and transponders. For 2003, depreciation and amortization increased 4% to $741.9 million from $711.8 million principally driven by the addition of broadcasting equipment and outdoor advertising properties.

Interest Expense For 2004, interest expense decreased 3% to $718.9 million from $742.9 million primarily due to lower average debt balances in 2004 including commercial paper borrowings and lower interest on programming contracts. For 2003, interest expense decreased 7% to $742.9 million from $799.1 million primarily due to a reduction in debt including lower average commercial paper borrowings. The Company had approximately

II-7 $9.9 baboo at December 31, 2004 and $10.1 billion at December 31, 2003 of principal amount of debt outstanding (including current maturities) at weighted average interest rates of 6.7% and 6-5%,

Interest Income

For 2004, interest income increased by $13.6 million to $253 nuHkm primarily due to increased cash and cash equivalents. For 2003, interest income decreased by $3 miffion to $11.7 nulbon versus the comparable prior-year period.

Other Items, Net

For 2004, "Other items, net" of $7.6 million principally reflected foreign exchange gains of $16.3 million and a net gain on the sale of investments of $34.5 million, partially offset by a non-cash charge of $21.7 million associated with other-than-temporary declines in the Company's investments, losses associated with securitizing trade receivables of $193 million and a loss of $2.7 million on the sale of radio stations.

For 2003, "Other items, net" reflected a net loss of $3.0 million principally consisting of fore* exchange losses of $3.9 miDion, losses associated with securitizing trade receivables of $14.8 million, and a^ aggregate loss of $5.0 mObon resulting from the write-down of several investments to their market value. These losses were partially offset by a net gain on the disposition of investments of $14.8 miDion and an recoupment of $5.6 nulbon.

For 2002, "Other Hems, net" reflected a net loss of $32.9 miDion principally consisting of foreign losses of $55.6 miDioo, losses of $19.7 miDion associated with securitizing trade receivables and an aggregate loss of approximately $12-5 million resulting from the write-down of several investments to their market value. These losses were partially offset by the recovery of advertising commitments of $29.8 mflbon, a gain of $18.8 miDion on the sale of a telephone kiosk advertising business and a net gain of $53 anffion from the sale of investments.

Provision for Income Taxes

The provision for income taxes represents federal, state and local, and foreign income taxes on earnings before income taxes. The annual effective tax rate before the cumulative effect of accounting change was (10.1%) in 2004 versus 40.0% in 2003 and 39.1% in 2002. Included in the 2004 rate was tt impact of the non-cash impairment and severance charges and the recognition of a tax benefit from resolution of certain income tax audits in 2004.

Equity in Earnings (Lass} of Affiliated Companies, Net of Tax

"Equity in earnings (loss) of affiliated companies, net of tax" reflected a loss of $20.8 miDion for 2004, earnings of $.1 miDion for 2003 and a toss of $373 miDion for 2002. For 2004, the loss prindpaDy reflected losses from the sale of international theater ventures and losses from internet investments, partially offset by the positive results of Westwood One. Inc. ("Westwood One"). For 2003 and 2002, results principally reflected operating losses from internet investments and international ventures, partially offset by the positive results of Westwood One and Comedy Central prior to its acquisition in May 2003.

Minority Interest, Net of Tax Minority interest primarily represented the minority ownership of certain theater advertising companies and international pay television companies.

II-S Net Earnings (Loss) from Discontinued Operations ; Net earnings (loss) from discontinued operations reflect the operating results of Blockbuster Inc. ("Blockbuster") which was split-off from the Company in 2004. Discontinued operations reflected a loss of $1.1 billion in 2004 versus a loss of $802.4 million in 2003 and earnings of $164.6 million in 2002. The loss from discontinued operations in 2004 included a non-cash charge of $1-5 billion ($1.2 billion net of minority interest and tax) for the impairment of Blockbuster goodwill and other long-lived assets in accordance with SFAS 142 and SFAS No. 144 "Accounting for the Impairment or Disposal of Long-lived Assets" ("SFAS 144"). Blockbuster performed an interim impairment test of its goodwill during the third quarter of 2004 because of factors surrounding Viacom's exchange offer for the split-off of Blockbuster. In March 2005, Blockbuster announced its intention to restate its previously issued financial statements to reflect appropriate lease accounting practices. Viacom has reflected the cumulative impact of the adjustment in 2004. This cumulative impact increased both the loss from discontinued operations and minority interest of discontinued operations, offset by a corresponding decrease in the loss on disposal of discontinued operations, resulting in no impact to Viacom's consolidated 2004 net loss from discontinued operations. The Company's discontinued operation presentation of Blockbuster for prior years has not been revised to reflect this adjustment due to the immateriality of this amount for the current year or any individual prior period consolidated statement of operations or financial position. In 2003, the Company recorded a non-cash impairment charge related to Blockbuster of approximately $1.3 billion ($1.0 billion, net of minority interest and tax) in accordance with SFAS 142. In completing its analysis of the fair value of the video business, several events led Blockbuster to conclude that the business had incremental risks that were required to be included in its evaluation of goodwill. Additionally, Blockbuster's review of long-lived assets in conjunction with SFAS 144 resulted in an impairment charge of approximately $18.5 million to reduce the carrying value of certain fixed assets in four international markets.

Cumulative Effect of Accounting Change, Net of Minority Interest and Tax Effective December 31, 2004, the Company elected early adoption of Emerging Issues Task Force Topic No. D-108 "Use of the Residual Method to Value Acquired Assets Other Than Goodwill" ("D-108"). D-108 requires companies who have* applied the residual value method in the valuation of intangible assets for purposes of impairment testing to use the direct value method: As a result of the adoption, the Company recorded a charge of $2.2 billion ($1.3 billion net of tax), or $.77 per share, to reduce the intangible balances attributable to its television stations' FCC licenses. This charge has been reflected as a cumulative effect of accounting change, net of tax. For 2003, the cumulative effect of accounting change, net of minority interest and tax, of $18.5 million, or $.01 per share, resulted from the adoption of SFAS No. 143 "Accounting for Asset Retirement Obligations." For 2002, the cumulative effect of accounting change of $1.5 billion (net of minority interest of $336.1 million), or $.84 per basic and $.83 per diluted share, resulted from the initial adoption of SFAS 142.

Net Earnings (Loss) For 2004, the Company reported a net loss of $17.5 billion versus net earnings of $1.4 billion for the prior year. For 2004, the loss was driven by the non-cash impairment charge of $18.0 billion. For 2003, net earnings reflected revenue growth in advertising, feature film exploitation, and affiliate fees partially offset by a non-cash charge of $1.0 billion, net of minority interest and tax, reflected in discontinued operations and higher operating expenses, primarily programming and production costs. For 2002, net earnings were $725.7 million.

II-9 Rente of Operations—for At Yfears Eaded December 31,20*4, 2003 *md 2002 The tables below present the Company's revenues, operating income, and depreciation and amortization by segment, for each of the yean ended December 31, 2004, 2003 and 2002.

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Cable Networks $ 6578.9 $ 5,6455 $ 4,726.7 lelevision 8504.6 7,761.0 7,456.8 Radio 2,096.1 2,097.6 2,121.6 Outdoor 1,8802 1,7483 1,6335 Entertainment 4,055.6 4,1013 3,680.1 Eliminations (5895) (526.1) (431.9) Total RCVCMCS $22525.9 $20327.6 $19,186.8 Opcntiag UKMK (Loss): Cable Networks $ 2525.1 $ 2,1723 $ 1,7722 lelevision 1238.1 1,177.6 Radio (10,0235) 975.0 1,007.6 Outdoor (63245) 207.9 218.0 Entertainment 254.0 271.4 3583 ^uiuoidiPVltfVUVlte* expense-•-.•... •cs (237.7) (187.9) (159.0) Residual costs (a) (113.8) (1465) (67.8) Eliminatioas (b) (96D) (56.7) (66.0) Total OperabBg Imcomt (Loss) $(12^69.0) $ 4,473.6 $ 4240.9 Dtpieuatioa mmd A»orrrnrio»- Cabk Networks $ 248.0 $ 1953 $ 190.9 lelevision 148.9 151.1 140.8 Radio 29.9 27.4 30.8 Outdoor 223.1 215.9 205.6 Entertainment 137.8 129.7 120.7 Corporate 222 225 23.0 Total Depndatioa aad AawrtfeaoM $ 809.9 $ 741.9 $ 711.8

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11-10 Segment Results of Operations—2004 vs. 2003 and 2003 vs. 2002 Cable Networks (Basic Cable Television Program Services through MTV Networks {"MTVN"), including MTV Music Television, Nickelodeon, Nick at Nite,VHl, MTV2, TV Land, Spike TV, CMT: Country Music Television and Comedy Central; BET and BET Jazz; and through Showtime Networks Inc. ("SNI"), owner of several premium subscription television program services) (Contributed 29% of consolidated revenues for the year ended December 31, 2004, 27% for the year ended December 31, 2003 and 25% for the year ended December 31, 2002.)

Year Boded December 31, 2004 2003 2002 Revenues $6,578.9 $5,645.5 $4,726.7 Operating income (OI) $2,525.1 $2,172.3 $1,772.2 OI as a % of revenues 38% 38% 37% Depreciation and amortization $ 248.0 $ 195.3 $ 190.9 Capita] expenditures $ 96.0 $ 90.3 $ 95.7

2004 vs. 2003 For 2004, Cable Networks revenues increased $933.4 million, or 17%, to $6.6 billion principally driven by a 21% increase in advertising revenues and an 8% increase in affiliate fees. Approximately 10% of Cable Networks revenues were generated from international regions, of which approximately 70% came from Europe. Comedy Central, which was acquired in May 2003, contributed 4% to Cable Networks revenue growth for the year. For 2004, MTVN advertising revenues increased 22%, reflecting an increase in the number of units sold and higher average unit rates at domestic channels. BET advertising revenues increased 11% as a result of an increase in the number of units sold, partially offset by a decline in average unit rates and an increase in reserves for audience deficiency liabilities. Affiliate fees increased 8% principally driven by rate increases and subscriber growth at MTVN and BET and slightly higher revenues at SNI. Ancillary revenues, which represent approximately 9% of Cable Networks revenues in 2004 and 8% in 2003, increased more than 30% benefiting from higher Nickelodeon consumer products revenues, higher home video revenues led by Chappelle's Show DVD, and higher licensing revenues. For 2004, Cable Networks operating income increased $352.8 million, or 16%, to $2.5 billion reflecting higher revenues, partially offset by a 17% increase in total expenses. The increase in total expenses for the year was driven by an 18% increase in operating expenses driven by higher programming costs. Selling, general and administrative expenses for the year increased 13% primarily due to higher sales W and marketing-related costs at MTVN and increased compensation. Total expenses also included the full-year impact of Comedy Central. Operating income as a percentage of revenues was 38% for 2004 and 2003. In 2004, the Company acquired 97.8% of VIVA Media AG for a total purchase price of $393.6 million. VIVA Media AG results are included as part of MTVN, contributing $63.0 million of revenues to Cable Networks since the date of acquisition. 2003 vs. 2002 For 2003, Cable Networks revenues increased $918.8 million, or 19%, to $5.6 billion principally driven by 26% growth in advertising revenues and a 9% increase in affiliate fees. Advertising revenues increased 26% reflecting 27% growth at MTVN principally due to selling more units and higher average unit rates and the impact of Comedy Central. BET delivered 17% advertising revenue growth for 2003 over the prior year as a result of higher average rates. The increase in affiliate fees was primarily due to rate and subscriber increases at MTVN and BET and the impact of Comedy Central, partially offset by declines at SNI. Other ancillary revenues for Cable Networks grew 40% reflecting higher consumer product licensing revenues at Nickelodeon and contributions from co-produced feature fihns.

11-11 For 2003, Cable Networks operating income increased $400.1 minion, or 23%, to $2~2 billion reflecting higher revenues, partially offset by increased expenses. Operating expenses increased 23% led by increases at MTVN and BET primarily for new programming initiatives and the impact of Comedy Central. Setting, general and administrative expenses increased 9% primarily due to higher marketing costs at MTVN and the inclusion of Comedy Central. Operating income as a percentage of revenues was 38% for 2003 and 37% for 2002.

i Ttlrruiia (CBS and UPN Television Networks and Stations; Television Production and Syndication) i (Contributed 38% of consolidated revenues for the year ended December 31,2004,37% for the year ' ended December 31, 2003 and 39% for the year ended December 31, 2002.)

lor EUrt Dtoafcir H. MM 2M3 2»K Revenues $8,504.6 $7,761.0 $7,456.8 Operating income (Ol) $1447.4 $1,238.1 $1,177.6 OI as a % of revenues 18% 16% 16% Depreciation and amortization $ 148.9 $ 151.1 $ 140.8 Capital expenditures $ 125.6 $ 123.6 $ 138.7

2*4 n. 2*3 For 2004, lelevtsioa revenues increased $743.6 milbon, or 10%, to $8.5 bilbon principally driven by advertising revenue growth at the broadcast networks and the Stations group and higher television license revenues. CBS and UPN Networks combined advertising revenues increased 12% with an 11% increase in CBS and UPN primetime due to 11% average rate increases. CBS Network and the Stations group advertising revenues benefited from the 2004 telecast of Super Bowl XXXVm. The combination of the j Super Bowl and increased political advertising contributed 3% of Television's total revenue growth. For the year, the Stations group advertising revenues increased 10% reflecting higher political advertising with more units sold at higher average unit rates. The Stations group also benefited from higher ad sales in the automotive, leisure and media, and restaurant industries. "television revenues included an increase in television license revenues of 2% benefiting from the basic cable availability of Star Trek: Deep Space Nine, the initial domestic syndication of CSI and the renewal by incumbent stations of Everybody Loves Raymond, partially offset by lower network revenues for shows no longer in production indndmg Fmsxr. Home entertainment revenues increased due to the DVD releases of Star Trek: Voyager and Star Trek Original Series. For 2004, Television operating income increased $3093 miffion, or 25%, to $13 bflbon principally due to the revenue increases noted above. Total expenses increased 7% for the year primarily due to high^j production and programming expenses and higher selling, general and administrative expenses. Production costs and programming expenses increased 5^r reflecting higher program rights expense for sports events and primetime series. Included in selling, general and administrative expenses was a severance charge of $10.4 milbon recorded in the second quarter of 2004 related to a management change. Television operating income in 2003 included approximately $27 million in insurance recoveries. Operating income as a percentage of revenues was 18% in 2004 versus 16% in 2003. License fees for completed television programming in syndication and on cable are recorded as revenue in the period that the products are available for exhibition, which, among other reasons, may cause substantial fluctuation in operating results. Unrecognized revenues attributable to such licensing agreements were approximately $734.4 million and $634.9 million at December 31, 2004 and 2003, respectively, including intercompany revenues of $1763 milbon and $3452 mflbon for these periods, respectively.

11-12 2003 vs. 2002 For 2003, Television revenues increased $304.2 million, or 4%, to $7.8 bfllion primarily driven by higher advertising revenues at the broadcast networks and the Stations group, and higher syndication revenues. CBS and UPN Networks combined advertising revenues increased 6%, with 8% growth in CBS primetime due primarily to a 6% average rate increase. Late night, daytime and news advertising revenues were up with average rate increases, partially offset by a rate decrease at sports, due primarily to the impact of the war on the broadcast of the NCAA basketball tournament. The Stations group delivered 2% year-over-year advertising revenue growth led by ratings improvements for the CBS Network, particularly at 10 pm, which improved the stations' local news and syndication as well as higher sales in the automotive, leisure and media industries. The Stations group also benefited from the full year results of KCAL-TV Los Angeles, acquired in May 2002, which contributed 3% to the revenue growth in 2003. These increases were more than offset by the absence of political advertising which was down over 80% versus 2002. Higher syndication revenues for 2003 were partially offset by a decrease in domestic syndication availabilities and home entertainment revenues. Syndication revenues were higher primarily due to increases in license fees and barter revenues for The Dr. Phil Show which debuted in September 2002 and higher barter revenues from Everybody Loves Raymond. Revenues from domestic syndication availabilities in 2003 included The Parkers, Sabrina, the Teenage Witch and the off-network syndication of seasons one through five of Becker, and did not match 2002's initial basic cable syndication availabilities including 7* « j Heaven, Charmed and Seven Days. Home entertainment revenues for 2003 decreased as contributions from the DVD release of seasons one through seven of Star Trek Deep Space Nine did not match the contributions from the 2002 DVD release of seasons one through seven of Star Trek The Next Generation. For 2003, Television operating income increased $605 million, or 5%, to $1.2 billion principally due to the revenue increases noted above. Operating expenses principally comprised of production costs and programming expenses increased 5%. CBS Network experienced higher programming costs due to more hours of original summer programming, contractual series increases in primetime and increased sports rights payments which were associated with the first year of new contracts with both the NCAA and the PGA Tour. The Stations group incurred higher operating expenses in 2003 principally due to expansion of news coverage and talent, partially offset by reduced advertising and promotion. Television operating income for 2003 included approximately $27 million from insurance recoveries. Operating income as a percentage of revenues was 16% for 2003 and 2002. Radio (Radio Stations) (Contributed 9% of consolidated revenues for the year ended December 31, 2004, 10% for the year ended December 31, 2003 and 11% for the year ended December 31, 2002.) w \ear Ended December 31, 2004 2003 2002 Revenues $ 2,096.1 $2,097.6 $2,121.6 Non-cash impairment charge $(10,941.8) Operating income (loss) (OI) $(10,023.5) $ 975.0 $1,007.6 OI as a % of revenues NM 46% 47% Depreciation and amortization $ 29.9 $ 27.4 $ 30.8 Capital expenditures $ 38.2 $ 14.1 $ 14.4 NM—Not meaningful 2004 vs. 2003 Radio's revenues are generated domestically from 183 radio stations. For 2004, Radio revenues were primarily flat at $2.1 billion reflecting continued weakness in national and local radio advertising revenues in part due to increased competition from other advertising media. Advertising revenues reflected a decline in the units sold, partially offset by an increase in average unit rates and higher affiliated revenues. Radio receives consideration for management services provided to Wesrwood One, an affiliated company.

11-13 Revenues from these arrangements were approximately $65.9 mflbon for the year ended December 31, 2004 versus $643 million for the prior year. For 2004, Radio reported an operating loss of $10.0 bflbon which inrmdcd a $10.9 bflKon non-cash impairment charge to reduce goodwill and intangibles. Expenses, including operating, selling, general and administrative expenses, and depreciation and amortization, iucieased 5% to $1.2 billion. Operating expenses, primarily comprised of radio programming expenses including on-air talent,-program rights amortization and other production costs, increased 5% to $513.9 mflbon primarily due to higher contractual talent costs. Selling, general and administrative expenses increased 5% to $634.0 million mainly from higher advertising and promotion expenditures and employee-related expenses. 2M3vs.2tt2 For 2003, Radio revenues decreased $24.0 million to $2.1 bflbon reflecting a 1% increase in advertismg revenues which was more than offset by lower revenues for management services provided to Westwood One. Revenues from these arrangements were approximately $643 mflbon for the year ended December 31, 2003 and $110.4 million for the year ended December 31, 2002. For 2003, Radio operating income decreased $32.6 mflbon, or 3%, to $975.0 mflbon principally due to the revenue decrease and an increase in expenses. Operating expenses increased 7% in 2003 primarily reflecting contractual talent increases as well as increased sports rights. Selling, general and administrative expenses decreased 3%, reflecting $13 million of insurance recoveries and lower advertising a promotional expenditures in 2003. Operating income as a percentage of revenues was 46% in 2003 verstBr 47% in 2002. (Outdoor Advertising Properties) (Contributed 8% of consolidated revenues for the years ended December 31, 2004 and 2003 and 9% for the year ended December 31, 2002.) Vim Ea*rf Dto^tr 31, WM MC 2M2~~ Revenues $ 1,8802 $1,7483 $1,633.5 Non-cash impairment charge $(7,0553) — — Operating income (toss) (Ol) $(6£24.5) $ 207.9 $ 218.0 OI as a % of revenues MM 12% 13% Depreciation and amortization $ 223.1 $ 215.9 $ 205.6 Capita] expenditures $ 5&5 $ 58.1 $ 67.1 NM—Not meaningful

11-14 2004 vs. 2003 For 2004, Outdoor revenues increased $131.9 million, or 8%, to $1.9 billion reflecting a 14% increase from its European properties and a 4% increase in North America. North American properties reflected a 16% increase in Canadian revenues and a 5% increase in U.S. billboards revenues, partially offset by Mexico billboards revenues decrease of 11%. Revenue growth from its European properties benefited from favorable foreign exchange rates. The impact of foreign exchange translation on revenues was approximately $68 million, or four percentage points of the increase for the year. Approximately 45% of Outdoor revenues were generated from international regions, principally Europe, in 2004 versus 43% in 2003. For 2004, Outdoor reported an operating loss of $6.8 billion, which included a non-cash impairment charge of $7.1 billion to reduce goodwill. Operating expenses, which exclude the non-cash charge, increased 9% due to higher transit and billboard lease costs, as well as the negative impact of foreign exchange translation.

2003 vs. 2002 For 2003, Outdoor revenues increased $114.8 million, or 7%, to $1.7 billion reflecting a 17% increase from its European properties and a 2% increase in North America. Revenue growth from its European properties was principally driven by favorable foreign exchange rates. North American results reflected higher revenues from U.S. billboards, driven by an increase in the number of displays, partially offset by lower revenues from the U.S. transit business, due to a decrease in the number of displays and in the average per unit rate, and lower revenues from billboards in Mexico. For 2003, Outdoor operating income decreased $10.1 million, or 5%, to $207.9 million as the revenue increase was more than offset by a 9% increase in total expenses principally due to higher billboard lease costs and sales-related expenses as well as in transit guarantees and posting rotation expenses due to shorter campaigns. Operating income as a percentage of revenues was 12% versus 13% in 2002. Entertainment (Production and distribution of Motion Pictures; Consumer Publishing; the operation of Theme Parks and Movie Theaters; and Music Publishing) (Contributed 18% of consolidated revenues for the year ended December 31, 2004, 20% for the year ended December 31, 2003 and 19% for the year ended December 31, 2002.)

Year Ended December 31, 2004 2003 2002 Revenues $4,055.6 $4,101.3 $ 3,680.1 Operating income (OI) $ 254.0 $ 271.4 $ 3583 OI as a % of revenues 6% 7% 10% Depreciation and amortization $ 137.8 $ 129.7 $ 120.7 Capital expenditures $ 74.2 $ 66.4 $ 74.6

2004 vs. 2003 For 2004, Entertainment revenues decreased $45.7 million, or 1%, to $4.1 billion principally reflecting lower Features revenues, partially offset by higher revenues from Publishing, Parks and Theaters. Approximately 38% of Entertainment's revenues were generated from international regions in 2004, principally Europe and Canada. For 2004, Features revenues decreased 6% principally reflecting lower home entertainment revenues as contributions from 2004 titles including School of Rock and Mean Girls did not match the success of last year's titles led by The Adventures of Indiana Jones—the Complete DVD Movie Collection. Publishing

11-15 increased 8% primarily due to several top selling titles indnding "Angds A Demons" by Dan Brown and "Family First" by Dr. PhD McGraw. Parks revenues increased 9% primarily due to higher attendance, up 12%, partially offset by lower average per capita spending. Parks also benefited from favorable foreign currency translation. Theaters revenues increased 2% primarily from the benefit of favorable foreign currency translation, partially offset by lower attendance. For 2004, Entertainment operating income decreased $17.4 mflboe, or 6%, to $254.0 mflBon primarily doe to the revenue decreases noted above, partially offset by an overaD 1% decrease in total expenses. Higher variable expenses at Parks and Publishing, and higher Theater operating expenses and depreciation prindpaOy resulting from the negative impact of foreign exchange rates, were more than offset by lower Features film amortization and distribution costs. Included in selling, general and administrative expenses was a severance charge of S10.4 million recorded in the second quarter of 2004 related to a management change. Operating income as a percentage of revenues was 6% in 2004 versus 7% in 2003. License fees for television exhibition of completed motion pictures are recorded as revenue in the period that the products are available for such exhibition, which, among other reasons, may cause ynhstainral fluctuation in operating results. Unrecognized revenues attributable to such licensing agreements were approximately $1-2 billion as of December 31, 2004 and 2003 including intercompany revenues of $287.4 nuDion and $281.1 million, respectively.

2M3TS.2M2 For 2003, Entertainment revenues increased $421.2 motion, or 11%, to $4.1 bOlion principally reflecting higher Features, Theaters and Publishing revenues. Features revenues were higher principally due to increased worldwide home entertainment, theatrical and pay television revenues, partially offset by lower network revenues. Domestic theatrical revenues were lower than the prior year due in part to fewer titles in domestic theatrical release. Foreign theatrical were higher than the prior year primarily doe to conUibutions from How To Lose A Guy In 10 Days, Lam Croft Tomb Raider. The Cradle Of Lift and The Italian Job. Pay television revenues were higher wmle network revenues were lower compared to the prior year, both reflecting a change in the mix of titles available. Theaters revenues increased 12% principally due to the benefit of favorable foreign currency translation, higher average admission prices and increased per capita spending, which more than offset a dectine in attendance. Parks revenues increased slightly for the year primarily due to a 1% increase in average per capita spending and the benefit of favorable foreign currency translation, partially offset by a 2% dedme in attendance. Publishing revenues increased 3% on the strength of its top-selling titles for th year which included "The Ultimate Wright Solution" by Dr. Phfl McGraw, "Living History" by Hfllar)*/ Rodham Clinton and "The Dark Tower V (Wolves Of The CaOa)" by Stephen King. For 2003, Entertainment operating income decreased $86.9 million, or 24%, to $271.4 million, as the revenue increases noted above were more than offset by increased Features distribution and film amortization costs. Operating income as a percentage of revenues was 7% in 2003 versus 10% in 2002.

Current assets decreased by $274.9 million to $7.5 billion at December 31, 2004 from $7.8 billion at December 31,2003 primarily due to a $962.7 million decrease in current assets of discontinued operations. This decrease was partially offset by an increase in cash and cash equivalents of $310.9 million, deferred tax assets of $146.0 mflbon, other current assets of $142.2 million and receivables of $66.0 million. The allowance for doubtful accounts as a percentage of receivables was 6.1% at December 31, 2004 compared with 6_5% at December 31. 2003.

11-16 Net property and equipment increased to $4.7 billion at December 31, 2004 from $4.6 billion at December 31, 2003 primarily reflecting capital expenditures of $415.0 million and the addition of capital leases of $141.7 million partially offset by depreciation expense of $665.2 million. Goodwill of $38.5 billion decreased $15.9 billion from December 31, 2003, primarily reflecting the impairment of goodwill at the Radio and Outdoor segments, partially offset by acquisitions. Intangibles, principally consisting of FCC licenses, decreased by $23 billion to $10.6 billion at December 31,2004 from $12.9 billion at December 31, 2003. This decrease reflected the $2.2 billion reduction of television station's FCC licenses due to a change in accounting. Current liabilities decreased $715.2 million to $6.9 billion primarily due to a $1.2 billion decrease in current liabilities of discontinued operations, partially offset by increases of $134.4 million in participants' share, residuals and royalties payable, primarily for feature films and television product, and other current liabilities of $300.8 million.

Cash Flows Cash and cash equivalents increased by $77.5 million for the year ended December 31, 2004. The change in cash and cash equivalents was as follows:

\ernr Ended December 31, 2004 2003 2002 -—— : Continuing Operations: Cash provided by operating activities $3,404.0 $2,901.9 $2,728.7 Cash used for investing activities (112.7) (1,683.3) (1,193.4) Cash used for financing activities (2,980.4) (1,080.2) (1,583.6) Net cash flow from continuing operations 310.9 138.4 (483) Net cash flow attributable to Blockbuster (233.4) 80.9 (47.7) Increase (decrease) in cash and cash equivalents $ 77.5 $ 2193 $ (96.0)

Operating Activities. In 2004, cash provided by operating activities from continuing operations increased $502.1 million, or 17%, to $3.4 billion principally reflecting growth in net earnings from continuing operations, after adjusting for the non-cash impairment charge, partially offset by higher taxes paid in 2004. In 2003, cash provided by operating activities from continuing operations increased $173.2 million, or 6%, to $2.9 billion principally reflecting higher earnings, partially offset by higher taxes paid in 2003 compared to 2002. Cash paid for income taxes of $1.2 billion for 2004 was higher than 2003 payments of $933.9 million principally due to higher operating income (excluding the non-cash 2004 impairment charge). The Company anticipates that higher operating income and the absence of audit refunds in 2005 will result in an increase in cash payments for taxes of approximately $400 million to $450 million over 2004 payments. Investing Activities. In 2004, cash used for investing activities from continuing operations of $112.7 million reflected acquisitions of $427.7 million, primarily consisting of the acquisition of 97.8% of VIVA Media AG, the remaining interest in SportsLine.com, Inc. and Outdoor properties and capital expenditures of $415.0 million, offset by the $738.1 million special distribution paid by Blockbuster in the third quarter. Capita] expenditures increased $57.4 million, or 16%, to $415.0 million in 2004 principally reflecting investment in systems upgrades and building improvements. Net cash expenditures for investing activities from continuing operations of $1.7 billion for the year ended December 31, 2003 principally reflected acquisitions of $13 billion and capita] expenditures of $357.6 million principally for broadcasting equipment and outdoor advertising structures. Acquisitions in 2003 included the acquisition of the remaining 50% interest in Comedy Central for $1.2 billion, as well as the acquisition of a billboard operator in Puerto Rico. Net cash expenditures for investing activities from continuing operations of $1.2 billion in

11-17 rimariry reflected acquisitions of $818.0 mflbon, principally for KCAL-TV and the remaining interest yn, as wefl as capital expenditures of J3963 million. ipnal ezpeoditures for 2005 are anticipated to be in tne range of $625 miffion to $675 million. The e over 2004 levels principally reflects investment in information systems, technology and building ements. •voicing Activities. In 2004, cash flow used for financing activities from continuing operations of Dion principally reflected the purchase of Company stock for $23 bflbon, repayment of notes and ores of $803 mfllioa and the net repayment of bank debt, including commercial paper and financing rf $26.1 million. In addition, the Company paid dividends of $415.2 million. These uses were y offset by proceeds from the exercise of employee stock options of $119.6 mflbon. In 2003, cash xd for financing activities from continuing operations of $1.1 bflUon principally reflected the se of Company stock for $945.1 million, repayment of notes and debentures of $765.4 mflbon, and repayment of bank debt, including commercial paper and financing costs, of $162.1 million. The jry paid dividends of $104.6 million in 2003. These uses were partiaDy offset by proceeds from the e of notes of $736.5 mflbon, net of financing costs, and from the exercise of employee stock options •2 million- Nei cash flow used for financing activities from continuing operations of $1.6 bflbon for intipally reflected the repayment of notes and debentures of $1.0 bflbon, the net repayment of bank Khxhng commercial paper, of $963.8 million, and the purchase of Company stock for $1.1 bfll jses were partially offset by proceeds from the issuance of notes of $13 bflbon and from the exerclSe loyee stock options of $315.1 million. 2005, the declarations of a $.07 per share quarterly dividend would result in an annual payment to i's stockholders of approximately $450 million. On January 26, 2005, the Company declared a $.07 ire quarterly dividend payable April 1, 2005 to Viacom's stockholders of record at the dose of s on February 28, 2005.

Pragrui mmd Cash Dividends i October 28, 2004, the Company announced a new stock purchase program under which the ny is authorized to acquire from time to time up to $8.0 bflbon in Viacom Class A Common Stock n-votmg Class B Common Stock. The program succeeded and replaced the Company's $3.0 bflbon urchase program announced in 2002, under which 40.7 million shares of Class B Common Stock ai purchased for $1.7 bfllion. The Company wfl] finance the purchase program using a combination i and investments, future cash flows and borrowing capacity. NAIRI, Inc. and National ments. Inc., each dosery held corporations controlled by Sumner M. Redstone, Chairman of jl Directors and Chief Executive Officer of the Company, have entered into an agreement with ny to participate in the program on a pro-rata basis. The agreement, which has been approved by an jdent committee of Viacom directors, will prevent the buyback from increasing NAIRI, Inc.'s uc interest in Viacom. National Amusements. Ino, through its wholly owned subsidiary, , Inc., beneficially owns Viacom's Class A Common Stock representing approximately 71% of the jower of aO dasses of the Company's Common Stock and approximately 12% of Viacom's Class A «ss B Common Stock on a combined basis at December 31,2004 (See Related Parties). In 2004, on a late basis, the Company purchased 68.4 million shares of Viacom Class B Common Stock for jnalery $25 bflbon, of which approximately $2.0 bflbon was spent under the new $8.0 bflbon n. As of December 31, 2004. there was approximately $6.0 bflbon remaining under the current Okm purchase program. From January 1 through March 14, 2005, the Company purchased an nal 34.7 mflbon shares for approximately $13 bflbon. iring 2003. on a trade date basis, the Company purchased approximately 23.6 mflbon shares of its : Common Stock for approximately $981.4 million under its stock purchase programs.

11-18 During the. first three quarters of 2004, Viacom declared a quarterly cash dividend of $.06 per share on Viacom Class A and Class B Common Stock. During the fourth quarter of 2004, the Company declared a quarterly cash dividend of $.07 per share on Viacom Class A and Class B Common Stock, which was paid on January 1,2005 to stockholders of record at the close of business on November 30,2004. Approximately $415.2 million was paid to these shareholders during 2004 and $116.2 million was paid in January 2005. During the third and fourth quarters of 2003, Viacom declared a quarterly cash dividend of $.06 per share and paid $104.6 million in 2003 and $104.4 million in January 2004.

Acquisitions In August 2004, the Company acquired 75.8% of VIVA Media AG for $306.9 million. Pursuant to a tender offer, the Company subsequently purchased additional shares of VTVA Media AG, raising the Company's total ownership to 97.8% for a total purchase price of $393.6 million. VIVA Media AG's results have been included as part of Cable Networks since the date of acquisition. The allocation of the purchase price is pending a final evaluation of the fair value of VTVA Media AG's assets acquired and liabilities assumed. On December 30, 2004 the Company acquired a 10% interest in Spanish Broadcasting System, Inc., in exchange for a San Francisco radio station. In addition to the 10% interest, the Company received warrants that would allow the Company to increase its equity stake by an additional 5%. On May 22,2003, the Company acquired the remaining 50% interest in Comedy Central that it did not own for $1.2 billion in cash. Comedy Central's results have been consolidated as part of Cable Networks, effective from the date of acquisition. The excess purchase price over the fair value of the tangible and identifiable intangible net assets acquired of approximately $1.0 billion was allocated to goodwill and other intangibles. The final allocation of the purchase price was based on comprehensive evaluations of the fair value of Comedy Central's assets acquired and liabilities assumed. On May 15, 2002, the Company acquired the assets of KCAL-TV Los Angeles for approximately $650 million. During 2002, the Company also acquired the remaining 50% interest in , the 24-hour digital network for kids that it did not already own for approximately $100 million.

Capital Structure

At December 31, 2004 200» Notes payable to banks $ 5.9 $ 107.2 Commercial paper 20.0 Senior debt-^.625%-8.875% due 2005—2051 9,421.4 9,474.7 Senior subordinated debt 10.50% due 2009 — 66.3 Other notes 17.9 26.0 Obligations under capital leases 471.8 387.0 Total debt 9,917.0 10,081.2 Less Blockbuster debt — 219.9 Less other discontinued operations debt 202.0 201.7 Less current portion 65.8 51.5 Total long-term debt from continuing operations, net of current portion $9,649.2 $ 9,608.1

Total debt of $9.9 billion at December 31, 2004 and $10.1 billion at December 31, 2003 was 19% and 14%, respectively, as a percentage of total capitalization of the Company.

11-19 lie senior debt of Viacom Inc. is fully and unconditionally guaranteed by its wbofly owned subsidiary a International Inc. Senior debt in the amount of $52.2 miDion of the Company's wholly owned tary, CBS Broadcasting Ino, is not guaranteed. le Company's total debt included, as of December 31, 2004 and December 31, 2003, respectively, aggregate unamortized premium of $353 million and $41.4 million and (n) the net change in the ig value of the debt relating to fair value swaps of $17.4 motion and $48-2 million. it the years ended December 31, 2004 and 2003, the following debt issuances, maturities and ptions occurred:

ay 14, 2003, $300.0 mflbon 4.625% senior notes due 2018 ay 14, 2003, $450.0 mflbon 5.50% senior debentures due 2033 terest on the above debt instruments is paid semi-annuaOy.

Vtember 1, 2003, 6£75% notes, $275.0 mflbon nuary 15, 2003. 6.75% senior notes, $333.8 mflbon

ry 15, 2004, aO of the outstanding Go Outdoor Systems Holdings S.A- 1030% senior subordinated notes due 2009 at 105.25% of principal ry 15, 2003, $150.0 mflbon 730% senior debentures due 2023 at 103.6% of principal ir the years ended December 31. 2004 and 2003, the Company repurchased approximately tuition and $1.0 mflbon of its debt, respectively. uring 2004, the Company acquired SportsLJne.com, Inc, which had outstanding $16.9 million 5% tibte subordinated notes due 2006. These notes were redeemed in January 2005. K Company's scheduled maturities of long-term debt at face value, excluding commercial paper and leases, outstanding at December 31, 2004 were as foOows:

HM 2M7 2MC Mg-termdebt $1,453.1 $818.7 $700.4 $.4 $.1 $6,419.8

11-20 Viacom Credit Agreement As of December 31, 2004, the Company's credit facilities totaled $4.5 billion comprised of a $3.0 billion revolving facility due February 2009 and a $1.5 billion revolving facility due March 2006 (collectively, the "Credit Facilities"). The Company, at its option, may also borrow in certain foreign currencies up to specified limits under the $3.0 billion and $1.5 billion facilities. Borrowing rates under the facilities are determined at the Company's option at the time of each borrowing and are based generally on the prime rate in the United States or the London Interbank Offer Rate ("LIBOR") plus a margin based on the Company's senior unsecured debt rating. The Company pays a facility fee based on the -total amount of the commitments. As of December 31,2004, the Company had unused revolving credit facilities of $4.27 billion in the aggregate. The facilities contain covenants, which, among other things, require that the Company maintain a minimum interest coverage ratio. At December 31, 2004, the Company was in compliance with all covenants under the Credit Facilities. The primary purpose of the credit facilities is to support commercial paper borrowings. At December 31, 2004, the Company had no commercial paper borrowings under its $43 billion commercial paper program. At December 31, 2004, the Company had classified as long-term debt approximately $1.38 bfllion of other debt scheduled to mature within the next twelve months, reflecting its intent and ability, through the existence of unused revolving credit facilities, to refinance this debt on a long-term basis.

Accounts Receivable Securitization Programs As of December 31, 2004 and December 31, 2003, the Company had an aggregate of $1.0 billion outstanding under revolving receivable securitization programs. The programs result in the sale of receivables on a non-recourse basis to unrelated third parties on a one-year renewable basis, thereby reducing accounts receivable and debt on the Company's Consolidated Balance Sheets. The Company enters into these arrangements because they provide an additional source of liquidity. Proceeds from the programs were used to reduce outstanding borrowings. The terms of the revolving securitization arrangements require that the receivable pools subject to the programs meet certain performance ratios. As of December 31, 2004, the Company was in compliance with the required ratios under the receivable securitization programs.

Liquidity and Capital Resources The Company believes that its operating cash flows ($3.6 billion in 2004), cash and cash equivalents ($928.2 million at December 31, 2004), borrowing capacity under committed bank facilities (which consisted of unused revolving credit facilities of $4.27 billion in the aggregate at December 31, 2004), and access to capital markets are sufficient to fund its operating needs, including commitments and contingencies, capital and investing commitments and its financing requirements for the foreseeable future. The funding for commitments to purchase sports programming rights, television and film operations, and talent contracts will come primarily from cash flow from operations. The Company continually projects anticipated cash requirements, which include capital expenditures, share purchases, acquisitions, dividends and principal payments on its outstanding indebtedness, as well as cash flows generated from operating activity available to meet these needs. Any net cash funding requirements are financed with short-term borrowings (primarily commercial paper) and long-term debt. Commercial paper borrowings, which also accommodate day-to-day changes in funding requirements, are backed by committed bank facilities that may be utilized in the event that commercial paper borrowings are not available. The Company's credit position affords sufficient access to the capital markets to meet the Company's financing requirements.

H-21 ic Company anticipates that future debt maturities wflj be funded with cash and cash equivalents, sh flows generated from operating activities and other debt financing- There are no provisions in any Company's material financing agreements that would cause an acceleration of the obligation in the rf a downgrade in the Company's debt ratings. le Company filed a shelf registration statement with the Securities and Exchange Commission ring debt securities, preferred stock and warrants of Viacom that may be issued for aggregate gross ds of $5.0 bilrkm. The registration statement was first declared effective on January 8, 2001. The net ds from the sale of the offered securities may be used by Viacom for general corporate purposes, ng repayment of borrowings, working capital and capital expenditures, or for such other purposes as : specified in the applicable prospectus supplement. To date, the Company has issued $2385 billion irrties under the shelf registration statement IT the year ended December 31. 2004. the Company had a total of $86J million of long-term debt ties, redemptions and repurchases. > of December 31, 2004, the Company's significant contractual obligations, including payments due tod, were as follows:

rnyw•to One by fierM 2>ld^ ^ Itaal 2MS 2M-2.Y7 2M9-2M9 ueiejn uniin* and talent t • ••unit iiMMitX M\ Slfi 1234 « anoo 24491 6 t34344 $4 1X7 5 ing leases (2) 2,903.0 459.9 7503 565.6 1,127.0 iteed minimum franchise payments (3) 13T73 432.6 487.1 248.9 208.7 se obligations (4) 4132 184.0 139.1 513 38-8 lease obligations (including interest) (5) 632.1 98J 173.7 143.4 216.7 erm debt obligations (6) 9J92J 1,453.1 1,519.1 3 6,419.8 long-term habumes (7) 1382.4 1,4063 292.0 183.9

i of the Company mdnde $10-9 boVon for the »-f—M*r-it of sports programming rights, i rebtng to leJcrtaom. radio and feature fun piuduomn and "fnAr.in and SljO binon for talent contracts. (long Hi in imm MnllMr operating lease commitments for office space and eqnipaKat, transponders, studio facilities

XMI'S oatdoot adicrtisiDg biaiam has franchise rigbts euUliiug it to display advertising OB media inducting billboards, transit . bvses, rari sntena (ia-caT. slatioa platforms and terminals), raal kiosks and stadmm agaagt. Under most of these choc agreonents. the fraacboor a eautled 10 receive toe greater of a p* "••n'-'p' of die relevant advertising revenues, net of TrhnBg ageacy fees, or a specified guaranteed amumu obagatjoBi indade agreements to purchase goods or services that are enforceable and legally biudiiig and that specify i terms, •ffcuiiag open purchase orders. jdes capital leases for satcHiic tiantpooders. g-«enn debt obhganons are presented at face value. g-ierm conuaUBal ohbgatinnt mdudmg program babib'ties and parnripaikjm doe to p»oduceis and residuals.

Shot Arnatgcmaxs tc Company foOows the recognition provisions of FASB Interpretation No. 45, "Guarantor's iting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness ers" ("FIN 45") for guarantees issued or modified after December 31, 2002. FIN 45 requires a lor to recognize, at the inception of a guarantee, a liability for the fair vahie of an obligation d by issuing a guarantee. FIN 45 also requires additional disclosures for certain guarantees. :e Company's off-balance sheet arrangements primarily consist of the following guarantees.

II-22 In the fourth quarter of 2004, the Company sold its 50% equity interest in United Cinemas International Multiplex B.V. ("UCI"), which operated movie theaters in Europe, Latin America and Asia. The Company had guaranteed UCI's debt obligations under a revolving credit facility which was repaid during the fourth quarter of 2004. The Company contributed $29.1 million toward the repayment of UCI's debt obligations under the terms of this guarantee. The Company continues to guarantee certain UCI theater leases which are secured by bank guarantees provided by the buyer. The Company's guarantee totaled approximately $177.0 million at December 31, 2004. The Company also owns a 50% interest in WF Cinema Holdings, L.P. and Grauman's Theatres LLC and guarantees certain theater leases for approximately $133 million. The lease guarantees would only be triggered upon non-payment by the respective primary obligors. These guarantees are not recorded on the balance sheet as of December 31, 2004 as they were provided by the Company prior to the adoption of FIN 45. The Company continues to remain as guarantor on certain Blockbuster store leases approximating $359 million at December 31, 2004 and secured by a $150 million letter of credit. Certain leases contain renewal options that can extend the primary lease term and remain covered by the guarantees. Blockbuster has agreed to indemnify the Company with respect to any amounts paid under these guarantees. The Company recorded a liability of $53.6 million reflecting the fair value of such guarantees. Additionally, the Company has indemnification obligations with respect to letters of credit and surety bonds primarily used as security against non-performance in the normal course of business. The outstanding letters of credit and surety bonds approximated $342.4 million at December 31, 2004 and are not recorded on the balance sheet as of December 31, 2004.

Legal Matters Asbestos and Environmental. The Company is a defendant in lawsuits claiming various personal injuries related to asbestos and other materials, which allegedly occurred principally as a result of exposure caused by various products manufactured by Westinghouse, a predecessor, generally prior to the early 1970s. Westinghouse was neither a producer nor a manufacturer of asbestos. The Company is typically named as one of a large number of defendants in both state and federal cases. In the majority of asbestos lawsuits, the plaintiffs have not identified which of the Company's products is the basis of a claim. Claims against the Company in which a product has been identified principally relate to exposures allegedly caused by asbestos-containing insulating material in turbines sold for power-generation, industrial and marine use, or by asbestos-containing grades of decorative micarta, a laminate used in commercial ships. Claims are frequently filed and/or settled in large groups, which may make the amount and timing of settlements, and the number of pending claims, subject to significant fluctuation from period to period. The Company does not report as pending those claims on inactive, stayed, deferred or similar dockets which some jurisdictions have established for claimants who allege minimal or no impairment. As of December 31, 2004, the Company had pending approximately 112,140 asbestos claims, as compared with approximately 112,280 as of December 31, 2003 and approximately 103,800 as of December 31, 2002. Of the claims pending as of December 31, 2004, approximately 82,370 were pending in state courts, 27,180 in federal courts and approximately 2,590 were third party claims. During 2004, the Company received approximately 16,060 new claims and closed or moved to an inactive docket approximately 16,200 claims. The Company reports claims as closed when it becomes aware that a dismissal order has been entered by a court or when the Company has reached agreement with the claimants on the material terms of a settlement. Settlement costs depend on the seriousness of the injuries that form the basis of the claim, the quality of evidence supporting the claims and other factors. To date, the Company has not been liable for any third party claims. The Company's total costs (recovery) for the years 2004 and 2003 for settlement and defense of asbestos claims after insurance recoveries and net of tax benefits were approximately $58.4 million and $(8.7) million, respectively. A portion of such costs relates to claims settled in prior years. If proceeds received in 2003 from an insurance commutation were excluded from the Company's total costs in 2003,

11-23 oopaoy's total costs after insurance recoveries and net of tax benefits would have been $56.6 million, ompany's costs for settlement and defense of asbestos claims may vary year to year as insurance ds are not always recovered in the same period as the insured portion of the expenses. lings include claims for individuals suffering from mesotbefioma, a rare cancer, the risk of which is Dy increased primarily by exposure to asbestos; lung cancer, a cancer which may be caused by ; factors, one of which is alleged to be asbestos eiposuie; other cancers, and conditions that are itiaDy less serious, including claims brought on behalf of individuals who are asymptomatic as to an Dy asbestos-related disease. Claims identified as cancer remain a small percentage of asbestos claims g at December 31, 2004. In a substantial number of the pending claims, the plaintiff has not yet ied the claimed injury. K Company believes that its reserves and insurance are adequate to cover its asbestos liabilities and ese asbestos liabilities are not likely to have a material adverse effect on its results of operations, al position or cash flows. ic Company from time to time receives claims from federal and state environmental regulatory is and other entities asserting that it is or may be liable for environmental deanup costs and related es principally relating to discontinued operations conducted by companies acquired by the my. In addition, the Company from time to time receives personal injury claims including toxic tort oduct liability daims arising from historical operations of the Company and its predecessors. aanuL In July 2002, judgment was entered in favor of the Company, Blockbuster, Paramount Entertainment and other major motion picture studios and their home video subsidiaries with to a complaint filed in the United States District Court for the Western District of Texas. The tint included federal antitrust and California state law daims. In August 2003, the Fifth Circuit of Appeals affirmed the federal court judgment The Supreme Court of the United States refused Is' petition for writ of certiorari in March 2004. In February 2003, a similar complaint that had been i a Los Angeles County Superior Court was also dismissrd with prejudice. The plaintiffs have id the California state court dismissal, as weD as a prior denial of dass certification. As a result of .t-off of Blockbuster in 2004, any judgment in this matter adverse to the Company, Blockbuster and/ tmount Home Entertainment will be allocated 3333% to Blockbuster and 66.67% to the Company, mpany believes that the plaintiffs' positions in these litigations are without merit and intends to •e to vigorously defend itself in the litigations, tigation is inherently uncertain and always difficult to predict. However, based on its understanding aroation of the relevant facts and circumstances, the Company believes that all of the above- ed legal matters and other litigation to which it is a party are not likely, in the aggregate, to have •» U adverse effect on its results of operations, financial position or cash flows.

:Risk «e Company is exposed to market risk related to foreign currency exchange rates and interest rates. •mpauy uses derivative financial instruments to modify exposure to risks from fluctuations hi foreign y exchange rates and interest rates. In accordance with hs policy, the Company does not use we instruments unless there is an underlying exposure and therefore, the Company does not hold or no financial instruments for speculative trading purposes. ExdmgtKuk e Company conducts business with companies in various countries outside the United States, g in exposure to movements in foreign exchange rates when translating from the foreign local y to the U.S. dollar. In order to hedge anticipated cash flows and foreign currency balances in such ies as the British Pound, the Australian Dollar, the Japanese Yen, the Canadian Dollar, the m Dollar and the Euro, foreign currency forward and option contracts are used. Additionally, the

H-24 Company designates forward contracts used to hedge future production costs as cash flow hedges, and designates certain forward contracts as a hedge of the foreign currency exposure of a net investment in a foreign operation. The change in fair value of the non-designated contracts is included in current period results as part of "Other items, net." The Company manages the use of foreign exchange derivatives centrally. At December 31,2004, the notional value of all foreign exchange contracts was $633.0 million, of which $82.9 million related to the hedging of future production costs and $157.2 million related to the hedging of a net investment in a foreign operation. The remaining $392.9 million represents hedges of underlying foreign currency balances, expected foreign currency net cash flows and investment hedges. At December 31, 2003, the notional value of all foreign exchange contracts was $296.9 million, of which $12.0 million related to the hedging of future productions costs. The remaining $284.9 million represented hedges of underlying foreign currency balances, expected foreign currency net cash flows and investment hedges.

Interest Rate Risk The Company's interest expense is exposed to movements in short-term rates. Swap agreements may be used to modify this exposure. The Company has entered into fixed to variable rate swaps, which are designated as fair value hedges. Based on the amount of variable rate debt and receivable securirization programs outstanding at December 31, 2004, a 100 basis point change in interest rates would cause a $26.1 million change to pre-tax earnings. As of December 31, 2004, if all parties were to agree, the swaps could have been terminated by a net payment from the counterparties of approximately $23.1 million. At December 31,2004, the Company was a party to the following outstanding fair value hedges, which were fully effective. Interest rate swaps totaling $250 million in notional amount, which mature on June 1, 2005, receive interest at a weighted average rate of approximately 4.54% and pay interest based on three-month LJBOR in advance. Interest rate swaps totaling $350 million in notional amount, which mature on January 30, 2006, and (i) receive interest on $200 million at a weighted average rate of approximately 2.78% and pay interest based on three-month LJBOR in advance and (ii) receive interest on $150 million at a weighted average rate of approximately 3.57% and pay interest based on six-month LJBOR in arrears. Interest rate swaps totaling $700 million in notional amount, which mature on May 1, 2007, and (i) receive interest on $400 million at 5.11% and pay interest based on three-month LJBOR in advance and (ii) receive interest on $300 million at a weighted average rate of approximately 5.35% and pay interest based on three-month LJBOR in arrears. Interest rate swaps totaling $300 million in notional amount, which mature on May 15, 2018, receive interest at a weighted average rate of approximately 4.55% and pay interest based on three-month LJBOR in advance. At December 31, 2004, the Company did not have any interest rate cash flow hedges outstanding.

Credit Risk The Company continually monitors its positions with, and credit quality of, the financial institutions which are counterparties to its financial instruments. The Company is exposed to credit loss in the event of nonperformance by the counterparties to the agreements. However, the Company does not anticipate nonperformance by the counterparties. The Company's receivables do not represent significant concentrations of credit risk at December 31, 2004, due to the wide variety of customers, markets and geographic areas to which the Company's products and services are sold.

II-25 4 Parties atkmal Amusements, Inc. ("NAJ") is a dosery held corporation that beneficially owned Class A ion Stock of the Company representing approximately 71% of the voting power of an classes of the ally's Common Stock, and approximately 12% of the Company's Class A Common Stock and Class B ion Stock on a combined basis at December 31, 2004. Owners of the Company's Class A Common are entitled to one vote per share. The Company's Class B Common Stock does not have voting NAI is not subject to the reporting requirements of the Securities Exchange Act of 1934, as led. Stunner M. Redstone, the controlling shareholder of NAI, is the Chairman of the Board of ors and Chief Executive Officer of the Company. On October 28, 2004, the Company entered into recment (the "NAIRI Agreement") with NAI and NAIRI, Inc. ("NAIRT), a wholly-owned iary of NAI, pursuant to which the Company agreed to buy, and NAI and NAIRI agreed to sell, a •r of shares of Viacom Gass B Common Stock each month such that the ownership percentage of n Class A Common Stock and Class B Common Stock (considered as a single class) held by NAI NAIRI would not increase as a result of purchases of shares of Viacom Common Stock under the ur/s $8.0 billion stock purchase program announced in October 2004. Pursuant to this agreement, n recorded the purchase of 6 J million shares of Viacom Class B Common Stock from NAIRI for million in 2004. AI licenses films in the ordinary course of business for its motion picture theaters from all m?:'v ; including Paramount Pictures. During the years ended December 31, 2004, 2003 and 2002, 1^ payments to Paramount Pictures in the aggregate amounts of approximately $11.2 million, nikm and $123 million, respectively. AI and Mr. Redstone owned in the aggregate approximately 75% of the common stock of Midway i Inc. ("Midway") as of December 31, 2004. Midway places advertisements on various of the my*s cable networks from time to time. During the years ended December 31, 2004, 2003 and 2002, .tions with Midway totaled approximately $5.5 million, $1.4 mfluon and $2.0 million, respectively. le Company owns approximatery 17% in Westwood One, Inc. ("Westwood One") which is treated as iity investment. Most of Infinity's radio stations are affiliated with Westwood One, and Westwood fctributes nationally certain of the Company's radio programming. In connection with these ements, the Company receives affiliation fees as well as programming cost reimbursements and in instances, shares in revenue from the sale by Westwood One of Infinity's programming. In addition, employees of Infinity serve as officers of Westwood One for which the Company receives a ement fee. CBS Television and Cable Networks also enter into programming agreements with 3od One. Revenues from these arrangements were approximately $86.9 million, $85.5 million and million in 2004. 2003 and 2002. respectively. le Company, through the normal course of business, is involved in transactions with other nies that have not been material in any of the periods presented.

December 2004. the FASB issued SFAS No. 123 (revised 2004) "Share-Based Payment" > 123R"). effective the first interim period or annual reporting period that begins after June 15, iFAS 123R revises SEAS No. 123 "Accounting for Stock-based Compensation'' and supersedes APB n No. 25 "Accounting for Stock Issues to Employees." SFAS 123R requires companies to measure t of employee services received in exchange for an award of equity instruments based on grant-date ue of the award. That cost will be recognized over the vesting period during which an employee is •d to provide service in exchange for the award. i March 8. 2005, the Compensation Committee of the Board of Directors of the Company approved rekration of the vesting of unvested stock options having an exercise price of $38.00 or greater 1 under the Company's 2000 and 1997 Long-Term Management Incentive Plans. Stock Option granted from 1999 through 2004 with respect to approximatery 29 million shares of the Company's

11-26 Class B Common Stock are subject to this acceleration which is effective as of March 8,2005. Since-these options had exercise prices in excess of the current market value and were not fully achieving their original objectives of incentive compensation and employee retention, the Company expects the acceleration to have a positive effect on employee morale, retention and perception of option value. The acceleration also eliminates future compensation expense the Company would otherwise recognize in its Consolidated Statements of Operations once SFAS 123R becomes effective on July 1, 2005.

Critical Accounting Policies Financial Reporting Release No. 60, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies" ("FRR 60"), suggests companies provide additional disclosure and commentary on those accounting policies considered most critical. FRR 60 considers an accounting policy to be critical if it is important to the Company's financial condition and results of operations, and requires significant judgment and estimates on the part of management in its application. For a summary of the Company's significant accounting policies, including the critical accounting policies discussed below, see the accompanying notes to the consolidated financial statements. The preparation of the Company's financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, which are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The result of these evaluations forms the basis for making judgments about the carrying values of assets and liabilities and the reported amount of expenses that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions. The following accounting policies require significant management judgments and estimates. • Accounting for the production and distribution of motion pictures and television programming is in accordance with SOP 00-2, which requires management's judgment as it relates to total revenues to be received and costs to be incurred throughout the life of each program. These judgments are used to determine the amortization of capitalized production costs, expensing of participation and residual cost and any necessary net realizable value adjustments. • The Company accounts for its business acquisitions under the purchase method of accounting. The total cost of acquisitions is allocated to the underlying net assets, based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the tangible net assets acquired is recorded as intangibles. Determining the fair value of assets acquired and liabilities assumed requires management's judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, asset lives, and market multiples, among other items. • In accordance with SFAS 142, the Company tests goodwill and other intangible assets for impairment during the fourth quarter of each year, and on an interim date should factors or indicators become apparent that would require an interim test. A significant downward revision in the present value of estimated future cash flows for a reporting unit or intangible assets could result in an impairment under SFAS 142 and a non-cash charge would be required. • Balance sheet reserves and liabilities related to legal issues, restructuring charges and discontinued businesses, including asbestos and environmental matters, require significant judgments and estimates by management. The Company continually evaluates these estimates based on changes in the relevant facts and circumstances and events that may impact estimates. While management believes that the current reserves for matters related to discontinued businesses, including environmental and asbestos are adequate, there can be no assurance that circumstances will not change in future periods.

11-27 Plosion benefit obiigatioos and net periodic pension costs are calculated using many actuarial assumptions. Two key assumptions used in accounting for pension fiabuities and expenses are the discount rate and expected rate of return on plan assets. The discount rate reflects the rate at which the pension benefit obligations could effectively be settled. The Company used investment grade corporate bond yields to support its discount rate assumption. The expected return on plan assets assumption was derived using the current and expected asset allocation of the pension plan assets and considering historical as well as expected returns on various classes of plan assets. For 2004, the unrecognized actuarial loss for pension increased principally as a result of lowering the discount rate for the Company's major plans from 6.0% in 2003 to 5.75% in 2004: A decrease in the discount rate or a decrease in the expected rate of return on plan assets would increase pension expense. The estimated impact of a 25 basts point change in the discount rate would be a change of approximately $15 mflbon on 2005 pension expense and wffl change the •projected benefit obligation by approximately S162 nulbon. The estimated impact of a 25 basis point change in the expected rate of return on pUn assets is a change of approximately $11 rndbon. The Company is subject to income taxes in both the VS. and numerous foreign jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes. The Company is continually audited by U.S. federal and state as wefl as foreign tax authorities. While it B often difficult to predict the final outcome or the timing of resolution of any particular tax matter, the Company believes that its tax reserves reflect the probable outcome of known contingend- - An estimated effective tax rate for a year is applied to quarterly operating results. In the event thw£ is a significant or unusual item recognized in the quarterly operating results, the tax attributable to that Hem is separately calculated and recorded in the same quarter. A number of years may elapse before a tax return containing tax matters, for which a reserve has been established, is audited and finaOy resolved. During 2004, the Company recognized $205.4 million of tax benefits related to the resolution of certain prior year tax audits. he risk factors listed below, in addition to those set forth elsewhere in this report, could affect the ss and future results of the Company. Past financial performance may not be a reliable indicator of performance and historical trends should not be used to anticipate results or trends in future s. The Company derives substantial revenues from the sale of advertising on its over-tne-air networks, basic cable networks, television stations, radio stations and outdoor businesses. The sale of advertising is affected by viewer demographics, viewer ratings and market conditions for advertising. Adverse changes to any of these factors, including as a result of acts of terrorism or w- could have a negative effect on revenues. ^/ The Company's basic cable networks and premium subscription television networks are dependent upon affiliation agreements with cable and drrect-to-bome sateOhe ("DTH") distributors on acceptable terms. The loss of carriage on such distributors, or continued carriage on less favorable terms, could adversely affect, with respect to bask cable networks, revenues from subscriber fees and the ability to seO advertising and, with respect to premium subscription television networks, subscriber fee revenues. In addition, continued consolidation among cable programming and/or DTH distributors and vertical integration of such distributors into the cable or broadcast network business, could have an adverse effect on subscriber fees and advertising revenues, as the Company's ability to launch new networks or maintain or obtain additional distribution for existing rks is impacted by these factors. Operating results derived from the Company's motion picture and television production businesses fluctuate depending primarily upon cost of such productions and acceptance of such productions by the public, which are difficult to predict. Motion picture and television production has experienced cydes in which increased costs of talent, reduced availability of co-financing opportunities, and

11-28 other factors'have resulted in higher production costs. In addition, the commercial success of the . Company's motion picture and television productions depends upon the quality and acceptance of other competing productions, and the availability of alternative forms of entertainment and leisure time activities. ' • The Company's operating results fluctuate, due to the timing and availability of theatrical and home video releases, as well as the recording of license fees for television exhibition of motion pictures and for syndication and basic cable exhibition of television programming in the period that the products are available for:such exhibition. . . : • In accordance with SFAS 142, the Company tests goodwill and other intangible assets for impairment during the fourth quarter of each year, and on an interim date should factors or indicators become apparent that would require an interim test. A downward revision in the fan- value of a reporting unit or intangible assets could result in an impairment under SFAS 142 and a non-cash charge would be required. Such a charge could have a significant effect on the Company^ reported net earnings. , , While the Company seeks to ensure compliance with FCC indecency laws and regulations, the definition of "indecency" is subject to interpretation and there can be no assurance that employees of the Company will not make decisions resulting in the broadcast of programming that is viewed'by regulators or the public as not meeting such standards. Such programming could subject the Company to regulatory review or investigation, fines, adverse publicity or other sanctions including the loss of station licenses. " ' Technology developments, including digital copying and file compression, and the growing penetration of high-bandwidth Internet connections, increase the threat of content piracy ty making it easier to duplicate and widely distribute pirated material. The Company takes actions to vigorously enforce its rights and protect its copyrighted materials and products, howpvef there can be no assurance that it will be successful in preventing the distribution of pirated content Increased piracy of the Company's copyrighted materials could negatively affect its operations and financial results. Newer technologies, including video on demand, personal video recorders and other devices that allow users to view television or motion pictures from a remote location or on a tinier-delayed basis, and technologies which implement the ability for users to fast-forward, rewind, pause and skip programming may cause changes in consumer behavior that could affect the attractiveness of the Company's offerings to viewers, advertisers and/or distributors and could therefore have an adverse effect on the Company's businesses, particularly its television business. The Company has contingent liabilities related to discontinued businesses, including environmental liabilities, liabilities related to illnesses of former employees, asbestos liabilities and other pending and threatened litigation. While the pending or threatened litigations and environmental and other liabilities should not have a material adverse effect on the Company, there can be no assurance in this regard. In the operation of its businesses, the Company engages the services of writers, directors, actors and others, which are subject to collective bargaining agreements. Work stoppages and/or higher costs in connection with these agreements could adversely impact the Company's operations. Changes in laws and regulations, including in particular FCC ownership rules and rules related to the carriage of broadcast and multichannel distribution programming, could, directly or indirectly, adversely affect the operations and ownership of the Company's properties. The Company's advertiser-supported businesses experience fluctuations based on the timing of advertising expenditures by retailers, which typically increase in the fourth quarter. NAI, through its beneficial ownership of the Company's Class A common stock, has voting control of the Company. Sumner M. Redstone, the controlling shareholder of NAI, is the chairman of the

11-29 board and chief executive officer of the Company, and Shari Redstone, president of NAI, is a director of the Company. NAI is in a position to control the outcome of corporate actions that require shareholder approval, including the election of directors, issuance of securities and transactions involving a change of control. On June 1,2004, the Company announced the appointment of Tom Preston and Leslie Moonves as co-presidents and co-chief operating officers. Until that time, Mr. Preston was the chairman and chief executive officer of MTV Networks and Mr. Moonves was the chairman and chief executive officer of CBS. Until this recent management change, the Company had a sole president and chief operating officer. The Company does not have experience with a co-president and co-chief operating officer management structure and there can be no assurance that this new management structure wfl] be successful. lese risk factors are not necessarily all of the important factors that could cause actual results to materially from those expressed by the Company. Other unknown or unpredictable economic, s, competitive, regulatory or other factors also could have material adverse effects on the iny's future results.

Srrtmcat Ccacenuag ferward-Lookiag Statements us document and the documents incorporated by reference into tins Annual Report on Form 10-K ng "Item 7. Management's Discussion and Analysis of Results of Operations and Finar^ km," contain both historical and forward-looking statements. AD statements other than statemeffis orical fact are, or may be deemed to be, forward-looking statements within the meaning of i 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934. These d-lookmg statements are not based on historical facts, but rather reflect the Company's current itions concerning future results and events. These forward-looking statements generally can be ied by the use of statements that include phrases such as "believe," "expect," "anticipate," "intend," ' "foresee," "likely," "wfli" or other similar words or phrases. Similarly, statements that describe the iny's objectives, plans or goals are or may be forward-looking statements. These forward-looking ents involve known and unknown risks, uncertainties and other factors that are difficult to predict rich may cause the actual results, performance or achievements of the Company to be different from ure results, performance and achievements expressed or implied by these statements. There may be •oal risks, uncertainties and factors that the Company does not currently view as material or that are xssarily known. The forward-looking statements included in this document are only made as of the f this document and the Company does not have any obligation to publicly update any forward- • statements to reflect subsequent events or circumstai

A. Qm»*tit*ii i mmd Qm*t*mtii i Dudatmra abamt Mortal JBtriL aponse to this is induded in "Management's Discussion and Analysis of Results of Operations and ial Condition—Market Risk."

11-30 Item 8. Financial Statements and Supplementary Data. MANAGEMENTS STATEMENT OF RESPONSIBILITY FOR FINANCIAL REPORTING

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Our internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and disposition of assets; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements. Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements prepared for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management conducted an evaluation of the effectiveness of the registrant's internal control over financial reporting as of December 31, 2004 based on the framework set forth in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company's internal control over financial reporting was effective as of December 31, 2004. Management's assessment of the effectiveness of internal control over financial reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein. VIACOM INC.

By: _ 1st SUMNER M. REDSTONE Sumner M. Redstone Chairman of the Board of Directors Chief Executive Officer

By: Is/ RICHARD J. BRESSLER Richard J. Bressler Senior Executive Vice President Chief Financial Officer

By: Isl SUSAN C. GORDON Susan C. Gordon Senior Vice President, Controller Chief Accounting Officer

II-31 RT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and tolders of Viacom Inc.: fe have completed an integrated audit of Viacom lnc.'s 2004 consolidated financial statements and of rrnal control over finanrial reporting as of December 31, 2004 and audits of its 2003 and 2002 idated financial statements in accordance with the standards of the Pnbbc Company Accounting ght Board (United States). Our opinions, based on our audits, are presented below.

Sdated financial statements and financial statement schedule i our opinion, the consolidated financial statements listed in the index appearing under Item 1) present fairly, in all material respects, the financial position of Viacom Inc. and hs subsidiaries Company") at December 31, 2004 and 2003, and the results of their operations and their cash flows ii of the three years in the period ended December 31,2004 in conformity with accounting principles ifly accepted in the United States of America. In addition, in our opinion, the financial statement ile listed in the index appearing under Item 15(aX2) presents fairly, in all material respects, the taboo set forth therein when read in conjunction with the related consolidated financial statements. financial statements and financial statement schedule are the responsibility of the Company's emenL Our responsibility is to express an opinion on these financial statements and finar ' I ent schedule based on our audits. We conducted our audits of these statements in accordance «*4( indards of the Public Company Accounting Oversight Board (United States). Those standards : that we plan and perform the audit to obtain reasonable assurance about whether the financial ents are free of material misstatement. An audit of financial statements includes examining, on a isis, evidence supporting the amounts and disclosures in the financial statements, assessing the iting principles used and significant estimates made by management, and evaluating the overall ial statement presentation. We believe that our audits provide a reasonable basis for our opinion. s discussed in Note 1 to the consolidated financial statements, the Company adopted ETTF Topic »-108, "Use of the Residual Method to Value Acquired Assets Other Than Goodwill", as of iber 31, 2004, changing the method for valuing FCC licenses for purposes of impairment testing, ttscussed in Note 1 to the consolidated financial statements, the Company adopted Statement of ial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" effective January 1, nd, accordingly, the Company ceased amortizing goodwill and indefinite lived intangible assets as of ite. i/ control over financial reporting bo, in our opinion, management's assessment, included in Management's Statement TOT nsinbty For Financial Reporting appearing under Item 8, that the Company maintained effective U control over financial reporting as of December 31, 2004 based on criteria established in Internal t—Inifgntfd Framework issued by the Committee of Sponsoring Organizations of the Treadway tssion (COSO). is fairly stated, in all material respects, based on those criteria. Furthermore, in our n, the Company maintained, in all material respects, effective internal control over financial ing as of December 31. 2004, based on criteria established in Internal Control—Integrated Framework by the COSO. The Company's management is responsible for maintaining effective internal control inancial reporting and for its assessment of the effectiveness of internal control over financial ing. Our responsibujry is to express opinions on management's assessment and on the effectiveness Company's internal control over financial reporting based on our audit. We conducted our audit of U control over financial reporting in accordance with the standards of the Public Company nting Oversight Board (United Stales). Those standards require that we plan and perform the audit am reasonable assurance about whether effective internal control over financial reporting was

11-32 maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/S/ PRICEWATERHOUSECOOPERS LLP

New York, New York March 15, 2005

w

11-33 VIACOM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (!• oullkms, except per share mmamm/ts) Vnr EMM Dcceaher31, 2M4 2N3 2M2 IKS $ 22^25.9 $20,827.6 $19,186.8 ses: rating 12^45.8 11,879.8 10,735.5 ng, general and administrative 444Z1 3,7323 3,498.6 reciatjon and amortization 809.9 741.9 711.8 airmen! charge (Note 3) 17,997.1 — Mai expenses 35,494.9 16354.0 14,945.9

ting income (loss) (12^69.0) 4,473.6 4240.9 a expense (718.9) (742.9) (799.1) a income 253 11.7 12.0 Hems, net 7.6 (3.0) (319) igs (loss) from continuing operations before income taxes, equity inrings (loss) of affiliated companies and minority interest (13,655.0) 3,739.4 on for income taxes (1378.6) (1,497.0) (1338% in earnings (loss) of affiliated companies, net of tax (20.8) .1 (373) ity interest, net of tax (5-1) (4-7) (33) -mings (loss) from continuing operations (15,059.5) 2237.8 2,042.0 itinued operations (Note 2): rings (loss) from discontinued operations (1,182.7) (718.8) 2553 •me taxes, net of minority interest 92.4 (83.6) (90.7) earnings (loss) from discontinued operations (1,0903) (802.4) 164.6 mings (loss) before cumulative effect of accounting change (16,149.8) 1,435.4 2206.6 ative effect of accounting change, net of minority interest tax (Note 1) (1312.4) (18.5) (1,480.9) .mings (loss) $(17,4622) $ 1,416.9 $ 725.7

.-arnings (loss) per common share: earnings (loss) from continuing operations (8.78) $ 1.28 $ 1.16 earnings (loss) from discontinued operations (.64) $ (.46) $ earnings (loss) before cumulative effect of accounting change (9.42) $ .82 $ for lulative effect of accounting change (-77) $ (.01) $ (.84) earnings (loss) (10.19) $ .81 $ .41 d earnings (loss) per common share: earnings (loss) from continuing operations (8.78) $ 1.27 $ 1.15 earnings (loss) from discontinued operations (.64) $ (.46) $ .09 earnings (loss) before cumulative effect of accounting change J (9.42) $ .82 $ 124 lutatrve effect of accounting change $ (.77) $ (.01) $ (.83) earnings (loss) $ (10.19) $ .80 $ .41 led average number of common shares outstanding: c 1,714.4 1,744.0 1,752.8 ted 1,714.4 1,760.7 1,774.8 nds per common share $ 25 $ .12 $ —

See notes to consolidated financial statements.

II-34 VIACOM INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In millions, except per share amounts)

At December 31, 2004 2003 ASSETS Current Assets: Cash and cash equivalents $ 928.2 $ 6173 Receivables, less allowances of $276.7 (2004) and $289.3 (2003) 4,229.3 4,1633 Inventory (Note 6) 996.7 1,003.7 Deferred tax assets, net (Note 11) 215.0 69.0 Prepaid expenses 263.5 233.8 Other current assets 810.1 667.9 Current assets of discontinued operations 50.7 1,013.4 Tbtal current assets 7,493.5 7,768.4 Property and Equipment: Land 754.7 737.1 Buildings 1,002.7 962.9 Capital leases 696.7 503.5 Advertising structures 1.492J 1,482.4 Equipment and other 3,855.4 3,820.6 7,802.0 7,506.5 Less accumulated depreciation and amortization 3,144.9 2,871.4 Net property and equipment 4,657.1 4,635.1 Inventory (Note 6) 4,466.0 4,236.2 Goodwill (Note 3) 38,520.2 54,445.2 Intangibles (Note 3) 10,623.1 123183 Other assets 2,014.5 1,9993 Other assets of discontinued operations 227.9 4,222.8 Total Assets $68,0023 $90,225.5 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 585.5 $ 523.1 Accrued expenses 1,454.7 1,507.6 Accrued compensation 663.5 544.6 Participants' share, residuals and royalties payable 1,296.6 1,162.2 Program rights 849.6 858.7 Deferred income 565.3 558.5 Income taxes payable 172.9 262.6 Current portion of long-term debt (Note 8) 65.8 51.5 Other current liabilities 1,123.6 822.8 Current liabilities of discontinued operations 102,0 1303.1 Tbtal current liabilities 6,879.5 7494.7 Long-term debt (Note 8) 9,649.2 9,608.1 Pension and postretiremen! benefit obligations (Note 12) V43.5 2,132.5 Deferred tax liabilities, net (Note 11) 1,356.7 221.0 Other liabilities 5,230.5 5,706.6 Other liabilities of discontinued operations 607.7 1,130.6 Commitments and contingencies (Note 13) Minority interest 10.9 13.2 Minority interest of discontinued operations 613.8 Stockholders' Equity: Class A Common Stock, par value $.01 per share; 750.0 shares authorized; 133.4 (2004) and 133.7 (2003) shares issued 13 1.3 Class B Common Stock, par value $.01 per share; 10,000.0 shares authorized; 1,737.8 (2004) and 1,730.8 (2003) shares issued 17.4 17.3 Additional paid-in capital 66,027.7 65,8403 Retained earnings (deficit) (14,747.3) 3,141.9 Accumulated other comprehensive loss (Note 1) (356.0) (317.6) Accumulated other comprehensive loss of discontinued operations (33.6) 50,943.1 68,649.6 Less treasury stock, at cost; 1.9 (2004) and 1.4 (2003) Class A shares; and 224.0 (2004) and 12&5 (2003) Class B shares 8,918.8 5,444.6 Tbtal stockholders' equity 42,0243 63,205.0 Tbtal Liabilities and Stockholders' Equity $68,002.3 $90,225.5

See notes to consolidated financial statements.

11-35 VIACOM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (laoullkms)

fear E*M December 31, 2*4 2*3 2*2 (•(Activities: roings(kw) $(17,4622) $1,4165 $ 725.7 «.6 3,497.4 3,124.4 •(Activities: •ulium, net of cash aconred (427.7) (1341-6) (818.0) tal expenditures (415.0) (357.6) (3963) uim m« jo amrf advances to affiliated companies (77.7 i (40.0) (58.8) ial distribution received from Blockbuster 738J 653 463 70.4 •s. net 4.1 9.7 93 ih flow used far kivistiug activities from continuing operations (11Z7) (1,6833) (U93.4) ih Bow from investing activities attributable to Blockbuster (Note 2) (421.0) (179.1) (248.8) * •*"*B^BBBBwT •Mna^V^EVA 4^m^m ^^^^B**^K•ffnfSDBf^ ALUVWA«4£wjwa>^M>Bt (533.7) (1,862.4) (1,4423) •(Activities 7363 13*j^ eeds from exercise of stock options M i 119.6 2453 315.1 tynieuts to banks. "• ^ * "g ujunueicial paper. net (26.1 (162.1) (963.8) ifiueiM of notes and debcutuiu ^803 (765.4) (1,000.7) tent of capital lease obhgations (663 (78.7) (903) base of Company common stock (23033 (945.1) (1,139.0) leads (4152 (104.6) i, net (&8 (6.0) (3^0) ih Bow used for (jninran, activities from continuing operations (258tt4) (1,0802) (1383.6) Ji Bow from R~*nfmg activities attributable 10 Blockbuster (Note 2) (49.0) (3353) (194.6) * Biw BSM Mrftatts)cwj (activitie s (34C9.4) (1,415.7) (1,7783) Tease (decrease) in cash and cash equivalents 773 2193 (96.0) nd cash eqnvalents at h>.iMainf of year (indodes $233.4 (2004), 3 (2003) and $2002 (2002) of Blockbuster cash) 850.7 631.4 727.4 S233.4 (2M3) mt $1523 (2*2) -.^•2-^-«-rfy-(.cl-e, $ 9282 $ 850.7 $ 631.4

See notes to consolidated financial statements.

II-36 VIACOM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) (In millions)

Vear Ended December 31, 2004 2003 2002 Sham Amount Shares Amonnt Shares Amount Class A Common Stock: Balance, beginning of year 133.7 $ 13 1373 J 1.4 138.8 $ 1.4 Conversion of A shares into B shares P) (3.6) (.1) (15) Balance, end of year 133.4 13 133.7 13 1373 1.4 Class B Common Stoeb Balance, beginning of year 1,730.8 17.3 1,716.0 17.1 1,697.0 17.0 Exercise of stock options 6.7 .1 11.2 .1 173 .1 Conversion of A shares into B shares 3 — 3.6 ,1 15 - Balance, end of year 1,737.8 17.4 1,730.8 173 1,716.0 17.1 Additional Paid-in Capital: Balance, beginning of year 65,8403 65,597.8 64,980.6 Exercise of stock options, including tax benefit 170.5 322.6 5262 Reversal of deferred taxes attributable to accelerated stock options from prior acquisitions (3.8) (66.0) Adjustments for stock options and share issuances from prior acquisitions 20.7 Reduction of equity interest in subsidiary and affiliated companies (14.1) (60.6) MTVi acquisition 151.6 Balance, end of year 66,027.7 65,8403 65597.8 Retailed Earnings (deficit): Balance, beginning of year 3,141.9 1,934.0 1,2083 Net earnings (loss) (17.46Z2) 1,416.9 725.7 Dividends (427.0) (209.0) Balance, end of year 04,7473) 3,141.9 1,934.0 Accmanlated Other Comprehensive Loss: Balance, beginning of year (317.6) (496.9) (713) Other comprehensive income .(loss) (38.4} 179.3 (425.6) Balance, end of year (356.0) (317.6) (496.9) Acomralated Other Comprehensive Loss of Discontinued Operations-. Balance, beginning of year (33.6) (83.6) (81-4) Other comprehensive income (loss) from discontinued operations 33.6 50.0 (12) Balance, end of year (33.6) (83.6) — Ireaswy Stock, at cost: Balance, beginning of year 129.9 (5,444.6) 106.7 (4,482.0) 793 (3337.8) Class B Common Stock purchased 68.4 (2529.7) 23.6 (981.4) 27.8 (1,164.1) w Stock received for Blockbuster spirt-off 28.0 (963.0) Issuance of stock for deferred compensation (.4) 185 (.4) 18.8 (.4) 19.9 Balance, end of year 225.9 (8,918.8) 129.9 (5,444.6) 106.7 (4,482.0) Total Stockholders' Equity $ 42,0243 $ 63,205.0 $ 62,487.8

Comprehensive Income (Loss): Net earnings (loss) $(17,46Z2) $ 1,416.9 $ 725.7 Other Comprehensive Income (Lois) from continuing operations, net of lax: Minimum pension liability adjustment (116.6) 48.5 (4913) Cumulative translation adjustments 73.6 122.3 71.6 Change in fair value of cash flow hedges Z4 1.1 2.1 Unrealized gain (loss) on securities 20.6 1.7 (93) Redassification adjustment for net realized (gains) losses (18.4) 5.7 (38.4) 1793 (425.6) Other Comprehensive Income (Loss) from discontinued operations, net of tax and minority interest 33.6 50.0 (2.2) Total Other Comprehensive Income (Loss), net of tax (4.8) 229.3 (427.8) Total Comprehensive Income (Loss) J(17,467.0) S 1,646.2 $ 297.9

See notes to consolidated financial statements. 11-37 VIACOM INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Taboiar dollars in millions, except per share

MMARY OF SIGNIFICANT ACCOUNTING POLICIES rindpla of Consolidation—The consolidated financial statements include the accounts of m Inc. and investments of more than 50% in subsidiaries and other entities ("Viacom" or the pany"). Investments in affiliated companies over which the Company has a significant influence or ship of more than 20% but less than or equal to 50% are accounted for under the equity method, ments of 20% or less over which the Company has no significant influence are accounted for under •st method. All significant intercompany transactions have been etiminated. he Company applies the guidelines set forth in Financial Accounting Standards Board ("FASB") relation No. 46R, "Consolidation of variable Interest Entities, an Interpretation of ARB No. 51" 46R") in assessing its interests in variable interest entities to decide whether to consolidate that The Company has completed its review of potential variable interest entities and determined that are no consolidation requirements under FIN 46R. ectasafications—Certain amounts reported for prior years have been redassified to conform to^ it year's presentation. 'x of Estimates—The preparation of the Company's financial statements in conformity with generally ed accounting principles in the United States requires management to make estimates, judgments sumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets abilities at the date of the financial statements and the reported amount of expenses during the ing period. The Company bases its estimates on historical experience and on various other ptioos that are believed to be reasonable under the circumstances, the results of which form the basis iking judgments about the carrying values of assets and liabilities that are not readily apparent from sources. Actual results may differ from these estimates under different assumptions or conditions. ash and Cash Equivalents—Cash and cash equivalents consist of cash on hand and short-term rities of three months or less at the date of purchase) highly liquid investments. tventories—Inventories related to theatrical and television product (which includes direct production production overhead and acquisition costs) are stated at the lower of amortized cost or net realizable Inventories are amortized, and estimated liabilities for residuals and parddpaaons are accrued, for bvidnal product based on the proportion that current estimated revenues bear to the estinraj ling total lifetime revenues. Estimates for initial domestic syndication and bask cable revenues are duded in the estimated lifetime revenues of network series until such sales are probable. These tes are periodically reviewed and adjustments if any, will result in changes to inventory amortization md estimated accruals for residuals and participations. be Company estimates that approximately 95% of unamortized costs of completed and released it December 31. 2004 wfll be amortized within the next three years. Appioximatery $808.4 million of Hlized costs for completed and released films, and completed but not released films are expected to ortized during the next twelve months. As of December 31.2004, unamortized acquired film libraries roximatery S379.2 million remain to be amortized on a straight-tine basis over an average remaining nine years. •ognan Rights—The Company acquires rights to programming and produces programming to exhibit broadcast and cable networks, and broadcast television and radio stations. The costs incurred in ing and producing programs are capitalized and amortized over the license period or projected

11-38 VIACOM INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Tabular dollars in millions, except per share amounts)

1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES—(Continued) useful life of the programming. Program rights and the related liabilities are recorded at the gross amount of the liabilities when the license period has begun, the cost of the program is determinable, and the program is accepted and available for airing. Property and Equipment—Property and equipment is stated at cost. Depreciation is computed by the straight-line method over estimated useful lives as follows:

Buildings (including capital leases) 20 to 40 years Leasehold improvements 4 to IS years Advertising structures 5 to 20 years Equipment and other (including capital leases) 3 to 20 years fc - Depreciation expense, including capitalized lease amortization, was $665.2 million (2004), $601.9 million (2003) and $571.5 million (2002). Amortization expense related to capital leases was $58.2 million (2004), $43.3 million (2003) and .$57.3 million (2002). Accumulated amortization of capital leases was $252.8 million at December 31, 2004 and $242.4 million at December 31, 2003. Impairment of Long-Lived Assets—The Company assesses long-lived assets and intangibles, other than goodwill and intangible assets with indefinite lives, for impairment whenever there is an indication that the carrying amount of the asset may not be recoverable. Recoverability of these assets is determined by comparing the forecasted undiscounted cash flows generated by those assets to their net carrying value. The amount of impairment loss, if any, will generally be measured by the difference between the net book value of the assets and the estimated fair value of the related assets. Investments in affiliated companies are reviewed for impairment on a quarterly basis by comparing their fair value to their respective carrying amounts each quarter. The Company determines the fair value of its public company investments by reference to their publicly traded stock price. With respect to private company investments, the Company makes its estimate of fair value by considering recent investee equity transactions, discounted cash flow analyses, estimates based on comparable public company operating multiples and in certain situations, balance sheet liquidation values. If the fair value of the investment has \H^ dropped below the carrying amount, management considers several factors when determining whether an other-than-temporary decline in market value has occurred including the length of the time and the extent to which the market value has been below cost, the financial condition and near-term prospects of the issuer, the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value, and other factors influencing the fair market value, such as general market conditions. Goodwill and Intangible Assets—Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards ("SEAS") 142 "Goodwill and Other Intangible Assets" ("SFAS 142"). The Company's intangible assets are considered to have finite or indefinite lives and are allocated to various reporting units, which are generally consistent with or one level below the Company's reportable segments. Intangible assets with finite lives, which primarily consist of leasehold, franchise and subscriber agreements, are generally amortized by the straight-line method over their estimated useful lives, which range from 5 to 40 years and are reviewed for impairment at least annually. Intangible assets with indefinite lives, which consist primarily of FCC licenses, and goodwill are no longer amortized but are tested for impairment on an annual basis and between annual tests if events occur or.circumstances change

II-39 VIACOM INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CoBtined) (latatar dollars u milKnas, except per share

MMARY OF SIGNIFICANT ACCOUNTING POLICIES—

II-40 VIACOM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Tabular dollars in millions, except per share amounts)

1) SUMMARY OF SIGND7ICANT ACCOUNTING POLICD2S—(Continued) agreements; the amount to be paid or received under such agreements would be accrued as interest rates change and recognized over the life of the agreements as an adjustment to interest expense. Foreign Currency Translation and Transactions—The Company's foreign subsidiaries' assets and liabilities are translated at exchange rates in effect at the balance sheet date, while results of operations are translated at average exchange rates for the respective periods. The resulting translation gains or losses, net of tax are included as a separate component of stockholders' equity in accumulated other comprehensive income. Foreign currency transaction gains and losses have been included in "Other items, net" in the Consolidated Statements of Operations. Subsidiary Stock Transactions—Gains or losses arising from issuances by a subsidiary of its own stock are recorded within stockholders' equity. Viacom Investments Inc., a wholly-owned subsidiary of CBS Broadcasting Inc., owned 414.4 million shares of Viacom Class B Common Stock. These shares were originally issued to CBS Broadcasting Inc. in February 2001 as a result of the acquisition by Viacom of the publicly-traded minority equity interest in Infinity Broadcasting Corporation. CBS Broadcasting Inc. contributed all 414.4 million snares to Viacom Investments Inc. in December 2003. In. August 2004, the 414.4 million Viacom Class B shares were exchanged for 4,144,000 shares of Viacom Series D Fully Participating Preferred Stock. These shares are eliminated in consolidation. Provision for Doubtful Accounts—The provision for doubtful accounts charged to expense was $116.1 million (2004), $76.5 million (2003) and $108.7 million (2002). Net Earnings (Loss) per Common Share—Basic earnings (loss) per share ("EPS") is based upon net earnings (loss) divided by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the effect of the assumed exercise of stock options only, in the periods in which such effect would have been dilutive. For the years ended December 31, 2004, 2003 and 2002, respectively, options to purchase 162.4 million, 61.4 million and 452, million shares of Class B Common Stock at weighted average prices of $39.27, $50.99 and $54.48 were outstanding but excluded from the calculation of diluted EPS because their inclusion would have been anti-dilutive. The table below presents a reconciliation of weighted average shares used in the calculation of basic and diluted EPS.

Yemr Ended December 31, 2004 2003 2002 Weighted average shares for basic EPS 1,714.4 1,744.0 1,752.8 Incremental shares for stock options 16.7 22.0 Weighted average shares for diluted EPS 1,714.4 1,760.7 1,774.8

Comprehensive Income (Loss)—As of December 31, 2004, the components of accumulated other comprehensive loss, are net of the following tax (provision) benefits: $379.1 million for minimum pension

11-41 VIACOM INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CoBthraed) CbMar dollars m •Olimu, except per share aawnts)

4MARY OF SIGNIFICANT ACCOUNTING POLICIES—

Accnwblcd Outer

Loss :ember31, 2001 $ (11.8) $(562) $(3.0) $(3) $(81.4) $(152.7) : Activity (4913) 71.6 2.1 (8.0) (22) (427.8) :ember31, 2002 (503.1) 15.4 (9) (83) (83.6) (580.5) • Activity 48.5 1223 1.1 7.4 50.0 229.3 :ember31, 2003 (454.6) 137.7 2 (-9) (33.6) (351.~ (Activity (116.6) 73.6 2,4 22 33.6 =ember 31, 2004 $(5712) $2113 $2.6 $13 $ — $(356.0)

ock-baxd Compensation—The Company foDows the disclosure-only provisions of SFAS No. 123, rating for Stock-Based Compensation" ("SFAS 123"). The Company applies APB Opinion No. 25 rating for Stock Issued to Employees" and, accordingly, does not recognize compensation expense stock option grants because the Company typically does not issue options at exercise prices below t value at date of grant ae foOowing taMe reflects the effect on net earnings (loss) from continuing operations and earnings per share from continuing operations if the Company had applied the fair value recognition oos of SFAS 123 to stock-based employee compensation. These pro forma effects may not be ^ntative of future stock compensation expense since the estimated fair value of stock options on the f grant is amortized to expense over the vesting period and the vesting of certain options was rated on March 8. 2005 (See Recent Pronouncements). See Note 10 for detailed assumptions.

31. 2*0 irnings (loss) from continuing operations $(15,059.5) $2237.8 $2,042*0 i expense, net of tax (3473) (234.7) (182.8) imings (loss) from continuing operations after option expense $(15,406.8) $2,003.1 $1,859.2 iamings (loss) per share: earnings (loss) from continuing operations $ (8.78) $ 1.28 $ 1.16 earnings (loss) from continuing operations after option qpense $ (859) $ 1.15 $ 1.06 d earnings (loss) per share: earnings (loss) from continuing operations $ (8.78) $ 127 $ 1.15 earnings (loss) from continuing operations after option yense $ (8.99) $ 1.14 $ 1.05

IM2 VIACOM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Tabular dollars in millions, except per share amounts)

1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES—(Continued) For the years ended December 31, 2004, 2003 and 2002, if the Company had applied the fair value recognition provision of SFAS 123, an additional expense of $15.2 million, $18.2 million and $17.5 million, respectively, would have been recognized in discontinued operations. Accounting Changes—Effective December 31, 2004, the Company elected early adoption of Emerging Issues Task Force Topic No. D-108 "Use of the Residual Method to Value Acquired Assets Other Than Goodwill" ("D-108"). D-108 requires companies who have applied the residual value method in the valuation of intangible assets for purposes of impairment testing to use the direct value method. As a result of the adoption, the Company recorded a charge of $2.2 billion ($1.3 billion net of tax), or $.77 per share, to reduce the intangible balances attributable to its television stations' FCC licenses. This charge has been reflected as a cumulative effect of accounting change. For 2003, the cumulative effect of accounting change, net of minority interest and tax, of $18.5 million, or $.01 per share, resulted from the adoption of SFAS No. 143 "Accounting for Asset Retirement Obligations." For 2002, the cumulative effect of accounting change of $1.5 billion (net of minority interest of $336.1 million), or $.84 per basic and $.83 per diluted share, resulted from the initial adoption of SFAS 142. The asset retirement obligation was $45.2 million at December 31, 2004. Derivative Instruments and Hedging Activities—SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended ("SFAS 133") requires all derivatives to be recorded on the balance sheet at fair value. SFAS 133 also established rules for hedging instruments which, depending on the nature of the hedge, require that changes in the fair value of the derivatives either be offset against the change in fair value of assets or liabilities through earnings, or be recognized in other comprehensive income until the hedged item is recognized in earnings. Recent Pronouncements—In December 2004, the FASB issued SFAS No. 123 (revised 2004) "Share- Based Payment" ("SFAS 123R"), effective the first interim period or annual reporting period that begins after June 15, 2005. SFAS 123R revises SFAS No. 123 "Accounting for Stock-based Compensation" and supersedes APB Opinion No. 25 "Accounting for Stock Issues to Employees." SFAS 123R requires companies to measure the cost of employee services received in exchange for an award of equity instruments based on grant-date fair value of the award. That cost will be recognized over the vesting period during which an employee is required to provide service in exchange for the award. On March 8,2005, the Compensation Committee of the Board of Directors of the Company approved the acceleration of the vesting of unvested stock options having an exercise price of $38.00 or greater granted under the Company's 2000 and 1997 Long-Term Management Incentive Plans. Stock option awards granted from 1999 through 2004 with respect to approximately 29 million shares of the Company's Class B Common Stock are subject to this acceleration which is effective as of March 8, 2005. Since these options had exercise prices in excess of the current market value and were not fully achieving their original objectives of incentive compensation and employee retention, the Company expects the acceleration to have a positive effect on employee morale, retention and perception of option value. The acceleration also eliminates future compensation expense the Company would otherwise recognize in its Consolidated Statements of Operations once SFAS 123R becomes effective on July 1, 2005.

II-43 VIACOM INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Coatinned) dollars n millions, except per share •••••IT)

CONTINUED OPERATIONS 2004, the Company completed the exchange offer for the spot-off of Blockbuster Inc. kbuster") (NYSE: BBI and BBI.B). Under the terms of the offer, Viacom accepted 27,961,165 of Viacom common stock in exchange for the 144 mflbon common shares of Blockbuster that i owned. Each share of Viacom Class A or Class B Common Stock accepted for exchange by i was exchanged for 5.15 shares of Blockbuster common stock, consisting of 2375 shares of aster dass A common stock and 2375 shares of Blockbuster dass B common stock. ic following table sets forth the Company's net earnings (loss) attributable to Blockbuster, which is led as a discontinued operation:

31. MM 2M3 2M2~~ jes from discontinued operations $ 4328J> $5,911.7 $536r gs (loss) from discontinued operations $(1,404.2) $ (878.8) $ n disposal of discontinued operations (38.2) — — ty interest 259.7 160.0 (55.7) (U82.7) (718.8) 2553 i tax (provision) benefit, net of minority interest 92.4 (83.6) (90.7) filings (loss) from discontinued operations $(1,0903) $ (802.4) $ 164.6

March 2005, Blockbuster announced its intention to restate its previously issued financial ents to reflect appropriate lease accounting practices. Viacom has reflected the cumulative impact of ustment in 2004. This cumulative impact increased both the loss from discontinued operations and ty interest, offset by a corresponding decrease in the loss on disposal of discontinued operations, ig in no impact to Viacom's consolidated 2004 net loss from discontinued operations. The iny*s discontinued operation presentation of Blockbuster in prior years has not been revised to this adjustment due to the immateriality of this amount on the current year or any individual prior consolidated statement of operations or financial position. 2004, the loss from discontinued operations of $1.4 bObon primarily reflects a non-cash i of $13 bflbon for the impairment of goodwill and other long-lived assets in accordance with 142 and SFAS 144. Blockbuster performed an interim impairment test of its goodwill during the third r of 2004 because of factors surrounding Viacom's exchange offer for the split-off of Blockbuster. 2003. the loss from discontinued operations of $878.8 mflbon primarily reflects a non-cash ment charge of $13 bflbon recorded in accordance with SFAS 142. In completing its analysis of the due of the video business, several events led Blockbuster to conclude that the business had cntal risks that were required to be included in the evaluation of goodwill. Additionally, •aster's review of long-lived assets in conjunction with SFAS 144 resulted in an impairment charge of imatery $183 mflbon to reduce the carrying value of certain fixed assets in four international is. These charges were included in loss from discontinued operations for the year ended iber 31. 2003. pon initial adoption of SFAS 142 in 2002, the Company recorded a charge as a cumulative effect of iting change, net of minority interest and tax as the goodwill related to Blockbuster was impaired.

11-44 VIACOM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Tabular dollars in millions, except per share amounts)

2) DISCONTINUED OPERATIONS—(Continued) The estimated fair values of Blockbuster reporting units were computed principally based upon the present value of future cash flows as of the date of adoption. The implied fair value of Blockbuster's goodwill was then compared to its book value resulting in an impairment charge of $1.8 billion in total or $1.5 billion, net of minority interest and tax. The following table presents the major classes of assets and liabilities of Blockbuster:

At December 31, 2003 Current assets (including cash and cash equivalents of $233.4) $ 981.3 Goodwill 2,611.6 Long-term assets 1,266.3 Total Assets $4,859.2 Current liabilities (including current debt of $144.8) $1,276.9 Long-term debt 75.1 Other liabilities 246.5 Total Liabilities $1,598.5

The Company's other discontinued operations primarily include aircraft financing leases that are generally expected to liquidate in accordance with contractual terms. The net liability of the other discontinued operations are $431.1 million at December 31, 2004 and $458.2 million at December 31, 2003 which includes long-term debt of $202.0 million at December 31, 2004 and $201.7 at December 31, 2003. The net cash flow provided by operating activities attributable to Blockbuster of $236.6 million in 2004 reflects Blockbuster activities prior to the completion of the split-off. The net cash flow from investing activities attributable to Blockbuster of $(421.0) million primarily consists of Blockbuster cash and capital expenditures of $221.9 million and $183.6 million, respectively. The net cash flow from financing activities attributable to Blockbuster of $(49.0) million primarily reflects the special distribution of $5 per Blockbuster's common share offset by the proceeds from Blockbuster's new credit facilities.

3) GOODWILL AND OTHER INTANGIBLE ASSETS For the year ended December 31, 2004, the changes in the book value of goodwill by segment were as follows:

Balance at Balance at December 31,2003 Acquisitions Impairment Adjustments^) December 31,2004 Cable Networks $ 8,473.6 $333.6 $ — $ 268.7 $ 9,075.9 Television 13,178.0 73.5 1,309.5 14,561.0 Radio 19,272.6 — (10,914.0—) (14.8) 8,343.8 Outdoor 11,577.5 10.0 (7,0553) 67.9 4,600.1 1,943.5 — (4.1) 1,939.4 Entertainment — Total $54,445.2 $417.1 $(17,969.3) $1,627.2 $38,520.2 (a) Primarily includes purchase price allocations for acquisitions; an adjustment to record goodwill and deferred tax liabilities for certain identifiable intangible assets; foreign currency translation adjustments; and the reversal of tax liabilities established in purchase price accounting that are no longer expected to be incurred. .

11-45 VIACOM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS— {Coatined) doBars im Bullions, except per share urants)

3DWILL AND OTHER INTANGIBLE ASSETS—

BMccBbcr 31, 2M4 Gran jU^LL! Net asebold agreements $ 775.0 $(2753) $ 4993 anchise agreements 4803 (143.8) 336.7 ibscriber agreements 406.5 (235.7) 170.8 ther intangible assets 246.6 (93-5) 153.1 Total $1,908.6 $(7483) $1,160.1

Dniilii 31,IM3 Gna il^LL! Net :aseboM agreements $ 1619 $(220.8) $ 541.1 andrise agreements 494.8 (130.2) 364.6 3723 (1833) 189.0 ther intangible assets 188.4 (62.6) 125.8 Total $1,817.6 $(597.1) $1,2203

K Company rsprrts its aggregate annual amortization expense for intangibk assets subject irtizatton for each of the next five succeeding years to be as foOows:

2M9 mortization expense $145.8 $1413 $120.4 $813 $80.0

•AS 142 requires the Company to perform an annual fair value-based impairment test of goodwill. st step of the test examines whether or not the book value of each of the Company's reporting units s its fair value. If the book vahte for a reporting unit exceeds its fair value, the second step of the test res the implied fair value of that reporting unit's goodwill with the book value of that goodwill. The ur/s reporting units are generally consistent with the operating segments underlying the reportable its identified in Note 14. As a result of the impairment test, the Company recorded an impairment of $18.0 bfllion in (be fourth quarter recorded in the Company's Consolidated Statement of tioos for the year ended December 31. 2004. The $18.0 bflbon reflects charges to reduce the carrying »f goodwill at the Radio segment of $10.9 billion and the Outdoor segment of $7.1 bfllion as weD as a km of the carrying value of intangibles of $27.8 million related to the FCC licenses at the Radio at.

11-46 VIACOM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Tabular dollars in millions, except per share amounts)

3) GOODWILL AND OTHER INTANGIBLE ASSETS—(Continued) The Company performs its impairment test concurrently with its annual budgeting process which begins in the fourth quarter of each year. Several factors have led to a reduction in forecasted cash flows and long-term growth rates for both the Radio and Outdoor segments. Radio and Outdoor fell short of budgeted revenue and operating income growth targets in 2004. Competition from other advertising media, including internet advertising and cable and broadcast television has reduced Radio and Outdoor growth rates. Also, the emergence of new competitors and technologies has necessitated a shift in management's strategy for the Radio and Outdoor businesses, including changes in composition of the sales force and operating management as well as increased levels of investment in marketing and promotion. The estimated fair values of the Radio and Outdoor reporting units were computed principally based upon the present value of future cash flows (Discounted Cash Flow Method) and prices of comparable . w businesses (Market Comparable Method). The discounted Cash Flow Method and Market Comparable Method were weighted equally and resulted in substantially equal fair values. As of December 31, 2004, FCC licenses were valued at approximately $9.4 billion, reflecting a $2.2 billion reduction of the intangible balances attributable to its television stations' FCC licenses due to the adoption of D-108 which requires the application of the direct value method to determine the fair value of assets other than goodwill. At December 31, 2003, FCC licenses were valued at approximately $11.7 billion. FCC licenses were recorded as intangible assets with indefinite lives and were not subject to amortization.

4) SEVERANCE AND OTHER CHARGES In the second quarter of 2004, the Company recorded severance charges of $56.2 million, $33.8 million net of tax, or $.02 per diluted share, due to management changes. The severance charges were recorded in selling, general and administrative expenses in the respective segments: Television $10.4 million, Entertainment $10.4 million and Corporate $35.4 million During the third quarter of 2004, Cable Networks recorded a decrease of $9.7 million to restructuring reserves due to a change in estimate for a 2001 charge at MTV Networks ("MTVN"). In the second ^^ quarter of 2003, restructuring charges of $26.4 million were recorded at Cable Networks. These charges principally reflected $17.7 million of severance liabilities resulting from the acquisition of the remaining 50% of Comedy Central that the Company did not own and organizational changes at Showtime Networks Inc. Also included in this total was $8.4 million for additional lease termination costs for MTVN due to a change in the initial estimate for its 2001 charge. The restructuring charges were reflected in the Consolidated Statement of Operations as part of selling, general and administrative expenses for $23.4 million and operating expenses for $3.0 million for the year ended December 31, 2003. In 2004, MTVN revised its initial estimate of severance liabilities for the acquisition of Comedy Central by $1.6 million. Severance payments will continue through 2005 since certain employees will be paid out over the terms of their employment contracts.

11-47 VIACOM INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CoBtnraed) (Tihaiir doBars u nuIKons, except per share wonts)

FRANCE AND OTHER CHARGES—(Coatimed) le following table summarizes the 2004 activity for the Cable Nctwmks restructuring charges ed above:

At December 31, 2003 $27.2 Severance payments (7-6) Lease payments (3-7) Revision to initial estimate (8.1) At December 31. 2004 $ 7.8 HJismoNS August 2004, the Company acquired 75.8% of VIVA Media AG for $306.9 mfltion. Pursuant to - offer, the Company subsequently purchased additional shares of VTVA Media AG, raising «^/ in/* total ownership to 97.8% for a total purchase price of $393.6 million. VIVA Media AG's results ;en included as pan of Cable Networks since the date of acquisition. The allocation of the purchase i pending a final evaluation of the fair value of VIVA Media AG's assets acquired and liabilities *L a December 30,2004 the Company acquired a 10% interest in Spanish Broadcasting System, Inc., in ge for a San Francisco radio station. In addition to the 10% interest, the Company received is that would allow the Company to increase its equity stake by an additional 5%. i May 22, 2003, the Company acquired the remaining 50% interest in Comedy Central that it did not r $12 biDioa in cash. Comedy Centrafs results have been consolidated as part of Cable Networks, •e from the dale of acquisition. The excess purchase price over the fair value of the tangible and able intangible net assets acquired of approximately $1.0 bflbon was allocated to goodwill and other bles. The final allocation of the purchase price was based on comprehensive evaluations of the fair 4 Comedy Centrafs assets acquired and liabilities assumed. a May 15, 2002, the Company acquired the assets of KCAL-TV Los Angeles for approximately liffion. During 2002, the Company also acquired the remaining 50% interest in Noggin, the 24-ho network for kids that it did not already own for approximately $100 nulboa.

11-48 VIACOM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Tabular dollars in millions, except per share amounts)

6) INVENTORY

At December 31, 2004 2003 Theatrical: Released (including acquired film libraries) $ 682.9 $ 629.4 Completed, not released 66.0 60.4 In process and other 361.1 399:9 Television: Released (including acquired film libraries) 681.8 845.0 In process and other 98.4 76.9 Program rights 3,377.1 3,051.8 Merchandise inventory 76.2 54.9 Publishing, primarily finished goods 65.6 64.2 Other 53.6 57.4 Total Inventory 5,462.7 5,239.9 Less current portion 996.7 1,003.7 Total Non-Current Inventory $4,466.0 $4,236.2

7) INVESTMENTS IN AFFILIATED COMPANIES The Company accounts for its investments in affiliated companies over which the Company has significant influence or ownership of more than 20% but less than or equal to 50%, under the equity method. Such investments principally include but are not limited to the Company's interest in United International Pictures (50% owned), Nickelodeon U.K. (50% owned), MTV Brazil (30% owned), MTV Russia (49% owned), MTV Japan (36% owned), WF Cinema Holding L.P. (50% owned), Granman's Theatres LLC (50% owned), Quetzal (34% owned) and MarketWatch.com, Inc. (22% owned). Additionally, the Company owns approximately 17% in Westwood One, Inc. ("Westwood One"), which is treated as an equity investment. Certain employees of Infinity serve as officers of Westwood One resulting in significant influence over its operations. For equity investments, a difference typically exists between the initial investment and the proportionate share in the underlying net assets of the investee. The unamortized difference was $83.8 million and $92.8 million at December 31, 2004 and 2003, respectively. At December 31, 2004 and 2003, the Company's equity investments included two publicly traded companies: MarketWatch.com, Inc., and Westwood One. At December 31, 2003, the Company's equity investments also included a 40% interest in SportsLine.com, Inc. ("SportsLJne.com"). During the fourth quarter of 2004, the Company acquired the remaining interest in SportsLine.com that it did not own for $67.7 million including Sportsline.com's outstanding debt. SportsLine.com's results have been consolidated as part of the Television segment effective from the date of acquisition. Based upon quoted market prices at December 31, 2004 and December 31, 2003, respectively, the aggregate market value of these investments was approximately $532.3 million and $617.4 million which exceeded the total carrying value on the Consolidated Balance Sheet. At the date of acquisition, for cost and equity investments in Internet-based companies, the Company typically records the investment at an amount equal to the cash consideration paid plus the fair value of the advertising and promotion time to be provided. The associated obligation

II-49 VIACOM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Tibniir dollars in millions, except per share wonts)

ESTMENTS IN AFFILIATED COMPANIES—(Confined) km time is non-cash and is recorded as deferred revenue at an amount equal to the fair value of the ang and promotion time to be provided. The related 2004 and 2003 deferred revenue balance of Dion and S13.7 mfllioa, respectively, is presented as "Deferred income" and "Other liabilities" in isobdated Balance Sheets. Deferred revenue is relieved and barter revenue is recognized as the advertising and promotion time is delivered. Barter revenue of S22.5 mfltion and $33.1 million has cognized for 2004 and 2003, respectively. December 31, 2004 and 2003, respectrvery, the Company had $93.2 million and $10.8 million,of estments that are included as a component of "Other assets" in the Consolidated Balance Sheets. O4 mark-to-market adjustments in fair value for the pubbdy traded cost investments were Ibon, net of tax and were recorded as a decrease in accumulated other comprehensive loss.

.Parties tiooal Amusements, Inc. ("NAJ") is a dosery held corporation that beneficially owned Classy in Stock of the Company representing approximately 71% of the voting power of all classes of the ny's Common Stock, and approximately 12% of the Company's Class A Common Stock and Class B » Stock on a combined basis at December 31, 2004. Owners of the Company's Class A Common re entitled to one vote per share. The Company's Class B Common Stock does not have voting NAJ is not subject to the reporting requirements of the Securities Exchange Act of 1934, as xL Stunner M. Redstone, the controlling shareholder of NAJ, is the Chairman of the Board of *s and Chief Executive Officer of the Company. On October 28, 2004, the Company entered into xmeat (the "NAIRI Agreement") with NAJ and NAIRI, Inc. ("NAIRT), a wholly-owned uy of NAJ. pursuant to which the Company agreed to buy, and NAJ and NAIRI agreed to sell, a • of shares of Viacom Class B Common Stock each month such that the ownership percentage of i Class A Common Stock and Class B Common Stock (considered as a single class) held by NAI NAIRI would not increase as a result of purchases of shares of Viacom Common Stock under the ny's $8.0 bilbon stock purchase program announced in October 2004. Pursuant to this agreement, i recorded the purchase of 63 million shares of Viacom Class B Common Stock from NAIRI for mObon in 2004. VI licenses films in the ordinary course of business for its motion picture theaters from all ma including Paramount Pictures. During the years ended December 31, 2004, 2003 and 2002, jayments to Paramount Pictures in the aggregate amounts of approximately $11.2 million, ffion and $123 mflbon, respectively. \1 and Mr. Redstone owned in the aggregate approximately 75% of the common stock of Midway Inc. ("Midway") as of December 31, 2004. Midway places advertisements on various of the ny's cable networks from time to time. During the years ended December 31, 2004, 2003 and 2002, tions with Midway totaled approximately $53 million, $1.4 million and $2.0 million, respectively. Kt of Infinity's radio stations are affiliated with Westwood One, and Wesrwood One distributes Oy certain of the Company's radio programming. In connection with these arrangements, the ny receives affiliation fees as well as programming cost reimbursements and in certain instances, in revenue from the sale by Wesrwood One of Infinity's programming. In addition, certain ees of Infinity serve as officers of Wesrwood One for which the Company receives a management tS Television and Cable Networks also enter into programming agreements with Westwood One.

11-50 VIACOM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Tabular dollars in millions, except per share amounts)

7) INVESTMENTS IN AFFILIATED COMPAMES—(Continued) Revenues from these arrangements were approximately $86.9 million, $85.5 million and $127.7 million in 2004, 2003 and 2002, respectively. The Company, through the normal course of business, is involved in transactions with other affiliated companies that have not been material in any of the periods presented. 8) BANK FINANCING AND DEBT Long-term debt consists of the following (a):

At December 31, 2004 2003 Notes payable to banks $ 5.9 $ 107.2 Commercial paper — 20.0 7.15% Senior Notes due 2005 500.0 499.6 7.75% Senior Notes due 2005 952.5 980.2 6.40% Senior Notes due 2006 800.6 802.2 5.625% Senior Notes due 2007 725.0 750.9 7.70% Senior Notes due 2010 1,666.9 1,669.9 6.625% Senior Notes due 2011 995.5 994.7 8.625% Debentures due 2012 248.7 248.6 5.625% Senior Notes due 2012 599.3 599.2 8.875% Notes due 2014 101.8 101.9 7.625% Senior Debentures due 2016 199.2 199.1 4.625% Senior Notes due 2018 288.6 284.0 7.875% Debentures due 2023 229.0 229.0 7.125% Senior Notes due 2023 (b) 52.2 52.2 7.875% Senior Debentures due 2030 1,280.5 1,281.7 5 .50% Senior Debentures due 2033 446.6 446.5 7.25% Senior Notes due 2051 335.0 335.0 10.50% Senior Subordinated Notes due 2009 — 663 Other notes 17.9 26.0 Obligations under capita] leases 471.8 387.0 Total debt 9,917.0 10,0812 Less Blockbuster debt (Note 2) — 219.9 Less other discontinued operations debt (Note 2) 202.0 201.7 Less current portion 65.8 51.5 Total long-term debt from continuing operations, net of current portion $9,649.2 $9,608.1 (a) Unless otherwise noted, the long-term debt instruments are issuances of Viacom Inc. and are guaranteed by Viacom International Inc. ("Viacom International"). (b) Issue of CBS Broadcasting Inc., a wholly owned subsidiary of Viacom Inc., which is not guaranteed. The Company's total debt included, as of December 31, 2004 and December 31, 2003, respectively, (i) an aggregate unamortized premium of $35.3 million and $41.4 million and (ii) the net change in the carrying value of the debt relating to fair value swaps of $17.4 million and $48.2 million.

II-51 VIACOM INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—••! i)

K FINANCING AND DEBT—

ly 14, 2003, $300.0 minion 4.625% senior notes due 2018 ly 14, 2003, $450.0 million 530% senior debentures due 2033 crest on the above debt instruments is paid semi-annuauy.

Member 1. 2003, 6.875% notes, $275.0 million mary 15, 2003. 6.75% senior notes, $333.8 million

y 15, 2004, all of the outstanding Go Outdoor Systems Holdings Sj\ 10.50% senior subordinated MMes doe 2009 at 10525% of principal y 15, 2003, $150.0 million 730% senior debentures due 2023 at 103.6% of principal r the years ended December 31, 2004 and 2003, the Company repurchased approximately iQIion and $1.0 million of its debt, respectively. ring 2004, the Company acquired SportsLine.com, which had outstanding $16.9 million 5% Me subordinated notes due 2006. These notes were redeemed in January 2005. e Company's scheduled maturities of long-term debt at face value, excluding commercial paper and leases, outstanding at December 31. 2004 were as follows:

2009 tbcrofttr ^^^^ ng-tenndebt $1.453.1 $818.7 $700.4 $.4 $.1 $6,419.8

Onfif Agnema* of December 31, 2004, the Company's credit faculties totaled $43 bflbon comprised of a boo revolving facility due February 2009 and a $13 bOtion revolving faculty due March 2006 ively, the "Credit Facilities"). The Company, at its option, may also borrow in certain foreign ies up to specified limits under the $3.0 bfllion and $13 bflfion facilities. Borrowing rates under the s are determined at the Company's option at the time of each borrowing and are based generally on DC rate in the United States or the London Interbank Offer Rate ("LffiOR") phis a margin based Company's senior unsecured debt rating. The Company pays a facflhy fee based on the total of the commitments. As of December 31. 2004, the Company had unused revolving credit facilities ' billion in the aggregate.

II-52 VIACOM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Tabular dollars in millions, except per share amounts)

8) BANK FINANCING AND DEBT—(Continued) The facilities contain covenants, which, among other things, require that the Company maintain a minimum interest coverage ratio. At December 31, 2004, the Company was in compliance with all covenants under the Credit Facilities. The primary purpose of the credit facilities is to support commercial paper borrowings. At December 31, 2004, the Company had no commercial paper borrowings under its $4.5 billion commercial paper program. At December 31, 2004, the Company had classified as long-term debt approximately $1.38 billion of other debt scheduled to mature within the next twelve months, reflecting its intent and ability, through the existence of unused revolving credit facilities, to refinance this debt on a long-term basis.

Accounts Receivable Securitization Programs As of December 31, 2004 and December 31, 2003, the Company had an aggregate of $1.0 billion outstanding under revolving receivable securitization programs. The programs result in the sale of receivables on a non-recourse basis to unrelated third parties on a one-year renewable basis, thereby reducing accounts receivable and debt on the Company's Consolidated Balance Sheets. The Company enters into these arrangements because they provide an additional source of liquidity. Proceeds from the programs were used to reduce outstanding borrowings. The terms of the revolving securitization arrangements require that the receivable pools subject to the programs meet certain performance ratios. As of December 31, 2004, the Company was in compliance with the required ratios under the receivable securitization programs.

9) FINANCIAL INSTRUMENTS The Company's carrying value of financial instruments approximates fair value, except for differences with respect to the notes and debentures and certain differences related to other financial instruments that are not significant. At December 31, 2004, the carrying value of the senior debt and senior subordinated debt was $9.4 billion and the fair value, which is estimated based on quoted market prices and includes accrued interest, was $10.9 billion. The Company uses derivative financial instruments to modify its exposure to market risks from changes in foreign exchange rates and interest rates. The Company does not hold or enter into financial instruments for speculative trading purposes. The foreign exchange hedging instruments used are spot, forward and option contracts. The foreign exchange contracts have principally been used to hedge the British Pound, the Australian Dollar, the Japanese Yen, the Canadian Dollar, the Singapore Dollar and the Euro. The Company designates forward contracts used to hedge future production costs as cash flow hedges. Additionally, the Company enters into non-designated forward contracts to hedge non-dollar denominated cash flows and foreign currency balances. The changes in fair value of the non-designated contracts are included in current period earnings as part of "Other items, net." The Company's interest expense is exposed to movements in short-term rates. Swap agreements may be used to modify this exposure. The Company has entered into fixed to variable rate swaps, which are designated as fair value hedges. As of December 31, 2004, if all parties were to agree, the swaps could have been terminated by a net payment by the counterparties of approximately $23.1 million.

H-53 VIACOM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS— {Continued) (Tabular dollars ia millions, except per share iam«»tT)

9) FINANCIAL INSTRUMENTS—

!•) STOCKHOLDERS' EQUITY Slock Purchase Program — On October 28, 2004, the Company announced a new stock purchase program under which the Company is authorized to acquire from time to time up to $8.0 billion in Viacom Class A Common Slock and non-voting Class B Common Stock. The program succeeded and replaced the Company's $3.0 bilhon stock purchase program announced in 2002. NAIR1 and NAI, each doseh/ held corporations controlled by Sumner M Redstone. Chairman of the Board of Directors and Chief Executive

11-54 VIACOM INC. AND SUBSIDIARIES NOTES TO CONSOUDATED FINANCIAL STATEMENTS— (Continued) (Tabular dollars in millions, except per share amounts)

10) STOCKHOLDERS' EQUITY— (Continued) Officer of the Company, have entered into an agreement with the Company to participate in the program on a pro-rata basis. The agreement, which has been approved by an independent committee of 'Viacom directors, will prevent the buyback from increasing NAIRI's economic interest in Viacom. NAI, through its wholly owned subsidiary, NAIRI, beneficially owns Viacom's Class A Common Stock representing approximately 71% of the voting power of all classes of the Company's Common Stock and approximately 12% of Viacom's Class A and Class B Common Stock on a combined basis at December 31, 2004 (See Note 7). Under its stock purchase programs, the Company purchased shares of its Class B Common Stock for each of the years as follows: 68.4 million shares for $2.5 billion (2004), 23.6 million shares for $981.4 million (2003) and 27.8 million shares for $1.2 billion (2002). During the first three quarters of 2004, Viacom declared a quarterly cash dividend of $.06 per share on Viacom Class A and Class B Common Stock. During the fourth quarter of 2004, the Company declared a quarterly cash dividend of $.07 per share on Viacom- Class A and Class B Common Stock. During the third and fourth quarters of 2003, Viacom declared a quarterly cash dividend of $.06 per share. Conversion Rights — Holders of Viacom Class A Common Stock have the right to convert their shares to Class B Common Stock at any time. Conversions of Class A shares into B shares for the years ended December 31, 2004, 2003 and 2002 were .3 million, 3.6 million and 1.5 million shares, respectively. Long-Term Incentive Plans — The Company has Long-Term Incentive Plans (the "Plans") under which options were issued: the Viacom Long-Term Management Incentive Plans (the "Viacom Plans"), the Infinity Long-Term Incentive Plans (the "Infinity Plans") and the CBS Long-Term Incentive Plans (the "CBS Plans"). Options under the Infinity Plans and CBS Plans generally vest over a three-year period and expire ten years from the date of grant. These converted options still maintain their original terms and conditions. Warrants to purchase 135,420 shares of Viacom Class B Common Stock were outstanding at December 31, 2004. The warrants, which were assumed in the Viacom/CBS merger, have no expiration date and an exercise price of zero. Viacom Plans — The purpose of the Viacom Plans is to benefit and advance the interests of the Company by rewarding certain employees for their contributions to the financial success of the Company and thereby motivating them to continue to make such contributions in the future. The Viacom Plans provide for awards of stock options, stock appreciation rights, restricted and unrestricted shares, restricted share units, phantom shares, dividend equivalents, performance awards and other equity-related awards and cash payments. The stock options generally vest over a three-to five-year period from the date of grant and expire ten years after the date of grant. The Company has reserved a total of 162,555,244 shares of Viacom Inc. Class B Common Stock for future exercise of stock options and warrants outstanding as of December 31, 2004. The stock options available for future grant under the Viacom Plans were as follows:

At December 31, 2002 67,879,728 At December 31, 2003 36,023,644 At December 31, 2004 137,972,312

II-55 VIACOM INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—{Coatiaved) (Tabular dollars ia aullioBS, except per share ••naali)

!•) STOCKHOLDERS' EQUITY—{Cootiaaed) The weighted-average fair value of each option as of the grant date was $17.95, $18.49 and $20.04 in 2004, 2003 and 2002, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scboks option-pricing model with the following weighted-average assumptions:

MM am 2>K~ Expected dividend yield (a) .61% 35% — Expected stock price volatility 38-88% 3934% 37.03% Risk-free interest rate 4.09% 338% 5.00% Expected life of options (years) 73 6.8 6.7

(a) The <~"-a|nnj did not declare any cask dividends oo its common Hock far 2002. The following table summarizes the Company's stock activity under the Viacom Plans:

OytiBBf OBtrtBKMBBf EUfQSt PnCC Balance at December 31. 2001 137,483371 $34 JO Granted 22,452448 4224 Fini nrtl (1736U61) 17.91 Canceled (34W8396) 49.63 Halinrr at December 31, 2002 138385^62 37.13 Graoted 23,759^56 39 .57 Eieicaed (1U70.461) 22.01 Canceled (3^65398) 45J5 Balance at December 31. 2003 147,408^59 38.47 Granted 28^95,741 3932 Eicif iicd (6,738^20) 17.74 Canceled (6446456) 43.67 Balance at December 31. 2004 162,419^24 $39.27

11-56 VIACOM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Tabular dollars in millions, except per share amounts)

10) STOCKHOLDERS' EQUITY—(Continued) The following table summarizes information concerning outstanding and exercisable stock options under the Plans at December 31, 2004:

Outstanding Exerdsable Remaining Anfeignteil" Range of Number Contractual Average Number Weighted-Average Eiereise Price of Options Life (Years) Exercise Price of Options Exercise Price $ 2 to 9.99 1,118,554 .55 $ 5.87 1,118,554 $ 5.87 10 to 19.99 14,822,686 1.85 $16.26 14,822,686 $16.26 20 to 29.99 13,470,699 1.72 $23.11 13,470,699 $23.11 30 to 39.99 53,275,905 6.79 $37.09 26351,597 $35.49 40 to 49.99 45,262,483 6,73 $4238 21,701,485 $43.21 50 to 59.99 33,460,277 5.20 $55.47 29,074,253 $55,56 60 to 69.99 548,420 5.44 $66.89 548,420 $66.89 70.00 460,800 5.48 $70.00 460,800 $70.00 162,419,824 107,548,494

Stock options exercisable at year end were as follows:

December 31, 2002 83,730,249 December 31, 2003 93,495,428 December 31, 2004 107,548,494

11) INCOME TAXES U.S. and foreign earnings (losses) before income taxes are as follows:

Year Ended December 31, 2004 2003 2002 United States $(14,055.8) $3,497.0 $3,099.5 Foreign 400.8 242.4 321.4 Total $(13,655.0) $3,739.4 $3.420.9

II-57 VIACOM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS— (Continued) dettan u BulBou, except per share ••nmtr)

11) INCOME Components of toe provision for income taxes on earnings (losses) before income taxes are as follows:

tear EMM Dcccaktr 31. 2M4 2M3 2M2 Current: Federal $ 862.7 $ 692.8 $ 482.6 State and local 190.0 195.6 261.2 Foreign 71.8 67.5 43.0 1,124.5 955.9 786.8 Deferred 254.1 541.1 550 Provision for income taxes $1378.6 $1,497.0 $13383

The equity losses of affiliated companies are shown net of tax on the Company's Consolida. Statements of Operations. The tax (provision) benefit relating to losses from equity investments in 2003, and 2002 were ($19.1) million, ($27.0) million, and ($142) million, respectively, which represented an effective tax rate of (1,100.1%), 100.8%, and (64.9%), respectively. The 2004 cumulative effect of accounting change of $1,312.4 mflbon was net of tax benefit of $871J miDion. For 2003 the cumulative effect of accounting change of $18-5 mflbon was presented net of a tax benefit of $11.5 miDion and net of minority interest The 2002 cumulative effect of accounting change of $13 bObon was net of minority interest and reflected no tax benefit

II-58 VIACOM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Tabular dollars in millions, except per share amounts)

11) INCOME TAXES—(Continued) :, , f . In 2004 and 2003, respectively, $50.7 million* and $77.1 million of income tax benefit was recorded as a component of stockholders' equity as a result of exercised stock options. The difference between income taxes as expected at the U.S. federal statutory income tax rate of 35% and income taxes provided on earnings are summarized as follows:

Year Ended December 31, 2004 2003 2002 Taxes on income at U.S. federal statutory rate $(4,779.2) $1,308.7 $1,197.3 State and local taxes, net of federal tax benefit (661.8) 163.8 197.6 Effect of foreign operations (873) (253) (147.4) Impairment charge 7,0663 — — Audit settlements (205.4) — — Realization of additional stock basis (31.0) - - Other, net 77.0 49.8 90.8 Total income taxes $1,378.6 ,$1,497.0 $1,338.3 The following is a summary of the components of the deferred tax accounts:

Yew Ended December 31, 2004 2003 ' Deferred tax assets: Provision for expense and losses $ 1,847.9 $ 1,109.1 Postretirement and other employee benefits . 924.5 827.7 lax credit and loss carryforwards 2603 138.4 Other 156.9 212.2 Total deferred tax assets 3,189.6 2^87.4 Valuation allowance (208.4) (57.8) Net deferred tax assets $2,981.2 $ 2,229.6 Deferred tax liabilities: Property, equipment and intangible assets $(4,122.9) $(2381.6) Lease portfolio (240.4) (264.4) Total deferred tax liabilities $(43633) $(2,646.0) Deferred tax liabilities, net $(1,382.1) $ (416.4) At December 31, 2004 and 2003, respectively, the Company had net current deferred tax assets of $215.0 million and $69.0 million. At December 31, 2004 and 2003, respectively, the Company had non-current deferred income tax liabilities of $1,597.1 million and $485.4 million. In 2004, deferred tax liabilities increased principally as a result of the recognition of the deferred tax impact associated with certain identifiable intangible assets. The Company included in "Other liabilities of discontinued operations" in 2004 and 2003, respectively, non-current deferred income tax liabilities of $240.4 million and $264.4 million, for its retained liabilities of discontinued business.

11-59 VIACOM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CoBtnraed) dollars in milKoas, except per share

11) INCOME TAXES—

12) PENSION AND OTHER POSTRETIREMENT BENEFITS The Company and certain of its subsidiaries have principally non-contributory pension plans covering specific groups of employees. The benefits for certain plans are based primarily on an employee's years of service and average pay near retirement. Benefits under other plans are based primarily on an employee's pay for each year that the employee participates in the plan. Participating employees are vested in the plans after five years of service. The Company's policy for afl pension plans is to fund amounts in accordance with the Employee Retirement Income Security Act of 1974, the Internal Revenue code of 1966 and the applicable rules and regulations. Plan assets consist principally of equity securities, marketable bonds and U.S. government securities. The Company's Class B Common Stock represents approximatery 2J% and 4.8% of the plan assets' fair values at December 31, 2004 and 2003, respectiveh In addition, the Company sponsors health and welfare plans that provide certain postretirement hearth care and life insurance benefits to retired employees and their covered dependents. Retiring employees are eligible for these benefits if they meet certain age and service requirements at the time of their retirement. Most of the plans are contributory and contain cost-sharing features such as deductibles and coinsurance which are adjusted annually. Claims are paid either through certain trusts funded by the Company or by the Company's own funds

11-60 VIACOM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Tabular dollars in millions, except per share amounts)

12) PENSION AND OTHER POSTRETIREMENT BENEFITS—{Continued) The Company uses a December 31 measurement date for all pension-and other postretiremen! benefit plans. The following table sets forth the change in benefit obligation for the Company's benefit plans:

Postretiremen! Pension Benefits Benefits At December 31, 2004 2003 2004 2003 Change in benefit obligation: Benefit obligation, beginning of year $5,693.2 $5,577.0 $1,250.6 $1,291.9 Service cost 62.5 58.2 2.9 2.6 Interest cost 324.9 345.6 72.1 803 Actuarial loss/(gain) 262.4 191.3 12.4 .(323) Benefits paid (492.8) (521.3) (93.1) (103.9) Business combinations 8.0 3.9 Participants' contributions .2 .2 14.5 10.2 Amendments 2.0 Cumulative translation adjustments 18.7 38.3 — — Benefit obligation, end of year $5,877.1 $5,693.2 $1,259.4 $1,250.6 The following table sets forth the change in plan assets for the Company's benefit plans:

Postrttirement Pension Benefits Benefits At December 31, 2004 2003 2004 2003 Change in plan assets: Fair value of plan assets, beginning of year $4,466.4 $4,248.9 $96.0 $ 32.6 Actual return on plan assets 305-.8 531.8 8 4 Employer contributions 203.0 167.1 80.3 156.7 Benefits paid (492.8) (521.3) (93.1) (103.9) Business combinations 5.5 1.4 Participants' contributions .2 .2 10.2 Cumulative translation adjustments 17.2" 38.3 Fair value of plan assets, end of year $4,505.3 $4,466.4 $98.5 $ 96.0

II-61 VIACOM INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Coatined) (Tabular d*0ars is miltioas, except per share aaMuts)

12) PENSION AND OTHER POSTRET1REMENT BENEFITS—(Cialhwd) The accrued pension and postretiicmenl costs recognized in the Company's Consolidated Balance Sheets were computed as follows:

Benefits 31. 2M3 2N3 Funded status $(1,371.8) $(1,226.8) $(1,160.9) $(1,154.6) Unrecognized transition obligation 1.2 1.5 — — Unrecognized prior service cost (benefit) 12.1 13.4 (4.6) (5.4) Unrecognized actuarial loss 1,106.6 884.0 156.9 146.5 Accrued pension liability $ (251.9) $ (327.9) $(1,008.6) $(1,013.5) Aaworts recognized n the Consolidated Balance Sheets: Accrued liability $(1,234.9) $(1,119.0) $(1,008.6) $(1,013^ Prepaid benefits cost 17.2 173 — — Intangible assets 15J 17.0 — — Accumulated other comprehensive pre-tax toss(l) 950J 756.8 — — Net nabihty recognized $ (251.9) $ (327.9) $(1,008.6) $(1,013.5)

(I) Reflects a i : of S193.S miBioa in 2004 and a i i babfttv decrease of $88.7 minion in 2003. The accumulated benefit obligation for an defined pension plans was $5,710.2 million and $5.549.4 motion at December 31, 2004 and 2003. respectively. Information for pension plans with an accumulated benefit obligation in excess of plan assets is set forth below:

2M3 Projected benefit obligation $5,791.2 $5,612.4 Accumulated benefit obligation $5,630.0 $5,4733 Fair value of plan assets $4,400.9 $43663 Net periodic cost for the Company's pension and postretirement benefit plans consists of the following:

PB.omiinM.•i Ft•siMBcBefiIs Bcwfits Al ITliiMtii 11. 2*M 2M3 2M2 2*M 2M3 20*2 CoaEpoBcats of act periodic cost Service cost $ 625 $ 58J2 $ 502 $ 2.9 $ 2.6 $ 2.4 Interest cost 324.9 345.6 347.6 72.1 803 82.2 Expected return on plan assets (297.8) (295.4) (354.7) (1.0) (2-0) (2-5) _2 — Amortization of transition obligation (.6) (-7) — — Amortization of prior service cost 1.6 1.6 1.1 (.8) (1.1) (12) Recognized actuarial loss (gain) 36.9 46.1 5.6 22 53 (.6) Net periodic cost $ 1283 $J555 $ 49.1 $75.4 $85.1 $803

11-62 VIACOM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Tabular dollars in millions, except per share amounts)

12) PENSION AND OTHER POSTRETIREMENT BENEFITS—(Continued)

Pension PostretireBent Benefits Benefits 2004 2003 2004 2003 Weighted-average assumptions used to determine benefit obligations at December 31: Discount rate 5.7% 6.0% 5.8% 6.0% Rate of compensation increase 3.5% 35% N/A N/A Weighted-average assumptions used to determine net periodic cost for years ended December 31: Discount rate 6.0% 6.5% 6.0% 6.5% Expected long-term return on plan assets 7.0% 7.3% 2.0% 8.0% V Rate of compensation increase 3.5% 4.0% N/A N/A N/A—not applicable The expected long-term returns on plan assets were based upon the target asset allocation and return estimates for equity and debt securities. The expected rate of return for equities was based upon the risk-free rate plus a premium for equity securities. The expected return on debt securities was based upon an analysis of current and historical yields on portfolios of similar quality and duration. The following assumptions were also used in accounting for postretirement benefits:

2004 2003 Projected health care cost trend rate for participants of age 65 and below 9.0% 8.0% • Projected health care cost trend rate for participants above age 65 10.0% 95% Ultimate trend rate 5.0% 5.0% Year ultimate trend rate is achieved for participants of age 65 and below 2013 2010 Year ultimate trend rate is achieved for participants above age 65 2015 2013 Assumed health care cost trend rates could have a significant effect on the amounts reported for the postretirement health care plan. A one percentage point change in assumed health care cost trend rates would have the following effects:

One Percentage Point One Percentage Increase Point Decrease Effect on total of service and interest cost components $ 3.6 $ (3.3) Effect on the accumulated postretirement benefit obligation $61.6 $(55.4)

11-63 VIACOM INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Coatimed) dollars in millions, except per share anwots)

12) PENSION AND OTHER POSTRETIREMENT BENEFITS—(Cimhwil) The asset allocations for the Company's retirement benefit trusts for the qualified pension benefit plans are based upon an analysis of the timing and amount of projected benefit payments, the expected returns and risk of the asset dasses and the correlation of those returns. The Company's largest retirement benefit trust, which accounted for 74% of assets at December 31,2004 is invested approximately 78% in a diversified portfolio of high quality fixed income instruments with a duration that approximates the duration of the liabilities covered by that trust. The Company's other trusts are invested approximately 57% in equity securities with the balance in fixed income securities, including cash. AD equity portfolios are diversified between U.S and non-U.S. equities and include small and large capitalization equities. The percentage of asset allocations of the Company's pension plans at December 31, 2004 and 2003, by asset category were as foOows;

Anctsat Dinaftif 31, Equity securities 31.1% 303% Debt securities 61.7 64.8 Cash and other 12 4.9 Total 100.0% 100.0%

At December 31, 2003, the asset allocations by asset category include only domestic pension plans. The percentage of asset allocations of the Company's other posuetiiement benefit plans at December 31, 2004 and 2003 were 95.4% in cash and 4.6% in securities.

The estimated future benefit payments are as follows:

2MS 2Mf 2M7 2MB 2M9 2M9-2M4 Pension $4962 $488.7 $483.0 $473.6 $466.6 $2,153.6 Postretirement $107.9 $1105 $112.0 $112.0 $1113 $ 519.1

The Company expects to contribute $50 million to the pension plans and $6 mObon to its other postxetirement benefit plans in 2005. The Company contributes to multi-employer plans that provide pension and health and welfare benefits to certain employees under collective bargaining agreements. The contributions to these plans were $61.4 million (2004) and S57.9 million (2003). In addition, the Company has defined contribution plans for the benefit of substantially all employees meeting certain eligibility requirements. Employer contributions to such plans were $54.1 million, $48.6 million and $423 nulbon for the years ended December 31, 2004, 2003 and 2002, respectively.

13) COMMITMENTS AND CONTINGENCIES The Company's commitments not recorded on the balance sheet primarily consist of programming and talent commitments, operating lease arrangements, purchase obligations for goods and services and

11-64 VIACOM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Tabular dollars in millions, except per share amounts)

13) COMMITMENTS AND CONTINGENCIES—(Continued) v guaranteed minimum franchise payments. These arrangements result from the Company's normal course of business and represent obligations that are payable over several years. Programming and talent commitments of the Company, estimated to aggregate approximately $16.1 billion as of December 31, 2004, included $10.9 billion for the acquisition of sports programming rights, $3.7 billion relating tp television, radio and feature film production and acquisitions and $1.0 billion for talent contracts. A majority of such fees are payable over several years, as part of the normal course of business. The Company has long-term noncancelable operating lease commitments for office space and equipment, transponders, studio facilities and vehicles. The Company also enters into capital leases for satellite transponders. At December 31,2004, future operating leases payments are estimated to aggregate $2.9 billion. The Company also has purchase obligations which include agreements to purchase goods or services in the future that totaled $413.2 million as of December 31, 2004. Viacom's outdoor advertising business has franchise rights entitling it to display advertising on media including billboards, transit shelters, buses, rail systems (in-car, station platforms and terminals), mall kiosks and stadium signage. Under most of these franchise agreements, the franchiser is entitled to receive the greater of a percentage of the relevant advertising revenues, net of advertising agency fees, or a specified guaranteed minimum annual payment. At December 31,2004, minimum rental payments under noncancelable leases and minimum franchise payments are as follows:

Leases Guaranteed Minimum Capital Operating Franchise Payments 2005 $ 98.3 $ 459.9 $ 432.6 2006 88.0 400.7 320.7 2007 85.7 349.8 166.4 2008 74.7 313.6 132.7 2009 68.7 252.0 1162 2010 and thereafter 216.7 1,127.0 208.7 Total minimum payments $632.1 $2,903.0 $1,377.3 Less amounts representing interest 160.3 Present value of net minimum payments $471.8

Future minimum operating lease payments have been reduced by future minimum sublease income of $58.0 million. Rent expense amounted to $475,8 million (2004), $439.3 million (2003) and $423.7 million (2002).

Guarantees The Company follows the recognition provisions of FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness

II-65 VIACOM INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Coathmed) (Tatmlar dollars in Billions, except per share mmamm/ts)

13) COMMITMENTS AND CONTINGENCIES—. and Grauman's Theatres LLC and guarantees certain theater leases if approximately J13J nulhon. The lease guarantees would only be triggered upon non-payment by ti^/ respective primary obligors. These guarantees are not recorded on the balance sheet as of December 31, 2004 as they were provided by the Company prior to the adoption of FIN 45. The Company continues to remain as guarantor on certain Blockbuster store leases approximating $359 mflbon at December 31, 2004 and secured by a $150 miDion letter of credit. Certain leases contain renewal options that can extend the primary lease term and remain covered by the guarantees. Blockbuster has agreed to indemnify the Company with respect to any amount paid under these guarantees. The Company recorded a liability of $53.6 million reflecting the fair value of such guarantees. Additionally, the Company has indemnification obligations with respect to letters of credit and surety bonds primarily used as security against non-performance in the normal course of business. The outstanding letters of credit and surety bonds approximated $342.4 mflbon at December 31, 2004 and are not recorded on the balance sheet as of December 31, 2004. In the course of its business, the Company both provides and receives the benefit of indemnities which are intended to allocate certain risks associated with business transactions. Similarly, the Company may remain contingently babk for various obligations of a business that has been divested in the event that ' third party does not bve up to its obligations under an indemnification obligation. The Company records*^ liability for its indemnification obligations and other contingent liabilities when probable under generally accepted accounting principles.

Legal Matters Asbestos and Environmental. The Company is a defendant in lawsuits claiming various personal injuries related to asbestos and other materials, which allegedly occurred principally as a result of exposure caused by various products manufactured by Westingbouse, a predecessor, generally prior to the early 1970s. Westingbouse was neither a producer nor a manufacturer of asbestos. The Company is typically named as one of a large number of defendants in both state and federal cases. In the majority of asbestos lawsuits, the plaintiffs have not identified which of the Company's products is the basis of a daim. Claims against the Company in which a product has been identified principally relate to exposures allegedly caused by asbestos-containing insulating material in turbines sold for power-generation, industrial and marine use, or by asbestos-containing grades of decorative micarta, a laminate used in commercial ships.

11-66 VIACOM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Tabular dollars in millions, except.per share amounts)

13) COMMITMENTS AND CONTINGENCIES—(Continued) Claims are frequently filed and/or settled in large groups, which may make the amount and timing of settlements, and the number of pending claims, subject to significant fluctuation from period to period. The Company does not report as pending those claims on inactive, stayed, deferred or similar dockets which some jurisdictions have established for claimants who allege minimal or no impairment. As of December 31, 2004, the Company had pending approximately 112,140 asbestos claims, as compared with approximately 112,280 as of December 31, 2003 and approximately 103,800 as of December 31, 2002. Of the claims pending as of December 31, 2004, approximately 82,370 were pending in state courts, 27,180 in federal courts and approximately 2,590 were third party claims. During 2004, the Company received approximately 16,060 new claims and closed or moved to an inactive docket approximately 16,200 claims. The Company reports claims as closed when it becomes aware that a dismissal order has been entered by a court or when the Company has reached agreement with the claimants on the material terms of a settlement. Settlement costs depend on the seriousness of the injuries that form the basis of the claim, the quality of evidence supporting the claims and other factors. To date, the Company has not been liable for any third party claims. The Company's total costs (recovery) for the years 2004 and 2003 for settlement and defense of asbestos claims after insurance recoveries and net of tax benefits were approximately $58.4 million and $(8.7) million, respectively. A portion of such costs relates to claims settled in prior years. If proceeds received in 2003 from an insurance commutation were excluded from the Company's total costs in 2003, the Company's total costs after insurance recoveries and net of tax benefits would have been $56.6 million. The Company's costs for settlement and defense of asbestos claims may vary year to year as insurance proceeds are not always recovered in the same period as the insured portion of the expenses. The Company believes that its reserves and insurance are adequate to cover its asbestos liabilities and that these asbestos liabilities are not likely to have a material adverse effect on its results of operations, financial position or cash flows. The Company from time to time receives claims from federal and state environmental regulatory agencies and other entities asserting that it is or may be liable for environmental cleanup costs and related damages principally relating to discontinued operations conducted by companies acquired by the Company. In addition, the Company from time to time receives personal injury claims including toxic tort and product liability claims arising from historical operations of the Company and its predecessors. Antitrust. In July 2002, judgment was entered in favor of the Company, Blockbuster, Paramount Home Entertainment and other major motion picture studios and their home video subsidiaries with respect to a complaint filed in the United States District Court for the Western District of Texas. The complaint included federal antitrust and California state law claims. In August 2003, the Fifth Circuit Court of Appeals affirmed the federal court judgment. The Supreme Court of the United States refused plaintiffs' petition for writ of certiorari in March 2004. In February 2003, a similar complaint that had been filed in a Los Angeles County Superior Court was also dismissed with prejudice. The plaintiffs have appealed the California state court dismissal, as well as a prior denial of class certification. As a result of the split-off of Blockbuster in 2004, any judgment in this matter adverse to the Company, Blockbuster and/or Paramount Home Entertainment will be allocated 33.33% to Blockbuster and 66.67% to the Company. The Company believes that the plaintiffs' positions in these litigations are without merit and intends to continue to vigorously defend itself in the litigations.

11-67 VIACOM INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CoBtnoed) dollars in millions, except per share mmemmts)

13) COMMITMENTS AND CONTINGENCIES—

14) REPORTABLE SEGMENTS The following tables set forth the Company's financial performance by reportaMe operating segment. The Company's reportaMe operating segments have been determined in accordance with the Company's internal management structure, which is organized based upon products and services. The Company operates five segments: (i) Cable Networks, (ii) Television, (in) Radio, (iv) Outdoor and (v) Entertainment. The accounting policies of the segments are the same as those described in Note 1 — Summary Significant Accounting Policies- Intercompany revenue eliminations associated with the Entertainment, Television, Cable Networks, Radio and Outdoor segments were $206.7 million, $322.6 mflbon, $9.1 million, $28.1 nulbon and $23.0 mulioa, respectively, for 2004. Operating income ehminanODS primarily reflect the timing of intercompany transactions from the sale of television product to Cable Networks and the sale of feature films to cable and broadcast networks. The 2003 intercompany revenue eliminations associated with the Entertainment, Television, Cable Networks, Radio and Outdoor segments were $217.5 million, $181.9 million and $68.5 nulbon, $30.5 million and $27.7 million, respectively. The 2002 intercompany revenue etiminatioos were principally associated with the Entertainment, Television and Cable Networks segments and were $216.4 million, $177.4 million and $23.6 million, respectively.

11-68 VIACOM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Tabular dollars in millions, except per share amounts)

14) REPORTABLE SEGMENTS—(Continued)

Year Ended December 31, 2004 2003 2002 Revenues: Cable Networks $ 6,578.9 $ 5,645.5 $ 4,726.7 Television 8,504.6 7,761.0 7,456.8 Radio 2,096.1 2,097.6 2,121.6 Outdoor 1,880.2 1,748.3 1,633.5 Entertainment 4,055.6 4,101.3 3,680.1 Eliminations (589.5) (526.1) (431.9) Ibtal Revenues $ 22,525.9 $ 20,827.6 $19,186.8

Operating Income: Cable Networks $ 2,525.1 $ 2,172.3 $ 1,772.2 Television 1,547.4 1,238.1 1,177.6 Radio (10,023.5) 975.0 1,007.6 Outdoor (6,824.5) 207.9 218.0 Entertainment 254.0 271.4 358.3 Segment Total (12,521.5) 4,864.7 4,533.7 Corporate expenses (237.7) (187.9) (159.0) Residual costs (a) (113.8) (146.5) (67.8) Eliminations (96.0) (56.7) (66.0) Total Operating Income (loss) $(12,969.0) $ 4,473.6 $ 4,240.9 Interest expense (718.9) (742.9) (799.1) Interest income 25.3 11.7 12.0 Other items, net 7.6 (3.0) (32.9) Earnings (loss) from continuing operations before income taxes, equity in earnings (loss) of affiliated companies and minority interest (13,655.0) 3,739.4 3,420.9 Provision for income taxes (1,378.6) (1,497.0) (1,338.3) Equity in earnings (loss) of affiliated companies, net of tax (20.8) .1 (37.3) Minority interest, net of tax (5-1) (4.7) (3.3) Net earnings (loss) from continuing operations (15,059.5) 2,237.8 2,042.0 Net earnings (loss) from discontinued operations (1,090.3) (802.4) 164.6 Net earnings (loss) before cumulative effect of accounting change (16,149.8) 1,435.4 2,206.6 Cumulative effect of accounting change, net of minority interest and tax (1,312.4) (18.5) (1,480.9) Net Earnings (loss) $(17,462.2) $ 1,416.9 $ 725.7 (a) Primarily includes pension and postretiremen! benefit costs for benefit plans retained by the Company for previously divested businesses.

11-69 VIACOM INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—

14) REPORTABLE SEGMENTS—

31. 2*2 DepreeiatkHi aad AaMrtfaatioa: Cable Networks $248.0 $1953 $ 190.9 Televisioo 148.9 151.1 140.8 Radio 29.9 27.4 30.8 Outdoor 223.1 215.9 205.6 Entertainment 137.8 129.7 120.7 Corporate 222 225 23.0 Ittal I AaMrtizatxM $809.9 $741.9 $ 711.8

Al 31. 2*13 "Mai Assets: Cable Networks $14,633.1 $13,186.2 Televisioo 24,980.7 25,648.6 Radio 14313.6 25,256.9 Outdoor 7262.6 14,4443 Entertainment 6^94.7 6,278.0 Corporate 2,024.8 1,7%.2 Discontinued operations 278.6 5,236.2 Emninations (1,785.8) (1,620.9) Total Assets $68,0023 $90,225.5

31. 2M2 Capital ExpeaUrtaiev Cable Networks $ 96.0 $ 903 $ 95.7 Televisioo 125.6 123.6 138.7 Radio 3&2 14.1 14.4 Outdoor 56.5 58.1 67.1 Entertainment 142 66.4 74.6 Corporate 245 5.1 6.0 Total Capital Expeadrrares $415.0 $357.6 $3%3

H-70 VIACOM INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Tabular dollars in millions, except per share amounts)

14) REPORTABLE SEGMENTS—(Continued) Information regarding the Company's consolidated revenues by type is as follows:

Revenues by Type Year Ended. December 31, 2004 2003 2002 Advertising sales $13,441.6 $12,088.6 $11,228.9 Affiliate fees 2,634.8 2,407.7 2,199.0 Feature film exploitation 2,205.6 2,347.0 2,000.5 TV license fees 1,402.3 1,514.5 1,472.2 Publishing 750.7 693.4 675.9 Parks operations 409.9 375.8 374.0 Other (a) 1,681.0 1,400.6 1,236.3 Total $22,525.9 $20,827.6 $19,186.8

(a) Other primarily includes revenues from home entertainment sales from cable and broadcast networks, movie theaters and consumer products. Information regarding the Company's operations by geographic area is as follows:

Year Ended December 31, 2004 2003 2002 Revenues (a): United States $18,812.0 $17,487.9 $16^30.3 International 3,713.9 3,339.7 2,856.5 Total Revenues $22,525.9 $20,827.6 $19,186.8

At December 31, 2004 2003 Long-lived Assets (b): United States $57,250.4 $79,255.2 International 2,660.7 2,684.6 Total Long-lived Assets $59,911.1 $81,939.8

Transactions within the Company between geographic areas are not significant. (a) Revenue classifications are based on customers' locations. (b) Reflects total assets less current assets, non-current deferred tax assets and investments in affiliated companies.

15) OTHER ITEMS, NET For 2004, "Other items, net" of $7.6 million principally reflected foreign exchange gains of $16.8 million and a net gain on the sale of investments of $34.5 million, partially offset by a non-cash charge of $21.7 million associated with other-than-temporary declines in the Company's investments, losses associated with securitizing trade receivables of $19.3 million and a loss of $2.7 million on the sale of radio stations.

11-71 VIACOM INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—

15) OTHER ITEMS, NET—

1O SUPPLEMENTAL CASH FLOW INFORMATION ^

TfcarE»«rf«rAiPiii»iii 3i. 2*M 2M3 2M2 Cash paid for interest, net of amounts capitalized (a) $ 636.3 $ 693.6 $ 727.6 Cash paid for income taxes (a) $1,185.0 $ 933.9 $ 630.1

fk|._ , ..h Summit! J fS___»i__ mrliiritiff Equipment acquired under capitalized leases $ 141.7 $ 64.9$ 27.7 Fur value of assets acquired $ 605.4 $1370.2 $ 830.7 Fair value of habOrties assumed (179.6) (102.0) (20.8) Minority interest 1.9 73.4 159.7 Cash paid, net of cash acquired (427.7) (1341.6) (818.0) 151.6 Impact on stockholders' equity $ — $ — $ (a) Amtoaaa aho ncMe ash panums for dcscontmoed operations.

11-72 VIACOM INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Tabular dollars in millions, except per share amounts)

17) QUARTERLY FINANCIAL DATA (unaudited):

Fourth First Second Third Quarter Total 2004 (a) Quarter Quarter Quarter 0>)(c) Year Revenues $5,298.3 $5,446.6 $5,484.6 $ 6,296.4 $ 22,525.9 Operating income (loss) $1,054.6 $1,370.8 $13443 $(16,738.9) $(12,969.0) Net earnings (loss) from continuing operations $ 618.4 $ 715.4 $ 722.6 $(17,115.9) $(15,059.5) Net earnings (loss) before cumulative effect of accounting change $ 710.5 $ 753.8 $ (487.6) $(17,126.5) $(16,149.8) Net earnings (loss) $ 710.5 $ 753.8 $ (487.6) $(18,438.9) $(17,462.2) Basic earnings (loss) per common share: Net earnings (loss) from continuing operations $ .36 $ .41 $ .42 $ (10.21)$ (8.78) Earnings (loss) before cumulative effect of accounting change $ .41 $ .44 $ (.28)$ (10.21)$ (9.42) Net earnings (loss) $ .41 $ .44 $ (.28)$ (10.99)$ (10.19) Diluted earnings (loss) per common share: Net earnings (loss) from continuing operations $ .35 $ .41 $ .42 $ (10.21) $ (8.78) Earnings (loss) before cumulative effect of accounting change $ .41 $ .43 $ (.28)$ (10.21) $ (9.42) Net earnings (loss) $ .41 $ .43 $ (.28)$ (10.99) $ (10.19) Dividends per common share (d) $ .06 $ .06 $ .06 $ .07 $ .25 Weighted average number of common shares outstanding: Basic 1,731.0 1,724.3 1,725.7 1,677.1 1,714.4 Diluted 1,7443 1,736.0 1,734.8 1,677.1 1,714.4 (a) In 2004, the exchange offer for the split-off of Blockbuster was completed and Blockbuster is presented as a discontinued operation. (b) As described in Note 3 to the Company's consolidated financial statements, the Company recorded a mnrcash impairment charge of $18.0 billion, or $10.43 per diluted share, related to the reductions of the carrying amount of goodwill and intangibles of Radio and Outdoor to their respective estimated fair values. (c) As described in Note 1 to the Company's consolidated financial statements, the Company recorded a charge of $2.2 billion ($1.3 billion, net of tax) to reduce intangible balances attributable to its Television Stations' FCC licenses as a cumulative effect of accounting change. (d) The Company announced a quarterly cash dividend of $.06 per share on its Common Stock during the first three quarters of 2004 and $.07 per share in the fourth quarter of 2004.

II-73 VIACOM INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—{Continued) (TaMar dollars in millions, except per share aaMmts)

17) QUARTERLY FINANCIAL DATA (uaodited):—(Contmned)

fin* Ttriai TIM tomrik IMal ^•Xa) Qtoartrr Qwter Quarter Quarter War Revenues $4,563.0 $5,055.7 $5,259.0 $5,949.9 $20,827.6 Operating income $ 838.0 $1,2103 $1,279.9 $1,145.4 $ 4,473.6 Net earnings from continuing operations $ 392.7 $ 610.8 $ 647.9 $ 586.4 $ 2,237.8 Net earnings (loss) before cumulative effect of accounting change $ 461.6 $ 659.6 $ 699.6 $ (385.4)$ 1,435.4 Net t-arningc (loss) $ 443.1 $ 659.6 $ 699.6 $ (385.4) $ 1,416.9 Bask earnings (loss) per common share: Net earnings from continuing operations $ 22. $ 35 $ 37 $ 34 $ 128 Faming* (loss) before cumulative effect of accounting change S 26 $ J8 $ .40 $ (-22)$ .sr Net earnings (loss) $ .25 $ J8 $ .40 $ (-22)$ .8f Muted earnings (loss) per common share: Net earnings from continuing operations S 22 $ J5 $ 37 $ 33 $ 1.27 Famhigs before cumulative effect of accounting change S 26 $ 37 $ .40 $ (-22)$ .82 Net earnings (loss) S .25 $ 37 $ .40 $ (-22)$ .80 Dividends per common share (b) — $ .06 $ .06 $ .12 Weighted average number of common shares outstanding: Bask 1,745.9 1,7462 1,745.0 1,739.1 1,744.0 Domed 1.761.1 1,7653 1.7632 1,7533 1,760.7 (a) to 3004. the offer for the spot-off of Blockbuster was completed and BkxxbBSter is |neaemed as a discontinued

(b) The Camfoarf declared a qmiieih cash dividend of $06 per share on its stock daring the third and fourth quarters of 3M3.

11-74 VIACOM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Tabular dollars in millions, except per share amounts)

18) CONDENSED CONSOLIDATING FINANCIAL STATEMENTS Viacom International is a wholly owned subsidiary of the Company. Viacom International has fully and unconditionally guaranteed Viacom Inc.'s debt securities (See Note 8). The following condensed consolidating financial statements present the results of operations, financial position and cash flows of Viacom Inc., Viacom International, the direct and indirect Non-Guarantor Affiliates of Viacom Inc. and Viacom International, and the eliminations necessary to arrive at the information for the Company on a consolidated basis.

Statement of Operations for the Year Ended December 31, 2004 Non- Viacom Guarantor Viacom Inc.

Revenues $ 209.5 $4,082.5 $ 18,439.0 $ (205.1) $ 22^25.9 Expenses: Operating 87.0 1,274.3 11312.5 (128.0) 12,545.8 Selling, general and administrative 152.1 1,099.3 2,914.0 (23.3) 4,142.1 Depreciation and amortization 5.0 100.1 704.8 809.9 Non-cash impairment charge 17,997.1 17,997.1 Total expenses 244.1 2,473.7 32,928.4 (151.3) 35,494.9 Operating income (loss) (34.6) 1,608.8 (14,489.4) (53.8) (12,969.0) Interest expense, net (759.2) (203.1) 268.7 (693.6) Other items, net 10.0 (93) 146.9 (140:0) 7.6 Earnings (loss) before income taxes (783.8) 1,396.4 (14,073.8) (193.8) (13,655.0) Provision for income taxes 312.7 (553.0) (1,1383) (1378.6) Equity in earnings (loss) of affiliated companies, net of tax (16,991.1) (73.2) (122.7) 17,166.2 (20.8) Minority interest, net of tax .1 (5.2) (5.1) Net earnings (loss) from continuing operations (17,462.2) 770.3 (15340.0) 16,972.4 (15,059.5) Net loss from discontinued operations, net of tax — (14.8) (1,075.5) — (1.090.3) Net earnings (loss) before cumulative effect of accounting change (17,462.2) 755.5 (16,415.5) 16,972.4 (16,149.8) Cumulative effect of accounting change, net of minority interest and tax — — (1,312.4) — (1,312.4) Net earnings (loss) $(17,462.2) $ 755.5 $(17,727.9) $ 16,972.4 $(17,462.2)

II-75 VIACOM INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Coathned) dollars in mfllioas, except per share mmammts)

IS) CONDENSED CONSOLIDATING FINANCIAL STATEMENTS—{CwtiMd)

31.2M3

Revenues $ 195.4 $3599.7 $ 17,189.0 $ (1565) $20,827.6 Expcnser Uperatinf\n .._•:__g 843 1,1343 10,8023 (141.1) 11,879.8 Selling, general and administrative 183.8 934 2 2,637.6 (233) 3,7323 Depreciation and amortization 53 675 669.1 741.9 273.4 2,136.0 14,109.0 (164.4) 16354.0 Operating income (loss) (78.0) 1,463.7 3,080.0 7.9 4,473.6^ Interest expense, net (729.9) (204.2) 202.9 (7312) Other Hems, net (155) 31.6 30.6 (49.7) (3-0) Earnings (loss) before income taxes (823.4) U91.1 33135 (41.8) 3,739.4 Provision for income taxes 328.6 (506.1) (U195) (1,497.0) Equity in earnings of affiliated companies, net of tax 1,911.7 1883 92 (2,109.1) .1 Minority interest, net of tax (4.7) (4.7) Net earnings from continuing operations 1,416.9 9733 1,9985 (2,150.9) 2^37.8 Net loss from discontinued operations, net of tax — — (802.4) — (802.4) Net earnings before cumulative effect of accounting change 1,416.9 9733 1,196.1 (2,150.9) 1,435.4 Cumulative effect of accounting change, net of miuuiily interest and tax - 03) (152) - (185) Net emiiugs $ 1.416.9 $ 970.0 S 1,1809 $(2.150.9) $ 1,416.9.

11-76 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None.

Item 9A. Controls and Procedures. The Company's chief executive officer and chief financial officer have concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended ("Exchange Act")) were effective, based on the evaluation of these controls and procedures required by Rule 13a-15(b) or 15d-15(b) of the Exchange Act. No change in the Company's internal control over financial reporting occurred during the Company's last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. Management's Statement of Responsibility For Financial Reporting is incorporated herein by reference to Item 8 on page II-31 of this report.

Item 9B. Other Information. None.

H-83 VIACOM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Tabular dollars in millions, except per share amounts)

18) CONDENSED CONSOLIDATING FINANCIAL STATEMENTS—(Continued)

Statement of Cash Flows for the Year Ended December 31, 2002 Non- Viacom Viacom Guarantor Viacom Inc. Inc. International Affiliates Eliminations Consolidated Net cash flow provided by (used for) operating activities $ (537.8) $ 509.5 $ 3,152.7 $— $ 3,124.4 Investing activities: Acquisitions, net of cash acquired (145.3) (672.7) — (818.0) Capital expenditures (70.3) (326.2) — (396.5) Investments in and advances to affiliated companies (4.8) (1.2) (52.8) - (58.8) Proceeds from sale, net of transaction costs 3.8 6.4 602 — 70.4 Other, net 11.5 (2.0) - 9.5 Net cash flow used for investing activities from continuing operations (1.0) (198.9) (993.5) — (1,193.4) Net cash flow from investing activities attributable to Blockbuster _ (248.8) — (248.8) Net cash flow used for investing activities (1.0) (198.9) (1,2423) — (1,442.2) Financing activities: Proceeds from issuance of notes and debentures 1,298.0 1,298.0 Proceeds from exercise of stock options 315.1 315.1 Repayments to banks, including commercial paper, net (959.7) (4.1) - (963.8) Repayment of notes and debentures (488.6) (489.4) (22.7) - (1,000.7) Payment of capita] lease obligations (11.1) (79.1) - (90.2) Purchase of Company common stock (1,139.0) (1,139.0) Increase (decrease) in intercompany payables 1,382.2 235.6 (1,617.8) — Other, net (3.0) - (3.0) Net cash flow provided by (used for) financing activities from continuing operations 408.0 (264.9) (1,726.7) - (1,583.6) Net cash flow from financing activities attributable to Blockbuster (194.6) — (194.6) Net cash flow provided by (used for) financing activities 408.0 (264.9) (1,921.3) — (1,778.2) Net increase (decrease) in cash and cash equivalents (130.8) 45.7 (10.9) - (96.0) Cash and cash equivalents at beginning of year 367.7 2.7 357.0 — 727.4 Cash and cash equivalents at end of year $ 236.9 $ 48.4 $ 346.1 $— $ 631.4

II-82 VIACOM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—

IS) CONDENSED CONSOLIDATING FINANCIAL STATEMENTS—(Coatined)

?t.tr»[»t if Tiifc flmi ht tti %• Eaiti TUI^II 11. TtlfT VUCM lac. iJ^SL. ^ssr*^« g^SZZ* Net cash Bow provided by (wed for) operating activities $< 1,449.9) $ 9452 $ 4,002.1 $— $ 3,497.4 Inmting activities: Acqnisitioas, net of cash acquired (40.6) (1230.9) (70.1) - (1341.6) Capital expenditures (64.1) (2933) - (357.6) Investments in and advances to affiliated companies (16.7) (8) (223) - (40.0) Pioceeds fjtotu sale, ott of UiUiattmu cc&l5 1.6 25.9 18.7 — 462 Other.net 11.6 (1.9) - 9.7 Net cash flow used for investing activities from i4Jul inning operations (55.7) (12583) (3693) - (1,6833) Net cash flow from investing activities attributable to Blockbuster __ (179.1) - (179.1) Net cash Bow •sed for investing activities (55.7) (12583) (548.4) - (1,862,4) Financing activities: Proceeds from issuance of notes and «!•!• UCUC1III1TC& 7353 12 — 7363 Proceeds from exercise of stock options 245.2 2452 Repayments to banks, including commercial paper.net (155.8) (63) - (162.1) Repayment of notes and debentures (609.7) (155.4) (3) - (765.4) Payment of capital lease obligations (12-4) (663) - (78.7) Purchase of Company common stock (945.1) (945.1) Dividends (104.6) (104.6) Increase (decie^se) in inteicompany payaWes 2315.9 4593 (2,7752) - Other.net (6-0) - (6-0) Net cash flow provided by (used for) financing activities from continuing operations 1.481.2 2913 (2J852J9) — (1,0802) Net cash flow from financing activities attributable to Blockbuster _ (3353) - (3353) Nrt rash flow provided by (nwd for) framing activities 1.481.2 291 .5 (3J88.4) — (1,415.7) Net increase (decrease) in cash and cash equivalents (24.4) (21.6) 2653 — 2193 Cash and cash equivalents at beginning of year 236.9 48.4 346.1 — 631.4 Cash and cash iqni»iitnti at end of year $ 2123 $ 26.8 $ 611.4 S— $ 850.7

H-81 VIACOM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Tabular dollars in millions, except per share amounts)

18) CONDENSED CONSOIJDATING FINANCIAL STATEMENTS—(Continued)

Statement of Cash Flows for the Year Ended December 31, 2004 Non- Viacom Viacom Gnarantor Viacom Inc. Inc. International Affiliates Eliminations Consolidated Net cash flow provided by (used for) operating activities $(1,706.7) $ 1,195.4 $ 4,151.9 $— $ 3,640.6 Investing activities: Acquisitions, net of cash acquired (4.0) (1.7) (422.0) — (427.7) Capital expenditures (90.5) (324.5) - (415.0) Investments in and advances to affiliated companies (2.0) (75.7) - (77.7) Special distribution received from Blockbuster 10.0 728.1 738.1 Proceeds from sale, net of transaction costs 47.9 (26.9) 44.5 — 65.5 Other, net .1 8.3 (4.3) - 4.1 Net cash flow provided by (used for) investing activities from continuing operations 52.0 617.3 (782.0) — (112.7) Net cash flow from investing activities attributable to Blockbuster (421.0) — (421.0) Net cash flow provided by (used for) investing activities 52.0 617.3 (1,203.0) — (533.7) Financing activities: Proceeds from exercise of stock options 119.6 119.6 Repayments to banks, including commercial paper, net (24.5) (1.6) - (26.1) Repayment of notes and debentures (20.1) (60.2) — (80.3) Payment of capital lease obligations (12.3) (54.0) - (66.3) Purchase of Company common stock (2,503.3) (2,503.3) Dividends (415.2) (415.2) Increase (decrease) in intercompany payables 4,854.9 (1,816.0) (3,038.9) — Other, net (8.8) - (8.8) Net cash flow provided by (used for) financing activities from continuing operations 2,011.4 (1,828.3) (3,163.5) — (2,980.4) Net cash flow from financing activities attributable to Blockbuster (49.0) — (49.0) Net cash flow provided by (used for) financing activities 2,011.4 (1,828.3) (3,212.5) - (3,029.4) Net increase (decrease) in cash and cash equivalents 356.7 (15.6) (263.6) — 77.5 Cash and cash equivalents at beginning of year 212.5 26.8 611.4 — 850.7 Cash and cash equivalents at end of year $ 569.2 $ 11.2 $ 347.8 $— $ 928.2

11-80 VIACOM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CoBtined) (Tabalir itolliM n auDittas, except per share ••!!••! i)

18) CONDENSED CONSOLIDATING FINANCIAL STATEMENTS—(CoatiMed)

Itlll.H Shctta1 t Dcca*cr3U2N3 NM- VbCMB VfeCM VlMMilBC. tee. ~^--_ CnmfUftti

AnetS Cash and cash equivalents $ 212J S 26J8 S 37&0 $ — $ 6173 Rfi'Tf MTwry net 43.6 632.9 3,721.1 (2343) 4,1633 Inventory 92 173.7 910.6 (89.8) 1,003.7 Prepaid expenses and ocber LIII i cut assets 85.6 153.9 760 (37.6) 970.7 Cuiieni ***^** of dBcootmoed operations 311 981J 1,013.4 Total uuicut assets 383.0 987.3 6,759^ (361.7) 7,768.4 p., _.,,,-, | 49J 723^ 6.733.4 75065 I iffss **"*^**T***^itfo oevyredaiMMt ^*i" ammti/jtinn 10J 409.7 2.45L4 : 2,871.4

M^t nj-TUl_»l1U insl J»JMIMMM««t 39.0 314.1 4,282.0 4,635.1 Inventory 17.8 1.13O2 3J79J (91.0) 42362 Goodwffl 100J 6275 53.717.4 54,4452 4.1 12^14.4 12^185 Investments in consoiidaled subsidiaries 67,753-5 15,285.7 (83,039.2) Olfaer assets 177.5 158.6 1^>11.0 (247^) 1^993 Other awt\ of dsscontmoed operations 344.9 3377.9 4222.8 Total Assets S6&816.0 $18,507.5 S86,641.7 $ (83.739.7) $902255 UaMMies and "Uiih«M

11-79 VIACOM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Tabular dollars in millions, except per share amounts)

18) CONDENSED CONSOLIDATING FINANCIAL STATEMENTS—(Continued)

Balance Sheet ai December 31, 2004 Non- Viacom Viacom Guarantor Viacom Inc. Inc. International Affiliates Eliminations Consolidated Assets Cash and cash equivalents $ 569.2 $ 11.2 $ 347.8 $ — $ 928.2 Receivables, net 45.1 691.5 3,779.0 (2863) 4,2293 Inventory 8.2 233.8 895.2 (1404) 996.7 Prepaid expenses and other current assets 75.4 174.3 1,044.7 (5.8) 1,288.6 Current assets of discontinued operations 50.7 50.7 Total current assets 748.6 1,110.8 6,066.7 (432.6) 7,493.5

Property and equipment 51.6 767.4 6,983.0 ~~~ 7,802.0 Less accumulated depreciation and amortization 10.5 407.4 2,727.0 3,144.9 Net property and equipment 41.1 360.0 4,256.0 — 4,657.1 Inventory 14.4 1,331.9 3,211.5 (91.8) 4,466.0 Goodwill 1003 628.2 37,791.7 38420.2 Intangibles 5.7 10,6192 (1.8) 10,623.1 Investments in consolidated subsidiaries 50,737.5 13,893.7 (64,631.2) Other assets 179.8 234.8 1,883.3 (283.4) 2,014.5 Other assets of discontinued operations 227.9 227.9 Total Assets $ 52,049.6 $17^65.1 $ 63,828.4 $(65,440.8) $ 68,0023 Liabilities and Stockholders' Equity Accounts payable $ 25 $ 65.9 $ 521.0 $ (3.9) $ 5854 Accrued expenses and other 770.0 910.1 33323 (182.8) 4,829.6 Participants' share, residuals and royalties payable 58.3 1,341.8 (1034) 1,296.6 Current portion of long-term debt 11.0 54.8 65.8 Current liabilities of discontinued operations 89.3 12.7 102.0 Total current liabilities 861.8 1,058.0 5,249.9 (290.2) 6,879.5 Long-term debt 9,219.4 107.2 322.6 9,649.2 Other liabilities (4,476.2) 7,656.1 (664.4) 6315.2 8,830.7 Other liabilities of discontinued operations 572.4 35.3 607.7 Minority interest 10.9 10.9 Stockholders' Equity: Preferred Stock 128.2 (128.2) Common Stock 18.7 122.8 1,162.3 (1,285.1) 18.7 Additional paid-in capital 66,027.7 1,924.1 92,863.5 (94,787.6) 66,027.7 Retained earnings (deficit) (10,809.4) 6,835.6 (13,139.4) 2,365.9 (14,7473) Accumulated other*comprehensrve income (loss) (446.0) (138.7) 215.5 13.2 (356.0) 54,791.0 8,743.8 81,230.1 (93,821.8) 50,943.1 Less treasury stock, at cost 8,918.8 22356.0 (22356.0) 8,918.8 Total stockholders' equity 45,872.2 8,743.8 58,874.1 (71,465.8) 42,024.3 Total Liabilities and Stockholders' Equity $ 52,049.6 $17,565.1 $ 63,828.4 $(65,440.8) $ 68,0023

II-78 VIACOM INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—

18) CONDENSED CONSOLIDATING FINANCIAL STATEMENTS—

S,*,m,ml •rOpcntiM• fcrthelfarEMcri Decentcr31, 2M2 ^tttm- Vtmnm Vbnabc. IK. i*£ZZ^ •rim-in Revenues S 189.1 $3,079.9 $ 16,0853 $ (1675) $19,186.8 •TDensGexr <"w._..i:_. V^JCiailllg 762 9263 9351.7 (118.7) 10;7355 Setting, general and administrative 1013 824.4 2480.9 (82) 3,498.6 Depreciation and amortizatioa 5.1 76.9 629.8 711.8 Tbtal expenses 182.8 1,827.6 13,062.4 (126.9) 14^45.9 Operating income 6J 1,252.3 3,022.9 (40.6) 4240.9 Interest expense* net (742.9) (313.9) 269.7 (787.1) Other hems, net (20J) (193.2) 181.1 (05) (32.9) Earnings (loss) before income ux££ (756.9) 7452 3,473.7 (41.1) 3,420.9 HCIICIH [ft ovisioo) loc income taxes 295.9 (2973) (13364) (13383) Equity in ear«mp (loss) of *ffiKa*«-H v^puiiMiii4rif oet OE tax 1,186.7 (671.8) (234) (528.7) (373) Minority interest, net of tax 02 (34) (33) Net gaining* (loss), from continuing operations before cumulative effect of accounting cosDce 725.7 (223.7) 2,109.8 (569.8) 2,042.0 Net earnings from discontinued operations, net of tax 164.6 164.6 Net earnings (loss) before cumulative effect of jug i naiigr 725.7 (223.7) 2274.4 (569.8) 2206.6 Ommlarive effect of accounting change, net of uuuuiiiy mterest and tax (1,480.9) (1,4804) Net earnings (loss) $ 725.7 5(223.7) $ 7935 $ (569.8) $ 725.7

n-77 PART in Item 10. Directors and Executive Officers of the Registrant.

The information required by this item with respect to the Company's directors is contained in the Viacom Inc. Proxy Statement for the Company's 2005 Annual Meeting of Stockholders (the "Proxy Statement") under the headings "Viacom's Board of Directors," "Item 1—Election of Directors," and "Section 16(a) Beneficial Ownership Reporting Compliance," which information, is incorporated herein by reference. The information required by this item with respect to the Company's executive officers is (i) contained hi the Proxy Statement under the headings "Corporate Governance" and "Section 16(a) Beneficial Ownership Reporting Compliance" and (ii) included in Part I of this Form 10-K under the caption "Executive Officers of the Company," which information is incorporated herein by reference.

Item 11. Executive Compensation. The information required by this item is contained in the Proxy Statement under the headings "Director Compensation" and "Executive Compensation," which information is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required by this item is contained in the Proxy Statement under the headings "Security Ownership of Certain Beneficial Owners and Management" and "Equity Compensation Plan Information," which information is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions. The information required by this item is contained in the Proxy Statement under the headings "Executive Compensation—Compensation Committee Interlocks and Insider Participation" and "Related Party Transactions," which information is incorporated herein by reference.

Item 14. Principal Accounting Fees and Services. The information required by this item is contained in the Proxy Statement under the heading "Services Provided by the Independent Auditor and Fees Paid," which information is incorporated herein by reference.

III-l PART IV Itrm IS. EduKt*, fomdflf Stmtrmn* Scktdula. (a) 1. Financial Statements. The Rpancjai statements of the Company filed as part of this report on Form 10-K are listed on the Index on page F-l. 2. Financial Statement Schedules. The financial statement schedule required to be filed by Item 8 of this Form 10-K is listed on the Index on page F-l. 3. Exhibits. The exhibits listed in Item 15(b) of this Part IV are filed or incorporated by reference as part of this Form 10-K. The Index to Exhibits is on page E-l. (b) Exhibits. The exhibits listed in Item 15(b) of this Part IV are filed or incorporated by reference as part or this Form 10-K. The Index to Exhibits is on page E-l. ^

IV-1 SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Viacom Inc. has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.

VIACOM INC.

By: Isl SUMMER M. REDSTONE Sumner M. Redstone Chairman of the Board of Directors Chief Executive Officer Date: March 16, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of Viacom Inc. and in the capacities and on the dates indicated: Signature Title Date

Isl SUMNER M. REDSTONE Chairman of the Board of Directors March 16, 2005 Sumner M. Redstone Chief Executive Officer

1st RICHARD J. BRESSLER Senior Executive Vice President March 16, 2005 Richard J. Bressler Chief Financial Officer

Isl SUSAN C. GORDON Senior Vice President Controller March 16, 2005 Susan C. Gordon Chief Accounting Officer

Director March 16, 2005 George S. Abrams

Director March 16, 2005 David R. Andelraan

Director March 16, 2005 Joseph A. Califano, Jr.

Director March 16, 2005 William S. Cohen

Director March 16, 2005 Philippe P. Dauman

Director March 16, 2005 Alan C. Greenberg

Director March 16 2005 Jan Leschty TWe Date

Director March 16, 2005 Charles E. Phillips. Jr.

Director March 16, 2005 Shari Redstone

Director March 16, 2005 Frederic V. Salerno

Director March 16, 2005 William Schwartz

Director March 16,2005 Patty Stooesifer x Director March 16,2005 Robert D. Walter

•By: N MICHAEL D. FUOOAS

Michael D. Fricklas March 16, 2005 Aaomey-m-Fact for the Directors INDEX TO EXHIBITS ITEM 15(b)

Exhibit No. Description of Document (3) Articles of Incorporation and By-laws (a) Amended and Restated Certificate of Incorporation of Viacom Inc. effective December 9, 2004 (filed herewith). (b) Amended and Restated By-laws of Viacom Inc. adopted June 1,2004 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K of Viacom Inc. filed June 1, 2004 (File No. 001-09553). (4) Instruments defining the rights of security holders, including indentures (a) Specimen certificate representing Viacom Inc. Class A Common Stock (incorporated by reference to Exhibit 4(a) to the Annual Report on Form 10-K of Viacom Inc. for the fiscal year ended December 31, 2002) (File No. 001-09553). (b) Specimen certificate representing Viacom Inc. Class B Common Stock (incorporated by reference to Exhibit 4(b) to the Annual Report on Form 10-K of Viacom Inc. for the fiscal year ended December 31, 2002) (File No. 001-09553). (c) The instruments defining the rights of holders of the long-term debt securities of Viacom Inc. and its subsidiaries are omitted pursuant to section (b)(4)(iii)(A) of Item 601 of Regulation S-K. Viacom Inc. hereby 'agrees to furnish copies of these instruments to the Securities and Exchange Commission upon request. (10) Material Contracts (a) Viacom Inc. 1994 Long-lerm Management Incentive Plan (as amended and restated through November 1,1996) (incorporated by reference to Exhibit 10(b) to the Annual Report on Form 10-K of Viacom Inc. for the fiscal year ended December 31, 1996) (File No. 001-09553) (as amended effective October 10, 2002 by the Amendment to Viacom Stock Option Plans) (incorporated by reference to Exhibit 10(bb) to the Annual Report on Form 10-K of Viacom Inc. for the fiscal year ended December 31, 2002) (File No. 001-09553).* (b) Viacom Inc. 1997 Long-Term Management Incentive Plan (as amended and restated through May 25, 2000) (incorporated by reference to Exhibit B to Viacom Inc.'s Proxy Statement dated June 5,2000) (File No. 001-09553) (as amended effective October 10, 2002 by the Amendment to Viacom Stock Option Plans) (incorporated by reference to Exhibit 10(bb) to the Annual Report on Form 10-K of Viacom Inc. for the fiscal year ended December 31, 2002) (File No. 001-09553).* (i) Form of Agreement for Stock Options granted under the 1997 Long-Term Management Incentive Plan (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Viacom Inc. filed March 14, 2005) (File No. 001-09553).* (ii) Form of Notice to Executive Officers regarding Acceleration of Vesting of "Underwater" Options (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K of Viacom Inc. filed March 14, 2005) (File No. 001-09553).* (c) Viacom Inc. 2000 Long-Term Management Incentive Plan (as amended and restated through January 31, 2001) (incorporated by reference to Exhibit 10(d) to the Annual Report on Form 10-K of Viacom Inc. for the fiscal year ended December 31, 2001) (File No. 001-09553) (as amended effective October 10, 2002 by the Amendment to Viacom Stock Option Plans) (incorporated by reference to Exhibit 10(bb) to the Annual Report on Form 10-K of Viacom Inc. for the fiscal year ended December 31, 2002) (File No. 001-09553).*

Management contract or compensatory plan required to be filed as an exhibit to this form pursuant to Item 15(b).

E-l (0 Form of Certificate and Terms and Conditions for Stock Options granted under the 2000 Long-lenn Management Incentive Plan (incorporated by reference to Extubh 102 to the Current Report on Bonn 8-K of Viacom Inc. fifed March 14, 2005) (Ffle No. 001-09553).' (if) Form of Notice to Executive Officers regarding Acceleration of Vesting of "Underwater" Options (incorporated by reference to Exiubh 103 to the Current Report on Form 8-K of Viacom Inc. filed March 14, 2005) (File No. 001-09553).' (d) Viacom Inc. 2004 Long-lerm Management Incentive Plan (incorporated by reference to Annex B to Viacom Inc.'s Proxy Statement dated April 15, 2004) (FDe No. 001-09553).' (i) Form of Certificate and Terms and Conditions for Stock Options under the Viacom Inc. 2004 Long-Term Management Incentive Plan (incorporated by reference to Exhibit 103 to the Current Report on Form 8-K of Viacom Inc. filed February 1, 2005) (File No. 001-09553).' (ii) Form of Certificate and Terms and Conditions for the Performance-Based Restricted Share Units under the Viacom Inc. 2004 Long-lerm Management Incentive Plan (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Viacom Inc. filed February 1, 2005) (File No. 001-09553).' (in) Form of Certificate and Terms and Conditions for the Performance-Based Restricted Share Units with Time Vesting under the Viacom Inc. 2004 Long- Term Management Incentive Plan (incorporated by reference to Exhibit 10-2 to the Current Report on Form 8-K of Viacom Inc. filed February 1, 2005) (FDe No. 001-09553).' (hr) Form of Deferral Elections for Performance-Based Restricted Share Units under the Viacom Inc. 2004 Long-Term Management Incentive Plan (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K of Viacom Inc. fikd February 1, 2005) (Ffle No. 001-09553).' (v) Form of Deferral Elections for Performance-Based Restricted Share Units with Time Vesting under the Viacom Inc. 2004 Long-Term Management Incentive Plan (incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K of Viacom Inc. filed February 1, 2005) (FDe No. 001-09553).* (e) Viacom Inc. Senior Executive Sbort-Term Incentive Plan (as an^mA-d and restated through March 20. 2003) (incorporated by reference to Exhibit C to Viacom Inc's Proxy Statement dated April 21. 2003) (FDe No. 001-09553).' (f) Summary of Viacom Inc. Compensation for Outside Directors (filed herewith).' (g) Viacom Inc. Deferred Compensation Plan for Non-Employee Directors (as amended and restated as of October 14. 2003) (incorporated by reference to Exhibit 10(e) to the Annual Report oo Form 10-K of Viacom Inc. for thie fiscal year ended December 31, 2003) (Ffle No. 001-09553).' (i) Form of Election Form for Viacom Inc. Deferred Compensation Plan for Non- Employee Directors (incorporated by reference to Exhim 10 to the Current Report on Form 8-K of Viacom Inc. filed December 15, 2004) (FDe No. 001-09533).'

Management contract or compensatory plan required to be filed as an exhibit to this form pursuant to Item I5(b).

E-2 Exhibit No. m,Bescriptioa of Document (h) Viacom Inc. Retirement Income'Plan for Non-Employee Directors (as amended and restated as of October 14, 2003) (incorporated by .reference to Exhibit 10(f) to the Annual Report on Form 10-X of Viacom Inc. for the fiscal year ended December 31, 2003} (Me No. 001-09553).* (i) Viacom Inc. Stock Option Plan for Outside'Directors (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q of Viacom Inc. for. the quarter ended June 30,1993) (File No. 001-09553) (as amended effective October 10,2002 by the Amendment to Viacom Stock Option Plans)* (incorporated by reference to Exhibit 10(bb) to the Annual Report on Form 10-K of Viacom Inc. for the fiscal year ended December 31, 2002) (File No. 001-09553).* (j) Viacom Inc. 1994 Stock' Option Plan for Outside Directors (incorporated by reference .to Exhibit B to Viacom Inc.'s! Proxy Statement dated April 28, 1995) (File. No. 1001-09553)' (as amended effective October 10,; 2002 by the Amendment to Vjacom Stock Option Plans) (incorporated by reference to Exhibit 10(bb) to the Annual Report on Form 10-K of Viacom Inc. for the fiscal year ended December ,31, 2002) (File No. 001-09553).* (k) Viacom Inc. 2000 Stock Option Plan for Outside Directors (as amended and restated through March 10, 2004) (incorporated by reference to Annex C to Viacom !lnc.'s Proxy Statement dated April 15, 2004) (File No, 001-09553).* (i) > Form of Stock Option Certificate-for Stock Option Grants under the Viacom Inc. 2000 Stock Option Plan for Outside Directors (initial grant form) (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Viacom Inc. filed January 27, 2005) (File No. OOi-09533).* (ii) Form of Stock Option Certificate for Stock Option Grants under the Viacom Inc. 2000 Stock Option Plan for Outside Directors (annual grant form) (incorporated by reference to Exhibit 10.2 to the Current Report on. Form 8-K of Viacom Inc. filed January 27, 2005) (File No. 001-09533).* (1) Amendment to Viacom Stock Option Plans referred to above in Exhibits 10(a) through 10(c), 10(i) and (10)(j) (incorporated .by reference to Exhibit 10(bb) to the Annual Report on Form 10-K of Viacom Inc. for the fiscal year ended December 31, 2002) (File No. 001-09553).* (m) Viacom Excess 401(k) Plan (Effective April 1,1984, Restated as of December 1,1999, amended effective January 1,2002 and August 28,2002) {incorporated by reference to Exhibit 10(j) to the Annual Report on Form 10-K of Viacom Inc. for the fiscal year ended December 31, 2003) (File No. 001-09553);* (n) Excess Pension Plan for Certain Employees of Viacom International Inc. restated as of January 1, 2003 (as. amended October 27, 2003) (incorporated by reference to Exhibit 10(k) to the Annual Report on Form 10-K of Viacom Inc. for the fiscal year ended December 31, 2003) (File No. 001-09553).* (o) Viacom Excess 401 (k) Plan for Designated Senior Executives (as amended October 27, 2003) (incorporated by reference to Exhibit 10(1) to the Annual Report on Form 10-K of Viacom Inc. for the fiscal year ended December 31, 2003) (File No. 001-09553).* (p) Viacom Bonus Deferral Plan for Designated Senior Executives (as amended October 27, 2003) incorporated by reference to Exhibit 10(m) to the Annual Report on Form 10-K of Viacom Inc. for the fiscal year ended December 31, 2003) File No. 001-09553).*

Management contract or compensatory plan required to be filed as air exhibit to this form pursuant to Item 15(b).

E-3 (q) Employment Agreement, dated July 1, 2004, bcimu-a Viacom Inc. and Simmer M. Redstone (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Viacom Inc filed July 22, 2004) (Fife No. 001-09553).« (r) Employment Agreement, dated Jury 1, 2004, between Viacom Inc. and Thomas E. Freston (incorporated by reference to Exhint 10.2 to theCbneat Report on Fbnn 8-K

(s) Employment Agreement dated Jury 1, 2004 between Viacom Inc. and Leslie Moonves (incorporated by reference to Exhibit 103' to the Current Report on Form 8-K of Viacom Inc. fikd Jury 22, 2054) (FDe No. 001-09S53).* (t) Agreement, dated March 22, 2001. between Viacom Inc. and Richard J. Bressfer (incorporated by reference to Exhibit 10(q) to the Amraal Report on Form IO-K of Viacom Inc. for the fiscal year ended December 31, 2001), as amended by a Letter Agreement dated as of January 31, 2005 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Viacom Inc. filed February 11, 2005) (FDe No. 001-09553).' (u) Agreement, dated as of May 1, 2000, between Viacom Inc. and Michael D. Fricklas (incorporated by reference to Exhibit 10 J to the Quarterly Report on Form 10-Q of Viacom Inc for the quarter ended September 30, 2000), as amended by Agreement dated April 1, 2003 (incorporated by reference to Exrobrt 10(a) to the Quarterly Report of Viacom Inc. for the quarter ended March 31, 2003) (FDe No. 001-09553).* (v) Service Agreement, dated as of March 1, 1994, between George S. Abrams and Viacom Inc. (incorporated by reference to Exhibit 10(q) to the Annual Report on Form 10-K of Viacom Inc for the fiscal year ended December 31, 1994) (FDe No. 001-09553).' j (w) CBS Corporation ("CBS") plans assumed by Viacom Inc after the merger with CBS, i consisting of the foOowmg: ' (0 CBS 1991 Long-Tenn Incentive Plan (as amended as of July 28, 1999) (incorporated by reference to Exhibit 10.15 to the Quarterly Report on Form 10-Q of Infinity Broadcasting Corporation for the quarter ended September 30, 1999) (FDe No. 001-14599).' (if) CBS 1993 Long-Term Incentive Plan (as amended as of July 28, 1999) (incorporated by reference to Exhibit 10.16 to the Quarterly Report on Form 10-Q of Infinity Broadcasting Corporation for the quarter ended September 30, 1999) (FDe No. 001-14599).' (in) CBS Supplemental Executive Retirement Plan (as rmn?*** as of April 1, • 1999) (incorporated by reference to Exhibit 10(h) to the Quarterly Report on Form 10-Q of CBS for the quarter ended September 30, 1999) (FDe No. 001-00977).' (iv) CBS Bonus Supplemental Executive Retirement Plan (as amended as of April 1. 1999) (incorporated by reference to Exhibit 10(i) to the Quarterly Report on Form 10-Q of CBS for the quarter ended September 30, 1999) (FDe No. 001-00977).' (v) CBS Supplemental Employee Investment Fund (as amended as of January 1, 1998 (incorporated by reference to Exhibit lOfj) to the Quarterly Report on Form 10-Q of CBS for the quarter ended September 30, 1999) (Ffle No. 001-00977).' (vi) Director's Charitable Giving Program (as amended effective April 30, 1996) (incorporated by reference to Exhibit 10(g) to the Quarterly Report on Form 10-Q of CBS (f/Va Westingbouse Electric Corporation) for the quarter ended June 30, 19%) (FDe No. 001-00977).'

Management contract or compensatory plan required to be filed as an exhibit to this form pursuant to Item 15(b). Exhibit No. Description of Document (vii) CBS Deferred Compensation and Stock Plan1 for Directors (as amended as of February 24, 2000) (incorporated by reference to Exhjbit^lQCyXJx) to the Annual Report on Form 10-K of Viacom Inc. for the fiscal year ended December 31, 2000) (File No. 001- 09553),* . (viii) Advisory Director's Plan •Termination Fee Deferral Terms and Conditions, Effective April 30, 1996 (As Revised Effective. February .24, 2000) (incorporated by reference to Exhibit 10(y)(x) to the Annual Report on Form 10-K of Viacom Inc. for the fiscal ydar ended T>eceinber 31, 2000) (Fife No. 001-09553).* . . , (x) Infinity Broadcasting Corporation ("Infinity") Stock Plan for Directors assumed by Viacom Inc. after the merger with Infinity (Effective as of February 24, 2000) (incorporated by reference to Exhibit 10(aa)(ii) to the Annual Report on Form 10-K of Viacom Inc. for the fiscal year ended December 31, 2002) (File No. 001-09553).* (y) Five-Year Credit Agreement, dated as of March 7, 2001, among Viacom Inc.; Viacom International Inc.; the Subsidiary Borrowers Parties thereto; the Lenders named therein; The Chase Bank, as Administrative Agent; Salomon Smith Barney . Inc., as Syndication Agent; and Bank of America, NA. and Fleet National Bank, as Co-Documentation Agents (incorporated by reference to Exhibit 10(ccj to the Annual Report on Form 10-K of Viacom Inc. for the fiscal year ended December 31, 2000), as amended by Amendment No. 1 to Five-Year Credit Agreement 4ated as of March 5, 2002 (incorporated by reference to Exhibit 10(aa) to the Annual Report on Form 10-K of Viacom Inc. for the fiscal year ended December 31, 2001) (File No. 001-09553), Amendment No. 2 to the Five-Year Credit Agreement dated as of February 28, 2003 (incorporated by reference to Exhibit 10(ee) to the Annual Report on Form 10-K of Viacom Inc. for the fiscal year ended December 31, 2002) (File No. 001-09553) and Amendment No. 3 to the Five-Year Credit Agreement dated as of February 19, 2004 (incorporated by reference to Exhibit 10(y) to the Annual Report on Form 10-K of Viacom Inc. for the fiscal year ended December 31, 2003) (File No. 001-09553). (z) Five-Year Credit Agreement, dated as of February 19, 2004, among Viacom Inc., • Viacom International Inc., the Subsidiary Borrowers Parties thereto, the Lenders named therein, JPMorgan Chase Bank, as Administrative Agent, Citibank, NJ\., as Co-Syndication Agent and Bank of America, N A., Deutsche Bank Securities, Inc., and The Bank of Tokyo-Mitsubishi, Ltd., New York Branch, as Co-Documentation Agents (incorporated by reference to Exhibit 10(z) to the Annual Report on Form 10-K of Viacom Inc. for the fiscal year ended December 31, 2003) (File No. 001-09553). (aa) Agreement among Viacom Inc., NAIRI, Inc. and National Amusements, Inc. dated as of October 28, 2004 (incorporated by reference to Exhibit 10(a) to the Quarterly Report on Form 10-Q of Viacom Inc. for the quarter ended September 30,2004) (File No. 001-09553).

Management contract or compensatory plan required to be filed as an exhibit to this form pursuant to Item 15(b).

E-5 (12) SMemt^t n CtmfUtttttmi «f Ratios (filed herewith). (21) "iBhiMhrifi «TViacMi be. (fifed herewith). (23) CkBKBts of Experts mmt Coosel (a) Cbosenl of PricewaterbouseCoopers LLP (filed herewith). (24) Ptowcn «T Attorney (filed hcrcwftfe). (31) R«le 13a-14

Management contract or compensatory plan required to be fifed as an exhibit to this form pursuant to Item 15(b).

E-6 INDEX TO FINANCIAL STATEMENTS AND SCHEDULE The following consolidated financial statements and schedule of the registrant and its subsidiaries are submitted herewith as part of this report:

Reference

Item 15(a) (1) Financial Statements: 1. Management's Statement of Responsibility for Financial Reporting 11-31 2. Report of Independent Registered Public Accounting Firm 11-32 3. Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002 11-34 4. Consolidated Balance Sheets as of December 31, 2004 and 2003 11-35 5. Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002 11-36 6. Consolidated Statements of Stockholders' Equity and Comprehensive Income for the years ended December 31,2004,2003 and 2002 11-37 7. Notes to Consolidated Financial Statements H-38 -11-82 Item 15(a) (2) Financial Statement Schedule: II. Valuation and qualifying accounts F-2 All other Schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule.

F-l VIACOM INC AND SUBSIDIARIES SCHEDULE n—VALUATION AND QUALIFYING ACCOUNTS (MilKons of dollars)

OLA CoLB CtLC Crf.D CaLE Baluce BC^^MMB£ '*q«rt*«*r..f h CMrtsa^T *»«*fcer EM oT PuilV±_ •f Ftri»d Fferiod ABwuce NT dovbtrel accMnts: Year ended December 31, 2004 $2893 $ 1.4 $116.1 $11.4 :(1413 $276.7 Year ended December 31, 2003 $274.8 $ 6.9 $ 763 $ .9 !E 69.8 $2893 Year ended December 31, 2002 $269.4 $ — $108.7 $ 4.1 :H07.4 $274.8 Vahutioa atowaace om deferred tax assets: Year ended December 31, 2004 $ 57.8 $87.6 $ 63.0 $ — — $208.4 Year ended December 31, 2003 $ 513 $ — $ 6.5 $ — — $ 57.8 Year ended December 31, 2002 $ 72.7 $ — $ 1.1 $ — 223(1) $ 51J Reserves PN* wcBioty ooyotg sctocft Year ended December 31, 2004 $ 78.0 $ — $ 192 $ — 12.6 $ 84.6 Year ended December 31. 2003 $ 72.1 $ — $ 17.1 $ — 112 $ 78.0 Year ended December 31. 2002 $ 54.2 $ — $ 23.0 $ — 5.1 $ 72.1

Mtfor (1) Primarily related to the release of valuations allowances related to foreign operating leases.

F-2 CERTIFICATION

I, Sumner M. Redstone, certify that: 1. I have reviewed this annual report on Form 10-K of Viacom Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 16, 2005 /s/ SUMNER M. REDSTONE Sumner M. Redstone Chairman and Chief Executive Officer CERTIFICATION

I, Richard J. Bressler, certify that: 1. I have reviewed this annual report on Form 10-K. of Viacom Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 16, 2005 /s/ RICHARD J. BRESSLER Richard J. Bressler Senior Executive Vice President and Chief Financial Officer I are always thinking.

^Technologies Corporation •" '"' Table of Contents

Chairman's Letter At a Glance Our Companies Businesses in Balance Carrier

Hamilton Sundsti

Pratt & Whitney Sikorsky UTC Pov.-er Finar.cials Board of Directors Leadership Shareowner Information

Factors That May Affect Future Results Thjs publication includes "forward looking statements" concerning expected revenue, earnings, cash now and other matters thut are subject TO rishs ana uncertainties. Important factors that could cause actual results to differ materially from those anticipated or implied in forward looking statements include the health of (tie global economy; strength of end-market demand in building construction ar,Q in both the commercial and defense segments of the aerospace industry; fluctuation in commodity prices, interest rates, foreign currency exchange rates, and the jmpactcl weather conditions; and company-specific items including ihe availability and impact of acquisitions, the rate and ability to effectively integrate these acquired businesses, the ability to achieve cost reductions at planned levels, and the outcome of legal proceedings. For information identifying other important economic, political, regulatory, legal, technological, competitive and other uncertainties, see United Technologies Corporation's (UTC) SEC filings as submitted from time to time, including but not limited to, the information in the "Business" section of UTC's Annual Report on Form aO-K, the information included in UTC's 10-K and 10-Q Reports under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the information Included in Current Reports on Form 8-K. At United Technologies, we are always thinking. We're unified by the belief that everything we do well today can be done better tomorrow. Standards, disciplines, systems and processes have built a culture that encourages us, even requires us, to challenge everything. This way of thinking turns the insignificant into the significant. It accelerates our momentum. And delivers the products of our imagination.

At UTC, thinking is working.

IJnibvt Torhnnlnoi« 1f\n& An Dear Stareowner

Earnings per share and net ncorne both grew 18 percent The reasons begin with operating disciplines leading to n 2004. Rmemes increased 21 percent on strong organic significant cost reductions and game changing products. growth and acqusibons. The rest* was yet another year of We see the evidence in UTC's segment operating income total shareholder return for i/TCequaing or exceeding margin having expanded from 5 percent a dozen years market averages. ago to 14 percent currently. We also see it in UTC's exceptional organic revenue growth of 8 percent in 2004. UTC"s total shareholder return performance has steady outperformed over a longer period, and welre induing We're benefiting from favorable economies and business this in this Chairman's Letter. We beieve there are dear conditions worldwide, out we are also outpacing com- and sustainable reasons. petitors in many of our markets. We see the evidence in Otis' 14 percent growth in unit elevator orders in 2004. We see it in Carrier's 15 percent growth in units snipped Ibtal Shareholder Return (1992-2004) in 2004. We see it in Pratt & Whitney Canada's 42 percent growth in engines shipped in 2004. These are powerful numbers.

Balance has long been a strength at UTC. Thirty-six percent of revenues last year arose from aerospace, and 64 percent from our commercial and industrial compa- nies. Forty-one percent arose from liS. markets, and 59 percent internationally. These trends continue, with the LirxJe acquisition having ctosed in 2004, and prospectively Kidde in the current quarter. Linde is the commercial refrigeration market leader in Europe and wffl take this business for Carrier to leadership worldwide. Kidde will double our commercial security and fire protection businesses worldwide, presuming the acquisition closes . Tbwa. Vo «d as scheduled at the end of the first quarter.

2 UMB We believe a new class of light jets is coming, to serve standard. Effective a year from now, Carrier residential general aviation markets and potentially a new generation systems shipped in the U.S. will be 30 percent more of air taxis asvaviatlon develops service on demand. energy efficient than the current federal standard. These We're delighted to have won with the PW600 the two major results and others are included in UTC's first Corporate engine placements in this segment to date, the Eclipse Responsibility Report, released coincident with this 5OO and Cessna Mustang. Technology and integration Annual Report also won for Hamilton Sundstrand the largest order in its history, eight aircraft systems for the Boeing 787 UTC's Employee Scholar Program is unique in the world Dreamliner. Notably, these wins totaled 92 percent of and of extraordinary impact We encourage college and the value of all the systems Hamilton Sundstrand bid advanced degree education for employees with support to Boeing for this great airplane. and incentives including a UTC common stock award on degree attainment. Results have been 15,800 degrees Performance for us goes beyond product innovations earned since we began in 1996, and current enrollment and financial results. Hazardous waste generation and air includes a further 13,500 employees. Our investment since emissions, the two important environmental impact inception totals $462 million, including $124 million categories reported to the EPA, have dropped 89 and 93 for common stock awards. percent, respectively, for UTC since 1990. Global energy and water usage normalized for volume have dropped 40 On behalf of shareholders, special thanks to every employee and 53 percent, respectively, since 1997 when we for amazing creativity and contributions. They're the began concentrating on these categories. reasons for the company we have today.

We target green performance in our products and Invest significantly for this. Otis' Qen2m elevator system is the first ever to be totally lubricant free and, amazingly, offers more than 70 percent energy savings in some applications. Carrier led the air conditioning industry with the elimination of CFCs from its new equipment in 1994, and with the George David adoption in 2004 of the new 13 SEER federal regulatory Chairman and Chief Executive Officer

United Technologies 2004 Annual Report 3 At a Glance

United Technologies provides high-technology products and services to the buikfing systems and aerospace industries worldwide through our industry-leading businesses: Carrier, Chubb. Hamilton Sundstrand, Otis, Pratt & Whitney, Sikorsky and UTC Power. In 2OO4. UTCTs revenues increased 21 percent to $37.4 biffion, including 8 points of organic growth as wen as the benefits of foreign exchange translation and acquisitions. Both earnings per share and net income grew 18 percent to $5.52 and $2.8 billion, respectively. Cash flow from operations was $3.7 bJion. used in pan to fund dividends, which increased to $L4O per share. UTC voluntarily contributed $906 m*on tote pension plans during the year. After capital expenditures of $795 mBon. cash *ow exceeded net raome. Share repurchases totaled neany $1 biffion for the year.

Revenues Operating Cash Rows Dividends Paid Per Common Share

00 M 02 03 04 00 01 02 C3 04 00 01 O2 03 04

Oiuted Earnings Per Debt To Capital Research Common Share and Development*

S *

00 01 02 03 04 30 01 02 03 00 01 02 O3 O4 Our Companies

Carrier Otis Heating, ventilating and air conditioning (HVAC) systems Design, manufacture, installation, maintenance and for residential, commercial, industrial and transportation; servicing of elevators, escalators and moving walkways refrigeration systems for food retail and transportation; for low-, mid-and high-rise commercial and residential controls, air quality and energy management systems for buildings, multipurpose malls and urban transportation residential and commercial HVAC and refrigeration'applica- systems tions; food service equipment; aftermarket parts and services for HVAC, refrigeration and food service industries Pratt & Whitney Large and small commercial and military turbofan, turbo- Chubb prop and turboshaft engines; spare parts and product Security and fire protection systems; integration, installation support; specialized engine maintenance and overhaul and servicing of intruder alarms, access control and and repair services for airline, government and private video surveillance, and monitoring, response and security fleets; rocket engines and space propulsion systems; personnel services; installation and servicing of fire industrial gas turbines and aftermarket services to detection and suppression systems support the electrical generation, mechanical pump drive and marine propulsion markets

Hamilton Sundstrand Aircraft electrical power generation and distribution Sikorsky systems; engine and flight controls; propulsion systems; Military and commercial helicopters; fixed-wing recon- environmental controls for aircraft, spacecraft and naissance aircraft; spare parts and maintenance submarines; auxiliary power units; product support, services for helicopters andfixed-win gaircraft ; and civil maintenance and repair services; space life support helicopter operations systems; industrial products including mechanical power transmissions, compressors, metering devices and fluid handling equipment UTC Power Combined heat, cooling and power systems for commercial and industrial applications and fuel cell systems made by UTC Fuel Cells for commercial, transportation and space applications, including the U.S. space shuttle program

Business Unit Revenues' (Dollais In Billions) Hamilton Carrier Otis Pratt & Whitney Sundstrand Chubb Sikorsky

'UTC fmtft tninail Information fi not reported as in own MgnunL Businesses in Balance

United Technologies' long-term strategy to btriW a wett-baianced business has ted us to multiple business sectors, global markets and diverse customer relationships. This balanced approach helps protect LTTC from economic shifts and market downturns, and aUows us to take advantage of both long- and snort-term business cycles.

Revenues by Geogdphy as a Percent of Total Revenues

Revenues by Business Type as a Percent of Total Revenues Always thinking means forever questioning what's possible: How can we improve a design? Eliminate waste? Accelerate productivity? It means constantly finding new ways to produce more value for our shareowners, partners and customers. 13004 Anniar Repoii Every manufacturing location we've built and rebuilt over the has taught us something. So when Carrier created its new industrial complex in Monterrey, Mexico, it became our smartest facility yet. Applying our ACE (Achieving Competitive Excellence) quality and process improvement methodology, a nontraditional team of engineers, designers, local managers and assembly workers collaborated to imagine and build an entirely different type of plant in just seven months. Every day they produce 14 percent more cooling and refrigeration systems in just 60 percent of the space previously needed, making this one of our most productive plants.

i

When Hamilton Sundstrand was selected by Boeing to provide eight systems for the new 787, the unprecedented win required an equally unprecedented process. In the largest production initiative in its manufacturing history, it brought together product designers, manufacturing engineers and factory operators as well as quality and procurement professionals to reassess how auxiliary power units were manufactured. The team's target included essentials like no off-line work. In-line inspections, no two-person work and continually moving lines. The results of this rethinking are convincing: build time reduced 70 percent and manufacturing space cut in half two years before production even begins.

--

United TechnolOEies 2004 Annual Rconrt 11 To add efficiency : •^ »••? subtract partsI ' . . ::•-. ;-L-t-^-.;i2§HHJL . '- : .-'-••-*-

JULES NUSESPV,6CQSi?p , C-*£•?••:, Canada " ;jt!-. Efficiency doesn't stop at the end of our manufacturing lines. We also consider how efficiently our products perform throughout their entire life cycle. This is why Pratt & Whitney is dramatically changing the way it will build its newest, smallest jet engine, the PW600. A global team of employees from Canada to Poland and more than 30 suppliers came together early in the development process to analyze and then revolutionize how the new engine was developed and manufactured. Their improvements will reduce engine assembly time from eight days to eight hours and cut the number of parts required in half. As a result, they lowered manufacturing costs and will save customers mainte- nance expense and equipment downtime.

United Technologies 2004 Annual Reoort 13

At UTC. thinking powers innovation. So we make it easy for employees to learn as much as they want. Our Employee Scholar Program allows employees to pursue any accredited course of study. We pay all costs up front, including tuition, fees and books,.and give 1.-W! :o^fe employees paid time off to study, equalto more than three weeks a year. Upon graduation, we reward them with UTC stock or its equivalent value. Since 1996, some 15,000 degrees nave been awarded through the program — a $-162 million investment, including $12-1 million in common stock awards. You'll find our graduates not only in the United states, but also in Argentina, Brazil. China, Hong Kong, Korea, Mexico, Poland, Russia, Singapore, South Africa, Taiwan and more than 30 other countries around the world.

ixceptional ly that believes iture as much » •{•••*

Inager. P'att & Whitney Services Pte Ltd SingaporM

United Technologies 2004 Anmrai Rpnort 1 R We pi4 the city bus on a different route.

'Tee:''.6-;c:es. ^TC Power.

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16 l»»««» Teomakwci JOW i^nuuf 3*0^ United Technolosles 70O4 Annual Runnrt 17 Our stafidat no bordeirs.

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es: r:er-atci: s:=".' = What's the one essential quality a helicopter must have? Safety. Sikorsky's new S-92™ helicopter is designed and manufactured to the world's highest safety standards in addition to delivering passenger comfort and award-winning

certified with flaw-tolerance technologies, .These-fAA stan- dards require that the S-92 helicopter's crjtjgjal cprjiiponents continue to operate safely even when dama|e|i. Sikorsky is taking safety to new heights. ;v|. V ' ' •"

i For us, safety is first. It's also second, third .,.'.,..- ^w-pssrysT^ andI fourth.T.X J.I" .' -•"•••--•~-~!---'>'^*^-«3*!«SjSSs~ " s

RON DOEPPNER Pilot, Flight Operations, SikorsKy (left)' RUS STILES Pilot, Flight Operations, Sikorsky (right) West Palm Beach, , U.S.

Uni ^ 9nf>4 Annual Onnnrt 1 Q I make sure we practicd what we preach.

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respons z\e cjs.res;

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sccjirB: n 2CC3 '«n 53 -£*'!•, soc United ^ 9OrM Annual Qonnn Employees

Revenue

22 United tojnufcj^q 2OCM Arauii o. Carrier builds its business on a century of innovation and Also in 2004, Carrier endorsed and committed to the U.S. world leadership in commercial and residential heating, Department of Energy's new 13 SEER (Seasonal Energy ventilating, refrigerating and air conditioning. Its innovative Efficiency Ratio) standard. As a result, Carrier residential products are more efficient, consume less energy and use air conditioning systems shipped in the United States after environmentally sound refrigerants. January 2006 will be 30 percent more efficient than today's federal standard. Carrier launched its Infinity" residential heating and cooling system in 2004, the only system that gives homeowners Carrier's acquisition of Linde Refrigeration in 2004 adds to complete control over temperature, humidity, air quality, its worldwide reach and builds on a tradition of innovation. fan speed and ventilation. The Infinity system also detects when its filters need to be replaced and automatically Linde refrigerated cases. Glattbeck. Germany (left) adjusts for maximum efficiency and performance. Infinity thermostat. Pittsburgh. . U.S. (right)

1 1 1 *\ \\ i » VT u M * .11 .it i r n IT i ( i rw i iM 1 1 1 < j mi nl r i n n » ..1111 * n H.JI IMITMI « m

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United Technologies 7004 Annnal p^nnrt Employees

Revenue wnafs different about Chubb's security and fire protection In Canada, Chubb provides virtually all Best Buy and affiliated services? Advanced technology, highly trained personnel Future Shop stores with intruder detection devices, and in and the ability to integrate services. 2004 Chubb won a contract to supply Future Shop with digital video recording for security surveillance. One example is AFx'", an electronic security product that provides integrated intrusion detection and access control Service and installation. London. England (left) with remote capability. In 2004, Chubb repackaged AFx Security services. Toronto. Ontario, Canada (right) to deliver a cost-effective solution to an expanded market. Today AFx is being used by Vodafone, one of the world's largest mobile phone providers, and by the Dutch tax offices in the Netherlands. Hamilton Sundstrand

Revenue

OpefBlmg Profit

-4-1 Virtually 100 percent of the world's new production commercial Hamilton Sundstrand's industrial businesses provide and regional jet aircraft use Hamilton Sundstrand systems, mechanical power transmission, pumps and compressors to ranging from electric power generation and distribution industries worldwide. In 2004, these businesses benefited systems, to auxiliary power units, air management and engine from the economic growth in China and the resulting increased control systems, and flight controls. Hamilton Sundstrand need for industrial products used in construction. also provides critical systems for the International Space

Station and was recently chosen as the prime contractor Hamilton Sundstrand Industrial (Shanghai) Co. Ltd., Shanghai. China (left) for NASA's extravehicular (EVA) systems, including the space- Airbus A380 In final assembly stage, Toulouse. France (right) suit, all related tools and crew aids, training support and on-site engineering. Employees

Revenue Otis innovations set the worldwide standard for safety, transformed the industry by eliminating machine rooms, functionality and reliability of elevators, escalators and replacing heavy steel cables with lightweight belts, and moving walkways. improving energy efficiency.

In China, where Otis has been doing business since the Otis maintains and modernizes its own products as well early 1900s, its presence remains strong. In 2004, Otis won as those of other manufacturers, and today maintains a contract to install 64 elevators and escalators in the more than 1.45 million elevators and escalators worldwide. new 101-story Shanghai World Financial Center. The center In 2004, Otis won a $10 million contract to modernize will feature 16 double-deck and seven Gen2 elevators. the elevators at City National Plaza, a Los Angeles landmark Carrying 1.4 million passengers every day, Shanghai's formerly called ARCO Towers. metro system is still growing and Otis will supply 70 Gen2 elevators and 74 escalators to 27 stations along a new line Shanghai Metro. Shanghai. China (left) currently under construction. The Gen2 elevator has City National Plaza, Los Angeles. California. U.S. (right) Pratt & Whitney Employees

Revenue Pratt & Whitney means power. From jet engines to rocket interceptor and ground attack aircraft. The 100th F119 engines, Pratt & Whitney propulsion serves more than 20 engine was delivered to the Air Force in 2004. There are governments, carries travelers around the world, and helps now more than 30 aircraft currently testing and preparing humans explore space. Pioneering innovations like improved the F119 for full operational capability. heat-resistant coatings, environmentally friendly engines and advanced service procedures contributed to Pratt & Pratt & Whitney not only builds the world's most advanced Whitney's milestone achievement of surpassing the $8 aircraft engines, it also services them worldwide. billion revenue mark in 2004. This aftermarket business represents more than half of Pratt & Whitney's total revenues. Pratt & Whitney's F119 is the world's most technologically advanced aircraft engine in production and powers the Pratt & Whitney Engine Overhaul Center. Cheshire, Connecticut U.S. (leftl U.S. Air Force's new F/A-22 Raptor- the latest supersonic U.S. Air force F/A-22 Raptor (right) Sikorsky Employees

Revenue Sikorsky's new S-92 is the first helicopter designed to the Sikorsky has a presence in all five branches of the U.S. world's highest safety standards. It's not only safer, it flies armed forces. It is the prime contractor in the U.S. Army's faster, farther and quieter than its closest competitor. UH-60M program, which involves evaluating the potential modernization of up to 1,200 Sikorsky BUCK HAWK In 2O04 the Canadian government chose the military version helicopters over the next 25 years. Worldwide, the BLACK of the S-92 as its next maritime helicopter. Sikorsky will HAWK and derivatives serve 25 governments. provide 28 helicopters to Canada, with first delivery in 2008. The S-92 is consistently chosen for its safety and perfor- U.S. Army UH-60L BLACK HAWK (left) mance, particularly in harsh environments. Large, offshore S-92 helicopter. Gull of Mexico (right) oil transport companies like Petroleum Helicopters, Inc. (PHI) and, most recently, CHC Helicopter Corp. chose the S-92. UTC Power 462 people Employees UTC Power is a single-source provider of clean, environmen- UTC Power also provides combined cooling, heating and tally friendly solutions for the transportation and on-site power (CCHP) solutions for commercial buildings, where power markets. Through partnerships with major automobile exhaust heat from the building's power plant is captured to manufacturers, including Nissan, Hyundai and BMW, as well run its heating and cooling systems. This provides efficient, as the U.S. Department of Energy, UTC Power is developing reliable energy with low emissions. In 2004 UTC Power fuel cell technology for cars. In 2004 UTC Power developed installed CCHP systems at an A&P supermarket in Mount and tested technology that allows fuel cells to operate in Kisco, New York; at the Presidential Library freezing conditions, a significant milestone. UTC Power also and Museum in Simi Valley, California; and at the University designs and manufactures fuel cells for buses and fleet of Toronto in Mississauga, Ontario, Canada. vehicles, and for commercial and space applications. A&P. Mount Kisco. New Yoik. U.S. (left) Hyundai TUCSON FCEV (right)

United TwhnolnBip« inn/I tnn,,*i Oonnrr •?<:

Five Year Summary

(in millions of dollars, except per share amounts) 2004 2003 2002 2001 2000

For the year Revenues $37,445 $31.034 $28,212 $27.897 $26.583 Research and development 1,256 1.027 1,191 1.254 1.302 <*. Net income 2,788 2.361 2.236 1.938 1.808 Earnings per share: £. Basic: Net earnings 5.62 4.93 4.67 4.06 3.78 Net earnings adjusted for SFAS No. 142 4.51 4.18 Diluted: Net earnings 5.52 4.69 4.42 3.83 3.55 Net earnings adjusted for SFAS No. 142 4.25 3.92 Cash dividends per common share 1.40 1.14 .98 .90 .825 Average number of shares of Common Stock outstanding: Basic 496.4 473.8 472.4 470.2 470.1 Diluted 505.4 502.9 505.6 505.4 508.0 Cash flow from operations 3,699 2,875 2,853 2.976 2.631 Voluntary pension contributions' 906 994 530 Capital expenditures 795 530 586 793 937 Acquisitions, including debt assumed 1,295 2.305 424 525 1.340 Share repurchase 992 401 700 599 800 Dividends on Common Stock1 660 533 462 423 387

At year end Working capital $2,575 $2,069 $4,050 $3.094 $1,864 Total assets 40,035 35.274 29.784 27.571 25,861 Long-term debt, including current portion 4,271 4,632 4,676 4,371 3.772 Total debt 5,591 5.301 4,873 4,959 4.811 Debt to total capitalization 29% 31% 37% 37% 39% ESOP Preferred Stock, net1 428 429 432 Shareowners' equity 14,008 11,707 8.355 8,369 7.662 Number of employees 209,700 203,300 155,000 152,000 153,800

I Note: During 2003. UJC acquired ChuoD pic, which Is reported as a separate segment A ' Represents cash contribution]. In addition, during 2002 and 2001, UTC contributed Treasury Slock of $253 million and $247 million, respectively, to Its domestic denned benefit pension plans. 7 During 20O3, UTC converted all or its outstanding shares of ESOP Preferred Stock Into Common Stock. 1 Excludes dividends paid on ESOP suck. Certain reclasslfications have been made to prior year amounts to conform to the current year presentation.

United Technologies 2004 Annual Report 37 Management's Discussion and Analysis

MaMeemeoTs Otscassion and Analysis of in addition. UTC invested $632 mtton and $182 million in 20O4 and Financial CondtthM and Results at Operations 2003. respective**, in restructunne actions across its businesses. For additional drsciresiort of acquisitions and restructuring, see "Liquidity and Financing Commitments'. Itestruclunng and Other Costs* and HTC it a global provider of h0» te ogyp as and services to a>e Notes 2 and 11 to the ConsobdateO FVianoal Statements. butting systems and aerospace industries, us operations are c ass. bed Mo SKI principal segments: Otis. Corner, Chubb. Pratt & Whitney. Business Environment llnnafcin Sumfcuand and Starsfcy Avcraft (SSttJrsKy). Otis. Carrier and As worldwide businesses. UKTs operations are affected by global, Chubb serve customers in tre convreroial and residential property regional and industry economic and pofibcal factors. However, l/TC*s mdustnes wmMwide. Camer atso serves commercial and transport geographic and industry diversity, as wel as the tSversrty of its product UMiCei Jtiot custumeis. Pratt & wtHtney. Ha«*ton Sundstrend and sales and services, has helped fcnt the impact of any one industry Stouter prhuaiir seme cmnmeitial and government customers m the or Die economy of any single country on the consolidated operating aerospace industry and also serve customers in industrial markets. results. Economic condrbons Jn the commercial airline Industry, global \^/ Revenues bom industrial markets are nduOed in 'commercial and refrigeration mdustries. conmierudl beating, ventilating and air conoV mOusuttT fit the tabte below. The percentage of consofidated revenues tjomng (HVACl and uniaocijl construction markets improved and had comriboud m 2004 and 2003 by UTCs businesses s as Mows: an overall positive impact on ITTCs consoidated operating results in 2004. Strength in commercial construction markets and continued 10M 2003 growth m me arfne revenue passenger maes are expected to contribute 64% positively to UTCs lesuts in 2005- 20% : Revenues from outside the US, indudng US. export sates, in dollars and as a percentage of total segment revenues, are as follows: 100% 100%: 2003 3002 2004 2003 2O02 m 20O4 and 20O3. appranrnacely S8% and 5Ti. resoecwety. of Europe S9J96 $7.150: 25% 23%: 19%: UTC"s sates wei* generated from ongmat eouprnent sates and 42* and AsaPactfic SJ73 15% 14%: 13%; 43%. it i« i li>i I) were generated from aftermarket sales. 1296 2j6O2; 9% 8%; 9%; : are docussed •< the Segment Review and OS. Ciports X563 3329: 4JTJ53: 10% 11%: 14% i HO» 18 of the Notts to Consoidated Franca! Statements. UTCTs eamngs growtn strategy contemplates organc revenue growth. in acovetirjons. new product development and fltntnues S17386: J15J54; 59% 56%: 55%:

to Oecender 20O4. UTC announced i mXiMfmn Tt» iiiMiiiKiiiKi n MI>»I ri ilin i on Ttie OTIS. CARRIED and CHUBS segments ccmprise UTC's commercial 9f Chubb- The rate and extern to wtccfi apprcprtate acquisitxxi oppor- susinesses and supply buildng system products and services globally. tsnbes ate available and the rate at wrVcn acqured Ct2i.nesses are rtie financial performance of these segments can be inBuenced by a naegnjUiJ and anttcjaated synergies ard ccst savings are achieved car number of external factors indudmg turtuaoons in residential and dfftxt u iCs opf > atMHB and nssutts commercial construction activity, interest rates, labor costs, foreign

(20O4AC currency exchange rates, customer attrition, raw material costs and The PRATT& WHITNEY. HAMILTON SUNDSTRAND and SIKORSKY segments other global and political factors. Carrier's financial performance can comprise UTC's aerospace businesses and produce and service iilso be influenced by fuel prices, industry capacity, production and utili- commercial and government aerospace and defense products and also sation of transport equipment, and in its residential business, weather serve customers in industrial markets. The financial performance of conditions in seasonal periods. these segments is directly tied to the aerospace and defense industries. During 2004, overall commercial construction starts in North America Traffic growth, load factors, worldwide airline profits, and general improved modestly over 2003 levels with continued growth expected in economic activity have been reliable indicators for new aircraft and 2005. Building construction activity in Europe was mixed across the aftermarket orders in the aerospace industry. Spare part sales and region but remained essentially flat overall. In Asia, construction activity aftermarket service trends are Impacted by many factors including continued to grow in China, but at a slightly slower pace, showed signs of usage, pricing, regulatory changes and retirement of older aircraft. weakening in South Korea, and remained essentially flat overall in the Performance in the general aviation sector is closely tied to the overall n«| of the Asia Pacific region. Commodity costs increased in 2004 and health of the economy and is positively correlated to corporate profits. -e cost pressures are expected to continue into 2005. Conditions in the airline industry improved overall in 2004, with increased revenue passenger miles and increased large commercial OTIS is the world's largest elevator and escalator manufacturing, and business jet new equipment demand. The commercial airline installation and service company. Otis designs, manufactures, sells and industry, however, continues to experience poor financial performance. installs a wide range of passenger and freight elevators, escalators As such, airlines and aircraft manufacturers will continue to pursue and moving walkways. In addition to new equipment, Otis provides lower cost packages from their suppliers. Revenue passenger miles are modernization products to upgrade elevators and escalators as well expected to Increase in 2005 and result in increased commercial as; maintenance services for the products it sells and those of other aerospace volume in 2005. manufacturers. Otis serves an international customer base, principally UTC's total sales to the U.S. Government increased in 2004 to $5.5 in the commercial and residential property industries. In 2004, 79% of billion or 15% of total sales, compared with $5.3 billion or 17% of total its revenues were generated outside the U.S. sales in 2003 and $4.6 billion or 16% of total sales in 2002. The defense portion of UTC's aerospace businesses is affected by changes in market CARRIER is the world's largest manufacturer and distributor of heating, demand and the global political environment. UTC's participation in ventilation and air conditioning (HVAC) systems, refrigeration and food long-term production and development programs for the U.S. Government service equipment, and related controls, for residential, commercial, has contributed positively to UTC's results in 2004 and is expected to . industrial and transportation applications. Carrier also provides continue to benefit results In 2005. but at lower levels than in 2004. aftermarket services and components for the products it sens and those of other manufacturers in both the HVAC and refrigeration industries. PRATT & WHITNEYisamongtheworld'sleadingsuppliersof commercial, During 2004, 51% of Carrier's revenues were generated outside the general aviation and military aircraft engines. Pratt & Whitney provides jnd by U.S. exports. In 2004, strength in housing starts favorably spare parts and aftermarket and fleet management services primarily North American residential operations and the transport for the engines it produces, along with power generation and space refrigeration business remained strong. Global pricing trends and propulsion systems. These products and services must adhere to strict increased commodity costs are expected to continue to present chal- regulatory and market driven safety and performance standards. lenges to the North American and international HVAC and commercial These standards, along with the long duration of aircraft engine refrigeration markets in 2005. In response to commodity cost increases, programs, create uncertainty regarding engine program profitability. The Carrier has announced price increases on many of its products. aftermarket business is impacted by competition and technological improvements to newer generation engines that increase reliability. CHUBB is a global provider of security and fire protection products and Pratt & Whitney continues to enhance its programs through performance services and was acquired by UTC on July 28, 2003. In the electronic improvement measures and product base expansion. Manufacturing security industry. Chubb provides system integration, installation and and aftermarket operations are benefiting from restructuring actions service of intruder alarms, access control systems and video surveillance aimed at improving efficiency and from selective acquisitions and systems. In the fire protection industry, Chubb provides system integra- ventures. Product base expansion includes Pratt & Whitney's develop- tion, installation and service of portable and fixed suppression systems ment of large commercial engines for the narrow-bodied and wide-bodied ancl fire detection systems. Chubb also provides monitoring, response aircraft markets and small commercial engines that have already and! security personnel services, including cash-in-transit security, to been selected for new light jet aircraft programs. Investments in new complement both the fire and electronic security equipment businesses. commercial engines involve significant financial risk due to the size of Chi bb's operations are predominantly outside the U.S. and Chubb holds the investment required and the technical issues surrounding new significant business positions in the U.K., France, Hong Kong, Australia, engine development. In order to lessen its risk on engine development Canada and South Africa. During 2004, 96% of Chubb's revenues were programs and to improve program economics, Pratt & Whitney has generated outside the U.S. entered into collaboration arrangements. Pratt & Whitney is also positioned to deliver engines and afterrnarket products and services for next generation fighter aircraft to both U.S. and foreign governments, including the Air Force's F/A-22 and F-35 Joint Strike Fighter aircraft.

United Technologies 2004 Annual Renml 38 HAMH.TON SUNOSTRANO is among (tie wortfs leadng suppfers of estimated product wdiianty and product performance guarantee costs tBchnologicaw/ advanced aerospace and industrial products and exceed the projected revenue from the products contemplated under aftamrhet so vices for Onersfed industries worldwide. Aerospace the contractual arrangement. Products contemplated under (he products include systems for pcwer generabon. management and contractual arrangement include products purchased under the contract dtetnbuton. and (or CgM. engine. fuel and ermnximemal coni/ds. and. in the aerospace businesses, required replacement parts that are power mis and propeier systems, industrial products incfuae purchased separately and subsequently lor incorporation into the origi- mpressors, Metering devices. BUHJ hanang equipment and gear nal equipment. Revenue projections used in determining contract loss , HawwXon Sundstrand is respondfig & vtdustry conditions provisions are based upon estimates, of the quantity, pricing and timing by teusne on development of new product ana service offerings. of future product defeveries. losses are recognized on shipment to the jrnjiKHum. and actions aimed at ingrovvjig effciencir and aftennarket extent that mventnriaUe manufacturing costs, estimated warranty costs porturabes. Hamtton Sundstrand is engaged in development and product performance guarantee costs exceed revenue realized. The extent of arogress toward completion on UTCTs long-term commercial design and devetopnent of s^nftcam systems ror the aerospace eqiHpment and hefioopter contracts is measured using unit! Boeing 787 aircraft, as wefl as tor me Airaus A380 commerce! aircraft of delivery. Jn adolbon. UTC uses the cosMo-cost method for development" and the MOOM ipwu j aircraft HamJton Sunostrand is also engaged UXIUJU& in the aerospace businesses and for elevator and escalator M development contracts for NASA and *s prime contractors far a variety installation and modernization cunujus- For long-term aftermarfcet contracts revenue is lecugMnl over the contract period in proportion to the costs eipettrd to be incurred in performing services under the SIKORSKY is one of (he •orkfs largest i uta i ofrattan ;an d contract. Contract accounting also requres estimates of future costs randavcraft over the performance period of the contract as wd as an estimate of sendees. SBtorsky has responded to continued award fees and other sources of revenue. pacity. neticopter manufacturers by iagyuiAng rts cost structure. Contract costs are incurred over a period of time, which can be several e capabwjbes of 4s exsbng products* devetopng new years, and the eMJomiun & these costs requires managements products and f iff^t ** afleiatartiet business. In its government judgment. The long-term nature of these contracts, the complexity of ousness. SworsKy continues to supper Stock Hawk bewoopters and their tne products, and the strict safety and performance standards under derivative* to (he US. and foreign governments. m February 20O*. which they are regulated can affect UTCTs abCty to estimate costs S*m m>. in a joint venture arrangeii ent wO Boeing, received notice o< precisely. As a resuR. UTC reviews and updates its cost estimates on me US. «nny?s detMon » tvmnate the RAH46 Comancne helicopter sitmicant contracts on a quarterly basis, and no less than annually IMO04U1 as part of As reassessmeAt of tfie A/ay's dwauui needs. for al others, or when circumstances change and warrant a modhV Slant, beevi deCvenes of me S^2 medwn fen heScopter for trie cation to a previous estimate. Adjustments to contract toss provisions uamigual market in 2004. Starsky is aKo JCK.MJXC tne H-9Z a are recorded in earnings upon identitcaUjn. owBary denotwe of tta S-92. m mneaOtr 2004. Starsky signed contracts widi ttie CanBwian fowmmcnt for oefe^ry and INCOME TAXES. The future lax benefit arising from net deductible support of 28 H«2 hefcopten be^rnne in 2OOB. temporary otftoejices and tax r^ i yta wards is $2.6 bMrjn at December 31.2004 and $2.7 twSon at December 32.2003. Management beBeves CrittcalJ that UTCTs earnings during the periods when the temporary differences Pin»am«»i of l/TCs Inancial statements requires management to become deductible w*l be sufficient to reafze the related future income i and assumptions that affect the lepoiied amounts of tax benefts. for those jurisdicblons where the expiration date of tax venues and expenses. Note 1 to the Consofdated carryforwards or the projected operating resuts indicate that realization foanmi Sl«yjffngmt5dmj8w5lhesvjntlcji^ accounong poioes used is not Bieiy. a valuation alowance is provided. •i p*j0arauon of the ConsofidBted Financd Statements. Mjnjfflim'rrt In assessing the need for a valuation alowancc. UTC estimates future befieves Ihe iiust ton^ilex and sen&ipve judgments, berausr* of their taxable income, considering the feauUty of ongoing tax planning s«n*c*nce 10 the Conscwdated finance* Statements. resuR poman> strategies and tne reafezabwty of tax less carryforwards. Valuation from the need 0 make estimates about the effects of matters that are alowances related to deferred tax assets can be impacted by changes frterereh; ymeit»n. The most sigiwiLant areas irwohnng roanagement to tai taws, changes to statutory tax rates and future taxable income judgments and eabrnaiea are described below. Actual resuts in these levels, in the event UTC were to determine that it wouk) not be able to reafia ad or a portion of its deferred tax assets in the future. UTC would reduce such amounts through a charge to income in the period in which LONG-TERM CONTRACT ACCOUNTING. OTC ut*Jes percentage of that determination is made. Conversely, if UTC were to determine that it *gT*ftf**1 flif 'Bffiftr^fJflnffUJft of tfs k3n^te*m contracts- ine psrce^il- would be able to reate its deferred ox assets in the future in excess of aft of mnoiicaon MWOiod reoures estimates of future reverses and the net carrying amounts. UTC would decrease Die recorded valuation costs c»er the ft* term of product deSvery. allowance through an increase to income in the period in which that losv^. * any. on bng-iem cent- acts are pnmded for when anuo determination is rftar^Su&sequentlyrecogiTgeiequenuyreeogn d tax benefits associated pxed. LOSS provisions on on^nal egupnien contracts are recognized with valuation aflov races ecorded in a business combination wifl be to the extent tttat estimated i able ufactuniTg, engineering. reconoea as an adjusting* to gcodwwL UTC has exposures related to tax filings in the ordinary course of these matters can result in amounts materially different from any provi- business. UTC periodically assesses its liabilities and contingencies for sionsmadewithrespecttotheirresolution.SeeNotelStotheConsolidated all tax years under audit based upon the latest information available. For Financial Statements for further discussion. UTC recorded sales to the those matters where it is probable that an adjustment will be asserted, U.S. Government of $5.5 billion in 2004 and $5.3 billion in 2003. UTC has recorded its best estimate of the tax liability, including related interest charges, in its Consolidated Financial Statements. See Notes 2 EMPLOYEE BENEFIT PLANS. UTC and its subsidiaries sponsor and 9 to the Consolidated Financial Statements for further discussion. domestic and foreign defined benefit pension and other postretiremen! plans. Major assumptions used in the accounting for these employee GOODWILL AND INTANGIBLE ASSETS, urc's investments in busi- benefit plans include the discount rate, expected return on plan assets, nesses in 2004 totaled $1.3 billion, including approximately $220 rate of increase in employee compensation levels and health care cost million of debtassumed. The assetsandliabllltiesof acquired businesses increase projections. Assumptions are determined based on company •'«% recorded underthe purchase method of accounting at their estimated data and appropriate market indicators, and are evaluated each year as |u^ values at the dates of acquisition. Goodwill represents costs in of the plans' measurement date. A change In any of these assumptions excess of fair values assigned to trie underlying net assets of acquired would have an effect on net periodic pension and postretiremen! benefit businesses. UTC has recorded goodwill of $10.1 billion at December 31, costs reported in the Consolidated Rnancial Statements. :>004 and $9.3 billion at December 31, 2003. Market interest rates declined in 2004 and as a result, the weighted- Goodwill and intangible assets deemed to have indefinite lives are not average discount rate used to measure pension liabilities and costs amortized, but are subject to annual impairment testing. The identifica- declined to 5.90%. Pension expense in 2005 is expected to be negatively tion and measurement of goodwill impairment involves the estimation of impacted by this change and the amortization of prior investment the fair value of reporting units. The estimates of fair value of reporting losses. See Note 10 to the Consolidated Financial Statements for units are based on the best Information available as of the date of the further discussion. assessment, which primarily incorporate management assumptions about expected future cash Hows and contemplate other valuation Results of Operations twhniques. Future cash flows can be affected by changes in industry or market conditions or the rate and extent to which anticipated synergies (In millions of dollars) 2004 2003 2002 or cost savings are realized with newly acquired entitles. Although no Sales $36,700 $30.723 i $27,980 • gijodwill impairment has been recorded to date, there can be no Financing revenues and other income, net 745 311 j 232 j assurances that future goodwill impairments will not occur. See Note 2 Revenues $37,445 $31,034 : $28.212 I to the Consolidated Financial Statements for further discussion. Consolidated revenues increased 21% in 2004 to $37.4 billion and PRODUCT PERFORMANCE. UTC extends performance and operating increased 10% in 2003 to $31.0 billion. The 2004 and 2003 revenue ^ . guarantees beyond its normal service and warranty policies for increases reflect revenue contributed from acquisitions, (8% and 4%, elBanded periods on some of its products, particularly commercial respectively), primarily reflecting the July 2003 acquisition of Chubb, aircraft engines. Liability under such guarantees is based upon future and the favorable impact of foreign currency translation (3% and 4%. product performance and durability. In addition, UTC incurs discretionary respectively), primarily due to the continued strength of the euro in costs to service its products in connection with product performance relation to the U.S. dollar. issues. UTC accrues for such costs that are probable and can be The sales increase in 2004 reflects growth at Otis, Carrier, Pratt & reasonably estimated. The costs associated with these product Whitney, Hamilton Sundstrand and Sikorsky. Sales growth in 2003 performance and operating cost guarantees require estimates over the reflects growth at Otis and Carrier and higher military revenues at Pratt full terms of the agreements, and require management to consider & Whitney and Hamilton Sundstrand, partially offset by lower commercial factors such as the extent of future maintenance requirements and the aerospace volume and fewer helicopter shipments at Sikorsky. future cost of material and labor to perform the services. These cost Financing revenues and other income, net, increased $434 million estimates are largely based upon historical experience. See Note 14 to (140%) in 2004 to $745 million and increased $79 million (34%) to $311 ths Consolidated Financial Statements for further discussion. million In 2003. The 2004 Increase reflects a $250 million payment from DaimlerChrysler in consideration for UTC's release of DaimlerChrysler CONTRACTING WITH THE U.S. GOVERNMENT. UTC's contracts with from certain commitments previously made in support of MTU Aero tha U.S. Government are subject to government oversight and audit. Like Engines GmBH, approximately $170 million of pretax interest income many defense contractors. UTC has received audit reports, which associated with the favorable settlement of claims and other disputed recommend that certain contract prices should be reduced to comply with items related to the 1986 to 1993 U.S: Federal tax audits, and an va -ious government regulations. Some of these audit reports have involved approximate $60 million gain associated with the disposition of an suostantial amounts. UTC has made voluntary refunds in those cases it Interest in a joint venture. The 2003 increase reflects a $50 million gain believes appropriate. In addition. UTC accrues for liabilities associated at Otis associated with the exchange of equity interests in China. with those government contracting matters that are probable andean be reasonably estimated. The inherent uncertainty related to the outcome of

1

T 2003 20O2 2004 2003 2003 Gran WL479 M.ZL5 : S7.819 Intercsi C.IIKJISC $383 S375: $381: 267% i 27 3% ' interest opense ityifj*,**! $12 irvjaon (3%) in 20O4 and $6 million Grass margn (gross margin represents product and service sates (2%) in 2003- The decrease in 2004 is due primariry to tower average leas cost of products and services soM) decreased nine-tentns of a lon£4erm borrown^ in 2O04. pcufnuge pom n 2OO4 to 25.8% due piintaii^ to hrgher restructmrtg iftaiges (J420 ration) in 2OO4. Grass margin also refects the rnoad 2OO4 2OO3 2002 of ««aeased comnioa*y costs (S200 rn*on). prrnariy al Carrier and Average interest rale dwinc the jear Otis. |lkHU»>| offset by unrein improvement from higher commercial Short-term tafomo^ 4.9% 5.2%: a4%: •evospBce volume. Gross starpn decreased 1.2 percentage poirts in total aetx 6.9*: 2DQ3 » 26-7% due priraanly to tower conanemjl aerospace spares and the absence of the apumumaietf J100 m*ion gain on the The average interest rate during 2004 on short-term borrowings was \^f settlement recanted in 2002- These decreases less than t)-at of total debt piimariy due to higher commercial paper we>e partial; offset by mar£n 'VnHovement at Otis and loner •estruc- balances. The weighted average merest rate applicable to debt tumgcnarges ($111 m*on) In 2003. outstanding at December 31.20O4 was 13% for short-term borrowings and 59% for total debt. 2003 3002 3004 2003 2002 S12S6 U.O37: *1O91 Hi 26.4% I 27.1XI 27J%: 3.4V 3.3%: The effective tan rate tor 2O04. 2003 and 2O02 tetects the tax benefit UTOs icsttarch and deidopment spending ndudes both company associated with the tower tax rale on inter national earnings, which UTC and customer Funded programs. Total research and delete omen intends to permanently reinvest outside the United Slates, bi 2004. ipandng for UTC mcreased S234 rmSon (9%) n 20O4 to $2.8 brton UTC reached a settlement with the Internal Revenue Service (IRS) and and $227 mflkn (1O%) in 2003 to $2.6 OBon Company funded research and development ncreased J229 mMkm •elated to claims and oth deputed terns related to the 1986 to 1993 (22%1 • 2004 and decreased S164 m*on (14%) in 20O3. ApproxiTiatery Federal tax audits. The 2004 effective tax rate reflects an approximate 75% of tne 2004 •meaae is due to ncreased spending on commercial $80 rnBon reduction in tax expense as a resuft of this settlement engne programs at Pratt & Wmitney. Tne lenuivja pnmanly retects As described • Mote 9 to the Consoidated Financial Statements, the increases at Carrier and HarnAon Sundstrand. The 2003 deuease is 2003 rate also benefits from a S448 mftn tax toss associated with prin*jn> doet otowe rsptndn g m the commerrial aerospace businesses. a non-core business (3^%) substantialy offset by a reduced benefit »lea»»togylUx»^arrar«einer«atPranA»»ti*jie»Caradaandlt>«r (3.8%) from international acnvibes attributable to a recognition of on Shorshys S-92 program, which received U.S. Federa1 forogn taxes as deductions and not cretfls far UJS. income tax purposes. KdnvBUiauuii type ceroftcabon during the fourth quarter of The tax loss was attributable to a worthless stock deduction UTC was 2002. Company funded n tearUi and oevetoprnem soefKtnf is subject emitted to in 2O03. relating primarily to a dnwwbon in value of its to the variable nave of p ngram development schedules, subsidiary. International Comfort Products. USA (1CP. USA) and other to adJfton so company funded MOgrann. customer funded research events trtat faed the toss in 2003, which included the transfer of certain and o»moomun •» S138S nvjfen m 20O4. S 1.580 rraBon in 2OO3. o( ICP. USA's assets to Carrier and the sale of ICP. USA to a third party. ar*J JJU89 rmfan m 2002. The 2003 ncrease of S391 mAon is The third party sate of the ICP. USA assets Okl not resuft in a significant primatir attntutabie to tire's Joint Strifce Fy at Carrier and Otis, and i>sr^* provides UTCan opportunity to repatriate up toSSOOrntton of reinvested restructmnt diaries (!«). The 2003 nuease refects We acgusibor foreign earnings and to dam an 85% omdend received deduction of Chabo I9»). parDaBy o«s«t by appronmaiely $50 mitton (2%) knver

42 IWHd 3004 against the repatriated amount. UTC is evaluating the effects of the assets associated with the exited facilities. Approximately 60% of the repatriation provision and expects to make a decision on implementation total pre-tax charge will require cash payments, which will be primarily later in 20O5. funded by cash generated from operations. UTC had pre-tax cash UTC expects its effective income tax rate in 2005 to approximate outflows related to the 2004 programs of approximately $136 million. 28%, before any Impact from ongoing tax examinations or repatriation Savings are expected to increase over a two-year period resulting in under the American Jobs Creation Act. recurring pre-tax savings of approximately $290 million annually. As of For additional discussion of income taxes, see 'Critical Accounting December 31, 2004, net workforce reductions of approximately 3,500 [Estimates — Income Taxes' and Note 9 to the Consolidated Financial employees have been completed and 1.0 million net square feet of Statements. facilities have been exited. The remaining workforce and facility related cost reduction actions are targeted for completion in 2005 and early (inminionief dolars) 2004 2003 2002 2006. A significant portion of the remaining square footage to be M«I income $2,788 $2.361 : $2.236 \ eliminated under the 2004 actions relates to facilities at Carrier and fc IpA earnings per share $5.52 $4.69 ! $4.42 i Pratt & Whitney. Additional restructuring and related charges of $128 million are expected to be incurred to complete these actions. As of Net income and diluted earnings per share increased $427 million December 31, 2004, $206 million of severance and related costs and (18%) and $ .83 per share (18%) in 2004 compa red to the full year 2003 $11 million of facility exit and lease termination accruals remain. and increased $125 million (6%) and $.27 per share (6%) in 2003 compared to the full year 2002. The favorable impact of foreign currency 2003 ACTIONS During 2004. UTC recorded net pre-tax restructuring translation contributed $.18 per share and $.23 per share in 2004 and and related charges of $90 million for actions initiated in 2003. These 2003. respectively. charges relate to ongoing cost reduction efforts, including workforce reductions and the consolidation of manufacturing, sales and service Restructuring and Other Costs facilities Including Carrier's Syracuse, New York-based container During 20O4, UTC recorded net pre-tax restructuring and related charges refrigeration and compressor manufacturing operations and Otis' totaling $632 million for new and ongoing restructuring actions. UTC Bloomington, Indiana-based manufacturing, distribution and field tool recorded these charges in the segments as follows: Otis $144 million, operations. The charges included $88 million recorded in cost of sales Ciirrier $241 million. Pratt & Whitney $152 million, Hamilton Sundstrand and $2 million in selling, general and administrative expenses. These $71 million, Sikorsky $9 million and Eliminations and other $15 million. charges were recorded in UTC's segments as follows: Otis $24 million, Trie charges include $546 million in cost of sales. $74 million In selling, Carrier $62 million, Pratt & Whitney $3 million and Hamilton Sundstrand general and administrative expenses and $12 million in other income. As $1 million. The charges included $21 million for severance and related described below, these charges relate to actions Initiated during 2004 and employee termination costs and $69 million for facility exit and lease 2003. For a discussion of restructuring actions associated with business termination costs. . Jsitions, see Note 2 to the Consolidated Financial Statements. The 2003 actions are expected to result in net workforce reductions of approximately 4,200 hourly and salaried employees, the exiting of 2004 ACTIONS During 2004, UTC initiated restructuring actions approximately 1.9 million net square feet of facilities and the disposal of re atingto ongoing cost reduction efforts, including workforce reductions assets associated with the exited facilities. Approximately 60% of the and the consolidation of manufacturing, sales and service facilities total pre-tax charge will require cash payments, which will be primarily including Carrier's McMinnville, Tennessee commercial air conditioning funded by cash generated from operations. UTC had pre-tax cash and ventilation product manufacturing facility, Otis' Stadlhagen, outflows of approximately $94 million related to the 2003 programs Germany escalator manufacturing facility and Pratt & Whitney's Space during 2004. Savings are expected to increase over a two-year period Propulsion facility located in San Jose, California. During 2004, net pre- resulting in recurring pre-tax savings of approximately $165 million tax restructuring and related charges, totaling $542 million) included annually. As of December 31,2004, net workforce reductions of approxi- $458 million recorded in cost of sales, $72 million in selling, general and mately 4,000 employees have been completed and 1.5 million net administrative expenses and $12 million in other income. These charges square feet of facilities have been exited. The balance of the remaining were recorded In UTC's segments as follows: Otis $120 million, Carrier workforce and facility related cost reduction actions are targeted for $179 million, Pratt & Whitney $149 million. Hamilton Sundstrand $70 completion through early 2005. As of December 31, 2004, the 2003 million. Sikorsky $9 million and Eliminations and othsr $15 million. actions have been completed substantiates planned with approximately These charges included $324 million for severance and related employ- $6 million of expected costs remaining to be incurred during 2005. As of ee termination costs, $79 million for asset write-downs. including December 31,2004, $13 million of severance and related costs and $7 impairments, largely related to manufacturing assets and exiting million of facility exit and lease termination accruals remain. facilities that will no longer be utilized, and $139 million for facility exit and lease termination costs. 2005 ACTIONS UTC may initiate additional restructuring actions in The 2004 actions are expected to result in net workforce reductions 2005 through its continuing cost reduction efforts. No specific plans for of approximately 5,700 hourly and salaried employees, the exiting of significant new actions have been finalized at this time. approximately 5.9 million net square feet of facilities and the disposal of

United Technnlnciw ?nod Anm iai Rannrr J 3 Dncnues Opminf Profit Margn 2004 2003 2002 200* 2003 2002 2004 2003 20O2 Ofe S8.999 J7.927 $6.811 S5U504 IL377 J1J057 16.7% 17.4% 15.5% Came 10.636 9.246 : 8.773 879 911 779 aj% 9.9* 8.9X CT»*0 2.881 1.136 : 138 55 - 4£K 43% - PrattMMtnqr 8.303 7.505 : 7.645 1O43 1025 L282 1OS* 15X1% 16.8% 5H9 ^K Skwtty Z50S 2J84 2.179 213 203 176 as% 93% 8.1%

operating profits arc operating pro6l margins of UTC's CHUBB revenues and operating praCt for the full year of 20O4 totaled SZ881 rraBon and S138 mOon. respectively, compared to $1.1? •.i"**W* •*< the management lepuning of mese businesses. For mSon ana *55 mfcxi reported for fce montns of 20O3. Appraxirnateff-* certvi of these subsidnrws. mmortty starcnofeters have rig-its. which SO% of the reported revenues and operating profit in 2004 and 2003 ci»^uji»it»presuinptano Mfc ) 111 .Hi nil* .nil nli nil PRATT & WHITNEY revenues increased $798 m*on (11%) in 2004. to Me norm quarter of 20O4. L/TC befian to separately report Hamilton The 20O4 increase is due piaiuiy to hi0ier commercial aerospace SwvMrand and SBorsky. AM pnor penods tone been restated tc oorrform revenues (9%). mamfy related to raster engne shipments at Pratt & teportihc structure. Umitney Canada and higher ujniuacial aftermarket volume. MBtary aetospace revenues were relatively tat in 2O04 compared to 2003. ared 102003 Pratt & WWney operating proHs increased $18 mitton (2%) in 2004 OTIS (ewnues gicreased J 1.072 m*on (14%) n 2O04 refecting due prtnarBy to mcreased commereial aerospace proCts (28%), reflecting e£ons. The 20O4 increase reflects the fawor- higher volume at Pratt ft Whitney Canada and higher volume, cost t of foreign curency imeJauai (6%). ne* equipment and reduction and prodoctwity in tne ujmrnerciat aftermarket business. •to oluaM px>*Oi (ff%) and me impact of acqusrtions (2%). partialy offset by higher company funded research and development Otoc ^ prate incrMsed « 127 ortton (9«) in 2004 compared spemtng(15%) and higher restructuring charges (12%). The 2004 and\^ U> 2003. The operating prott increase reAeos prorrt KDpuxemern a; 2003 results each retect approdatatety $40 raBon of costs associated with a coBaborabon accoonnng maeer. •npact of fereC" currency transiatran (7%). partialy offset Of togher (•sowclumg charges (6%) and tne absence in 20O4 of an approximate HAMILTON SUNDSTRAND revenues increased $323 million (9%) in SSO m*on (4«| non-casn gain in 20O3 assonated ««i an excfange of 2004. The increase «as due to higher aerospace revenues (4%). and equty JMenests in China. higher industrial revenues (4%). and the favorable impact of foreign currency translation of djjuiuumicfy 2%. The aerospace revenues CARRIER a $1390 mafcn (15%) The 2004 Increase reject both higw original equipment and aftermarket vohimes. volume ero^ti (9%). inlri Norpi Anenca rfVAC conatbubng 45% Hamaton Sundstrand operating proft increased $28 million (5%) in Of Die noease. Asia - 25%. transport refngeraocn - 2O%. and Europe 2004. The operating piofit increase was due primarily to higher — 1O». she fawrawe «npact of fore^n currency transabon (3%) and ttw profits (9%). and higher industrial profits (4%). partially offset impact of acqurutons (3%). pnrnanly lefccUig lie faurUi quarter by higher restructuring charges in 2004 (8%). The aerospace results reflect higher artermarket wfcjrnes. ofits de d $32 m»on (4%; m 2004. Higher ntstrocturnc costs (19%) and unfjwxaote comrnextty prior£ ) SIKORSKY revenuesi a $322mSon(i5%)in 2004. The increase A 2004 "ore than offset prott .Tpro*em0KS frcm r.igTier \xi)urr.e was due pri marty to higher heScopter program revenues (11%) and after- and factory productnity (24%). pn— anry aanbocatt: to the transput marxet revenues (6%J. partialy offset by toner Comanche revenues (2%). JefJigMJUan. Europe and Nonti America rfVAC Cusi-iesses. and ne Sfkorsky's operating proft • creased $10 milfion (5%) in 2004. The tavoraue mcuci of fore^n currency uansiabcrt (4%). increase reflects the profit impact of the increased helicopter and aftermarket revenues (18%). offset by fewer Comancne profits (9%) and higher restructurng charges (4%).

K«ex 2004 AMU* Regan 2003 Compared to 2002 HAMILTON SUNOSTRAND revenues Increased $152 million (4%) in OTIS revenues Increased $1.116 million (16%) in 2003 reflecting 2003. The increase reflects the favorable impact of foreign currency increases in all geographic regions, particularly Asia and Europe. The rev- translation (3%) and higher industrial revenues (IK). enue Increase reflects the favorable impact of foreign currencytranslation Hamilton Sundstrand operating profit increased $17 million (3%) in (9%), the impact of acquisitions (2%), and volume growth within the 2003. The operating profit increase reflects lower restructuring charges businesses (5%). The favorable impact of foreign currency translation in 2003 (3%). The 2003 results also reflect lower aftermarket volumes, reflects the continued strength of the euro in relation to the U.S. dollar. the favorable impact of a third quarter 2003 commercial contract Otis operating profits increased $320 million (30%) in 2003. The termination and the estimated cost of a pending commercial litigation operating profit Increase reflects strong profit improvement in Asia and matter, the net impact of which were not material, and the favorable Europe, at constant currency, and the favorable Impact of foreign Impact of foreign currency translation (2%). currency translation (12%). Otis' operating profit in 2003 also includes a non-cash gain of approximately $50 million (5%) associated with an SIKORSKY revenues increased $5 million (less than 1%) in 2003. The ^ Change of certain equity interests in China. Restructuring and related increase was due to higher aftermarket revenues (11%), resulting in part marges at Otis were comparable in 2003 and 2002. from the acquisition of Derco largely offset by lower helicopter program revenues (11%), primarily military. CARRIER revenues increased $473 million (5%) in 2003. The increase Sikorsky's operating profit increased $27 million (15%) in 2003. The primarily reflects the favorable impact of foreign currency translation increase wasdue to lower research and development spending, primarily (4%) and growth In transport refrigeration (2%), which were partially reflecting lower S-92 post-certification spending. offset by weakness in global commercial HVAC and North American commercial refrigeration. The favorable Impact of foreign currency Liquidity and Financing Commitments translation primarily reflects the strengthening of the euro in relation to the U.S. dollar. (in minium of dotarx) 2004 2003 Carrier's operating profits Increased $132 million (17%) In 2003. The Cash and cash equivalents $2,265 $ 1,623 increase reflects lower restructuring charges (6%), the favorable impact Total debt 5.591 5.301 of foreign currency translation (5%) and (6%) attributable to higher Nat debt (total debt less cash) 3,326 3.678 volume in the transport refrigeration business and the benefits of cost Shareowners' equity 14,008 11,707 reduction and productivity actions, partially offset by lower profits in Total capitalization (debt plus equity) 19,599 17,008 commercial refrigeration and continued unfavorable pricing trends in Net capitalization (debt plus equity less cash global commercial HVAC. and cash equivalents) 17,334 15.385 Debt to total capitalization 29% 31% CHUBB revenues and operating profits were $1,136 million and $55 Net debt to net capitalization 19% 24% Jon, respectively, for the five-month period ended December 31, . Security services in Australasia, the United Kingdom and Europe Management assesses UTC's liquidity in terms of its ability to generate represent the majority of the reported revenue and operating profit cash to fund its operating, investing and financing activities. Significant for 2003. factors affecting the management of liquidity are: cash flows generated from operating activities, capital expenditures, customer financing PRATT & WHITNEY revenues decreased $140 million (2%) in 2003. requirements, investments in businesses, dividends. Common Stock The decrease was due primarily to decreased commercial aerospace repurchases, pension funding, adequacy of available bank lines of credit, volume (8%), reflecting lower commercial aftermarket and engine and the ability to attract long-term capital with satisfactory terms. volume, which was largely offset by higher military aerospace revenues (fi%). due primarily to higher development revenues. OPERATING CASH FLOWS. Net cash provided by operating activities in Pratt & Whitney operating profits decreased $157 million (12%) in 2004 was $3,699 million compared to $2,875 million in 2003. The 2003, reflecting lower commercial aerospace profits (28%), due primarily increase is primarily due to improved operating performance in 2004, to lower commercial aftermarket volume, and costs associated with a anda $250 million payment from the settlement with OaimlerChryslerin collaboration accounting matter (3%). These decreases were partially the first quarter of 2004 and lower cash contributions to UTC's pension offset by the profit impact of increased military aerospace revenues plans. Pre-tax cash outflows associated with restructuring and other (9%), and lower research and development costs (8%) primarily reflecting actions. Including costs notaccruableor contemplated when the actions a technology funding arrangement at Pratt & Whitney Canada. The 2002 were initiated, were $230 million in 2004 and $246 million in 2003. UTC commercial aerospace profit also includes PW6000 costs which were expects pre-tax cash outflows associated with restructuring actions to partially offset by the favorable impact of commercial engine contract increase approximately 20% in 2005. In addition, pre-tax cash outflows changes, both recorded in the first quarter of 2002. associated with liabilities established in connection with acquisitions are expected to increase in 2005. The funded status of UTC"s pension plans is dependent jpoo many FINANCING CASH FLOWS. Net cash Bow used in financing was $1.402 factors, including returns on nvested asses, levef of market interest m*bon in 2004 compared to $1.696 rntton in 2003. primariry reflecting rales and tends of voluntary amtntwdons to the puns. DecSnes m tong- knver debt repayments, due in part to repayment in 2003 of $1.1 billion terai iiiieuBl races have nad a negatne i-npad en the fu.Tced status of of debt assumed in the Chubb acquaiUxi. and increased commercial d«|Mr& OwnC^CXM and 2OO3. UTC made •w^untary cash co-itntxitions paper borrowings, partialy offset byhi^wr share repurchases. Financing of $906 iiwaon and $994 mwhyv resoectiveir. to its desned benefit cash outflows for 2004 and 2O03 include UTCTs repurchase of 10.9 penuon plans. These contnbuions are reported as an ccrease m other mBon and &S mMon shares of Common Stock for S992 million and aiaa> in the ComoMMed Balance Sheet. l/TC can ccntrocte casn or $401 mOBon. respectively- Share repurchase continues to be a significant Ubnetmn within certain Emits, ard stats to use of inCs cash lavs and is expected to offset the diutive effect of the I $500 nvwon of cash contributions in 2OOS. As of issuance of stock and options under the smcttbased employee benefit Oeceanbet 31,2OO4. the total investment by the denned ber-efit pension piirHi«> I r»sli uirnriN «m linn nn ini luili il under mo revolving AgeeiBOnta. The irstcommaiitent. which totals $1.5 speadng across the businesses in 20O4 and cnmariy "mended UTCTs bi&on. serves as a badtup facBty for issuance of commercial paper. In •wfiat purchase of sCghtty less man 2O* of the outstandfrig shares of December 20O4. UTC entered Mo a second 364 day revolving credit Kidde ($45O •wKn) and Carrier's tourth quarter acqu&tixi cf fre agreement for $2-5 Miun in support of UTTTs offer to acquire Kidde in Linde comnieiuial feftiferauon business f$324 rnfeort. The final 2005. At December 3X 2004. there «ere no txwrowings under the punjiase price of Linde s suoject to many factors ddudtog finafizauon revolving credit agreements. In addUon. at December 31.20O4. approx- of the value of oertan assets and katohoes and mtegratjon investmer.ts irnateiy $1-7 bflton vas avaiable under short-term tones of credU with n«rin»jr to leverage scale across comptenentary refrigeration pn> local banks at UTCS various domestic and international subsidiaries. As of February 10. 2OO5. UTC contiiued to own At December 31. 2OO4. up to appmanately $2 btton of additional less Own 2O% of the outstanding shares of KJdde. UTC owned debt and equity secmiues coukt be issued under stietf registration and had mjtima vald lenders or jgmincm to tender as 3f February statements on fie with thfi Securities and Exhange Commission. 10. 2OO5 wOt respect to aporoximatety 79.82 aercent of tr« issued Dividends paid on Common Stock increased in 2004 reflecting in part Cash spenorvj for acquisition n 2003 totaled Sl.l the Board of Directors' approvals of a 10% and a 30% increase in its . pi marly lefccum UTCs acquniriort of Chubb for approximately S900 nwSon of cash and $1.1 bwlon of debt assumed. UTC expects to 27 and 35 cents per ujmnon share, respectively, bi February 2005, total nvesunents m businesses in 2O05 to appjoumate $4 bwjon. the Board of Directors approved a 26% increase in its dividend payabli inck>tne$2-5 bflton for acqusoon of the renia«wig shares of Kidde in the first quarter of 2OO5. and $L5 bwion tar other potenbal acquBibbns. Howeve'. aciuai During the fourth quarter of 20O3. the 10.6 mwSon convertible aCT|uiwlinnH>eMing«nay vary depemSng upon thetkm-vf and ava^abHrty preferred shares itekt in the Employee Stock Ownership Plan (ESOP) of appropriate acquisition opportunraes. were converted to 425 awBtn of common shares. The conversion had increased $265 ndfion n 2OO4 to $795 million rto effect on oJuted earnings per share and sfeghtty decreased the debt- CD further increase in 2OOS tc again apptnimate to-capital ratio as shares were reetassifcd as equity. UTCsshareowners'equty is impacted by a variety of factors, including nt acti ities used net cash of $51 mttor .n 20O4. trxjse items that are not reported in earnings but are reported okectiy in to $?33 mtton m 2003 lefccwig decreased customef equity, sucti as foreign currency uanslauuii. minimum pension liabflity reounments lor fciamjig- WMe LTC expects irtat custcrner financing adjustments, unrealized hoktng gains and losses on avaaable-for-sale ••I He a net use of cash in 20O5. actual fundng & subject to usage securities and cash tow hedging transactions. See the Consolidated under e3BStn£ cirttpcier fenacong arrangements- At December 31. Statement of Changes in Shareowners* Equfty tor rnformation on such 2004. UIC had tnanaric and rental commtnerts of S83£ mil -on non-shareowners' changes. UTC manages its worldwide cash requirements considering available debused in 2O05. UTC nay also arrange for mird-pany funds dTTtong the many stih%a1idn& stnu^ which it conducts its to assume a portion o/ tscommtmens-flefertDNote'ltotue business and the cost effectiveness with which those funds can be Consokdated Financial Slatemems for atttbocal ctscvjssor of LTC s accessed. Trie repatriation of cash balances from certain of UTC'ssubsi- com«itiual aefosoacf industry assets and coanntnicnts. cfiaries could have adverse tax consequences: however, those balances are generafly avaiable without legal restrictions to fund ordinary business operations. UTC has and •* continue to transfer cash from those subsidiaries to the parent and to other utter national subsidiaries when it is cost effective to do so. UTC believes that existing sources of liquidity are adequate to meet Commercial Commitments anticipated borrowing needs at comparable risk-based interest rates for the foreseeable future. Although uncertainties in acquisition spending Anuunl of Commitment Expiration pec Period could cause modest variations at times, management anticipates that the Less Uian More tnan level of debt to capital will remain generally consistent with recent levels. (In millions ol dollars) Committed lYear 1-3 Years 3-5 Yean 5 Years The anticipated level of debt to capital is expected to be sufficient to sat- Commercial aerospace isfy UTC's various cash flow requirements, Includlngacquisi lion spending, financing and rental continued Common Stock repurchases and pension funding as needed. commitments • $838 $292 $208 $253 $83 IAE financing Off-Balance Sheet Arrangements and Contractual Obligations arrangements 1.224 417 88 55 664 UTC extends a variety of financial guarantees to third parties in support Unconsolidated subsidiary of unconsolidated affiliates and for potential financing requirements of debt guarantees 160 127 8 - 25 tlUJlc'ommerclal aerospace customers. UTC also has obligations arising from Commercial aerospace sales of certain businesses and assets, including representations and financing arrangements 163 39 7 3 114 warranties and related indemnities for environmental, health and safety, Commercial customer tax and employment matters. Circumstances that could cause the financing arrangements 61 61 - - - contingent obligations and liabilities arising from these arrangements to Performance guarantees 111 29 55 27 - come to fruition are changes in an underlying transaction (e.g., hazardous Total commercial waste discoveries, adverse tax audit, etc.), non-performance under a commitments $2.557 $965 $366 $338 $888 contract, customer requests for financing or deterioration in the financial condition of the guaranteed party. Refer to Notes 4.8.14 and 15 to the Consolidated Financial Statements A summary of UTC's consolidated contractual obligations and for additional discussion on contractual and commercial commitments. commitments as of December 31,2004 is as follows: Market Risk and Risk Management Contractual Obligations UTC is exposed to fluctuations in foreign currency exchange rates, interest rates and commodity prices. To manage certain of those Payments Due by Period exposures, UTC uses derivative instruments, including swaps, forward Less than More than contracts and options. Derivative instruments utilized by UTC in its (In millions ol tt>nan) Total lYear 1-3 Years 3-5 Years 5 Years hedging activities are viewed as risk management tools, involve little Long-term debt $4.271: $40: $7411 $472! $3,018: complexity and are not used for trading or speculative purposes. UTC Operating leases 1.138 i 330: 420; 199: 189: diversifies the counterparties used and monitors the concentration of •chase obligations 6.495°: 3.239i 1.262 • 676- 1.318': risk to •limit its counterparty exposure. long-term liabilities 3.229 '• 686J 734 j 6111 L198 i UTC has evaluated its exposure to changes in foreign currency Total contractual exchange rates, interest rates and commodity prices in its market risk obligations $15.133; $4.295: $3,157; $1.958 i $5,7231 sensitive instruments, which are primarily cash, debt and derivative instruments, using a value at risk analysis. Based on a 95% confidence Purchase obligations include amounts committed under legally level and a one-day holding period, at December 31,2004, the potential enforceable contracts or purchase orders for goods and services with loss in fair value of UTC's market risk sensitive instruments was not defined terms as to price, quantity, delivery and termination liability. material in relation to UTC's financial position, results of operations or Approximately 38% of the purchase obligations disclosed above cash flows. UTC's calculated value at risk exposure represents an represent purchase orders for products to be delivered under firm estimate of reasonably possible net losses based on volatilities and contracts with the U.S. Government for which UTC has full recourse correlations and is not necessarily indicative of actual results. Refer to under normal contract termination clauses. In addition, as disclosed in Notes 1, 8, 12 and 13 to the Consolidated Financial Statements for Note 10 to the Consolidated Financial Statements, utc expects to make additional discussion of foreign currency exchange, interest rates and $500 million of voluntary contributions to its pension plans in 2005. financial instruments. which have been excluded from the table above. Other long-term liabilities primarily include those amounts on UTC's FOREIGN CURRENCY EXPOSURES. UTC has a large volume of foreign December 31, 2004 balance sheet representing obligations under currency exposures that result from its international sales, purchases, product service and warranty policies, performance and operating cost investments, borrowings and other International transactions. Interna- guarantees, estimated environmental remediation costs and payments tional segment revenues, including U.S. export sales, averaged under employee benefit programs. The timing of cash flows associated approximately $18 billion over the last three years. UTC actively manages with these obligations are based upon management's estimates over foreign currency exposures that are associated with committed foreign the terms of these agreements and are largely based upon historical currency purchases and sales and other assets and liabilities created in experience. the normal course of business at the operating unit level. Exposures that cannot be naturaty offset wrth-n an operatmg jrrit a> an insigrifcant UTC has been identified as a nctpntiaOy responsible party under the araoonl ace hedged with foreign currencv derivatives. UTC also fas a Comprehensive Environmental Response Compensation and Liability sip aft, ant amount of foreign c-jnency net asset exposures. Current^. Act (CERCLA or Superfund) at approcmateh; 106 sites. The number of UICdoes not hold any denwatwe contracts thai hedge its foreign cur;eicy Superfund sites, in and of itsdf. does not represent a relevant measure net asset exposures but may consoer such strategies «i the toUire. of iatafcty because tfte nature and extent of environmental concerns unrs cash position irchjdes amounts denomrated in foreign vary from site to site and UTCTs share of respcnsariBty varies from sole currencies. UTC manages its wofiawiiie cash requ-rements considering tespons«*ty to very MDe responsfeMy. In estimating its liability for j»dJjuHr funds among its many sutetftaries and me cost ef ettiver.ess remediation. UTC coraKtas its Bceiy proportionate share of the with WAR* these funds can be accessed. The reoatnanon ol cast) anticipated remediatian expense and me abffity of other potentially balances barn cena-n of UTC"s sJb&icSanes could have adverse lax responsible parties to MB thagobBeations. lormoi-tnci'i However, tttose balances are generally ava-laWe without Al December 3L 2004. UTC had $438 rraffioo reserved for environ- let* «f MI«H««I»C to fund ordinary business coerz&sns. L.TC has and w* mental remediabon. Cash ouotows for envinvunental remediation WE conttnut ID transfcr cash frcm those suttsxkanes to me parent and to $49 rufeon in 2004. $32 oBcn in 2003 and $42 million in 2O02. ufo* other nternatkonat subsidiaries. «nen «-s cost «fecove to do so. estimates that ongoing; environmental cemed&bon expenditures in each o< me next two years w* not exceed $60 rnSon. INTEREST RATE EXPOSURES. UTCs tone-tern debt portfolio consists of hcd-raw -nstruments. Due to recent decfnes in market Government Mattets t rates, a portion of Out portfofo s hedged with faced for floating As descrfeed in the "Critical Accounting Estimates - Contracting with *iM»tjtrateiwam The hedges are designated as fair value hedges and the U. S Government.* UTCs coKijos with the U.S. Government are the gains and losses on the swaps are reported r\ interest expense. subject ID audfts. Such audits may recommend that certain contract pric- refecting that portion of merest expense at a variable rate. From time es should be reduced to comply win various government regulations. • UTC issues commercial oaoer. winch exposes UTC to changes in UTC is also the subject of one or more investigations and legal pro- ceedmgs initiated by the US. Government with respect to government

COMMODITY POKE EXPOSURES. UTC e exposed to votabity in me In one of these legal proceedmgs. UTC received a demand notice in prices of raw *~t»*»t* used r -n m»mi 'orr nfrtimr nprrm relating to an ongoing depute over Pratt & Wrutney's government cost The forward tunuaus are designated as hedges of she cash low accounting practices for engfcie |jwi» received from its partners on vianablit*'that ri rut* from the forefasied purchases. Cans and tosses certain commercial engine cotaboradon programs from 1984 to the on those deitxauxes are deferred r other comprehensive ncome to the present. This matter was previously disclosed by UTC and is described in fltcnt Kney are effective as hedges and fectassifted nto cost of products Note 15 to the Consofioated financial Statements, h July 2001, the US sold in the penod in which the hedgM transaction impacts earmngs- Armed Services Board of Contract Appeals (AS8CA) ruled that Pratt **•/ Whitney's accounting for these parts was in compliance with US. Government Cost Accounting Standards (CAS). The DoO appealed the l/TCs fiw«^iiij«T are subject to envronmerKaf regutaoon by federal. ruing to the Court of Appeals for the Federal Circuit and in January and local authorities n (tie us. and regutatory authcnnes «ntr 2003. the Court reversed the ASBCA'S decision and remanded the case o»er as toeign operanoos. *s a resuB. UTC nas estabhsned. Dart to me AS8CA. The case cs currently pending before the ASBCA. and contjouaty updatts. poioes retabng to enwrortmental stardaros of ft addition, and as prewoudy drsriosprf. the US. Department of perionrancetor its operabons worldwide. UTC beieves tliat expenoitures Justice (OOJ) Bed a complaint against UTC in 1999 under the civfl False neceaaaiir lo comply wanne present regUtatic«iseo»erf^enviroou*rtBim iwanfiai oos*jon. resets of ooe^tans or casn flo<*s. alleges that ire Government overpaid for engines because Pratt & UTC ras iaenfjied appronmatetY <94 kxatnns. mostly in the Ureied Whitney inflated certain costs and withheld data. The Government i it may have some larjoKy for remecfcatins corrarwia- claims damages of $624 rafirjn. UTC believes this estimate is substan- bon. UTC does not befeeve that any ird\«jLai toca!«r's exposure wii tially overstated, denies any lobftity and is vigorously defending the nave a material effect on me resuRs of ocerabons of UTC. Sites in me matter. Trial of this matter was conpteted in December 2004 and a mcsaeation or remedkarjon stage -represent approximately 96^ of decision is expected in 2005. This matter is described "m Note 15 to the UTCs accrued enwror ment ConsoBOated Hnanciat Statements. Should the US. Government uBimatsiy prevaS with respect to one or more of the significant eotemnem contracting matters, the outcome coutd result in a material effect en UTCs results of operations hi the period the matter is resohed. However. UTC befeves that the resolution ol these matters wfl not have a material adverse effect on UTC's results of operations, competitive position, cash tows or financial condition.

48 U As previously disclosed, the European Commission's competition The increase to stock option expense described in the above table directorate conducted inspections in early 2004 at offices of UTC's Otis was determined using the Black-Scholes valuation model as disclosed, subsidiary in Berlin, Brussels, Luxembourg and Paris. The Inspections on a pro forma basis, in Note 1 to UTC's Consolidated Financial relate to the Commission's ongoing investigation of possible unlawful Statements. UTC will utilize the binomial lattice fair value method, collusive arrangements Involving the elevator and escalator industry in described in SFAS 123R, to value stock-based compensation beginning Europe. UTC is cooperating fully with the Commission's investigation. with awards granted in 2005. UTC expects its 2005 stock option expense Based on the results of its own internal investigation, UTC believes that to approximate 2004 levels. UTC does not expect the adoption of SFAS some Otis employees in limited European locations engaged in activities 123R to have a material impact on its cash flows or financial condition. at a local level in violation of Otis and UTC policies, and may have violated applicable competition law. It is still too early in the Commission's Cautionary Note Concerning Factors investigation for UTC to reasonably estimate the civil fines to which it That May Affect Future Results •fould likely be subject The aggregate amount of such fines, if ultimately This Annual Report contains statements which, to the extent they are not ed. could be material to UTC's operating results for the period in statements of historical or present fact, constitute "forward-looking which the liability would be recognized or cash flows for the period in statements" under the securities laws. From time to time, oral or written which the lines would be paid. UTC does not believe that any such fines forward-looking statements may also be Included in other materials would have a material adverse effect on UTC's financial condition, or released to the public. These forward-looking statements are intended to that the resolution of this matter would have a material adverse effect provide management's current expectations or plans for the future on Otis' competitive position. operating and financial performance of UTC, based on assumptions Additional discussion of UTC's environmental, U.S. Government currently believed to be valid. Forward-looking statements can be contract matters, product performance and other contingent liabilities identified by the use of words such as: "believe," "expect," "plans." is included in "Critical Accounting Estimates' and Notes 1,14 and 15 to •strategy," "prospects," "estimate," "project." "target," "anticipate* and the Consolidated Financial Statements. For additional discussion of other words of similar meaning in connection with a discussion of future UTC's legal proceedings, see Item 3 "Legal Proceedings' In UTC's Form operating or financial performance. These include, among others, 10-K for 2004. statements relating to:

New Accounting Pronouncements • Future earnings and other measurements of financial In December 2004, the Financial Accounting Standards Board issued performance Statement of Rnancial Accounting Standards No. 123 (revised 2004), • Future cash flow and uses of cash "Share-Based Payment' ("SFAS123R'). The standard, which is effective • The effect of economic downturns or growth in particular regions for awards issued after June 15. 2005, requires that all equity-based • The effect of changes in the level of activity in particular Compensation be recorded in the financial statements at the grant date industries or markets r value. UTC has elected to adopt the standard as of January 1.2005 • The availability and cost of materials, components, services as permitted by the early adoption provisions in the standard. UTC will and supplies utilize the modified retrospective transition alternative and will restate • The scope, nature or impact of acquisition activity and integration its financial statements in 2005 for all periods presented. into UTC's businesses The impact of recording stock option expense on UTC and its seg- • Product developments and new business opportunities ments, and the impact on certain line items on the Statement of • Restructuring costs and savings Operations is as follows: • The outcome of contingencies • Future repurchases of Common Stock (In minions of dollars, except p« share amounts) 2004 2003 • Future levels of indebtedness and capital spending Oils $29 $31 • Pension plan assumptions and future contributions Carrier 33 44 Chut* 6 1 All forward-looking statements involve risks and uncertainties that Pratt & Whitney 38 41 may cause actual results to differ materially from those expressed or Hamilton Sundstrand 20 21 implied in the forward-looking statements. For additional information Sikorsky 13 13 identifying factors that may cause actual results to vary materially from Total segment option expense 139 151 those stated in the forward-looking statements, see UTC's reports on Eliminations & other 3 6 Forms 10-K. 10-Q and 8-K filed with the Securities and Exchange General corporate expenses 27 41 Commission from time to time. UTC's-Annual Report on Form 10-K for Impact on income before income taxss 2004 includes important information as to risk factors in the "Business" and minority interest 169 198 section under the headings "Description of Business by Segment" and income taxes 54 73 'Other Matters Relating to UTC's Business as a Whole," and In the "Legal Net income impact $115 $125 Proceedings" section. Diluted earnings per share $.23 $.25 . Management's Report on Internal Control Over Financial Reporting

The management at UTC is responstte foe estaohslvng and main- 2004. in making its assessment, management has utilized the taining an adrcnaie system of raemal control over fnanoat criteria set forth by the Committee of Sponsoring Organizations reporting. Internal control over ir-anaal reporting is a process (COSO) of the Treadway Commission in Internal Control - Integrated designed to provide reasonable assurance regarding trie rcliafrfety Framework. Management concluded that based on its assessment. or btanoal reporting and tne preparation of tnaraal statements UTC's internal control over financial reporting was effective as of tar aoenial reporting purposes m accordance witti generally December 31. 20O4. UTC managements assessment of the Koepl «J actounting principles. Because of ts nherenl ArrOraboris, effectiveness of UTC's internal control over financial reporting as of at control over inanctal reporting may not prevent or detect December 31.20O4 has been audfted by PricewaterhouseCoopers «ei»ei

Uf**i

George David James E. Geister Charaan and Chief Executive Of«cer Vice President. Finance

Gregory J. Hayes Vice President Accounting & Control

SO

To the Board of Directors and Shareowners effectiveness of internal control over financial reporting. Our of United Technologies Corporation: responsibility is to express opinions on management's assessment and on the effectiveness of the Corporation's internal control over We have completed an integrated audit of United Technologies financial reporting based on our audit. We conducted our audit of Corporation's 2004 consolidated financial statements and of its internal control over financial reporting in accordance with the internal control over financial reporting as of December 31,2004 and standards of the Public Company Accounting Oversight Board (United audits of its 2003 and 2002 consolidated financial statements in States). Those standards require that we plan and perform the audit accordance with the standards of the Public Company Accounting to obtain reasonable assurance about whether effective internal Oversight Board (United States). Our opinions, based on our audits, control over financial reporting was maintained in all material are presented below. respects. An audit of internal control over financial reporting includes obtaining an understandingof internal control over financial reporting, nsolidated financial statements evaluating management's assessment, testing and evaluating the our opinion, the accompanying consolidated balance sheets and design and operating effectiveness of internal control, and performing the related consolidated statements of operations, of cash flows and such other procedures as we consider necessary in the circum- of changes in Shareowners' equity present fairly, in all material stances. We believe that our audit provides a reasonable basis for our respects, the financial position of United Technologies Corporation opinions. and its subsidiaries at December 31,2004 and 2003, and the results of their operations and their cash flows for each of the three years in A corporation's internal control over financial reporting is a process the period ended December 31. 2004 in conformity with accounting designed to provide reasonable assurance regarding the reliability of principles generally accepted in the United States of America. These financial reporting and the preparation of financial statements for financial statements are the responsibility of the Corporation's external purposes in accordance with generally accepted accounting management. Our responsibility is to express an opinion on these principles. A corporation's internal control over financial reporting financial statements based on our audits. We conducted our audits of includes those policies and procedures that (i) pertain to the these statements in accordance with the standards of the Public maintenance of records that, in reasonable detail, accurately and Company Accounting Oversight Board (United States). Those fairly reflect the transactions and dispositions of the assets of the standards require that we plan and perform the audit to obtain corporation: (ii) provide reasonable assurance that transactions are reasonable assurance about whether the financial statements are recorded as necessary to permit preparation of financial statements Tree of material misstatement. An audit of financial statements in accordance with generally accepted accounting principles, and includes examining, on a test basis, evidence supporting the amounts that receipts and expenditures of the corporation are being made •j disclosures in the financial statements, assessing the accounting only in accordance with authorizations of management and directors %|rficiples used and significant estimates made by management, and of the corporation; and (Hi) provide reasonable assurance regarding evaluating the overall financial statement presentation. We believe prevention or timely detection of unauthorized acquisition, use, or that our audits provide a reasonable basis for our opinion. disposition of the corporation's assets that could have a material effect on the financial statements. Internal control over financial reporting Also, in our opinion, management's assessment, included in the Because of its inherent limitations, internal control over financial accompanying Management's Report on Internal Control Over reporting may not prevent or detect misstatements. Also, projections F inancla I Reporting, that the Corporation maintained effective internal of any evaluation of effectiveness to future periods are subject to the control over financial reporting as of December 31, 2004 based on risk that controls may become inadequate because of changes in criteria established in Internal Control - Integrated Framework issued conditions, or that the degree of compliance with the policies or ty the Committee of Sponsoring Organizations of the Treadway procedures may deteriorate. Commission (COSO), is fairly stated, in all maten'al respects, based on tliose criteria. Furthermore, in ouropinion.theCorporation maintained, /s~ in all material respects, effective internal control over financial reporting as of December 31. 2004, based on criteria established in PRICEWATERHOUSECOOPERS LLP Internal Control - Integrated Framework issued by the COSO. The Hartford. CT Corporation's management is responsible for maintaining effective February 10, 2005 iriternal control over financial reporting and for its assessment of the Consolidated Statement of Operations

20O4 2003 2002

Product sdtes 526^09 J2Z363 $21.189 ScrMoe sates 10,491 &360 6.791 nnanancrevenuesandottierincaine.net 745 311 232 37.445 3L034 28.212 Costs and Eveases Cost of products sold 2O38S 17.064 15.717 Cost of sennces sold 6^836 5.424 4.444 Rflscwcft 3Ad ddfftopmcflt 1.?S6 L027 L191 Scttn^ fEACirai «tnd ddniinistrative 4^88 1654 3.203 Openting Pratt 4.470 3.845 3.657 innmt 363 375 381

4^107 o *7TI o O7K Income cues LOSS 941 887 Mkwnty interest kn suteadanes eamnc; 234 168 153 MM Incw $2.788 $2^61 $i236

Eamiacs per Stafe of Cmnmoa Stock Base tS£2 $4^3 $4^7 OHutcd $551 «4£9 $4.42

1200* Consolidated Balance Sheet

In millions ol dollars, except per share (shares In thousands) 2004 2003

Assets Cash and cash equivalents $2,265 $1,623 Accounts receivable (net of allowance for doubtful accounts of $368 and $421) 6,315 5,187 Inventories and contracts in progress 5,006 4,420 Future income tax benefits 1,441 1,372 Other current assets 49S 388 Total Current Assets 15,522 12,990 Customer financing assets 1,090 1,031 Future Income tax benefits 1,124 3,283 Fixed assets 5,231 5,080 Goodwill 10,111 9,329 Intangible assets 2,016 1.895 Other assets 4,941 3,666 Total Assets $40,035 $35.274

Liabilities and Shareowners' Equity Short-term borrowings $1,320 $669 Accounts payable 3,490 2,612 Accrued liabilities 8,097 7,265 Long-term debt currently due .40 375 Total Current Liabilities 12,947 10,921 Long-term debt 4,231 4,257 Future pension and postretirement benefit obligations 4,595 4,752 Other long-term liabilities 3,344 2,928 Commitments and contingent liabilities (Notes 4 and 15) Minority interests in subsidiary companies 910 709 Total Liabilities 26,027 23,567

Shareowners' Equity: Capital Stock: Preferred Stock. $1 par value; Authorized-250,000 shares; None issued or outstanding - - Common Stock. $1 par value; AutHorrzed-2,000,000 shares; Issued 664.420 and 656,911 shares 7,159 6,587 Treasury Stock 153,322 and 142,849 common shares at cost (6,312) (5,335) Retained earnings 14,569 12.527 Unearned ESOP shares (256) (273) Accumulated other non-shareowners' changes in equity: Foreign currency translation 210 (304) Minimum pension liability (1,549) (1.581) Other 187 86 Total Accumulated Other Non-Shareowners' Changes in Equity (1,152) (1,799) Total Shareowners' Equity 14,008 11.707 Total Liabilities and Shareowners' Equity $40,035 $35.274

See accompanying Notes to Consolidated financial Statements Consolidated Statement of Cash Rows

2004 2003 2002

OfMfaOncActMbes Net Kiconiie $2,788 SZ361 $2,236 Mfostmons to reconcile net incorre to net cash ftoirs prowoec Oy operating activities: Depreciation and amorteaticn 978 799 727 OOQ 9*>d •J-l O Mnonty mferests in subsxfeanes eammgs 234 168 153 Chance «v Accovnts lecfaajbic (346) (26) 80 Inventories and contracts m progress (144) 41 194 Other ctfient assets 23 114) 10 Aocntfits paraMr and accrued jabmties 380 55 (168) Voluntary onentjubora to pension pians (906) (994) (530) OtHtt.net 483 j 231 (167) Net Cask ProMdid by Operaone ActMMies 3.699 2^75 Z8S3

hunting rs (1.762) (1.761} (1.088) nnMKM(ActH

Net noease idea ease) in Casn and casn eqwvaienis 642 (457) 522 Catfi ane casn e

'wfftemetta OsOasan of Casti Po« information: Interest pan. net cf amounts camtakzec) $522 $372 $368 Income tvtts poid. net of refunds 5758 $378 $396 Man-casn mtesang and fmandng accruties -ncfcx* * Tf« 2002 Treasury Stock comntxjLon o^ S2S3 mfton to domestic defioed benefit pension ptars __ .^nrfvn • »•. rrrtn -ki f ^ k irrt\a It

•1(0 Coovnop Sliares

54 W idle fw

Consolidated Statement of Changes in Shareowners' Equity

Accumulated Non- Other Nor>- Shareowners' Unearned Shareowners1 Changes in Corn man Treasury Retained ESOP Changes Equity (or (In rnHUonj of dollars, ucept per share amounts) Stock Stock Earnings Shares in Equity the Period

December 31, 2001 $5.090 $(4,404) $9.149 $- $(1,466) $1.263 Common Stock issued under employee plans (4.2 million shares), including tax benefit of $45 247 10 (56) Common Stock contributed to denned benefit pension plans (4.1 million shares) 110 143 Common Stock repurchased (10.9 million shares) . (700) Dividends on Common Stock ($.98 per share) (462) Dividends on ESOP Preferred Stock ($4.80 per share) (31) Non-Shareowners' Changes In Equity: Net Income 2.236 $2,236 Foreign currency translation adjustments 57 57 Minimum pension liability adjustments, net of income tax benefits of $927 (1,588) (1,588) Unrealized holding loss on marketable equity securities, net of Income tax benefits of $4 (7) (7) Unrealized cash flow hedging gain. net of income taxes of $14 27 27 December 31, 2002 $5,447 $(4.951) $10,836 $- $(2.977) $725 Common Stock issued under employee plans (7.9 million shares), Including tax benefit of $111 442 17 (104) 1 Common Stock — ESOP conversion (42.5 million shares) 698 (274) Common Stock repurchased (5.9 million shares) (401) Dividends on Common Stock ($1.14 per share) (533) Dividends on ESOP Preferred and Common Stock ($3.60 and $.35 per share, respectively) (33) Non-Shareowners' Changes In Equity: Net income 2.361 $2.361 Foreign currency translation adjustments 528 528 Minimum pension liability adjustments, net of Income taxes of $332 570 570 Unrealized holding gain on marketable equity securities, net of income taxes of $18 29 29 Unrealized cash flow hedging gain, net of income taxes of $23 51 51 December 31, 2003 $6,587 $(5.335) $12.527 $(273) $(1,799) $3,539 Common Stock Issued under employee plans (7.9 million shares), including tax benefit of $141 • 572 15 (51) 17 Common Stock repurchased (10.9 million shares) (992) Dividends on Common Stock ($1.40 per share] (660) Dividends on ESOP Common Stock ($1.40 per share) (35) Non-Shareowners' Changes in Equity: Net income 2,788 $2,788 Foreign currency translation adjustments 514 514 Minimum pension liability adjustments,

net of income taxes of $46 « 32 32 Unrealized holding gain on marketable equity securities, net of Income taxes of $57 91 91 Unrealized cash flow hedging gain. nee of income taxes of $7 10 10 December 31, 2004 $7,159 4(6,312) $14,569 $(256) $(1.152) $3,435

Sie accompanying Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements

Motel Sanmarr of Accounting Principles FIXED ASSETS. Fned assets are stated at cost. Depreciation is com- The preparation of fcvaocial statements re^mes management to make pjted over Oie assets'useful Eves using the straight-One method, except [ and assumptions trial a/fee vie reported amounts :>» assets. for aerospace assets acquired prior to January L 1999. which are . revenues and expenses. Actja* results could differ from mose 3sn CLiateri usin^ iKv^^'itfr^if rnethods.

Certain recftassifeatians have been made 10 anor year amounts to GOODW1U AND OTHER INTANGIBLE ASSETS. Goodwin represents cunfd in in the current year presentation costs in excess of fair values assjened »the underlying net assets or acquired businesses. GoodvtJ and iraangMe assets deemed to have CONSOLIDATION- The consoidaied %tanoal statements rrtuoe me if»ae6r»tetves are not ammuied-Ai other irongaile assets are amortized accounts of UTC and its controlled subsidiaries (rtercompan^ iransac- over their estimated useful ives. GrjodMi and indefinite-lived intangible bons have been cfirninatecL assets are sudject to annual impainDent testing using the guidance and criteria described in Statement of Financial Accounting Standard No. CASH AND CASH EQUIVALENTS Casn and cash eojutvaiews 14Z -Goodmi and Other intangUe Assets*. This testing compares canyi ng values t» fair values and. when appropriate, the carrying value of tuff*l IqMd to nature and haw onfirat matLnbes & three morrns or 'ess these assets is reduced to fair value. During 2OO4. UTC was not required to record any impairment on goodnfl or indetinite-ived intangibles. ACCOUNTS RECEIVABLE. Current and lonMerm accounts receivable OTHER LONG-LIVED ASSETS. UTC evaluates the potential impairment of other long-tved assets «nen appropriate- If the carrying value of 2004 2303 assets CTceedstrtesuai of the undiscuurged expected future cash ttovs. *«7 $53 the carrying value of the asset is written down to fair value. MS4 1199 INCOME TAXES. UTC Has exposures related to tan ttngs in the ordinary Rctanate leueseas amounts. «rfidv pnsuant to Itie cant-act, are mtiro nt h.xaMTC HIT, jmrmff^f aenacggg rt«; «ahaaicaty. net o/ d««ened income tares Sates under elevator and escalator instaBation and modernization con- tracts are accajntec for under the percertaee-rf-ccmptetiori method. INVENTORIES AND CONTRACTS IN PROGRESS. WftenKmes and Losses, if any. on contracts are provided for when anticipated. Loss conuaus in proge« are smeJ at tnelcmercfcost of estimated reafaa tee provisions on original equipment contracts are recognized to the extent value and arc pnmanrf based on icsvin. frst-out fTBTD or average cost that estimated imentoriaole manufatmiine. engineering, estimated •icinods. ho»n»er. certain sut»irJar«s use the lasKx firs^out rUFO') prod act warranty and product performance guarantee costs exceed the protected revenue from the products contemplated under the contractual under me RFD mettiod. tnev oould rtawe been righer &/ $114 arrangement Prodjet s contemplated under tr« contractual arrangement r include products purchased under the contract and. in the aerospace Costs acoumulattd a^inst specie contracts or orders are at actual business, required replacement parts that are purchased separately cost. Mjtniflh in excess of reojurerrena for cunttam and ctrent c-r and subsequently for incorporation into the original equipment Revenue anbopated orders have been reserved as acaropnate. projenjons used in deterrrtmng contract loss provisions are based upon Uanofactmc costs are aBocated :o cvrenc poxJucDon ar<] trm estimates of the quantity, prang and baling of future product defiveries. Losses are recognese on stapment to me extent that mventoriable narw fa cturt-ig costs, estimated warranty costs and product performance

SC UrOM 2004A«iuMte0art guarantee costs exceed revenue realized. Contract accounting requires cash flow hedges. Gains and losses on derivatives designated as cash estimates of future costs over the performance period of the contract as flow hedges are recorded in other comprehensive income and reclassified well as estimates of award fees and other sources of revenue. These to earnings in a manner that matches the timing of the earnings impact estimates are subject to change and result in adjustments to margins on of the hedged transactions. The ineffective portion of all hedges, if any, contracts in progress. The extent of progress toward completion on is recognized currently in earnings. UTC's long-term commercial aerospace equipment and helicopter contracts is measured using units of delivery. In addition, UTC uses the ENVIRONMENTAL. Environmental investigatory, remediation, operating cost-to-cost method for development contracts in the aerospace and maintenance costs are accrued when it is probable that a liability has businessesand for elevator and escalator Installation and modernization been incurred and the amount can be reasonably estimated. The most contracts. For long-term aftermarket contracts revenue is recognized likely cost to be incurred is accrued based on an evaluation of currently over the contract period in proportion to the costs expected to be available facts with respect to each individual site, including existing incurred in performing services under the contract. UTC reviews its cost technology, currentlawsandregulationsand prior remediation experience. iy|itlmates on significant contracts on a quarterly basis, and for others, Where no amount within a range of estimates is more likely, the minimum no less frequently than annually, or when circumstances change and is accrued. For sites with multiple responsible parties, UTC considers its warrant a modification to a previous estimate. Adjustments to contract likely proportionate share of the anticipated remediation costs and the loss provisions are recorded in earnings upon identification. ability of the other parties to fulfill their obligations in establishing a Service sales, representing aftermarket repair and maintenance provision for those costs. Liabilities with fixed or reliably determinate activities, are recognized over the contractual period or as services are future cash payments are discounted. Accrued environmental liabilities performed. are not reduced by potential insurance reimbursements. Revenues from engine programs under collaboration agreements are recorded as earned and the collaborator share of revenue Is recorded as STOCK-BASED COMPENSATION. As more fully described in Note 10, a reduction of revenue at that time. The collaborator share of revenues UTC has long-term incentive plans authorizing various types of market under Pratt & Whitney's engine programs was approximately $583 and performance based Incentive awards that may be granted to officers million, $542 million and $595 million for 2004,2003 and 2002, respec- and employees. UTC applies APB Opinion 25, 'Accounting for Stock tively. Costs associated with engine programs under collaboration Issued to Employees,' and related interpretations in accounting for its agreements are expensed as incurred. The collaborator share of program long-term incentive plans. The exercise price of stock options is set on costs is recorded as a reduction of the related expense item at that time. the grant date and may not be less than the fair market value per share on that date. Stock options have a term of ten years and generally vest RESEARCH AND DEVELOPMENT. Research and development costs after three years. not specifically covered by contracts and those related to UTC-sponsored The following table illustrates the effect on net income and earnings share of research and development activity in connection with cost- per share as if tfie Black-Scholes fair value method described in SFAS ring arrangements are charged to expense as incurred. No. 123, "Accounting for Stock-Based Compensation' had been applied Research and development costs incurred under contracts with to UTC's long-term Incentive plans: customers are expensed as incurred and are reported as a component of cost of products sold. Revenue from such contracts is recognized as rear Ended December 31 product sales when earned. (in millions of doBare. except per share amounts) 2004 2003 2002 Net income, as reported $2.788 12.361 $2.236 HEDGING ACTIVITY. UTC uses derivative instruments, including swaps. Add: Stock-based employee compensation Forward contracts and options, to manage certain foreign currency, expense Included in net income. interest rate and commodity price exposures. Derivative instruments net of related tax effects 4 8 3 are viewed as risk management tools by UTC and are not used for trading Less: Tola! stock-based employee or speculative purposes. Derivatives used for hedging purposes must be compensation expense determined designated and effective as a Hedge of the identified risk exposure at under Black-Senates option pricing i he inception of the contract. Accordingly, changes in fair value of the model, net of related tax effects (119) (133) (121) derivative contract must be highly correlated with changes in the fair Pro forma net income $2.673 $2,236 $2.118 value of the underlying hedged item at inception of the hedge and over Earnings per share: (he life of the hedge contract. Basic -as reported $6.62 $4.93 $4.67 All derivative instruments are recorded on the balance sheet at fair Basic - pro forma $5.39 $4.67 $4.42 value. Derivatives used to hedge foreign-currency-denomlnated balance Diluted - as reported $5.52 $4.69 $4.42 sheet items are reported directly in earnings along with offsetting Diluted - pro forma $5.29 $4.44 $4.19 transaction gains and losses on the items being hedged. Derivatives used to hedge forecasted cash flows associated with foreign currency commitments or forecasted commodity purchases are accounted for as

II United 1>rhn Note 2 Business Acquisitions. Goodwill and Intangible Assets The 2OO2 amount ndudes Starsky's acquisition of Oerco Holding BUSINESS ACQUISITIONS UTCs mestments n businesses in 2O04. and acqvisitiORs at Pratt A Whitney. 2003 a«d 2O02 KKaled $1 3 b*oa $23 Cuoon and S424 mdf en. The assets and babWes of the acquired businesses are accounted ncfcidir* debt assumed of $220 infton. $1.2 bifljori and $72 mrfiicr. for under the purchase method of accounting and recorded at their fair respeo>ely- values at die dates of acquiaoon. The excess of the purchase price over Tl» 2OO4 amount consisted of acoueatioos a( Carrie'. Harru:cn the estimated fair values of the net assets acquired was recorded as an Sundstraad and the purchase of sfcghtfy less man 2O% of Kidde shares increase m gcodui of $471 oMon in 2O04. S2J. billion in 2003, and tar $450 nw>on. Carrier's 2004 auautsiMns include its fourtn Quarter $156 m&on in 2002. The icsute of opeiatiae. of acquired businesses acquisition of LindeAG"s refrigeration cSwsori (TjideT for $324 mt|»on. nave been included in the ConsofcJatEd Statement of Operations begmng as of the eflecove date of acquisition. The fatal purchase price of December 31, 2OO4. AS part of the Linde acqusbon. JTC allocation for acquisitions is subject to the fnafeation of the valuation of lecoroed appronmaterf $60 rtwfcm of £oodw* and $36 mflSon of certain assets and iWBif , plans for consolidation of facilities ant **^ Ltfide. a commercial refngerabon business fieafl- relocation of employees and other integration activities. As a in Germany, has annual sates of acproomate*y $1 bdbon 115 preTimnary amounts ass&Kd to assets andfeatnStte swff l be subject to optnatiore include manufacturing rao*bes m Europe. Asia and South revision in future periods. America. The feat purchase price aaocaoon ol Unde is subject to many fnafaaoon ol tne valuation of certain tangtte and GOODWILL. The changes in the carrying amount of goodwill, by segment,

efrigeration product plaifcxrrs These imestrnenls are M«elf to include manu^actunig

(in mOoB of oMwx) L2004 OM•twiatans and outer 31.2004 The 2003 amoirt includes the anx-armo of Chubb pic. on Ji>y 28. Otis $911; $26 $51 $988 2003. Under Met terns of the lender offet UTC acqured 100% of tne Camer 2JJS9: 141 31 2J31 [ snares of Chubb tor approbmaiely $900 rrtSon m casri a n 3 Out* 2j096: 202 192 2.490 $1J 0*0*1 of debt Because UTC arowXs Pran & wnMner 462^ 10 3 475 ta»id services •ortJ»nrJc. U>e acqu SJOon o< Hamaon Sunaaund 3jE78: (20) 27 3,685 CfaUbb rmnanrh UlCi bufeftng systtm offerings poOaOy. The foCowing Stoaky 129: 25 - 154 table sumaiaraes the estimated far vakies of assets accured and TouJSeenva"* 9J35; 384 304 10.023 at the .My 28. 20O3 acouoirjon date: ^"hiMMiiJum A Otter 16): 87 7 88 Total S9J329: $471 $311 $10,111

S587 • T^ein<3^3semeo

S1A36 :

In ccnnecbon nth the acqueiDcn or Cnucb. UTC recorded $962

S53S nfion. vas assorted an mdeSnce He. The aniotued assets and the related weighted average amortization periods are as MkMS: tradcmarfcs - (32 enUon (30 rears), cdcxner retarjonships - $389 ndon (10 years) and comrjleled -Echnofogy - S6 mtton (7 >ears).

58 Ur I Anrual Report INTANGIBLE ASSETS. Identifiable intangible assets are comprised of Note 4 Commercial Aerospace Industry Assets and Commitments the following: UTC has receivables and other financing assets with commercial aero- space industry customers totaling $2.358 million and $2.003 million at 2004 2003 December 31,2004 and 2003, respectively. Gross Accumulated Grass Accumulated Customer financing assets related to commercial aerospace industry Amount Amortization (In minions of dollar:] Amount Amortization customers consist of products under lease of $530 million and notes Amortized intangible and leases receivable of $555 million. The notes and leases receivable assets are scheduled to mature as follows: $93 million in 2005, $38 million in Purchased service 2006. $27 million in 2007. $23 million in 2008. $14 million in 2009, $997 $(349) contracts $894 $(275) and $360 million thereafter. 254 (44) Patents and trademarks 197 (34) Rnancing commitments, in the Form of secured debt, guarantees or Other, principally lease financing, are provided to commercial aerospace customers. The 682 (122) w^ custome— r relationships 581 t (51) extent to which the financing commitments will be utilized is not currently $1.933 $(515) $1.672 $(360) known, since customers may be able to obtain more favorable terms Unamortized intangible from other financing sources. UTC may also arrange for third-party assets investors to assume a portion of its commitments, if financing commit- $598 $- Trademarks $- $583 ments are exercised, debt financing is generally secured by assets with fair market values equal to or exceeding the financed amounts with Amortization of intangible assets for the year ended December 31. interest rates established at the time of funding. UTC also may lease 2004 was $133 million. Amortization of these intangible assets for aircraft and subsequently sublease the aircraft to customers under 2005 through 2009 is expected to approximate $130 million per year. long-term noncancelable operatingleases. Insomeinstances, customers may have minimum lease terms, which result in sublease periods shorter Note 3 Earnings Per Share than UTC's lease obligation. Lastly, UTC has made residual value and other guarantees related to various commercial aerospace customer- (In millions of dollars. Average Per Share financing arrangements. The estimated fair market values of the «c«pt par snare amounts) Income Shares Amount guaranteed assets equal or exceed the value of the related guarantees, December 31. 2004 net of existing reserves. Nat Income $2.788 : UTC's commercial aerospace financing and rental commitments as of Net Income — basic 2,788 • 496.4 $5.62 December 31, 2004 were $838 million and are exercisable as follows: Stock awards -: 9.0 $292 million in 2005. $106 million in 2006. $102 million in 2007. $244 Net Income — diluted $2,788 ; 505.4 $6.52 million in 2008. $9 million In 2009. and $85 minion thereafter. UTC's ecember 31, 2003 J financing obligations with customers are contingent upon maintenance (ret Income $2.361 ; of certain levels of financial condition by the customers. Less: ESOP Stock dividends (24): In addition. UTC had residual value and other guarantees of $163 Net Income - basic 2.337 i 473.8 $4.93 million as of December 31, 2004. Stock awards -: 7.0 UTC has a 33% interest in International Aero Engines AG (1AE), an ESOP Stock adjustment 23: 22.1 international consortium of four shareholders organized to support the Net incoma - diluted $2.360 ; 502.9 $4.69 V2500 commercial aircraft engine program. UTC's interest in IAE is December 31. 2002 accounted for under the equity method of accounting. IAE may offer Net income $2,236 : customer financing in the form of guarantees, secured debt or lease Less: ESOP Stock dividends (31)j financing in connection with V2500 engine sales. At December 31, Net income - basic 2.205 : 472.4 $4.67 2004, IAE had financing commitments of $743 million and asset value Stock awards -: 7.1 guarantees of $85 million. UTC's share of lAE's financing commitments ESOP Stock adjustment 29 • 26.1 and assetvalue guarantees wasapproximately$269millionat December Net income - diluted $2,234 : 505.6 $4.42 31, 2004. In addition, tAE had lease obligations under long-term noncancelable leases of approximately $396 million, on an undiscounted basis, through 2020 related to aircraft, which aresubleased to customers under long-term leases. These aircraft have fair market values, which approximate the financed amounts, npt of reserves. The shareholders

I Inirwt Torhnnlntfioc 7nnd Annual Ponnrl 1Q at IAE none guaranteed lATs financnc arrangements to the extent of Note? AccruedIJaMibes the* respect** ownership mterestv in me event c/ delau t by a shareholder on certain of fliese Vuarong arrargemertts. the sifter viiPons of oabwsJ 2004 2003 shareMtters wouM be proportortatw. rescoostote AOvanres on sales u»«*jm am sernce Ufaifci 52.208 J 1,808 Total reserves related to receivables and tnanang assets, financ ng *JM (mow: 1,627 mnim«rner«-. and guarantees iwe S284 nwxon and $288 .TutTton at r 31.2CCM and 2003. respective*?. Sen** a*d •CTanty 465 534 Income laces payout 351 521 NoteS and Coritrdcts in Accrued restnxfunne costs 380 100 OJier 2^43 2.186 20O4 58,097 S7.265

IIMVnfQrtCS C0UIS1 OF Aft fOlOWlg: ;

Snort -term fcoframngs consist of the toVonii^: KMKOCMda 2^03 2J21 OBBtractSMpraeaa 2-6*3 2J63 : [*rw*om(rfdc*«i 2004 2003 7J73 6.445 Oontcstic &onown(S $14 $8j L0K Forei0i bvA oorown^ 302 321: COMncrcol paocr 1.004 340 1 ••US.GaMnMicn(ca«cracts (128) (UOI S1.320 $669: OfcHio»tii«rntotts and oowf deoi denomwtec n: Note 6 Rxed Assets U-S itofiars 6-7% 2005-2029 $4.063 $4.407 44 2004 2OC3 Rtrngncuncncr Sol; 200S-201B 27 164 S240 S717 ESOPSrtl 7.7% 20O5-2O09 198 4.143 4^71 4.632 3 20 yon ! 7.959 7597 : Less: Lonj-tem OeM Onet 334 2*2 currenDy ouff 40 375 12.736 1Z082 : $4.231 $4.257 7.S05) (7.00?): S5.OSO PTTtopal oayraents required on long-te/m debt for the next five years are: $40 mJRofl in 2005. S704 rraKon m 20Q6. $37 miUion in 2007, $37 i expense was S793 frrtxxi n 2CO4 $677 m nor ") Ti 2008. and $135 mjJtion in 2009. 2003 and S64O mrikon n 2O02.

•0 UTC has entered into $200 million and $225 million of interest rate Current and non-current future income tax benefits and payables contracts in 2004 and 2003, respectively, which swap fixed interest within the same tax jurisdiction are generally offset for presentation In rates for floating rates. The expiration dates of the various contracts are the Consolidated Balance Sheet. Valuation allowances have been tied to scheduled debt payment dates and extend to 2006. established primarily for tax credit, tax loss carryforwards, and certain At December 31. 2004, approximately $2 billion of additional debt foreign temporary differences to reduce the future income tax benefits and equity securities could be issued under a shelf registration to expected realizable amounts. Of the total valuation allowance amount statement on file with the Securities and Exchange Commission. of $467 million, $244 million was established in purchase accounting, The percentage of total debt at floating interest rates was 34% and relating primarily to the purchase of Chubb. Subsequently recognized 26% at December 31, 2004 and 2003, respectively. tax benefits associated with a valuation allowance recorded in a business combination will be recorded as an adjustment to goodwill. Note 9 Taxes on Income The sources of income from continuing operations before income Significant components of income tax provision (benefit) for each year taxes and minority interests are: re as follows: (in millions of dollars) 2004 2003 2002 (In millions of dollars) 2004 2003 2002 United States $1,952 $1,582 $1,899 Current: Foreign 2,155 1.888 1.377 United Stales: $4,107 $3.470 $3.276 Federal $186 $125 $116 State 52 47 15 United States income taxes have not been provided on undistributed Foreign 638 515 438 earnings of international subsidiaries. It is not practicable to estimate 876 687 569 the amount of tax that might be payable. UTC's intention is to reinvest Future: these earnings permanently or to repatriate the earnings only when it is United States: tax effective to do so. Accordingly. UTC believes that any U.S. tax on repa- Federal 295 290 321 triated earnings would be substantially offset by U.S. foreign tax credits. State (39) (77) 19 The American Jobs Creation Act. signed into law in October of 2004. Foreign (47) 41 |22) provides UTC an opportunityto repatriate up to $500 million of reinvested 209 254 318 foreign earnings and to claim an 85% dividend received deduction income tax expense $1.085 $941 $887 against the repatriated amount. UTC is evaluating the effects of the Attributable to items repatriation provision and expects to make a decision on implementation credited (charged) to later in 2005. equity and goodwill $150 $(240) $912 Differences between effective income tax rates and the statutory U.S. federal income tax rates are as follows: Future income taxes represent the tax effects of transactions, which are reported in different periods for tax and financial reporting purposes. 2004 2003 2002 These amounts consist of the tax effects of temporary differences Statutory U.S. federal income tax rate 35.0% 35.0% 35.0% : between the tax and financial reporting balance sheets and tax carry- Tax on International activities including exports (7.8) (4.2) (7.0): forwards. The tax effects of temporary differences and tax carryforwards Benefit from non-core business losses — (3.9) (0.7): which gave rise to future income tax benefits and payables at December Tax audit settlement (1.8) - - i 31.2004 and 2003 are as follows: Other 1.0 0.2 (0.2>: Effective income tax rate 26.4% 27.1% 27.1% : (in miiions of dollars! 2004 2003 Future income tax benefits: The effective tax rate for 2004, 2003 and 2002 reflects the tax Insurance and employee benefits $771 $1.024 benefit associated with the lower tax rate on international earnings. Other asset basis differences 343 285 The 2004 rate includes the favorable impact of the settlement of federal Older liability basis differences 1.143 1.092 tax claims and other disputed items related to tax years 1986 to 1993. Tax loss carryforwards 387 287 The 2003 rate also benefits from a tax loss associated with a non- Tax credit carryforwards 388 444 core business (3.9%) substantially offset by a reduced benefit (3.8%) Valuation allowance (467) (477) from international activities attributable to recognition of foreign taxes $2,565 $2,655^ as deductions and not credits for U.S. income tax purposes. The tax loss Future income taxes payable: was attributable to a worthless stock deduction UTC was entitled to in Fixed and intangible assets $381 $376 2003, relating primarily to a diminution in value of its subsidiary. Other items, net 322 173 International Comfort Products, USA ("ICP, USA") and other events that $703 $549 fixed the loss in 2003, which included the transfer of certain of ICP, USA's assets to Owner and me sate o! Kf. USA u> a mm) party. T PENSION PLANS. UTC and its subsidiaries sponsor both funded and party sale of me O> assets did not resuK • a agraicam loss for financial jr funded do-nestic and foreign oeSned benefit pension plans that cover the majority of its employees. The effecove tax rate tor 20O2 refects ate benefit of increased use UTC uses a November 30 measurement date for a majority of its of certain lac-ptarmng strategies, mcfaduig utfizatJon of a capital vjss pension alans.

Tax credt carry fonords at December 31. 20O4 «ere $388 nafcon, o» 2004 20O3 wtach $147 rnjiofi expve as fokws: $12 ration expire from 2005 Change m Bencft ObBgaSo*: 2009. S4 m*on from 2O10-2O14. and $131 m*on from 2015-2O24. Bepnrmjj balance $17^26 $13^25: Tax loss carry forwards, pnrcvaSy staae and fore&i. at December 31 Service oast 347 293! 2OO4 «we S2JJ13 rotton of vfucti SL388 m*on expire as follows intefestccst If02 948: S376 m*on trooT 2005-2009. $ 145 «*cn from 2O10-2O14. ar-d $867 Actuaraf toss 629 727 : ntro«n2O15-2O24. Total benefits paid (1.009) (8621!^ Net serQement jnd corottBeni (£tnl toss (25) 3! Note 10 Employee Benefit Plans Acqustons 236 i^soo: UTC and its a»T»uifca»iea sponsor -unerous domestic and foreign Other 375 392; employee bcrtclK DIJTH. ^iich are dccussed below. EmM«bat*nee SIB^U J17U226: Otanet • Pin Assets: : EMPLOYEE SAVINGS PLANS JTC and certain subsHanes sponsor S13.498 •anous «rnufcnef savingi ptans. ITCs eonutmUcms to employer Actual tetum on plan assets U72 L979: aponaoied **ned contrtxition plans «we J14S 11*01-1. $122 mffion and $111 n*on far 2004.2O03 and 2002. tespeowely. Benefits P*d fmm pteA assect (958) (837)! UTCs non-urtoo domestic employee iaanct pan uses an Employee «tO«Btiofs 63 1.176; Stock Oanasnip nan (E5OP1 for trrptoyer contriutjors. External OOter 181 146: borroMrngK. guaranteed by ITTC and reported as debt in the Conso&dated EntnttaaiMX $15.672 $13.498 i Datanct Street. »ere used by the ESOP to h»id a portion of its purchase Funded status SP439) «3.728I| of ESOPConoerttte Pietened Soxfc (ESOP Preferred Stock) from UTC uneuip'^d net actuwl toss 4.791 4.867: On Maimmftei 6. 2003. UTC and Trustee effected the ujmetsion of al tlnrecofnaeil prior serMceoost 244 225 i 10L6 n«on outstarKtnc snares of ESOP Pretend Stock Mo 42.5 fn»on 17 4 •' stares of Coronoa Slock. At the tome of me connerson. each share of Net anowt necafniad si/m J 1^368! ESOP Pnfencd Stock «es comertMe rto tour snares of Common Stock, had a g»M*n>Md minimum vafcje cf S63. a M-80 annual dwidend and Amomts BecaCaUM • tte CanoMatod i •es eOeeuuUe Oy IfTC at any time *or %K per snare. Because of its . 0» ESOP Preferred Sw* -as oassfad ootside of Prapatf benett cast S2.756 $Z36Si Snafeewiers' fjfjtf. In me December 33L 2003 balance sfteet. Co-nmon Vzraed beneft cost (3.377) (3.594>: Stock IMU by (he ESOP and comnaaed to employees is dassified as IntarfUe Rseis 75 rs: pennari«nteoju

(in millions of dolUn) 2003 Target Percentage of Projected benefit obligation $15.455 $14.460 Allocation Plan Assets Accumulated benefit obligation 13,942 12,800 Asset Category 2005 2004 2003 Fair value of plan assets 12,151 10.657 Equity securities 65%-75% : 72% 72% Debt securities 15%-25% : 20% 20% (In irtmom of dollars) 2004 2003 2002 Real estate 0%-5% ; 4% 3% Components of Net Periodic Benefit Cost: Other o%-7% : 4% 5% Pension Benefits: 1X10% 100% Service cost $347 $293 $255 ™ Interest cost 1.032 948 884 Total plan assets include approximately 4% and 5% of UTC's Common Expected return on plan assets (1,261) (1,140) (1,116) Stock at December 31,2004 and 2003, respectively. Assets are rebal- Amortization of prior service cost 27 28 39 anced to the target asset allocation at least once per calendar quarter. Amortization of unrecognized net transition obligation 3 2 2 Estimated Future Contributions and Benefit Payments Recognized actuarial net loss 145 49 4 UTC expects to make voluntary contributions of approximately $500 Net settlement and curtailment loss 53 49 37 million in cash to its defined benefit pension plans in 2005. Contributions Net periodic pension benefit cost - employer $346 $229 $105 do not reflect benefits to be paid directly from corporate assets. Benefit payments, including amounts to be paid from corporate Contributions to multiemployer plans were $101 million. $76 million assets, and reflecting expected future service, as appropriate, are and $55 million for 2004.2003 and 2002. respectively. expected to be paid as follows:

(in millions of dollars) 2005 : 2006 : 2007 [ 2008 : 2009] 2010-2014 I $992 V"" $1.011 T" $iio38":" "$1.067"!""il.ioV| $5.928 \ POSntETOEMENT BENEFIT PLANS. UTC and its suteKli3r.es also 2003 2OO2 itmnet a nomber of postretiremen! benetf plans thai provide health Cotfflpoivtfits o* Met Pen and Me eeoewts to eSgrtrie retirees. Such benefits are provided primarily Omer fosuetaemem Be from dumesoi pores, wtacri comprise approunately SO* of tte benefit Service cog 57 58 sii; QOwg-ifiO-L Die postiet»eiiie« ptarts are primarty ivifunded. The aOoca- 61 64 73: ooo erf assets •> funded plans is approunatety 70% eouky and 30% Expected return on plan assets (4) (4) (5): (23) 121) tis)i Certain employee* are covered egacy bere* pro* Mns mat Net and (5) (57)i include prescnptton drug cow age for Uedkare efcgibte referees, in Net (benefit 009 S36 $32 December 2003. ihe Me die are Presc.-«Xjon Drug, improvement atd Moderaoaaan Act of 2003 (tne Act) was s^ied into law. The Act During 2002, UTC muUBul the postretiremen! medical and Bfe irtsur- Mtroduced a ptan smnsor subsriy based on a percentage of a benefi- ance beneits provided to certain employees, resulting in Uie recognition oaryt tvnat pinrnpnon drug DeneAts. within defned imrts. end me of a (43 minion curtatotent gain. The gain was recorded in segment opponuKy for a rewee to ooian arescrvoon drug benefits under cost of products sow and se*ng. genera) and administrative expenses. impact of lite subsitv on the postreoremerrt benefit Mayor assumpoons used in determining the benefit obligation and net t was not natenai n 20O4. cost for postretiremen* plans are presented in the following table as UTC uses a No»c«tei 3O measwenieni date for a maiority of its oatreorementbene-iptans. Boccta MM Cost 2003 ZO04 2003 1004 2003 2O02 Oiscountiate 6J>% 6-3% &3% 6.7% 7i% 11,066 (997 Ejected fetura 7 8 oapenassets — - 7.5% 83X 9.6% M 65 f3S) 77 Assumed heaWi care cost trend rates are as tawows: m (W1 e a 2004 2003 (5) 4 10% 10%: ftooi 11065 nitt (not t}ie L4U trcntf cs 5% Iter tnM me rate metes the raK t is i percentage-point change 1 2 in assuned heaUi care cost trend rates woirid have the fofcwfng effects: $55 2004 Owi Ptrr.miff Point (39)| 18] lmi> Jiif Dcoease f74) ETiect on tool igrvirg and Xfif w cost 3 (3) 40 (38)

Estimated Future Benefit Payments SeneSi payments, inducing net amounts to oe paid from corporate assets, and refecting expected" future service, as appropriate, are tapected to be paid as fctows:

M m«*n a ettaa) xos •. 20O6: 2008 j 2009 : 2010-2014 : "VST-" $90: S86: 1374:

*4 ]*MI«c»jala0es2O04AnMwl Report STOCK-BASED COMPENSATION. UTC has long-term incentive plans In accordance with SFAS No. 123. "Accounting for Stock Issued to authorizing various types of market and performance-based incentive Employees," the fair value of each stock option has been estimated on awards, which may be granted to officers and employees. UTC's Long- the date of grant using the Black-Scholes option-pricing model with the term Incentive Plan provides for the annual grant of awards in an amount following weighted-average assumptions: not to exceed 2% of the aggregate shares of Common Stock, treasury shares and potentially dilutive common shares for the preceding year. 2004 2003 2002 The Long-Term Incentive Plan has a ten year term from the date of the Risk-free interest rate 3.1% 3.0% : 4.4% most recent shareowncr approval and will expire April 24, 2005. In Expected life 5 years 5 years j 5 years addition, up to 4 million options on Common Stock may be granted Expected volatility 38% 39% j 39% annually under UTC's Employee Stock Option Plan. No more than 20 Expected dividend yield 1.5% 1.8X : 1.6% million shares, in the aggregate, may be granted after June 30. 2003. A summary of the transactions under all plans for the three years A table illustrating the effect on net income and earnings per share as ended December 31.2004 follows: if the Black-Scholes fair value method had been applied to long-term incentive plans is presented in Note 1. Slock Options The weighted-average grant date fair values of options granted during Average Other Incentive 2004, 2003 and 2002 were $30.88. $20.82 and $23.30, respectively. (sharas and units In thousands) Price Shares/Units In December 2004. the FASB issued SFAS No. 123 (revised 2004), Outstanding at: "Share-Based Payment." The standard requires that the cost of stock December 31. 2001 43.149 $48.85 394 ; options be measured at fair value on the grant date and recognized in Granted 10,313 65.18 280 ! the statement of operations. UTC has elected to adopt the standard Exercised/earned . (4,031) 32.01 (88): effective January i. 2005 using the modified retrospective method Canceled (1.383) 68.99 (16): described in the standard. Accordingly, beginning with the first quarter of December 31. 2002 48,048 $53.19 570 ; 2005, all periods prior to January 1,2005 will be restated to reflect the Granted 6,612 62.75 : December 31, 2004 43,739 $66.51 351 1 Note 11 Restructuring During 2004, UTC recorded net pre-tax restructuring and related charges Granted options in the above table include options issued in connec- totaling $632 million for new and ongoing restructuring actions. UTC tion with business combinations. recorded charges in the segments as follows: Otis $144 million, Carrier The following table summarizes information about stock options $241 million, Pratt & Whitney $152 million. Hamilton Sundstrand $71 outstanding and exercisable (in thousands) at December 31,2004: million, Sikorsky $9 million and Eliminations and other $15 million. The charges include $546 million in cost of sales. $74 million in selling, Options Outstanding Options Exercisable general and administrative expenses and $12 million in other income. Average Remaining Average As described below, these charges relate to actions initiated during Exeicise Price Shares Price Term Shares Price 2004 and 2003. For a discussion of restructuring actions associated S15.01-$30.00 1.255 124.73 1.0 1.255 $24.73 with business acquisitions, see Note 2. $30.01-$45.00 3.956 $36.37 2.5 3.956 $36.37 $45.01-$60.00 4.786 $52.99 3.9 4.751 $52.95 2004 ACTIONS. During 2004, UTC initiated restructuring actions $60.01-$75.00 20.264 $64.96 6.6 6,294 $65.51 relating to ongoing cost reduction efforts, including global workforce $75.01-$90.00 5,892 $76.12 5.9 5.813 $75.94 reductions and the consolidation of manufacturing, sales and service S90.01-tl05.00 T.586 $94.36 9.1 5 $94.92 facilities including Carrier's McMinnville. Tennessee commercial air conditioning and ventilation product manufacturing facility, Otis' Stadthagen, Germany escalator manufacturing facility and Pratt & Whitney's Space Propulsion facility located in San Jose, California. During 2004, net pre-tax restructuring and related charges, totaling $542 million, included $458 million recorded in cost of sales, $72 million in selling, general and administrative expenses and $12 million in other income.

United Technologies 2004 Annual Report 65 The 2004 actions that have cccwred during Die year resulted in ret As of Deoeinber 31.2OO4. net vortcforce reductions of approximately •orkfone reductions of appronmatety 3300 ercpteyees and ma eutng 4.000 employees have been completed and 1_5 rraRkm net square feet Of 1-0 m*Vn> net square feel of faoftres. The remaBung voritfcxe and of facilities have been exited since Die actions were initiated. Trie faofity related cost reductions aie largetsd for comdedon Curing 2005 balance of me remartng •akface and faoEty related cost reduction and early 2O06. actons are targeted for completion through early 2OO5. The totomg table summarizes tfle resuuoiring accrual balances The toUming table suomarues the restructuring accrual balances and utfaatpn oy cost typefe wih e 20O4 programs: ana utilization by cost type for me 20O3 programs:

and Lease TamnaOon Total Coax Tool I pre-tar oorgts 1324 S79: 1139 SS42 SaUnce « Janowy J. 2DO4 S92: «s: tioo.; (128) Het pie-tax cuarges 21 i 69 • 90 i

r 31. 2004 S30C: SU S217 Balance « Oecmtar XL 2OO4 J13

The fafcwing table surmantes eipeeterl. ncurred and remairane The fotomne table summarizes npectprt. incurred and remaining costs fcv the 20O4 propams by type: costs lor tr« 2OO3 proerana by type:

and lease

Cam Taut Total S341 . »249 S6G9 txpeeteo casts »in: ss $116 : $295 : Casts moned ihmcK 31. 20O4 (139) Oecanner 31. 2003 O50)i (8)

9110 5127 : Deceneer 3L 2004 (23)! 1-1 (69,i (90)!

ThetoMojMng 1tabl e summames f afjf f tftfi ^icurred and remsioMg M. 2004 $6: $6: costs far lie 20O4 prograrrs by segment: Cans The fohmine tabte cted. incurred and remaining eostsfOTthe2OO3(jiuBr3msoyscgnieia:

Costs incurred Retnartnc rhroo(ti Cosssat Oecenber Oecember Costs 3L2O03 31.2004 31.20Q4 Ota $97 SOU: «CMI; $2 Camei 130 (66): (62): 3 Pntt&MM&wy 31 f27)= (3): 1 Jterrofuai Suromaot) 27 (1): (26i; _ Bmnauns i Ouw 10 (ID)'- - i 2003 ACTJOHS. Dunne 2004. UTC recaroed ret pre-tai restructunng TOUI $295 JT199): soo)i $6 ana related charges of $90 m*on for actcrts moated dunrg 2OO3. The charges relate to on0»ng cost reduction t'fcrts. inducing workforce reductions and the consofedabon of manufectLnng. sates znd service t»c*t»es >«diurtn( Carriers Syracuse. Hew YorMtased coo'.anef ai*d compressor manufaefj^fig coerafjons and Otis' StoorranpDrt. mSanHtaseH maoufactjriie. Atrbc^cr: and 6e!d tool cueuucns. The charges mcluoed S88 rrriCon reccrced in cost of SB es and $2 rmnon n seOrg. ggneral and adnvrtstrative enaerses. Note 12 Foreign Exchange All derivative instruments are recorded on the balance sheet at fair UTC conducts business In many different currencies and, accordingly, is value. At December 31. 2004 and 2003, the fair value of derivatives subject to the inherent risks associated with foreign exchange rate recorded as assets is $165 million and $162 million, respectively, and movements. The financial position and results of operations of the fairvalue of derivatives recorded as liabilities is $43 million and $56 substantially all of UTC's foreign subsidiaries are measured using the million, respectively. UTC uses derivatives to hedge Forecasted cash local currency as the functional currency. Foreign currency denominated flows associated with foreign currency commitments or forecasted assets and liabilities are translated into U.S. dollars at the exchange commodity purchases, which are accounted for as cash flow hedges. In rates existing at the respective balance sheet dates, and income and addition, UTC uses derivatives, such as interest rate swaps, which are expense items are translated at the average exchange rates during the accounted for as fair value hedges. respective periods. The aggregate effects of translating the balance The carrying amounts and fair values of financial instruments at sheets of these subsidiaries are deferred as a separate component of December 31 are as follows: Shareowners' Equity. UTC had foreign currency net assets in more than forty currencies, aggregating $8.5 billion and $6.5 billion at December 2004 2003 31,2OO4 and 2003. respectively. Carrying Fair CarryJng Fair The notional amount of foreign exchange contracts hedging foreign (in millions of dollars) Amount Value Amount Value currency transactions was $5.7 billion and $4.9 billion at December 31, Financial Assets and Liabilities 2004 and 2003, respectively. Marketable equity securities $746 $746 $79 $79 Long-term receivables 170 166 128 125 Note 13 Financial Instruments Customer financing UTC operates internationally and, in the normal course of business, is note receivables 483 465 439 425 exposed to fluctuations in interest rates, foreign exchange rates and Short-term borrowings (1,320) (1.320) (669) (669) commodity prices. These fluctuations can increase the costs of financing, Long-term debt (4,243) (4,941) (4.614) (5.363) investing and operating the business. UTC manages its foreign currency transaction risks and some commodity exposures to acceptable limits The above fair values were computed based on comparable through the use of derivatives designated as hedges. transactions, quoted market prices, discounted future cash flows or an By nature, all financial instruments involve market and credit risks. estimate of the amount to be received or paid to terminate or settle UTC enters into derivative and other financial instruments with major the agreement, as applicable. investment grade financial institutions and has policies to monitor the The values of marketable equity securities represent UTC's investment credit risk of those counterparties. UTC limits counterparty exposure in Common Stock that is classified as available for sale and is accounted and concentration of risk by diversifying counterparties. UTC does not for at fair value. The increase in marketable equity securities primarily anticipate non-performance by any of these counterparties. reflects the initial purchase of Kidde shares. The non-shareowner changes in equity associated with hedging UTC had outstanding financing and rental commitments totaling activity for the twelve months ended December 31, 2004 and 2003 $838 million at December 31. 2004. Risks associated with changes in were as follows: interest rates on these commitments are mitigated by the fact that interest rates are variable during the commitment term and are set at the date of funding based on current market conditions, the fair value of (in millions ol dollars) 2004 2003 Balance at January 1 $55 $4 the underlying collateral and the credit worthiness of the customers. Cash now hedging gain, net 86 66 As a result, the fair value of these financings is expected to equal the Net (gain) reclassified to sales or cost of products sold (76) (15) amounts funded. Balance at December 31 $65 $55 The fair value of the commitment itself is not readily determinate and is not considered significant. Additional information pertaining to Of the amount recorded in Shareowners' Equity, a $67 million pre-tax these commitments is included in Note 4. gain is expected to be reclassified into sales or cost of products sold to reflect the fixed prices obtained from hedging within the next twelve months. Gains and losses recognized in earnings related to the discontinuance or the ineffectiveness of cash Flow and fair value hedges were immaterial for the years ended December 31, 2004 and 2003. At December 31, 2004, all derivative contracts accounted for as cash now hedges mature by October 2009.

United Technologies 2004 Annual Report 67 Note 14 Guarantees mAons cf dofijnj 2004 2003 UTC extents a variety of financial guarantees to tnrd parties. Xs Df Balance as

Note 15 Commitments and Contngent Liabitties LEASFS. l/TC occupies space and uses certain equipment under lease arrangements. Rental cammnnents of SM.38 maTion at December 31, J160 S4 S191 $9 I I 2O04 under toog^eoiinopMnceiatite operating leases are payable as ftJ- lows: $330 mUon in 2005. S248 rnBon in 2006. $172 million in 2007. 1.224 22' 1.406 22 $116 mrmon in 200a $83 mffion in 2009 and $189 mfflkxi thereafter. r Rent expense *as $321 nriEon in 2004. S261 million In 2003 and IKS- n leo 36: I $214 maion in 2O02. I Aocfebonai intormation peitaining 10 uniaiieiual aerospace rental II 68 61, r commitments is indudea in Note 4. -I ENVIRONMENTAL UTCs operations are subject to environmental rep*- UTC also Ms otifMions ansng from sales ol cenam businesses and larjon by federal state and tocal authonbes in the United States and nets. ncludncrepresenfations ana warranties and related indemn ities re&rfaiory authorities with jurisdiction oner its foreign operations. As lor enviionmenm. heaWi and safety, tax and employment matins The described in Note i. UTC has accrued far the costs of environmental nanmun potential payment related to these obfegMtons is not a remediation activities and ftfrindiraBif reassesses these amounts. Hitcifcidi amount as a number of the ottgauurado not contain tnanciaJ Management befeves that the aenhood of incurring losses materially caps. The carrynf amount of kaDMes reoted lo these oMgations m excess of amounts accrued is remote. •as $156 mflion and $191 m*or at December 31. 20O4 and 2003 respecavcly. For addbonal nkxmaoon rcgaiOfcig Che environmental GOVERNMENT. UTC is the subject of one or more investigations and Mdonvtitcations. see Note 15. «gal proceedings moated by me OS-Go»cinmcnt witli respect to UTC accrues tor costs associated with guarantees »men * s probable government contract maners. UTC beJcucs that in fight of the current DM a fcattty has bee* ncurred and the amour* can be reasonably US. Government contracting ermronment t •* be the subject of one or flumaMd. The most Boe*y cost to be incured is accrued based on an t>ore OS. Government ai»csUgatjons.< UTC or one of its business units i >n itigate certain cases. In tooiicji eipertence. Adjustments are matt to accruals as ckatm data addition. UTC accrues for SabaTUes ayaooatgd with those matters that am nstcocaf emenoiLe warrant The cnar^es r Lte carrying amount are probable and can be reasonably estimated. of semce and crococt warranties and oroduct perfonrance guarantees tor tne rears ended December 3L 2OJM arvo 2003. are as taflews:

6* jmtMfeovKUDCo 2004 Amwal Deport As previously disclosed in the fourth quarter of 2003, UTC received a matters may differ from the recorded liability, management believes that demand notice for $755 million from the U.S. Department of Defense resolution of these matters will not have a material impact on UTC's (DoD) relating to an on-going dispute over Pratt & Whitney's government financial position, results of operations or cash flows. cost accounting practices for engine parts received from its partners on UTC also has other commitments and contingent liabilities related to certain commercial engine collaboration programs from 1984 to the legal proceedings, self insurance programs and matters arising out of present. The case is currently pending before the Armed Services Board the normal course of business. of Contract Appeals (ASBCA). In addition, and as previously disclosed, the U.S. Department of Note 16 Segment Financial Data Justice (DOJ) filed a complaint against UTC In 1999 under the civil False UTC's operations are classified in six principal segments. During the Claims Act and other theories related to the 'Fighter Engine Competition* fourth quarter, Hamilton Sundstrand and Sikorsky, formerly aggregated between Pratt & Whitney's F100 engine and GE's F110 engine. The DOJ within the Right Systems segment, are now reported as separate Alleges that the Government overpaid for engines because Pratt & segments. Those segments were generally determined based on the inflated certain costs and withheld data. The Government management of the businesses and on the basis of separate groups of claims damages of $624 million. UTC believes this estimate Is substan- operating companies, each with general operating autonomy over tially overstated, denies any liability and is vigorously defending the diversified products and services. matter. Trial of this matter was completed in December 2004 and a decision is expected in 2005. OTIS products include elevators, escalators, moving walkways, service Should the U.S. Government ultimately prevail with respect to one or and spare parts sold to a diversified international customer base princi- more of the significant government contracting matters discussed pally in the commercial and residential property industries. above, the outcome could result in a material effect on UTC's results of operations in the period the matter Is resolved. However, UTC believes CARRIER products Include commercial, industrial and residential that the resolution of these matters will not nave a material adverse heating, ventilating and air conditioning (HVAC) systems and equipment, effect on UTC's results of operations, competitive position, cash flows commercial and transport refrigeration systems and equipment, building or financial condition. controls and energy management and air quality systems, and after- As previously disclosed, the European Commission's competition market service and components. directorate (the Commission) conducted inspections in early 2004 at offices of UTC's Otis subsidiary in Berlin, Brussels, Luxembourg and CHUBB products include electronic security systems and fire detection Paris. The inspections relate to the Commission's ongoing Investigation and suppression, monitoring and rapid response systems, security of possible unlawful collusive arrangements involving the elevator and personnel services and service for a diversified international customer escalator industry in Europe. UTC is cooperating fully with the Commis- base principally in the commercial and residential property industries. sion's investigation. Based on the results of its own internal investigation, fc

— United Tar>hnnto»«inei«.dhinissjl and compensation of senior manaeeire-n. impact on UTCs results of operations, financial condition or cash flows approval of CIB*M Jtmoal structure changes, potoes. annual operating ui 2004. it did rest* in the consofclation of certain entities that were and capUf plans.

2002 2O04 3OO3 2002 OM $&999 $7327 : $6L811 : SL504 $1^77 $1.057 I Camet 10.636 9L246 : 8.773 : 879 911 779! OvA» 2.881 1036 : - 1 138 55 -j 7J505 : 7*45 : 1J43 1.125 U82J 582 565 • 2J84 : 2L179 : 213 203 ITS; t«0»lie»l 1 37.253 3U603 : 2&861 : 4.487 4.253 3^59: (5691: (6491 1 262 (174| (27)- c^TTTT*i^l-^- "* -\ -j f£79) (234» (1751 i Cm luilam« $37.445 S3UD34 : S2&212 : 54.47O $3^45 $3^7 ;

2004 2O33 2002 2004 2003 2002 7OO4 2003 2002 CCS ii3» S5572 S4.T34 $79 $77 $81 405 $154 $138 Canter 9J££ 7.7JO : 7.431 176 89 94 2DO 182 189 OM* 4^74 4 J96 G9 16 - 95 44 - fna«w«»teT 7J66 S.648 6.O82 244 132 257 273 214 209 "II— H- " -fn— f 7.473 6.906 : 6.675 134 103 85 129 130 127 Stamv L96S L573 1J30 46 35 41 42 37 42 l*Mutr*n XJK3 3ZB1* : 26.252 748 513 558 914 761 70S QnMMns and «mcr 3.1 S7 1.460 3532 47 18 28 64 38 22 C^ooMaKd 5Ti S3SJ74 129.784 »795 $530 $586 $978 $799 $727"

SEGMENr REVENUES AND OPERAHNG PfiOFrr Total revenues Or segirienl include mterseemenc sales. wnKh are generaBy maae at pnces apDrapmabng Pose mat the sefrng endty 3 attte to otxan on

70 Geographic Areas External Revenues Operating Profits Long-Lived Assets (In millions of dollars) 2004 2003 2004 2003 2002 2004 2003 2002 United States operations $18.519 $16.988; $16.760 $2.091 $2.156 ; $2.289 • $8,680 $8.675 j $8.648 International operations • ; ; • Europe 9,396 7.150 j 5.573 1,187 970 ! 690 • 4,888 4.984 • 1.547 Asia Pacific 5,723 4.505 I 3.647 796 722 : 573 : 2.287 1.663 ! 1,428 Other 3,296 2.602 • 2.581 414 404 ! 307 : 1,062 682 i 521 Eliminations and other 511 (211)1 (349) (IB) (407); (202); •*«• 300 ; 78 Consolidated $37,445 $31,034 : $28.212 $4,470 $3,845 ! $3.657 : $17,358 $16.304: $12.222

^ GEOGRAPHIC EXTERNAL REVENUES AND OPERATING PROFIT. GEOGRAPHIC LONG-LIVED ASSETS. Long-lived assets include net s ^•'Geographic external revenues and operating profits are attributed to the fixed assets, goodwill and intangibles, which can be attributed to the 1 geographic regions based on their location of origin. United States exter- specific geographic regions. 'i nal revenues include export sales to commercial customers outside 3 the U.S. and sales to the U.S. Government, commercial and affiliated MAJOR CUSTOMERS. Revenues include sales under prime contracts v customers, which are known to be for resale to customers outside the U.S. and subcontracts to the U.S. Government, primarily related to Pratt & Revenues from United States operations include export sales as Whitney, Hamilton Sundstrand and Sikorsky products, as follows: ; follows: (in millions of dollars) 2004 2003 2002 (in nrilkms at dollars) 2004 2003 2002 Pratt 1 Whitney $2.990 $3.025 j $2,489 : Europe $1,126 $1471 : $1.422 : Hamilton Sundstrand 761 681! 5921 Asia Pacific 1,309 1,145 : 1.594 I Sikorsky 1,692 1.515 j 1.423 i Older 1,128 1.013 • 1.037 1 Other 62 48 j 50 i $3,563 $3.329 I $4.053 : $5,505 $5,269 I $4,554 :

Selected Quarterly Financial Data (Unaudited) 20O4 Quarters 2003 Quarters tin millions of doflars. eicept per snare amounts) First Second Third Fourth First Second Third Fourth Sales $8,357 $9,455 $9,248 $9,640 $6.653 $7.708 $7,875 J $8.487 tross margin 2,087 2,484 2.451 2,457 1.787 2.089 2,162 : 2.177 * et Income " 579 837 722 650 502 632 639 • 588 Earnings per share of Common Stock: ; Basic $1.16 $1.69 $1.46 $1.31 $1.05 $1.33 $1.34 ; $1.21 Diluted $1.14 $1.66 $1.43 $1.29 $1.00 $1.26 $1.27 i $1.16

Comparative Stock Data 2004 2003 Common Stock High Low Dividend Hifth Low Dividend First quarter $97.50 $84.05 $.350 $66.21 $54.15 I $.245 Second quarter $91.48 $81.50 $.350 $73.51 $58.75 : $.270 Third quarter $95.79 $88.31 $.350 $80.25 $71.29 i $.270 Fount! quarter $105.52 $89.90 $.350 $95.54 $79.88 : $.350

UTC's Common Stock is listed on the New York Stock Exchange. The high and low prices are based on the Composite Tape of the New York Stock Exchange. There were approximately 26,000 common shareowners of recotri al December 31,2004.

i T Board of Directors Permanent Committees

Betsy 1 Bernard Frank P. Report AudX Committee Forma Prescient Reived Charman ana Frank P. Report . Cnanman AT&T Corporation Over Executive Officer Jamie S. Gorefeck The Dow Chemical C^noany fticnard D. McCorrrack (Chemicals and OemicaJ Frodocts) H. Patrick Swrgcrt George David AnrJre VBeneine Qtamnanand H. Patnck Sw>gert H. A. Wagner Chief fjecutjve Officer President Howard Un/wersrfy OceDa«id.au A*- Products and Chemeais. Inc. Charles R. Lee CtaftoR-Lee (tnojstna) Gases and Chemicals) FranfcP.Popcfl •vdCnanna* K A. Wagner ICoOifefEMculneOrlcer dmstine Todd Whitman President :Comrnittse (VteconiiMicaoors} Tt<« whitman Strategy Group Charles R. lee. Chairman George David RutualQ. McGoraticfi Jan»eS.GoreSck HaraUMcGravH awl CMcf Eiecubie Odcer FrankP.PopoR USWesLtnc Andre VOeneme Christine Todd WhAman HaroMHcCrawH

Richard D. McCormcfc. Chairman (GtoMMn Betsy J-Bernard Jean-Ptorre Garner Charles R. Lee K Patrick Swygert H. A. Warier

PubEc Issues Review Committee Jean-Fferre Gamier. Charmao Betsy X Bernard JanueS.Goreick Harotd McGraw U H. Patrick Svygen Andre VBeneuve Leadership

Mario Abajo Halsey Cook Todd Kallman Eric Patry President. South Europe President, North America Vice President, Corporate President, Europe, Chubb and Middle East. Otis Residential, Carrier Strategy & Development Jeffrey P. Pino David Adler Geraud Darnls James E. Keenan Senior Vice President, Senior Vice President. President, Carrier Senior Vice President and Marketing & Commercial Worldwide Customer Service, General Manager, Aftermarket Programs, Sikorsky Sikorsky George David Services, Pratt & Whitney Chairman and Olivier J.Robert TesrayaAklilu Chief Executive Officer Edwin W. Laprade President. Chubb Vice President, Quality President, Industrial, and Manufacturing John Doucette Hamilton Sundstrand Thomas I. Rogan Vice President and Vice President. Treasurer Ted F. Amyuni Chief Information Officer Richard Laubenstein Senior Vice President, President, Carrier Transicold Kelly A. Romano Operations. Carrier Michael R. Dumals President Carrier Distribution, Vice President and General John P. Leary Americas Alain M. Bellemare Manager, Customer Service, Vice President, Employee President, Hamilton Sundstrand Relations Richard J. Sanfrey Pratt & Whitney Canada President, Thomas E. Farmer Robert Leduc North America Commercial Richard H. Bennett, Jr. President, Military Engines. President, Flight Systems, Refrigeration, Carrier Vice President. Environment, Pratt & Whitney Hamilton Sundstrand Health & Safety William H. Trachsel Stephen N. Finger Patrick L'Hostis Senior Vice President Todd Bluedorn President, Sikorsky President, Europe, Middle East and General Counsel President. North and South and Africa, Carrier America, Otis Kenneth P. Fox TobinJ-Treichel President, North America Arthur W.Lucas Vice President Tax Ari Bousbib Commercial, Carrier Senior Vice President, President, Otis Engineering, Pratt & Whitney Joseph E. Triompo James E. Geisler President Engine and Control Kent L Brittan Vice President, Finance Paul W. Martin Systems, Hamilton Sundstrand Vice President, Senior Vice President Supply Management Bruno Grab U.S. Government & Advanced Debra A. Valentine President, North and East Development Programs, Vice President. Secretary William M. Brown Europe, Otis Sikorsky and Associate General Counsel President. Asia Pacific, Carrier Gregory J.Hayes Ronald F. McKenna Jan van Dokkum William L. Bucknall, Jr. Vice President, Accounting Chairman, Hamilton Sundstrand President, UTC Power Senior Vice President, Human and Control Resources and Organization Didler Michaud Charles Vo Stephen N. Heath President, U.K. & Central President, John F. Cassidy, Jr. President, Commercial Engines, Europe Area, Otis North Asia Pacific, Otis Senior Vice President, Pratt & Whitney Science and Technology Raymond j. Moncini Randal E. Wilcox David P. Hess Senior Vice President, President, Tony Chamberlain President, Hamilton Sundstrand Operations, Otis South Asia Pacific, Otis President, Australasia, Chubb Darryl Hughes Michael Monts Louis R. Chenevert President, U.K., Ireland & Vice President, President. Pratt & Whitney S. Africa, Chubb Business Practices

Jean Colpin Tadayuki Inoue Larry 0. Moore Director, United Technologies President, Japan, Otis Senior Vice President, Research Center Module Centers and Operations, George H. Jamison Pratt & Whitney Vice President Communications Timothy M. Morris President, Aerospace Power Systems. Hamilton Sundstrand Shareowner Information

Corporate Office Certifications urrted Tecfinotogfes Corporatoon UTC rias nduded as Emibit 31 to its Our Internet and telephone services give Umged TecMatogiesBwkfrie Annual Report on Form 10-K for fecal snareowners fast access to UTC financial •arrlord. Connecticut 06101 tear 2004 Sled witn the Securities and resuts. The 24-hour-a-day. tcfl-free telephone leepftone 060.72&7000 Excnange Conrrissjon ce-tificales of service inckides recorded summaries of rts CJi-ef Ejcecutive Officer and onnopal UTC5 quarterly earnings in formation and "i irpon ii mirtf ixnitiilili' tn rtijrr f na-Tcra! offers certifycig. among other other company news. Calers also may •nmers n advance of the annual meetTig tfuogs, tne information contained in request copies of our quarterty earnings and of snBnowners tt> be held at 2rCO pjiu the Form 10-K. UTC nas also submioed news releases, by either fax or mat and Apr* 13.2005. in Nm Ytark. New Ytork. to itx New Yorx Stock Exchange (NYSE) obtain copies of the UTC Annual Report and r*v p*vy statement wil be mace a»dfaUb a certificate of UTtTs Chief Executrve Officer FonnlO-K. -.o stavtowners on Of about February 25. certifying tttat rte was not aware of any ACS. at •Inch fen* prows for the mertng wXaton by UTC of f/YSE corporate To access the servce. del L80a881_1914 governance listing standards as of Die fran any touch-tone phone and fbBow the date of tfie certification. • jrmabon about UTC, inducing fnancat . CM be faunda t our web ate Omdends Oki i System Dividends are usuaBy paid on cne IDCioay If your stares are hew in street name of fctarcn. June. September and December. through a broker and you are interested in uauupating in tfte Direct Registration .•we* Hark. London. Paris. Frankfurt. Electronic Access System, you may have your broker transfer Rrusceb and Swiss Stock Exchanges aueownti:. of record may sign up at the the shares to EqutSene Trust Company. faBowvig web sfte for eteciiorBc access to MA, etectronica»ythrou#i the Direct •cwr Symbol: UTX *uc*» annual reports and pnxy materials. Registration System. Interested investors raOier than reaming maOed copies: can request a description of this book-entry rKtpy/www-econsent con/utx form of regislJduon by caMngSnarcowncr CquScne Trust Company. N-/U ts Information Services at U80O8aLlS14. ih« transfer agent re0strar and dvideno Your ennUjrjent is revocable unu eacn tar UTCS CDnvnon year's record date for the annual meeting. FrteBdry Report nniftrial snarecwners ttay be abte to This annual report is printed on recycled request electronic access by contacting and recyclable paper. fotr broker or bank, or AOP at: inances and Me OMdend Rerwes sttrs/econsem/ics-ntin and Stock Purchase Ran should be AddMoul Wbrmatton WWW.UTOCOM Soareownas may obtain a copy of Itie United EquSovi Trust Company. N.A. Tecrmologies Report on Form 10-K for WWW.CMHIER.COM PXX 80143069 2004 Bed witti the Securities and Exchange WWW.CHUB8PUXCOM ProMderm. n 02940-3069 Convrisuuri by witmg to: WWWJiAMLTONSUNOSTRANO.COM Telephone. L800 •*!<* 3111 WWWJOTISJCOM ir httpy/W««r.equiserv( Corporate Secretary WWWJ1MTTWWTNEY.COM Urmed Technologies Corporation WWW^KORSKY.COU 100:130095^9245 Untied Technologies Buddatg WWWJITCPOWEILCOM Te4ecoaHrieabons device for tne Hartford, Connec-Jcut 06101 ^eamnj impaBred. For addkional informauon about Che corporation please ccniaa investor Relations at the aooe corporate office adtf-ess. or vis* our Web sire at wwwutc-ajrn

APPENDIX B

Viacom Inc. and United Technologies Corporation Document Preservation Certifications CERTIFICATION

In accordance with Paragraph 63 of Unilateral Administrative Order V-W-05-C812, I am providing written certification on behalf of Respondent, VIACOM Inc., that, to the best of my knowledge and based on reasonable inquiry, VIACOM has not intentionally altered, mutilated, discarded, destroyed or otherwise disposed of any records, documents or other information relating to its potential liability with regard to the Little Mississinewa River Site since the time of its notification of potential liability by U.S. EPA or the State of Indiana.

On Behalf Of:

VIACOM INC. CERTIFICATION

In accordance with Paragraph 63 of Unilateral Administrative Order V-W-05-C812, I am providing written certification on behalf of Respondent, United Technologies Corporation ("UTC"), that, to the best of my knowledge and based on reasonable inquiry, UTC has not intentionally altered, mutilated, discarded, destroyed or otherwise disposed of any records, documents or other information relating to its potential liability with regard to the Little Mississinewa River Site since the time of its notification of potential liability by U.S. EPA or the State of Indiana.

On Behalf Of:

UNITED TECHNOLOGIES CORPORATION

William F. Leikin Assistant General Counsel