The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand the results of operations and financial condition of Honeywell International Inc. ("Honeywell") for the three years ended December 31, 2008. All references to Notes relate to Notes to the Financial Statements in "Item 8-Financial Statements and Supplementary Data".

CONSOLIDATED RESULTS OF OPERATIONS

Net Sales


                                          2008               2007              2006
                                                    (Dollars in millions)
Net sales                             $   36,556         $   34,589         $   31,367
% change compared with prior year              6 %               10 %

The change in net sales in 2008 and 2007 is attributable to the following:

                                2008           2007
                               Versus         Versus
                                2007           2006
Price                              2 %            1 %
Volume                             -              6
Foreign Exchange                   1              2
Acquisitions/Divestitures          3              1

                                   6 %           10 %

The increase in full year 2008 sales was partially offset by a 6 percent decrease in sales during the fourth quarter of 2008 compared to the prior year period. A discussion of net sales by segment can be found in the Review of Business Segments section of this MD&A.

Cost of Products and Services Sold


                                           2008               2007               2006
                                                     (Dollars in millions)
Cost of products and services sold     $   27,994         $   26,300         $   24,096
Gross margin %                               23.4 %             24.0 %             23.2 %

Gross margin decreased by 0.6 of a percentage point in 2008 compared with 2007 primarily due to (i) higher repositioning charges and (ii) decreases of 2.2 and 1.4 percent, respectively, in our Transportation Systems and Specialty Materials segments, primarily due to lower sales volume, partially offset by (i) lower pension and other post retirement benefits expense, (ii) higher margins in our Automation and Controls Solutions segment of 0.8 of a percentage point mainly resulting from productivity savings, and (iii) higher margins in our Aerospace segment of 0.2 of a percentage point mainly resulting from sales volume growth and increased prices. We expect pension and other post retirement expense to increase in 2009.

Gross margin increased by 0.8 of a percentage point in 2007 compared with 2006 primarily due to (i) higher margins in our Specialty Materials segment of 1.0 percentage point mainly due to the continued growth of UOP, (ii) higher margins in our Aerospace segment of 0.8 of a percentage point mainly resulting from sales volume growth, increased prices and productivity savings, and (iii) lower pension and other post retirement benefits expense of 0.3 of a percentage point, which were partially offset by lower margins in our Transportation Systems segment of 1.0 percentage point primarily attributable to lower Consumer Products Group ("CPG") sales volume and operational planning and production issues.

For further discussion of segment results, see "Review of Business Segments".

Selling, General and Administrative Expenses

                                                    2008              2007              2006
                                                              (Dollars in millions)
Selling, general and administrative expenses     $   5,033         $   4,565         $   4,210
Percent of sales                                      13.8 %            13.2 %            13.4 %

Selling general and administrative expenses (SG&A) as a percentage of sales increased by 0.6 of a percentage point in 2008 compared with 2007. The increase was primarily due to higher SG&A in our Automation and Control Solutions segment mainly due to acquisitions, partially offset by decreases in SG&A in our Specialty Materials and Aerospace segments mainly due to cost savings initiatives and the positive impact of prior repositioning actions.

SG&A as a percentage of sales decreased by 0.2 of a percentage point in 2007 compared with 2006. SG&A as a percentage of sales decreased in all of our segments primarily due to the benefits from cost savings initiatives and the positive impact of prior repositioning actions. A reduction of 0.1 of a percentage point from lower pension and other post retirement benefits expense was offset by higher repositioning costs.

Other (Income)/Expense


                                                           2008            2007             2006
                                                                   (Dollars in millions)
Gain on sale of non-strategic businesses and assets     $   (635 )       $   (19 )       $    (30 )
Equity (income)/loss of affiliated companies                 (63 )           (10 )            (13 )
Interest income                                             (102 )           (81 )            (94 )
Foreign exchange                                              52              34               18
Other (net)                                                   20              23                8

Total                                                   $   (728 )       $   (53 )       $   (111 )

Other income increased by $675 million in 2008 compared to 2007 primarily due to a higher gain on sale of non-strategic businesses and assets representing the sale of our Consumables Solutions

Other income decreased by $58 million, or 52 percent in 2007 compared to 2006 primarily as a result of lower interest income due to interest received on a favorable tax settlement in 2006 and higher foreign exchange losses due to changes in exchange rates.

Interest and Other Financial Charges


                                           2008            2007            2006
                                                  (Dollars in millions)
Interest and other financial charges     $   456         $   456         $   374
% change compared with prior year              - %            22 %

Interest and other financial charges were flat in 2008 compared to 2007 due to higher debt balances offset by lower borrowing costs. Interest and other financial charges increased by 22 percent in 2007 compared with 2006, due to higher debt balances and higher borrowing costs.

Tax Expense


                          2008              2007             2006
                                   (Dollars in millions)
Tax expense            $   1,009         $    877         $    720
Effective tax rate          26.5 %           26.4 %           25.7 %

The effective tax rate increased by 0.1 of a percentage point in 2008 compared with 2007 due principally to a higher overall state effective tax rate and a decreased impact from the settlement of audits, partially offset by a decrease in the foreign effective tax rate. The effective tax rate was lower than the U.S. statutory rate of 35 percent primarily due to earnings taxed at lower foreign tax rates.

The effective tax rate increased by 0.7 of a percentage point in 2007 compared with 2006 due principally to the expiration of the tax benefit on export sales, partially offset by a decrease in the overall state and foreign effective tax rate, an increase in the tax benefit for the domestic manufacturing deduction, and the favorable resolution of certain tax audits. The effective tax rate was lower than the statutory rate of 35 percent due in part to tax benefits derived from lower foreign taxes and benefits from tax planning strategies.

In 2009, the effective tax could change based upon the Company's operating results and the outcome of tax positions taken regarding previously filed tax returns currently under audit by various Federal, State and foreign tax authorities, several of which may be utilized in the foreseeable future. The Company believes that it has adequate reserves for these matters, the outcome of which could materially impact the results of operations and operating cash flows in the period they are resolved.

Income From Continuing Operations


                                                             2008              2007             2006
                                                                  (Dollars in millions, except
                                                                       per share amounts)

The increase of $0.60 in earnings (diluted) per share from continuing operations in 2008 compared with 2007 primarily relates to (i) the gain on sale of the Consumables Solutions business, (ii) lower pension and other post retirement expense, (iii) an increase in segment profit (most significantly in Automation and Control Solutions and Aerospace, partially offset by a decline in Transportation Systems segment profit) and (iv) a reduction in the number of shares outstanding due to share repurchases, partially offset by increased repositioning costs.

The increase of $0.65 in earnings (diluted) per share from continuing operations in 2007 compared with 2006 primarily relates to an increase in segment profit (most significantly in Aerospace and Automation and Control Solutions), a reduction in the number of shares outstanding due to share

For further discussion of segment results, see "Review of Business Segments".

Income From Discontinued Operations

Income from discontinued operations of $5 million, or $0.01 earnings per share (diluted) in 2006 relates to the operating results of the Indalex business which was sold in February 2006 to Sun Capital Partners, Inc.

BUSINESS OVERVIEW

This Business Overview provides a summary of Honeywell and its four reportable operating segments (Aerospace, Automation and Control Solutions, Specialty Materials and Transportation Systems), including their respective areas of focus for 2009 and the relevant economic and other factors impacting their results, and a discussion of each segment's results for the three years ended December 31, 2008. Each of these segments is comprised of various product and service classes that serve multiple end markets. See Note 23 to the financial statements for further information on our reportable segments and our definition of segment profit.

Economic and Other Factors

In addition to the factors listed below with respect to each of our operating segments, our consolidated operating results are principally driven by:

• Impact of global economic growth rates (US, Europe and emerging regions) and industry conditions on demand in our key end markets;

• Overall sales mix, in particular the mix of Aerospace original equipment and aftermarket sales and the mix of Automation and Control Solutions (ACS) products and services sales;

• The extent to which cost savings from productivity actions are able to offset or exceed the impact of material and non-material inflation;

• The impact of the pension discount rate on pension expense and pension asset returns on funding requirements; and

• The impact of changes in foreign currency exchange rate, particularly the US dollar-Euro exchange rate.

Areas of Focus for 2009

The areas of focus for 2009, which are generally applicable to each of our operating segments, include:

• Driving profitable growth by building innovative products that address customer needs;

• Achieving sales growth, technological excellence and manufacturing capability through global expansion, especially focused on emerging regions in China, India and the Middle East;

• Proactively managing raw material costs through formula and long term supply agreements, price increases and hedging activities, where feasible;

• Driving cash flow conversion through effective working capital management and capital investment in our businesses, thereby enabling liquidity, repayment of debt, strategic acquisitions, and the ability to return value to shareholders;

• Actively monitoring trends in short-cycle end markets, such as the Transportations Systems turbo business, ACS products businesses, Aerospace business and general aviation aftermarket and Specialty Materials resins and chemicals, and continuing to take proactive cost actions;

• Align and prioritize investments in long-term growth vs. short-term demand volatility;

• Driving productivity savings through execution of repositioning actions;

• Actively reducing discretionary spending with focus on non-customer related costs;

• Proactively managing capacity utilization, supply chain and inventory demand while achieving customer satisfaction;

• Utilizing our enablers Honeywell Operating System (HOS), Functional Transformation and Velocity Product Development (VPD) to standardize the way we work, increase quality and reduce the costs of product manufacturing, reduce costs and enhance the quality of our administrative functions and improve business operations through investments in systems and process improvements;

• Monitoring both suppliers and customers for signs of liquidity constraints, limiting exposure to any resulting inability to meet delivery commitments or pay amounts due, and identifying alternate sources of supply as necessary; and

• Managing Corporate costs, including costs incurred for asbestos and environmental matters, pension and other post-retirement expenses and our tax expense.

Review of Business Segments


                                         2008               2007               2006
                                                   (Dollars in millions)
Net Sales
Aerospace                            $   12,650         $   12,236         $   11,124
Automation and Control Solutions         14,018             12,478             11,020
Specialty Materials                       5,266              4,866              4,631
Transportation Systems                    4,622              5,009              4,592
Corporate                                     -                  -                  -

                                     $   36,556         $   34,589         $   31,367

Segment Profit
Aerospace                            $    2,300         $    2,197         $    1,892
Automation and Control Solutions          1,622              1,405              1,223
Specialty Materials                         721                658                568
Transportation Systems                      406                583                574
Corporate                                  (204 )             (189 )             (177 )

                                     $    4,845         $    4,654         $    4,080

A reconciliation of segment profit to income from continuing operations before taxes follows:

                                                               2008              2007              2006
                                                                        (Dollars in millions)
Segment profit                                             $    4,845         $   4,654         $   4,080
Other income (expense)(1)                                         665                53               111
Interest and other financial charges                             (456 )            (456 )            (374 )
Stock compensation expense(2),(3)                                (128 )             (65 )             (77 )
Pension and other postretirement benefits (expense)(2)           (113 )            (322 )            (459 )
Repositioning and other charges(2)                             (1,012 )            (543 )            (483 )

Income from continuing operations before taxes             $    3,801         $   3,321         $   2,798

(1) Equity income/(loss) of affiliated companies was included in Segment Profit, on a prospective basis, commencing January 1, 2008. Other income/(expense) as presented above includes equity income/(loss) of affiliated companies of $10 and $13 million for the years ended December 31, 2007 and 2006, respectively.

(2) Amounts included in cost of products and services sold and selling, general and administrative expenses.

(3) Costs associated with restricted stock units ("RSU") were excluded from Segment Profit, on a prospective basis, commencing January 1, 2008. Stock compensation expense, including RSU expense, totaled $112 and $106 million for the years ended December 31, 2007 and 2006, respectively. Stock option expense is included for all periods presented.

Aerospace

Overview

Aerospace is a leading global supplier of aircraft engines, avionics, and related products and services for aircraft manufacturers, airlines, aircraft operators, military services, and defense and space contractors. Our Aerospace products and services include auxiliary power units, propulsion engines, environmental control systems, engine controls, flight safety, communications, navigation, radar and surveillance systems, aircraft lighting, management and technical services, advanced systems and instruments, aircraft wheels and brakes and repair and overhaul services. Aerospace sells its products to original equipment (OE) manufacturers in the air transport, regional, business and general aviation aircraft segments, and provides spare parts and repair and maintenance services for the aftermarket (principally to aircraft operators). The United States Government is also a major customer for our defense and space products.

Economic and Other Factors

Aerospace operating results are principally driven by:

• New aircraft production rates and delivery schedules set by commercial air transport, regional jet, business and general aviation OE manufacturers, as well as airline profitability and retirement of aircraft from service;

• Global demand for commercial air travel as reflected in global flying hours and utilization rates for corporate and general aviation aircraft, as well as the demand for spare parts and maintenance and repair services for aircraft currently in use;

• Level and mix of U.S. Government appropriations for defense and space programs and military activity; and

• Availability and price volatility of raw materials such as titanium and other metals.

Results of Operations


                                          2008               2007              2006
                                                    (Dollars in millions)
Net sales                             $   12,650         $   12,236         $   11,124
% change compared with prior year              3 %               10 %
Segment profit                        $    2,300         $    2,197         $    1,892
% change compared with prior year              5 %               16 %

Aerospace sales by major customer end-markets were as follows:

                                                          % of Aerospace                            % Change in
                                                               Sales                                   Sales
                                                                                               2008            2007
                                                                                              Versus          Versus
Customer End-Markets                           2008            2007            2006            2007            2006
Commercial:
Air transport and regional original
equipment                                         14 %            16 %            16 %           (6 )%            10 %
Air transport and regional aftermarket            23              22              22              4                8
Business and general aviation original
equipment                                         11              11              12              5               16
Business and general aviation
aftermarket                                       10              10              10              6               16
Defense and Space                                 42              41              40              6                8

Total                                            100 %           100 %           100 %            3 %             10 %

Aerospace sales increased by 3 percent in 2008. Details regarding the net increase in sales by customer end-markets are as follows:

• Air transport and regional original equipment (OE) sales decreased by 6 percent in 2008. The decrease is driven by the sale of our Consumables Solutions business, partially offset by increased deliveries to our air transport customers, notwithstanding a decrease in total aircraft production rates at major OEM's mainly due to a strike at a major OEM, which was settled in the fourth quarter. We expect sales to OE customers to decline in the first quarter of 2009 due to reduced delivery schedules in light of order deferrals and cancellations and platform mix.

• Air transport and regional aftermarket sales increased by 4 percent in 2008 primarily due to increased volume, the price of spare parts and aftermarket growth driven by flight hour growth. Consistent with our previously reported expectations, the growth rate in global flying hours slowed to 3 percent in 2008, including a 2 percent decline in the fourth quarter and is expected to decline further in the first quarter of 2009. In addition, aftermarket customers may change buying patterns and reduce inventory levels.

• Business and general aviation OE sales increased by 5 percent in 2008 due to continued demand in the business jet end market as evidenced by an increase in new business jet deliveries (which is expected to decline in the first quarter of 2009), improved pricing and continued additions to the fractional ownership and charter fleets (which is expected to decline in the first quarter of 2009). In 2008 sales to this end-market primarily consisted of sales of Primus Epic integrated avionics systems and the TFE 731 and HTF 7000 engines.

• Business and general aviation aftermarket sales increased by 6 percent in 2008. The increase was primarily due to increased revenue under maintenance service agreements and higher sales of spare parts both of which are expected to decline in the first quarter of 2009, consistent with the expected decrease in business jet utilization.

• Defense and space sales increased by 6 percent in 2008. The increase was primarily due to logistics services (including the positive impact of the acquisition of Dimensions International, a defense logistics business), helicopter OE sales, an increase in government funded engineering related to the Orion (CEV) program, higher sales of specialty foam insulation, certain surface systems and classified space programs.

Aerospace segment profit increased by 5 percent in 2008 compared to 2007 due primarily to increased prices, productivity and sales volume growth. These increases are partially offset by inflation, the Consumable Solutions divestiture and higher spending to support new platform growth. We expect segment profit to decline in the first quarter of 2009 primarily due to the expected adverse sales impacts noted above.

2007 compared with 2006

Aerospace sales increased by 10 percent in 2007. Details regarding the net increase in sales by customer end-markets are as follows:

• Air transport and regional original equipment (OE) sales increased by 10 percent in 2007 compared to 2006. This increase was driven by increased deliveries to air transport customers primarily due to higher aircraft production rates at major OE manufacturers.

• Air transport and regional aftermarket sales increased by 8 percent in 2007. The increase was a result of increased sales volumes and price of spare parts and maintenance activity relating to the approximately 6 percent increase in global flying hours.

• Business and general aviation OE sales increased by 16 percent in 2007. The increase is due to continued demand in the business jet end market as evidenced by an increase in new business jet deliveries, as well as the launch of new aircraft platforms. Sales to this end-market primarily consisted of sales of Primus Epic integrated avionics systems and the TFE 731 and HTF 7000 engines.

• Business and general aviation aftermarket sales increased by 16 percent in 2007. The was primarily due to increased revenue under maintenance service agreements and higher sales of spare parts.

• Defense and space sales increased by 8 percent in 2007. The increase was primarily due to higher sales of surface systems, a 2 percent positive impact of the acquisition of Dimensions International and an increase in space sales, including engineering activities relating to the Orion (CEV) program.

Aerospace segment profit increased by 16 percent in 2007 compared to 2006 due primarily to sales volume growth, increased prices and productivity, partially offset by inflation.

2009 Areas of Focus

Aerospace's primary areas of focus for 2009 include:

• Focus on cost structure initiatives to maintain profitability in the face of challenging conditions in the aerospace industry, such as lower flight hours and order deferrals and cancellations;

• Aligning inventory, production and research and development with customer demand and production schedules;

• Pursuit of new defense and space platforms and growth opportunities;

• Continuing to design equipment that enhances the safety, performance and durability of aerospace and defense equipment, while reducing weight and operating costs; and

• Delivering world-class customer service and achieving cycle and lead time reduction to improve responsiveness to customer demand.

Automation and Control Solutions (ACS) . . .