The following management discussion and analysis is based on financial results for the three months ended December 31, 2008 and 2007 and should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto in Item 1 of Part I of this quarterly report.

Three Months Ended December 31, 2008 and 2007

Sales
(dollars in millions)     Three Months Ended
                              December 31
                          2008           2007
Total sales             $   1,058       $ 1,112
Percent (decrease)             (5 )%

Total sales for the three months ended December 31, 2008 decreased 5 percent to $1,058 million compared to the three months ended December 31, 2007. Incremental sales from the April 2008 acquisition of Athena Technologies (Athena) and the November 2008 acquisition of SEOS Group Limited (SEOS) contributed a total of $9 million, or 1 percentage point of revenue growth. The organic sales decline of 6 percent was primarily attributed to a decrease in Commercial Systems sales of 14 percent partially offset by an increase in Government Systems organic sales of 3 percent. See the following operating segment sections for further discussion of sales for the three months ended December 31, 2008 and 2007.

Net Income and Diluted Earnings Per Share
(dollars in millions, except per share amounts)     Three Months Ended
                                                        December 31
                                                    2008           2007
Net income                                        $     151       $   154
Net income as a percent of sales                       14.3 %        13.8 %
Diluted earnings per share                        $    0.95       $  0.93

Net income for the three months ended December 31, 2008 decreased to $151 million, or 14.3 percent of sales, from net income of $154 million, or 13.8 percent of sales, for the three months ended December 31, 2007. The decrease in net income was primarily the result of lower Commercial Systems sales volume, partially offset by lower employee incentive compensation costs, lower research and development costs, and a lower income tax provision due primarily to the availability of the Federal R&D Tax Credit. Diluted earnings per share increased 2 percent to 95 cents for the three months ended December 31, 2008 from 93 cents for the three months ended December 31, 2007. Diluted earnings per share for the three months ended December 31, 2008 benefited from our share repurchase program.

Government Systems Financial Results

Government Systems' Sales
The following table presents Government Systems' sales by product category:
(dollars in millions)      Three Months Ended
                               December 31
                          2008            2007
Airborne solutions      $     403       $     375
Surface solutions             171             172
Total                   $     574       $     547
Percent increase                5 %

Airborne solutions sales increased $28 million, or 7 percent, for the three months ended December 31, 2008 compared to the three months ended December 31, 2007. Incremental sales from the acquisitions of Athena and SEOS contributed a total of $8 million, or 2 percentage points of the overall revenue growth. The 5 percent organic sales increase was due primarily to higher sales from simulation and training solutions, higher production sales on the Eurofighter Tranche 2 program, and higher development program revenues on the Common Range Integrated Instrumentation System (CRIIS) program.

Surface solutions sales were relatively flat for the three months ended December 31, 2008 compared to the three months ended December 31, 2007. Higher development program sales from the Joint Precision Approach and Landing System (JPALS) program were offset by lower production volume from the Multifunctional Information Distribution System-Low Volume Terminal (MIDS-LVT) program and lower development program sales from the Joint Tactical Radio System Ground Mobile Radio (JTRS GMR) program.

Government Systems' Segment Operating Earnings

(dollars in millions)          Three Months Ended
                                   December 31
                               2008           2007
Segment operating earnings   $     140       $   115
Percent of sales                  24.4 %        21.0 %

Government Systems' first quarter operating earnings increased 22 percent to $140 million, or 24.4 percent of sales, for the three months ended December 31, 2008 compared to operating earnings of $115 million, or 21.0 percent of sales, for the same period a year ago. The increase in operating earnings and operating earnings as a percent of sales was primarily due to lower employee incentive compensation costs, incremental margin on higher sales, lower research and development costs, and a favorable mix of higher margin hardware sales.

Commercial Systems Financial Results

Commercial Systems' Sales

The following table presents Commercial Systems' sales by product category:
(dollars in millions)                            Three Months Ended
                                                     December 31
                                                 2008            2007
Wide-body in-flight entertainment products     $     21         $   41
All other air transport aviation electronics        199            260
Total air transport aviation electronics            220            301
Business and regional aviation electronics          264            264
Total                                          $    484         $  565
Percent (decrease)                                  (14 )%

Wide-body in-flight entertainment products (Wide-body IFE) relate to sales of twin-aisle IFE products and systems to customers in the air transport aviation electronics market. All other air transport aviation electronics sales include all other air transport sales, including service and support sales for installed Wide-body IFE. In September 2005 we announced our strategic decision to shift research and development resources away from traditional IFE systems for next generation wide-body aircraft. We continue to execute on Wide-body IFE contracts and plan to support our existing customer base, which includes on-going service and support activities for Wide-body IFE. All periods have been presented consistent with the above description of air transport aviation electronics revenues.

Total air transport aviation electronics sales decreased $81 million, or 27 percent, for the three months ended December 31, 2008 compared to the three months ended December 31, 2007. Excluding the $20 million decrease in Wide-body IFE revenues, air transport aviation electronics sales decreased $61 million, or 23 percent, for the three months ended December 31, 2008 compared to the three months ended December 31, 2007. This decrease in sales was due primarily to lower original equipment manufacturer (OEM) sales as a result of Boeing's labor strikes and their aircraft production issues. In addition, air transport aviation aftermarket sales were impacted by lower Boeing 787 simulator equipment sales and lower service and support revenues.

Business and regional aviation electronics sales were unchanged for the three months ended December 31, 2008 compared to the three months ended December 31, 2007. Sales in business and regional aviation electronics for the three months ended December 31, 2008 to both OEMs and the aftermarket were flat compared to the same period a year ago.

The following table presents Commercial Systems' sales based on the type of product or service:
(in millions)

                                                Three Months Ended
                                                    December 31
                                               2008            2007
Original equipment                           $     244       $     283
Aftermarket                                        219             241
Wide-body in-flight entertainment products          21              41
Total                                        $     484       $     565

See the discussion below the Commercial Systems' sales by product category table for a definition of Wide-body in-flight entertainment products.

Original equipment sales decreased $39 million, or 14 percent, for the three months ended December 31, 2008 compared to the three months ended December 31, 2007. This sales decline is attributed primarily to lower OEM sales as a result of Boeing's labor strikes and their aircraft production issues.

Aftermarket sales decreased $22 million, or 9 percent, for the three months ended December 31, 2008 compared to the three months ended December 31, 2007. This decrease is due primarily to lower Boeing 787 simulator equipment sales as well as lower air transport service and support sales.

Commercial Systems' Segment Operating Earnings

(dollars in millions)          Three Months Ended
                                   December 31
                               2008           2007
Segment operating earnings   $      97       $   137
Percent of sales                  20.0 %        24.2 %

Commercial Systems operating earnings decreased 29 percent to $97 million, or 20.0 percent of sales, for the three months ended December 31, 2008 compared to operating earnings of $137 million, or 24.2 percent of sales for the three months ended December 31, 2007. The decrease in operating earnings was due primarily to lower sales volume and the absence of a favorable adjustment related to a contract option exercise benefiting the three months ended December 31, 2007, partially offset by lower employee incentive compensation costs and lower research and development costs.

Retirement Benefits

Net benefit expense (income) for pension benefits and other retirement benefits
are as follows (in millions):

                                  Three Months Ended
                                     December 31
                                 2008             2007
Pension benefits               $      (3 )       $   (1 )
Other retirement benefits              1             (1 )
Net benefit expense (income)   $      (2 )       $   (2 )

Pension Benefits
Because the cost of providing retirement benefits under a defined benefit structure has become increasingly uncertain due to changes in discount rates and the volatility in the stock market, we amended our U.S. qualified and non-qualified pension plans in 2003 covering all salary and hourly employees not covered by collective bargaining agreements to discontinue benefit accruals for salary increases and services rendered after September 30, 2006 (the Pension Amendment). Concurrently, we replaced this benefit by supplementing our existing defined contribution savings plan to include an additional company contribution effective October 1, 2006. We believe this benefit structure achieves our objective of providing benefits that are valued by our employees and enable more consistency and predictability in estimating future costs and funding requirements over the long term.

Defined benefit pension income for the full year 2009 is expected to be $17 million compared to defined benefit pension income of $3 million for the full year 2008. The change is due primarily to the favorable impact of an increase in the defined benefit pension plan valuation discount rate from 6.6 percent in 2008 to 7.6 percent in 2009 used to measure our pension expense.

Our objective with respect to the funding of our pension plans is to provide adequate assets for the payment of future benefits. Pursuant to this objective, we will fund our pension plans as required by governmental regulations and make discretionary contributions as conditions warrant. We made a contribution of $75 million to our U.S. qualified pension plan in January 2009. As a result of this contribution, we do not anticipate being required to make any further contributions to our U.S. qualified pension plan by governmental regulations in 2009. Contributions to our international plans and our U.S. non-qualified plan are expected to total $13 million in 2009. For the three months ended December 31, 2008 and 2007, we made contributions to our international plans and our U.S. non-qualified pension plan of $4 million and $2 million, respectively.

The recent turmoil in the financial markets has had a significant impact on the funded status of our pension plans. Our pension expense (income) is significantly impacted by the market performance of our pension plan assets, our expected long-term return on plan assets, and the discount rates used to determine our pension obligations. If our pension plan assets don't achieve positive rates of return consistent with our long-term plan asset return assumptions or if discount rates trend down, we may experience unfavorable changes in our pension expense and could be required to make significant contributions to our U.S. qualified pension plan. While we believe the actions we have taken under the Pension Amendment have had a positive affect on pension expense (income) and future funding requirements, our plan assets and discount rates are significantly impacted by changes in the financial markets.

Other Retirement Benefits
We expect Other Retirement Benefits expense of approximately $4 million for the full year 2009 compared to the full year 2008 income of $2 million, primarily due to the elimination of favorable amortization for a plan amendment that will no longer benefit other retirement benefits expense (income).

Income Taxes

At the end of each interim reporting period we make an estimate of the annual effective income tax rate. Tax items included in the annual effective tax rate are pro-rated for the full year and tax items discrete to a specific quarter are included in the effective tax rate for that quarter. The estimate used in providing for income taxes on a year-to-date basis may change in subsequent interim periods. The difference between our effective tax rate and the statutory tax rate is primarily the result of the tax benefits derived from the Federal Research and Development Tax Credit (Federal R&D Tax Credit), which provides a tax benefit on certain incremental R&D expenditures, and the Domestic Manufacturing Deduction (DMD), which provides a tax benefit on U.S. based manufacturing.

During the three months ended December 31, 2008 and 2007, our effective income tax rate was 32.0 percent and 33.6 percent, respectively. The lower effective income tax rate for the three months ended December 31, 2008 was primarily due to differences in the availability of Federal R&D Tax Credits during each period. The Federal R&D Tax Credit expired December 31, 2007. On the last day of our 2008 fiscal year, the Emergency Economic Stabilization Act of 2008 was enacted, which retroactively reinstated and extended the Federal R&D Tax Credit from January 1, 2008 to December 31, 2009. The effective tax rate for the three months ended December 31, 2008 reflects a full year benefit from the Federal R&D Tax Credit in the estimate of the annual effective tax rate. The effective tax rate for the three months ended December 31, 2007 reflects an unfavorable impact of lower R&D Tax Credits as a result of pro-rating the three months of available R&D Tax Credits over the full 2008 fiscal year.

The effective tax rate for the three months ended December 31, 2008 and December 31, 2007 both include a tax benefit related to the DMD. The DMD tax benefit available in fiscal year 2009 and fiscal year 2008 is two-thirds of the full benefit that will be available in fiscal year 2011.

For 2009, our projected effective income tax rate is expected to be in the range of 31.5 percent to 32.5 percent.

Outlook

A summary of our 2009 anticipated results is as follows:

· Total revenues of about $4.70 billion

· Diluted earnings per share in the range of $4.10 to $4.30

· Cash flow from operations in the range of $675 million to $725 million

· R&D expenditures of about $900 million, or about 19 percent of sales

Our 2009 anticipated results assume the market conditions for our Government Systems business and the air transport portion of our Commercial Systems business will continue to track to previously provided guidance over the balance of 2009. However, we have seen a significant deterioration in business aviation market conditions. As a result of announced and anticipated production cuts at our OEM customers as well as further reductions in business aircraft utilization, we have reflected lower Commercial Systems sales in our 2009 full-year forecast from previously reported guidance.

The projected 2009 cash provided by operating activities range includes a $75 million contribution to the U.S. qualified defined benefit pension plan, which was contributed in January 2009.

                        FINANCIAL CONDITION AND LIQUIDITY



Cash Flow Summary

Operating Activities
(in millions)                              Three Months Ended
                                              December 31

The decrease in cash provided by operating activities during the three months ended December 31, 2008 compared to the same period last year was primarily due to the timing of payments on accounts payable and employee payroll-related liabilities and a lower level of advance payments from customers, partially offset by collections on accounts receivable and the benefit of an income tax refund received for the three months ended December 31, 2008 compared to net income tax payments in the same period a year ago.

Investing Activities
(in millions)                           Three Months Ended
                                            December 31

The increase in cash used for investing activities was primarily due to the November 2008 acquisition of SEOS for $28 million.

Property additions were $45 million and $43 million for the three months ended December 31, 2008 and December 31, 2007, respectively. We expect capital expenditures for the full year 2009 to be approximately $150 million compared to full year 2008 capital expenditures of $171 million.

Financing Activities
(in millions)                                          Three Months Ended
                                                           December 31

The change in cash provided by / (used for) financing activities during the three months ended December 31, 2008 was primarily due to a $183 million decrease in the amount of treasury share repurchases as a result of the accelerated share repurchase agreement executed in the three months ended December 31, 2007. This change was partially offset by a $36 million decrease in financing cash flows related to short-term borrowings and $12 million in higher dividend payments.

Liquidity
In addition to cash provided by normal operating activities, we utilize a combination of short-term and long-term debt to finance operations. Our primary source of short-term liquidity is through borrowings in the commercial paper market. Our access to that market is facilitated by the strength of our credit ratings and an $850 million committed credit facility with several banks (Revolving Credit Facility). Our current ratings as provided by Moody's Investors Service, Standard & Poor's and Fitch, Inc. are A-1 / A / A, respectively, for long-term debt and P-1 / A-1 / F-1, respectively, for short-term debt. All three agencies have stable outlooks on our credit rating.

Under our commercial paper program, we may sell up to $850 million face amount of unsecured short-term promissory notes in the commercial paper market. The commercial paper notes may bear interest or may be sold at a discount and have a maturity of not more than 364 days from time of issuance. Borrowings under the commercial paper program are generally used for working capital needs and other general corporate purposes. To date, our commercial paper program has not been impacted by the global credit crisis as our investment grade ratings have enabled uninterrupted access to the commercial paper markets. If our credit ratings were to be adjusted downward by the rating agencies, the implications of such actions could include impairment or elimination of our access to the commercial paper markets and an increase in the cost of borrowing. In the event that our access to the commercial paper markets is impaired in the future, we have access to an $850 million Revolving Credit Facility and are eligible to participate in the Federal Reserve Commercial Paper Funding Facility (CPFF) up to a maximum of $490 million. The CPFF program is currently set to expire on April 30, 2009. In addition, alternative sources of funding could include funds available from the issuance of securities and potential asset securitization strategies.

At December 31, 2008 short-term commercial paper borrowings outstanding were $432 million with a weighted average interest rate and maturity period of 0.75 percent and 34 days, respectively.

Our Revolving Credit Facility consists of an $850 million five-year unsecured revolving credit agreement entered into on May 24, 2005 and amended in 2007 to extend the term to 2012, with options to further extend the term for up to two one-year periods and/or increase the aggregate principal amount up to $1.2 billion. These options are subject to the approval of the lenders. The Revolving Credit Facility exists primarily to support our commercial paper program, but is available to us in the event our access to the commercial paper market is impaired or eliminated. Our only financial covenant under the Revolving Credit Facility requires that we maintain a consolidated debt to total capitalization ratio of not greater than 60 percent, excluding the accumulated other comprehensive loss equity impact related to defined benefit retirement plans. Our debt to total capitalization ratio at December 31, 2008 was 25 percent. The Revolving Credit Facility contains covenants that require us to satisfy certain conditions in order to incur debt secured by liens, engage in sale/leaseback transactions, or merge or consolidate with another entity. The Revolving Credit Facility does not contain any rating downgrade triggers that would accelerate the maturity of our indebtedness. We had no borrowing at December 31, 2008 under our Revolving Credit Facility. In addition short-term credit facilities available to foreign subsidiaries amounted to $59 million as of December 31, 2008, of which $28 million was utilized to support commitments in the form of letters of credit. There are no significant commitment fees or compensating balance requirements under any of our credit facilities. There were $9 million of short-term borrowings outstanding under our foreign subsidiaries credit facilities as of December 31, 2008.

In addition to our credit facilities and commercial paper program, we have a shelf registration statement filed with the Securities and Exchange Commission pursuant to which we can publicly offer and sell securities from time to time. This shelf registration covers an unlimited amount of debt securities, common stock, preferred stock or warrants that may be offered in one or more offerings on terms to be determined at the time of sale.

On November 20, 2003, we issued $200 million of debt due December 1, 2013 (the Notes). The Notes contain covenants that require us to satisfy certain conditions in order to incur debt secured by liens, engage in sale/leaseback transactions, or merge or consolidate with another entity. In addition, during June 2006 we entered into a five-year unsecured variable rate loan facility agreement for 20.4 million euros ($25 million). Our outstanding variable rate loan facility agreement contains customary loan covenants, none of which are financial covenants. Failure to comply with customary covenants or the occurrence of customary events of default contained in the agreement would require the repayment of any outstanding borrowings under the agreement. As of December 31, 2008, 17 million euros ($24 million) was outstanding under our variable rate loan facility agreement. The Company is in compliance with all debt covenants at December 31, 2008.

For information related to environmental claims, remediation efforts and related matters, see Note 18 of the condensed consolidated financial statements.

Preparation of the Company's financial statements in accordance with accounting principles generally accepted in the United States of America requires management of Rockwell Collins to make estimates, judgments, and assumptions that affect our financial condition and results of operations that are reported in the accompanying condensed consolidated financial statements as well as the related disclosure of assets and liabilities contingent upon future events. The critical accounting policies used in preparation of the Company's financial statements are described in Management's Discussion and Analysis in the Company's Annual Report on Form 10-K for the year ended September 30, 2008. Actual results in these areas could differ from management's estimates.

This quarterly report contains statements, including certain projections and business trends, that are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected as a result of certain risks and uncertainties, including but not limited to the health of the global economy and the commercial aerospace industry; the continued deterioration in economic and financial market conditions, including the impact of credit tightening; the financial condition of our customers (including major U.S. airlines); delays related to the award of domestic and international contracts; the continued support for military transformation and modernization programs; the impact of the global war on terrorism on U.S. government military procurement expenditures and budgets; changes in domestic and foreign government spending, budgetary and trade policies adverse to our businesses; market acceptance of our new and existing technologies, products and services; reliability of and customer satisfaction with our products and services; favorable outcomes on or potential cancellation or restructuring of contracts, orders or program priorities by our customers; customer bankruptcies and profitability; recruitment and retention of qualified personnel; regulatory restrictions on air travel due to environmental concerns; . . .