The following management discussion and analysis is based on financial results for the three and six months ended March 31, 2009 and 2008 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 March 31, 2009 and 2008

Sales

(dollars in millions)     Three Months Ended
                               March 31
                          2009           2008

Total sales             $   1,138       $ 1,186
Percent (decrease)             (4 )%

Total sales for the three months ended March 31, 2009 decreased 4 percent to $1,138 million compared to the three months ended March 31, 2008. Government Systems sales increased 6 percent offset by a decrease in Commercial Systems sales of 14 percent. 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 $12 million, or 1 percentage point of revenue growth. See the following operating segment sections for further discussion of sales for the three months ended March 31, 2009 and 2008.

Net Income and Diluted Earnings Per Share

(dollars in millions, except per share amounts)     Three Months Ended
                                                         March 31
                                                    2009           2008

Net income                                        $     164       $   168
Net income as a percent of sales                       14.4 %        14.2 %
Diluted earnings per share                        $    1.03       $  1.03

Net income for the three months ended March 31, 2009 decreased 2 percent to $164 million, or 14.4 percent of sales, from net income of $168 million, or 14.2 percent of sales, for the three months ended March 31, 2008. The decrease in net income was primarily the result of lower Commercial Systems sales volume and a higher effective income tax rate which were partially offset by lower employee incentive compensation costs and lower research and development costs. Diluted earnings per share was $1.03 for both the three months ended March 31, 2009 and 2008 as lower net income for the three months ended March 31, 2009 was offset by the positive impact of 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
                                March 31
                          2009            2008

Airborne solutions      $     431       $     399
Surface solutions             182             177
Total                   $     613       $     576
Percent increase                6 %

Airborne solutions sales increased $32 million, or 8 percent, for the three months ended March 31, 2009 compared to the three months ended March 31, 2008. Incremental sales from the acquisitions of Athena and SEOS contributed a total of $10 million, or 2 percentage points of the overall revenue growth. The 6 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 increased $5 million, or 3 percent, for the three months ended March 31, 2009 compared to the three months ended March 31, 2008. Higher development program sales from the Future Combat Systems (FCS) and the Joint Precision Approach and Landing System (JPALS) programs were offset by lower data link systems revenues.

Government Systems' Segment Operating Earnings

(dollars in millions)          Three Months Ended
                                    March 31
                               2009           2008

Segment operating earnings   $     145       $   115
Percent of sales                  23.7 %        20.0 %

Government Systems' operating earnings increased 26 percent to $145 million, or 23.7 percent of sales, for the three months ended March 31, 2009 compared to operating earnings of $115 million, or 20.0 percent of sales, for the same period a year ago. The increase in operating earnings and operating margin is primarily attributed to incremental margin on higher sales and lower employee incentive compensation costs.

Commercial Systems Financial Results

Commercial Systems' Sales

The following table presents Commercial Systems' sales by product category:

(dollars in millions)                            Three Months Ended
                                                      March 31
                                                 2009            2008

Wide-body in-flight entertainment products     $     17         $   35
All other air transport aviation electronics        242            285
Total air transport aviation electronics            259            320
Business and regional aviation electronics          266            290
Total                                          $    525         $  610
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. 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 $61 million, or 19 percent, for the three months ended March 31, 2009 compared to the three months ended March 31, 2008. Excluding the $18 million decrease in Wide-body IFE revenues, air transport aviation electronics sales decreased $43 million, or 15 percent, for the three months ended March 31, 2009 compared to the three months ended March 31, 2008. This decrease in sales was due partially to lower original equipment manufacturer (OEM) sales that were adversely impacted by the timing of Boeing's gradual return to full production rates following their labor strike. In addition, air transport aviation aftermarket sales were adversely impacted by lower Boeing 787 simulator equipment sales and lower service, support, and hardware revenues.

Business and regional aviation electronics sales decreased $24 million, or 8 percent, for the three months ended March 31, 2009 compared to the same period in the prior year. Both OEM and aftermarket sales declined due to business jet OEM production rate cuts and lower business aircraft utilization as the ramifications of global macro-economic factors began to impact the business jet market.

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

                                                Three Months Ended
                                                     March 31
                                               2009            2008

Original equipment                           $     295       $     328
Aftermarket                                        213             247
Wide-body in-flight entertainment products          17              35
Total                                        $     525       $     610

See the discussion below the Commercial Systems' sales by product category table for the three months ended March 31, 2009 and 2008 for a definition of wide-body in-flight entertainment products.

Original equipment sales decreased $33 million, or 10 percent, for the three months ended March 31, 2009 compared to the same period in the prior year. This sales decline is attributed primarily to lower OEM sales that were adversely impacted by the timing of Boeing's gradual return to full production rates following their labor strike and lower sales to business jet OEMs as a result of macro-economic factors impacting the global economy.

Aftermarket sales decreased $34 million, or 14 percent, for the three months ended March 31, 2009 compared to the three months ended March 31, 2008. This decrease is due primarily to lower Boeing 787 simulator equipment sales as well as lower service, support, and hardware sales.

Commercial Systems' Segment Operating Earnings

(dollars in millions)          Three Months Ended
                                    March 31
                               2009           2008

Segment operating earnings   $     110       $   140
Percent of sales                  21.0 %        23.0 %

Commercial Systems' operating earnings decreased 21 percent to $110 million, or 21.0 percent of sales, for the three months ended March 31, 2009 compared to operating earnings of $140 million, or 23.0 percent of sales for the three months ended March 31, 2008. The decrease in operating earnings and operating margin was primarily due to lower sales volume and the absence of royalty income benefiting the three months ended March 31, 2008, partially offset by lower employee incentive compensation costs and lower research and development costs.

Six Months Ended March 31, 2009 and 2008

Sales
(dollars in millions)     Six Months Ended
                              March 31
                         2009          2008

Total sales             $ 2,196       $ 2,298
Percent (decrease)           (4 )%

Total sales for the six months ended March 31, 2009 decreased 4 percent to $2,196 million compared to the six months ended March 31, 2008. Government Systems sales increased 6 percent offset by a decrease in Commercial Systems sales of 14 percent. Incremental sales from the April 2008 acquisition of Athena and the November 2008 acquisition of SEOS contributed a total of $21 million, or 1 percentage point of revenue growth. See the following operating segment sections for further discussion of sales for the six months ended March 31, 2009 and 2008.

Net Income and Diluted Earnings Per Share

(dollars in millions, except per share amounts)     Six Months Ended
                                                        March 31
                                                    2009          2008

Net income                                        $     315      $  322
Net income as a percent of sales                       14.3 %      14.0 %
Diluted earnings per share                        $    1.98      $ 1.96

Net income for the six months ended March 31, 2009 decreased 2 percent to $315 million, or 14.3 percent of sales, from net income of $322 million, or 14.0 percent of sales, for the six months ended March 31, 2008. The decrease in net income was primarily the result of lower Commercial Systems sales volume and a higher effective income tax rate, partially offset by lower employee incentive compensation costs and lower research and development costs. Diluted earnings per share increased to $1.98 for the six months ended March 31, 2009 from $1.96 for the six months ended March 31, 2008 primarily due to the positive impact of our share repurchase program partially offset by lower net income.

Government Systems Financial Results

Government Systems' Sales

(dollars in millions)     Six Months Ended
                              March 31
                          2009         2008

Airborne solutions      $     834     $   774
Surface solutions             353         349
Total                   $   1,187     $ 1,123
Percent increase                6 %

Airborne solutions sales increased $60 million, or 8 percent, for the six months ended March 31, 2009 compared to the six months ended March 31, 2008. Incremental sales from the acquisitions of Athena and SEOS contributed a total of $18 million, or 2 percentage points of the overall revenue growth. The 6 percent organic sales increase was due primarily to higher sales from simulation and training solutions, higher development program revenues on the Common Range Integrated Instrumentation System (CRIIS) program, and higher production sales on the Eurofighter Tranche 2 program.

Surface solutions sales increased $4 million, or 1 percent, for the six months ended March 31, 2009 compared to the six months ended March 31, 2008. Higher development program sales from the Future Combat Systems (FCS) and the Joint Precision Approach and Landing System (JPALS) programs were offset by lower data link systems revenues.

Government Systems' Segment Operating Earnings

(dollars in millions)          Six Months Ended
                                   March 31
                               2009          2008

Segment operating earnings   $     285      $  230
Percent of sales                  24.0 %      20.5 %

Government Systems' operating earnings increased $55 million, or 24 percent, for the six months ended March 31, 2009, compared to the same period a year ago. The increase in operating earnings and operating margin is primarily attributed to incremental margin on higher sales, lower employee incentive compensation costs, and lower research and development costs.

Commercial Systems Financial Results

Commercial Systems' Sales

The following table represents Commercial Systems' sales by product category:

(dollars in millions)

                                                          Six Months Ended
                                                              March 31
                                                          2009         2008

         Wide-body in-flight entertainment products     $     38      $    76
         All other air transport aviation electronics        441          545
         Total air transport aviation electronics            479          621
         Business and regional aviation electronics          530          554
         Total                                          $  1,009      $ 1,175
         Percent (decrease)                                  (14 )%

See the discussion below the Commercial Systems' sales by product category table for the three months ended March 31, 2009 and 2008 for a definition of Wide-body in-flight entertainment products.

Total air transport aviation electronics sales decreased $142 million, or 23 percent, for the six months ended March 31, 2009 compared to the six months ended March 31, 2008. Excluding the $38 million decrease in Wide-body IFE revenues, air transport aviation electronics sales decreased $104 million, or 19 percent, for the six months ended March 31, 2009 compared to the six months ended March 31, 2008. This decrease in sales was due partially to lower OEM sales that were adversely impacted by Boeing's labor strike. In addition, air transport aviation aftermarket sales were adversely impacted by lower Boeing 787 simulator equipment sales and lower service, support and hardware revenues.

Business and regional aviation electronics sales decreased $24 million, or 4 percent, for the six months ended March 31, 2009 compared to the six months ended March 31, 2008. Both OEM and aftermarket sales declined due to business jet OEM production rate cuts and lower business aircraft utilization as the ramifications of global macro-economic factors began to impact the business jet market.

The following table represents Commercial Systems' sales based on the type of product or service:

(dollars in millions)
                                                         Six Months Ended
                                                             March 31
                                                         2009         2008

          Original equipment                           $     539     $   611
          Aftermarket                                        432         488
          Wide-body in-flight entertainment products          38          76
          Total                                        $   1,009     $ 1,175

See the discussion below the Commercial Systems' sales by product category table for the three months ended March 31, 2009 and 2008 for a definition of Wide-body in-flight entertainment products.

Original equipment sales decreased $72 million, or 12 percent, for the six months ended March 31, 2009 compared to the six months ended March 31, 2008. This sales decline is attributed primarily to lower OEM sales that were adversely impacted by Boeing's labor strike and lower sales to business jet OEMs as a result of macro-economic factors impacting the global economy.

Aftermarket sales decreased $56 million, or 11 percent, for the six months ended March 31, 2009 compared to the six months ended March 31, 2008. This decrease is due primarily to lower Boeing 787 simulator equipment sales as well as lower service, support, and hardware sales.

Commercial Systems' Segment Operating Earnings

(dollars in millions)          Six Months Ended
                                   March 31
                               2009          2008

Segment operating earnings   $     207      $  277
Percent of sales                  20.5 %      23.6 %

Commercial Systems' operating earnings decreased 25 percent to $207 million, or 20.5 percent of sales, for the six months ended March 31, 2009 compared to operating earnings of $277 million, or 23.6 percent of sales for the six months ended March 31, 2008. The decrease in operating earnings and operating margin was due primarily to lower sales volume, the absence of a favorable adjustment related to a contract option exercise benefiting the six months ended March 31, 2008, and the absence of royalty income benefiting the six months ended March 31, 2008, 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:
(dollars in millions)

                                         Three Months Ended          Six Months Ended
                                              March 31                   March 31
                                        2009             2008       2009          2008

     Pension benefits                 $      (5 )       $   (1 )   $    (8 )     $    (2 )
     Other retirement benefits                1              -           2            (1 )
     Net benefit expense / (income)   $      (4 )       $   (1 )   $    (6 )     $    (3 )

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 provides 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 discretionary contribution of $75 million to our U.S. qualified pension plan in January 2009. We do not anticipate being required to make 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 six months ended March 31, 2009 and 2008, we made contributions to our international plans and our U.S. non-qualified pension plan of $9 million and $5 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 effect 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 income tax rate are pro-rated for the full year and tax items discrete to a specific quarter are included in the effective income 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 income 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 March 31, 2009 and 2008, our effective income tax rate was 31.7 percent and 27.6 percent, respectively. During the six months ended March 31, 2009 and 2008, our effective income tax rate was 31.8 percent and 30.6 percent, respectively. The higher effective income tax rate for the three and six months ended March 31, 2009 was primarily due to the resolution of certain tax matters that benefited the prior year related to the completion of the Internal Revenue Service (IRS) examination of the taxable years ended September 30, 2004 and 2005 as well as the amended returns for the years ended September 30, 2002 and 2003, partially offset by differences in the availability of the Federal R&D Tax Credit. 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 and six months ended March 31, 2009 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 and six months ended March 31, 2008 reflects an unfavorable impact of lower Federal R&D Tax Credits as a result of pro-rating the three months of available Federal R&D Tax Credits over the full 2008 fiscal year.

The effective tax rate for the three and six months ended March 31, 2009 and March 31, 2008 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 beginning 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 $4.50 billion

· Diluted earnings per share in the range of $3.70 to $3.90

· Cash flow from operations in the range of $625 million to $675 million

· R&D expenditures of about $900 million, or about 20 percent of sales

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

                       FINANCIAL CONDITION AND LIQUIDITY

Cash Flow Summary

Operating Activities

(in millions)                             Six Months Ended
                                              March 31

Cash provided by operating activities $ 137 $ 130

The increase in cash provided by operating activities during the six months ended March 31, 2009 compared to the same period last year is primarily due to working capital improvements related to inventory and collections on accounts receivable as well as lower income tax payments, partially offset by higher pension plan contributions, a lower level of advance payments from customers, a lower level of accounts payable, and the timing of payments on employee compensation related liabilities.

Investing Activities

. . .