10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 30, 2004. Commission file number 001-16445

Rockwell Collins, Inc.

(Exact name of registrant as specified in its charter)

Delaware	52-2314475
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
400 Collins Road NE Cedar Rapids, Iowa	52498
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (319) 295-1000

SECURITIES REGISTERED PURSUANT

TO SECTION 12(b) OF THE ACT:

Title of each class	Name of each exchange on which registered
Common Stock, par value $.01 per share (including the associated Preferred Share Purchase Rights)	New York Stock Exchange

SECURITIES REGISTERED PURSUANT

TO SECTION 12(g) OF THE ACT: None

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  ¨

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.  x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes  x    No  ¨

The aggregate market value of the registrant’s voting stock held by non-affiliates of the registrant on March 31, 2004 was approximately $5.6 billion. For purposes of this calculation, the registrant has assumed that its directors and executive officers are affiliates.

176,537,815 shares of the registrant’s Common Stock were outstanding on October 31, 2004.

DOCUMENTS INCORPORATED BY REFERENCE

(1) Certain information contained in the Annual Report to Shareowners of the registrant for the fiscal year ended September 30, 2004 is incorporated by reference into Part I, Part II and Part IV.

(2) Certain information contained in the Proxy Statement for the Annual Meeting of Shareowners of the registrant to be held on February 15, 2005 is incorporated by reference into Part III.

Rockwell Collins, Inc.

Annual Report on Form 10-K

Table of Contents

PART I
Item 1.	Business	2
Item 2.	Properties	15
Item 3.	Legal Proceedings	15
Item 4.	Submission of Matters to a Vote of Security Holders	16
Item 4A.	Executive Officers of the Company.	16
PART II
Item 5.	Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	18
Item 6.	Selected Financial Data.	19
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	19
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk.	19
Item 8.	Financial Statements and Supplementary Data.	19
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.	19
Item 9A.	Controls and Procedures.	20
Item 9B.	Other Information	20
PART III
Item 10.	Directors and Executive Officers of the Company	20
Item 11.	Executive Compensation	21
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	21
Item 13.	Certain Relationships and Related Transactions	21
Item 14.	Principal Accountant Fees and Services	22
PART IV
Item 15.	Exhibits and Financial Statement Schedules	22
SIGNATURES		26
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM		S-1
SCHEDULE II		S-2
EXHIBIT INDEX		E-1

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PART I

Item 1. Business.

General

Our company, Rockwell Collins, Inc., is a leader in providing design, production and support of communications and aviation electronics for military and commercial customers worldwide. While our products and systems are primarily focused on aviation applications, our Government Systems business also offers products and systems for ground and shipboard applications. We also provide a wide range of services and support to our customers through our network of over 60 service centers worldwide, including equipment repair and overhaul, service parts, field service engineering, training, technical information services and aftermarket used equipment sales. We operate in multiple countries and are headquartered in Cedar Rapids, Iowa.

Our company’s heritage is rooted in the Collins Radio Company formed in 1933. Rockwell International Corporation (now named Rockwell Automation, Inc. and referred to herein as “Rockwell”) purchased the Collins Radio Company in 1973. The Collins legacy continued to be fostered under Rockwell’s ownership until 2001 when we became an independent company. Rockwell Collins, Inc. was incorporated in Delaware in March 2001 in connection with the June 29, 2001 distribution of our shares (the “Distribution”) by Rockwell to Rockwell shareowners. As used herein, the terms “we”, “us”, “our” or the “Company” include subsidiaries and predecessors unless the context indicates otherwise.

Whenever reference is made in any Item of this Annual Report on Form 10-K to information under specific captions of our 2004 Annual Report to Shareowners (the “2004 Annual Report”) or to information in our Proxy Statement for the Annual Meeting of Shareowners to be held on February 15, 2005 (the “2005 Proxy Statement”), such information shall be deemed to be incorporated herein by such reference.

Prior to 2004, we operated on a fiscal year basis with the fiscal year ending on September 30. Beginning with the 2004 fiscal year, we changed for administrative efficiencies to a 52/53 week fiscal year ending on the Friday closest to September 30, which for 2004 was October 1. This change resulted in one additional day of operations reflected in our fiscal 2004 results. All date references contained herein relate to our fiscal year unless otherwise stated. For ease of presentation, September 30 is utilized consistently throughout this report to represent the fiscal year end date.

Financial Information About Our Business Segments

Financial information with respect to our business segments, including product line disclosures, revenues, operating income and total assets, is contained under the caption Segment Financial Results in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2004 Annual Report, and in Note 22 of the Notes to Consolidated Financial Statements in the 2004 Annual Report.

Access to the Company’s Reports

We maintain an Internet website at http://www.rockwellcollins.com. Our annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on this site as soon as reasonably practicable after the reports are filed with or furnished to the Securities and Exchange Commission (“SEC”). All reports we file with the SEC are also available free of charge via EDGAR through the SEC’s website at http://www.sec.gov. We also post corporate governance information (including our corporate governance guidelines and committee charters) and other information related to our company on our Internet website and this information is available free of charge on this site. We will provide, without charge, upon written request, copies of our corporate governance information. Our Internet website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K.

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Description of Business by Segment

We serve our worldwide customer base through our Government Systems and Commercial Systems business segments. These two segments are described in detail below.

Government Systems

Our Government Systems business supplies defense communications systems and products as well as defense electronics systems and products, which include subsystems, navigation and displays, to the U.S. Department of Defense, other government agencies, civil agencies, defense contractors and foreign ministries of defense. These product lines support airborne, ground, and shipboard applications.

Our defense communications and defense electronics products and systems include:

• Communications products and systems designed to help customers transfer information across the communications spectrum, ranging from Very Low and Low Frequency to High, Very High and Ultra High Frequency to satellite communications.

• Military data link products and systems.

• Navigation products and systems, including radio navigation systems, global positioning systems (GPS), handheld navigation systems and multi-mode receivers.

• Subsystems for the flight deck that combine flight operations with navigation and guidance functions and that can include flight controls and displays, information/data processing and communications, navigation and/or safety and surveillance systems.

• Cockpit display systems, including flat panel, multipurpose, wide fields of view, head up, head down and helmet mounted displays for tactical fighter and attack aircraft.

• Integrated computer systems for future combat systems.

• Simulation and training systems.

Highlights for the Government Systems segment in 2004 included:

• We were selected to develop small, lightweight software-defined radios as a member of the General Dynamics team for use by all of the branches of the U.S. military under the U.S Army’s Joint Tactical Radio System (JTRS) Cluster 5 program. These tactical radios are expected to allow the use of common software waveform applications ensuring interoperability with current and future force radios. Potential future revenues to us under the JTRS Cluster 5 program is $46 million related to the initial contract for the systems design and development phase of the program expected to be performed over the next four years, and about $2 billion in total through 2020. Coupled with the 2002 win on the JTRS Cluster 1 program, we now anticipate potential future revenues in excess of $5 billion from these two JTRS-related programs.

• We were selected for the Pre-System Development and Demonstration (Pre-SDD) phase for the Airborne and Maritime/Fixed Station (AMF) JTRS program as a member of the Boeing team. The 15-month, $54 million Pre-SDD contract awarded to the team by the U.S. Air Force is the first step in providing radios that are expected to be integrated into more than 150 airborne, shipboard and fixed station platforms enabling maritime and airborne forces to communicate seamlessly and with greater efficiency in the joint battlespace environment. At the completion of the Pre-SDD phase, the Boeing team, or a competing team that was also awarded a Pre-SDD phase contract, is expected to be selected to continue on into the ensuing SDD and production phases of the AMF JTRS program. When combined with our previous JTRS Cluster 1 and Cluster 5 program awards, we believe this award positions Rockwell Collins as a leader in the development of advanced communication systems for all branches of the U.S. military.

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• We were selected by the GPS Joint Program Office for full rate production of Defense Advanced GPS Receivers (DAGRs). The DAGR is a handheld device used for GPS position and navigation and is also expected to be used to provide precise timing to synchronize tactical radios for the U.S. Army’s digital battle space. Full rate production is anticipated to extend over an eight-year period. The total contract value is expected to be within the range of $238 million to $338 million over the life of the program.

• We were awarded a $79 million contract from the U.S. Navy to provide Block I Modification upgrades for their fleet of
E-6B aircraft, with total potential sales of $300 million over 10 years. This modification effort includes providing the E-6B with open systems architecture for the mission avionics and upgrading primary mission systems. We were also selected by the U.S. Navy to develop and produce a “Next Generation” Maintenance Training Unit supporting EA-6B ICAP-III configured aircraft to accomplish initial qualification and career level training for maintenance personnel on the Navy’s premier airborne electronic countermeasures platform.

• The U.S. Air Force authorized us to begin the $36.9 million, first phase of full rate production of Lot II, as part of the
C/KC-135 Global Air Traffic Management (GATM) program. This first full rate production phase calls for the build, delivery and installation of 30 additional R-model aircraft ship sets with deliveries beginning as early as April 2005. Fully executed, the GATM program could generate approximately $490 million in additional revenue for us through fiscal year 2011.

• We were awarded a contract by the U.S. Air Force to supply up to 810 AN/ARC-210 multi-band radios capable of providing military aircraft with Very High Frequency (VHF) communications directly with civil air traffic control authorities and civilian aircraft in support of the Homeland Defense mission. The contract includes providing repair and support services, and will provide about $20 million in revenues.

• We were awarded a contract from the U.S. Army Aviation Applied Technology Directorate for the Manned/Unmanned Common Architecture Program Phase III (MCAP III) along with other team members. Under this contract we will perform systems engineering activities to define a common computing and network architecture for application to U.S. Army Unmanned Air Vehicles (UAVs). This architecture will be common to mission processing systems currently under development by us for U.S. Army helicopters and Future Combat Systems ground vehicles.

• The U.S. Air Force awarded us a contract to lead a Weapon Data Link Architecture program for the development of networked, in-flight communication for precision guided weapons. The first delivery order under this contract is valued at $5 million and the contract has a ceiling value of $23 million.

• Warner Robins Air Logistics Center (WR-ALC) entered into a 10-year strategic contract with us to enhance the availability of our resources and improve technical and logistics support to maximize operational readiness. This indefinite delivery/indefinite quantity contract has a ceiling of $3.6 billion. This contract brings together Air Force and Rockwell Collins support expertise to provide transformational depot partnering in order to improve the effectiveness and efficiency by which we support the critical systems used by the men and women engaged in the United States’ war on terror. Under the terms of the agreement, we expect to deliver a full range of products and services to U.S. Air Force and other Department of Defense customers.

• The Northrop Grumman/ Raytheon team selected us to supply the Interceptor Communications Unit subsystem on the Kinetic Energy Interceptor (KEI) defense system. The KEI defense system is intended to provide the U.S. military with the ability to destroy hostile missiles at their most vulnerable stage, the boost/ascent phase of flight. It is anticipated that total company revenues will be approximately $100 million over the eight year contract term.

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Commercial Systems

Our Commercial Systems business supplies air transport aviation electronics systems and products as well as business and regional aviation electronics systems and products. These systems and products include flight deck electronic systems and products, including communications, navigation, surveillance, displays and automatic flight control and flight management systems, as well as in-flight entertainment, cabin electronics and information management systems. We also provide a wide range of services to our commercial customers. Commercial Systems customers include manufacturers of commercial air transport, regional and business aircraft, commercial airlines, regional airlines, fractional jet operators and business jet operators.

Our air transport aviation electronics and business and regional aviation electronics systems and products include:

• Integrated avionics systems and products, such as the Pro Line 21 system, which provide advanced avionics such as liquid crystal flight displays, flight management, integrated flight control, automatic flight controls, engine indication and crew alerts.

• In-flight entertainment systems and products, including the enhanced Total Entertainment System (eTES^™) and the Passenger Audio Video Entertainment System (P@ves), as well as a full line of audio and video entertainment solutions for widebody and narrow aircraft.

• Cabin electronics products and solutions for the business jet market, including lighting and other environmental controls, passenger information and entertainment, business support systems, network capabilities and passenger flight information systems.

• Communications systems and products, such as data link, High Frequency (HF), Very High Frequency (VHF) and satellite communications systems.

• Navigation systems and products, including multi-mode receivers, radio and geophysical navigation sensors, as well as flight management systems.

• Situational awareness and surveillance systems and products, such as Head-Up Guidance Systems, weather radar and collision avoidance systems.

• Flight deck systems and products, which include a broad offering of multi-function cockpit liquid crystal display (LCD) units, CRT display units and head-up displays (HUDs).

• Integrated information systems, such as eEnable and eXchange, to provide information management solutions that help improve flight operations, maintenance and cabin services, as well as provide worldwide TV coverage.

Highlights for the Commercial Systems segment in 2004 included:

• The Boeing Company (Boeing) selected us to provide display, communication and surveillance systems, the core network cabinet and the pilot controls for Boeing’s new 7E7 Dreamliner aircraft. We are also assisting Smiths Aerospace by providing certain elements of the common data network that will be used on the 7E7. In total, these selections have the potential to provide us with up to $3.5 billion in revenues over the life of the program.

• Rockwell Collins’ Airshow 21 integrated cabin electronics system was unveiled at the Farnborough Air Show onboard Bombardier’s Global 5000^™ intercontinental business jet. Supplemental type certification of the system is expected in December 2004. The Airshow 21 system offers the Global 5000, an advanced system architecture that supports a complete line of cabin electronics centered on an operator’s specific requirements. The system features a redundant communications backbone, maximizing system availability while providing digital distribution of information and allowing for easy installation of future upgrades. Global 5000 passengers and crew will have control of nearly all aspects of the cabin environment through the Airshow 21 system. Advanced functionality includes the latest in real-time business connectivity, information, entertainment and cabin management capabilities.

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• Air New Zealand selected our eTES ^™ audio and video on-demand (AVOD) in-flight entertainment equipment on eight Boeing 777-200ER aircraft. This follows their decision to retrofit seven Boeing 747-400 aircraft with eTES ^™ throughout the cabin. In addition, Air New Zealand has selected our newest moving map and in-flight information product, Airshow 4200, for installation on eight new Boeing 777 aircraft and seven existing Boeing 747 aircraft. The Airshow 4200 contains major advancements in features, functionality, and look-and-feel over previous map products. Initial installation of both products and systems is set for mid-2005.

• Along with LogisTechs, Inc., we entered into a 10-year spare parts service agreement to support Mesa Air Group, Inc. We will perform repair chain management of Collins and non-Collins rotable components on Mesa’s CRJ 100/200 regional aircraft at a fixed rate per flying hour. This represents our first Rotable Total Service Solution contract.

• We were selected by NetJets Services, Inc. to provide avionics maintenance repair and technical support on its fleets of Gulfstream G200 aircraft, Raytheon Hawker 400XP aircraft. Under two separate 10-year agreements, we will provide NetJets with forward exchange avionics support on NetJets’ fleet of G200 aircraft and Raytheon Hawker 400XP aircraft. Designed to support fractional operations by maximizing aircraft dispatchability, our forward exchange avionics support includes all aspects of maintaining our avionics onboard the aircraft.

• We introduced the industry’s first weather radar with a fully automatic worldwide hazard detection system. Our new MultiScan Global^TM weather radar is the next-generation in the WXR-2100 MultiScan^™ weather radar series that enhances passenger and crew safety by significantly reducing pilot work load and enhancing weather-detection capability. The MultiScan Global weather radar automatically adjusts weather detection parameters for variations caused by time of day, time of year and geographic position and then uses advanced radar threshold technologies to adjust the radar returns to more accurately display actual thunderstorm threats. MultiScan Global weather radar builds on the MultiScan radar tradition that digitizes and stores multiple weather sweeps in a temporary data base and then processes the digitized weather information to provide an optimized weather picture. The system features Overflight^™ protection, providing crews with the ability to avoid inadvertent penetration of thunderstorm tops, one of the leading causes of unexpected turbulence encounters. Additionally, the WXR-2100 MultiScan weather radar, introduced in 2000, was the first fully automatic radar to provide enhanced safety by reducing the need for manual intervention. It is certified on all Boeing aircraft and certification on Airbus aircraft is scheduled to be completed in 2004.

• We were selected to provide Corporate Aircraft Service Program support for aircraft operating under Raytheon Aircraft Company’s Beechcraft and Hawker Support PLUS Maintenance Plan.

• Iberia airlines selected us to supply avionics equipment on seven new Airbus A340-600 aircraft with an option for five additional aircraft. The avionics equipment will include Multi Mode Receivers, satellite and high frequency communication systems, transponders, automatic direction finders and distance measuring equipment. Delivery of the avionics equipment began in 2004.

Customers; Sales and Marketing

We serve a broad range of customers worldwide, including the U.S. Department of Defense, U.S. Coast Guard, civil agencies, defense contractors, foreign ministries of defense, manufacturers of commercial air transport, business and regional aircraft, commercial airlines, regional airlines, fractional jet operators, and business jet operators. We market our products, systems and services directly to Government Systems and Commercial Systems customers through an internal marketing and sales force. In addition, we utilize a worldwide dealer network to distribute our products and international sales representatives to assist with international sales and marketing. In 2004, various branches of the U.S. Government accounted for 43% of our total sales.

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Our largest customers have substantial bargaining power with respect to price and other commercial terms. Although we believe that we generally enjoy good relations with our customers, the loss of all or a substantial portion of our sales to any of our large volume customers for any reason, including the loss of contracts, bankruptcy, reduced or delayed customer requirements or strikes or other work stoppages affecting production by these customers, could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Competition

We operate in a highly competitive environment. Principal competitive factors include total cost of ownership, product and system performance, quality, service, warranty terms, technology, design engineering capabilities, new product innovation and timely delivery. We compete worldwide with a number of United States and international companies, including approximately ten principal competitors in each of our Government Systems and Commercial Systems businesses. Some of our competitors include Honeywell International, Inc., Thales S.A., Matsushita, Raytheon Co., Harris Corp., BAE Systems Aerospace, Inc., General Dynamics Corporation, L3 Communications, Inc., and Northrop Grumman Corp. Several of our competitors are significantly larger than us in terms of resources and market share, and can offer a broader range of products. Some of our competitors have more extensive or more specialized engineering, manufacturing and marketing capabilities than we do in some areas. As a result, these competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements or may be able to devote greater resources to the development, promotion and sale of their products. Furthermore, competitors who have greater financial resources may be better able to provide a broader range of financing alternatives to their customers in connection with sales of their products.

Industry consolidation has had a major impact on the competitive environment in which we operate. Over the past several years, our competitors have undertaken a number of mergers, alliances and realignments that have contributed to a very dynamic competitive landscape. During the past three years, we have completed three acquisitions and entered into several strategic alliances to improve our competitive position and expand our market reach.

Raw Materials, Supplies and Working Capital

We believe we have adequate sources for the supply of raw materials and components for our manufacturing and service needs with suppliers located around the world. Electronic components and other raw materials used in the manufacture of our products are generally available from several suppliers. We continue to work with our supply base for raw materials and components to ensure an adequate source of supply, including through strategic alliances, dual sourcing, identification of substitute or alternate parts that meet performance requirements and life-time buys. These life-time buys involve purchases of multiple years of supply in order to meet production and service requirements over the life span of a product. Although historically we have not experienced any significant difficulties in obtaining an adequate supply of raw materials and components necessary for our manufacturing operations or service needs, the loss of a significant supplier or the inability of a supplier to meet performance and quality specifications or delivery schedules could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our investment in inventory is a significant part of our working capital and historically we have maintained sufficient inventory to meet our customers’ requirements on a timely basis. This investment includes production stock, finished goods, spare parts and goods on consignment with airlines. Our accounts receivable also constitute a significant part of our working capital. Accounts receivable includes unbilled receivables related to sales recorded under the percentage-of-completion method of accounting that are billed to customers in accordance with applicable contract terms. The critical accounting policies involving inventory valuation reserves are discussed under the caption Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2004 Annual Report.

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Backlog

The following table summarizes our backlog (in billions):

	September 30
	2004		2003
Commercial Systems	$	0.4	$	0.3
Government Systems:
Funded Orders		2.1		1.8
Unfunded Orders		0.2		0.2
Total Backlog	$	2.7	$	2.3

Our backlog represents the aggregate of the sales price of orders received from customers, but not recognized as revenue, and excludes unexercised options. Although we believe that the orders included in backlog are firm, some orders may be canceled by the customer without penalty, and we may elect to permit cancellation of orders without penalty where management believes that it is in our best interest to do so. Our backlog includes approximately $.9 billion of orders not expected to be filled by us in 2005, principally in our Government Systems business.

Joint Ventures

Joint ventures, strategic investments and other cooperative arrangements are part of our business strategies to broaden the market for our products and develop new technologies. We currently have interests in three non-majority owned joint ventures.

We have a 50% ownership interest in Data Link Solutions LLC (DLS), a joint venture with BAE Systems, plc, for joint pursuit of the worldwide military data link market. We have a 50% ownership interest in Vision Systems International, LLC (VSI), a joint venture with Elbit Systems, Ltd., for joint pursuit of helmet mounted cueing systems for the worldwide military fixed wing marketplace. We and Rockwell each own a 50% equity interest in Rockwell Scientific Company LLC (RSC), which is engaged in advanced research and development of technologies in electronics, imaging and optics, material and computational sciences and information technology. RSC provides research and development services to us, as well as to Boeing, Rockwell, the U.S. Government and other customers. RSC is also pursuing the commercialization of its technologies through licensing, low rate production and strategic alliances.

Highlights for our Joint Ventures in 2004 included:

• Boeing awarded VSI two contracts totaling $75.6 million and $62.6 million for the delivery of joint helmet-mounted cueing systems, including spares, technical support and support equipment, to be used on domestic and foreign military aircraft.

• The U.S. Space and Naval Warfare Systems Command awarded DLS a $57 million contract to provide the Multifunctional Information Distribution System terminals for deployment on several U.S. Navy and Air Force and international aircraft platforms.

• RSC spun off its CMOS Image Sensors Business Group and retained a substantial equity interest in the venture (now named Altasens, Inc.)

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Acquisitions and Dispositions

We continually consider various business opportunities, including strategic acquisitions and alliances, licenses and marketing arrangements, and we review the prospects of our existing businesses to determine whether any of them should be modified, sold or otherwise discontinued.

We completed three acquisitions in the past three years to augment our internal growth plans. These acquisitions were:

• flight simulators: the December 2003 acquisition of NLX Holding Corporation;

• cabin electronics systems: the August 2002 acquisition of Airshow, Inc.; and

• signals intelligence and surveillance solutions: the March 2002 acquisition of Communication Solutions, Inc.

In March 2002 we completed the disposition of Kaiser Fluid Technologies, Inc., which produced a variety of non-core products.

Additional information relating to our acquisitions is contained in Note 3 of the Notes to Consolidated Financial Statements in the 2004 Annual Report.

Research and Development

We have significant research, development, engineering and product design capabilities. At September 30, we employed approximately 4,000 engineers.

Amounts attributed to our research and development activities are as follows (in millions):

	2004		2003		2002
Company-funded	$	218	$	216	$	253
Customer-funded 1		327		259		231
Total	$	545	$	475	$	484

¹ Customer-funded research and development includes activities relating to the development of new products and the improvement of existing products.

Intellectual Property

We own more than 600 United States and foreign patents and have numerous pending patent applications, including patents and patent applications purchased in our acquisitions. We also license certain patents relating to our manufacturing and other activities. While in the aggregate we consider our patents and licenses important to the operation of our business, we do not consider any individual patent or license to be of such importance that the loss or termination of any one patent or license would materially affect us.

Rockwell continues to own the Rockwell name. In connection with the Distribution, we were granted the exclusive right to continue to use the Rockwell Collins name other than in connection with industrial automation products. This exclusive right would terminate following certain change of control events applicable to us as described in the distribution agreement among Rockwell, RSC and us.

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Employees

As of September 30, 2004, we had approximately 15,800 full-time employees. Approximately 2,250 of our employees in the United States are covered by collective bargaining agreements. We reached agreement in 2003 with three bargaining units on multi-year extensions of their collective bargaining agreements. The collective bargaining agreements are generally set to expire between September 2006 and May 2008.

Cyclicality and Seasonality

The avionics and communications markets in which we sell our products are, to varying degrees, cyclical and have experienced periodic downturns. For example, markets for our commercial aviation electronic products have experienced downturns during periods of slowdowns in the commercial airline industry and during periods of weak conditions in the economy in general, as demand for new aircraft generally declines during these periods. Although we believe that aftermarket demand for many of our products and our Government Systems business reduce our exposure to these business downturns, we may experience downturns in the future.

Our business tends to be seasonal with our fourth quarter usually producing relatively higher sales and our first quarter usually producing relatively lower sales. A large part of this seasonality variance is attributable to our Government Systems business and relates to the U.S. Government procurement cycle.

Regulatory Matters

As a defense contractor, our contract costs are audited and reviewed on a continual basis by the Defense Contract Audit Agency. Audits and investigations are conducted from time to time to determine if our performance and administering of our U.S. Government contracts are compliant with applicable contractual requirements, and procurement and other applicable Federal statutes and regulations. Under present U.S. Government procurement regulations, if indicted or adjudged in violation of procurement or other Federal civil laws, a contractor, such as us, could be subject to fines, penalties, repayments or other damages. U.S. Government regulations also provide that certain findings against a contractor may lead to suspension or debarment from eligibility for awards of new U.S. Government contracts for up to three years.

The sale, installation and operation of our products in commercial aviation applications is subject to continued compliance with applicable regulatory requirements and future changes to those requirements. In the U.S., our commercial aviation products are required to comply with Federal Aviation Administration regulations governing production and quality systems, airworthiness and installation approvals, repair procedures and continuing operational safety. Some of our products, such as radio frequency transmitters and receivers, must also comply with Federal Communications Commission regulations governing authorization and operational approval of telecommunications equipment.

Internationally, similar requirements exist for airworthiness, installation and operational approvals. These requirements are administered by the national aviation authorities of each country and, in the case of Europe, coordinated by the European Joint Aviation Authorities. Many countries also impose specific telecommunications equipment requirements, administered through their national aviation authorities or telecommunications authority. In Europe, approval to import products also requires compliance with European Commission directives, such as those associated with electrical safety, electro-magnetic compatibility and the use of metric units of measurement.

Products already in service may also become subject to mandatory changes for continued regulatory compliance as a result of any identified safety issue, which can arise from an aircraft accident, incident or service difficulty report.

Rockwell Collins’ products and technical data are controlled for export and import under various regulatory agencies. Audits and investigations by these agencies are a regular occurrence to ensure compliance with applicable Federal statutes and regulations. Violations, including as a successor to an acquired business, can result in fines and penalties assessed against the corporation as well as individuals, and the most egregious acts may result in a complete loss of export privileges.

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Although we do not have any significant regulatory action pending against us, any such action could have a material adverse impact on our business, financial condition, results of operations and cash flows.

Environmental Matters

Federal, state and local requirements relating to the discharge of substances into the environment, the disposal of hazardous wastes, and other activities affecting the environment have had and will continue to have an impact on our manufacturing operations. Compliance with environmental requirements and resolution of environmental claims have been accomplished without material effect on our liquidity and capital resources, competitive position or financial condition. We believe that our expenditures for environmental capital investment and remediation necessary to comply with present regulations governing environmental protection and other expenditures for the resolution of environmental claims will not have a material adverse effect on our business or financial condition, but could possibly be material to the results of operations or cash flows of any one period. Additional information on environmental matters is contained in Note 20 of the Notes to Consolidated Financial Statements in the 2004 Annual Report.

Geographic Information

Our principal markets outside the United States are in France, Canada, the United Kingdom, Australia, Japan, Germany, Israel, Singapore, China and Brazil. In addition to normal business risks, operations outside the United States are subject to other risks including, among other factors, political, economic and social environments, governmental laws and regulations, and currency revaluations and fluctuations.

Selected financial information by major geographic area for each of the three years in the period ended September 30, 2004 is contained in Note 22 of the Notes to Consolidated Financial Statements in the 2004 Annual Report.

Certain Business Risks

Our business, financial condition, operating results and cash flows can be impacted by a number of factors, including but not limited to those set forth below and elsewhere in this Annual Report on Form 10-K, any one of which could cause our actual results to vary materially from recent results or from our anticipated future results.

International conflicts may further adversely affect our business.

International conflicts such as the war in Iraq, political turmoil in the Middle East and the possibility of future terrorist attacks cause significant uncertainty with respect to U.S. and other business and financial markets and adversely affect our business. These international conflicts also affect the price of oil, which has a significant impact on the financial health of our air transport and regional customers. Although our Government Systems business may experience greater demand for its products as a result of increased government defense spending, factors arising (directly or indirectly) from international conflicts which have adversely affected our business and which may further adversely affect our business include reduced aircraft build rates, upgrades, maintenance and spending on discretionary products such as in-flight entertainment, as well as increases in the cost of property and aviation products insurance and increased restrictions placed on our insurance policies. The war in Iraq creates the risk that our Government Systems’ customers may need to reprogram funding from our existing business to pay for war-related activities. Furthermore, we currently hold only nominal insurance related to the effects of terrorist acts on our assets and our aircraft products.

We depend to a significant degree on U.S. Government contracts, which are subject to unique risks.

In 2004, 43% of our sales were derived from United States government contracts. In addition to normal business risks, we engage in supplying products to the United States government that are subject to unique risks which are largely beyond our control. These risks include:

• dependence on Congressional appropriations and administrative allotment of funds;

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• the ability of the U.S. government to terminate, without prior notice, partially completed government programs and contracts that were previously authorized;

• changes in governmental procurement legislation and regulations and other policies which may reflect military and political developments;

• significant changes in contract scheduling;

• intense competition for available United States government business necessitating increases in time and investment for design and development;

• difficulty of forecasting costs and schedules when bidding on developmental and highly sophisticated technical work;

• changes over the life of United States government contracts, particularly development contracts, which generally result in adjustments of contract prices; and

• claims based on United States government work, which may result in fines, the cancellation or suspension of payments or suspension or debarment proceedings affecting potential further business with the United States government.

New airspace management technologies may impact future sales.

The aerospace industry is experiencing a global transition from traditional communications, navigation, surveillance and air traffic control systems to air traffic management systems utilizing satellite-based technologies that will allow pilots to fly at desired paths and speeds selected in real time, while still complying with instrument flight regulations. The transition to these technologies will require the use of digital communications systems, global positioning system navigation, satellite surveillance techniques and ground surveillance systems. These technologies are expected to result in more direct and efficient flight routes, fewer flight delays and reduced airport congestion. Although we believe that we are well positioned to participate in this market evolution, our ability to capitalize on the transition to these airspace management technologies is subject to various risks, including:

• delays in the development of the necessary satellite and ground infrastructure by U.S. and foreign governments;

• delays in adopting national and international regulatory standards;

• competitors developing better products;

• failure of our product development investments in communications, navigation and surveillance products that enable airspace management technologies to coincide with market evolution to, and demand for, these products; and

• the ability and desire of customers to invest in products enabling airspace management technologies.

We derive a significant portion of our revenues from international sales and are subject to the risks of doing business in foreign countries.

In 2004, revenues from products and services exported from the U.S. or manufactured and serviced abroad were 30% of our total sales. We expect that international sales will continue to account for a significant portion of our total sales. As a result, we are subject to risks of doing business internationally, including:

• laws, regulations and policies of foreign governments relating to investments and operations, as well as U.S. laws affecting the activities of U.S. companies abroad;

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• changes in regulatory requirements, including imposition of tariffs or embargoes, export controls and other trade restrictions;

• uncertainties and restrictions concerning the availability of funding, credit or guarantees;

• import and export licensing requirements and regulations;

• uncertainties as to local laws and enforcement of contract and intellectual property rights; and

• rapid changes in government, economic and political policies, political or civil unrest or the threat of international boycotts or U.S. anti-boycott legislation.

While these factors or the impact of these factors are difficult to predict, any one or more of them could adversely affect our business, financial condition, operating results and cash flows in the future.

We have made, and expect to continue to make, strategic acquisitions that involve significant risks and uncertainties.

We completed three acquisitions in the last three years and we intend to enter into acquisitions in the future in an effort to enhance shareowner value. Acquisitions involve a certain amount of risks and uncertainties such as:

• the difficulty in integrating newly-acquired businesses and operations in an efficient and cost-effective manner and the risk that we encounter significant unanticipated costs or other problems associated with integration;

• the challenges in achieving strategic objectives, cost savings and other benefits expected from acquisitions;

• the risk that our markets do not evolve as anticipated and that the technologies acquired do not prove to be those needed to be successful in those markets;

• the risk that we assume significant liabilities that exceed the limitations of any applicable indemnification provisions or the financial resources of any indemnifying parties;

• the potential loss of key employees of the acquired businesses; and

• the risk of diverting the attention of senior management from our existing operations.

We enter into fixed-price contracts that could subject us to losses in the event that we have cost overruns.

During 2004 approximately 90% of our total sales were from firm, fixed-price contracts. This allows us to benefit from cost savings, but it carries the burden of potential cost overruns since we assume all of the cost risk. If our initial estimates are incorrect, we can lose money on these contracts. These fixed price contracts can expose us to potentially large losses because the customer can compel us to complete a project or, in the event of a termination for default, pay the entire incremental cost of its replacement by another provider regardless of the size of any cost overruns that occur over the life of the contract. Because many of these projects involve new technologies and applications and can last for years, the following items can result in the contractual price becoming less favorable or even unprofitable to us over time: unforeseen events, such as technological difficulties, fluctuations in the price of raw materials, problems with subcontractors and cost overruns. Furthermore, if we do not meet project deadlines or specifications, we may need to renegotiate contracts on less favorable terms, be forced to pay penalties or liquidated damages or suffer major losses if the customer exercises its right to terminate. In addition, some of our contracts have provisions relating to cost controls and audit rights, and if we fail to meet the terms specified in those contracts we may not realize their full benefits. Our results of operations are dependent on our ability to maximize our earnings from our contracts. Lower earnings caused by cost overruns would have an adverse impact on our financial condition, operating results and cash flows.

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Costs of certain employee and retiree benefits may continue to rise.

Over the last few years, we have experienced significant increases in the costs of medical and pension benefits. Although we have taken action seeking to contain these cost increases, including making material changes to these plans, there are risks that our costs for these benefits will increase as a result of:

• continued increases in medical costs related to current employees due to increased usage of medical benefits and medical inflation in the United States;

• declines in the U.S. stock market on the performance of our pension plan assets; and

• potential reductions in the discount rate used to determine the present value of our benefit obligations.

Tax law changes may impact our effective tax rate.

Our effective tax rate is less than the statutory tax rate primarily as the result of the tax benefits derived from the Research and Development Tax Credit (“R&D Tax Credit”), which provides a tax benefit on certain incremental R&D expenditures, and the Extraterritorial Income Exclusion (“ETI”), which provides a tax benefit on export sales. The R&D Tax Credit expired on June 30, 2004. In October 2004, Congress passed the Working Families Tax Relief Act of 2004, which extended the R&D Tax Credit for an 18 month period on a retroactive basis from June 30, 2004 to December 31, 2005. The federal R&D Tax Credit for the fourth quarter of fiscal year 2004 will be recognized during the first quarter of fiscal year 2005. In October 2004, Congress also passed the American Jobs Creation Act of 2004 (“the Act”). The Act repealed and replaced the ETI with a new deduction for income generated from qualified production activities by domestic manufacturers. The ETI will be phased out through calendar 2006 and the new deduction under the Act will be phased in between calendar 2005 and 2009. The ETI repeal and replacement under the Act is not expected to have a significant impact on our effective income tax rate in 2005. We are evaluating the impact of the ETI repeal and replacement under the Act on our effective income tax rate in years beyond 2005.

The Act also provides for a possible lower tax rate on funds repatriated into the U.S. from non-U.S. subsidiaries through September 30, 2006. We are evaluating the merits of repatriating funds under this new law. We have not provided for income taxes on unremitted earnings generated by our non-U.S. subsidiaries given our to-date continuing intent to permanently invest these earnings abroad. As a result, additional income taxes may be required to be recorded for any funds repatriated under the Act. Our estimate of the 2005 effective income tax rate does not include the potential tax effects of repatriating funds under the Act.

Cautionary Statement

This Annual Report on Form 10-K, and documents that are incorporated by reference in this Annual Report on Form 10-K, contain statements, including certain projections and business trends, accompanied by such phrases as “believes”, “estimates”, “expects”, “could”, “likely”, “anticipates”, “will”, “intends”, and other similar expressions, 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, the continued recovery of the commercial aerospace industry and the continued strength of the military communications and electronics industry; the impact of oil prices on the commercial aerospace industry; domestic and foreign government spending, budgetary and trade policies favorable to our businesses; market acceptance of new and existing products and services; reliability of and customer satisfaction with our products and services; potential cancellation or termination of contracts, delay of orders or changes in procurement practices or program priorities by our customers; customer bankruptcies and profitability; recruitment and retention of qualified personnel; performance of our suppliers and subcontractors which we are highly dependent upon for timely, high quality and specification compliant products and services; risks inherent in fixed price contracts, particularly the risk of cost overruns; risk of significant and prolonged disruption to air travel; our ability to execute to our internal performance plans such as our continuous productivity improvement and cost reduction initiatives; achievement of our acquisition and related integration plans; continuing to maintain our planned effective tax rates; favorable outcomes of certain customer procurements, congressional approvals and regulatory mandates; and the uncertainties of the outcome of litigation, as well as other risks and uncertainties, including but not limited to those detailed herein and from time to time in our Securities and Exchange Commission filings. These forward-looking statements are made only as of the date hereof.

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Item 2. Properties.

As of September 30, 2004, we operated 17 manufacturing facilities throughout the United States and one manufacturing facility each in Mexico, France and the United Kingdom. The Company also had engineering facilities, sales offices, warehouses and service locations in approximately 75 cities and 20 countries around the world. These facilities have aggregate floor space of approximately 5.6 million square feet, substantially all of which is in use. Of this floor space, approximately 64% is owned and approximately 36% is leased. There are no major encumbrances on any of our plants or equipment, other than financing arrangements which in the aggregate are not material. In the opinion of management, our properties have been well maintained, are in sound operating condition and contain all equipment and facilities necessary to operate at present levels. A summary of floor space of these facilities at September 30, 2004 is as follows:

Location	Owned Facilities	Leased Facilities	Total
	(in thousands of square feet)
United States	3,451	1,614	5,065
Europe	90	206	296
Canada and Mexico	—	111	111
Asia Pacific	—	85	85
South America	—	7	7
Total	3,541	2,023	5,564
Type of Facility	Owned Facilities	Leased Facilities	Total
	(in thousands of square feet)
Manufacturing	1,532	948	2,480
Sales, engineering, service and general office space	2,009	1,075	3,084
Total	3,541	2,023	5,564

We have facilities with a total of at least 100,000 square feet in the following cities: Cedar Rapids, Iowa (2,480,000 square feet), Richardson, Texas (280,000 square feet), Melbourne, Florida (275,000 square feet), Pomona, California (240,000 square feet), San Jose, California (225,000 square feet), Irvine, California (220,000 square feet), Coralville, Iowa (180,000 square feet), Toulouse, France (130,000 square feet) and Mexicali, Mexico (110,000 square feet). Most of our facilities are generally shared for the benefit of our Government Systems and Commercial Systems businesses.

Certain of our facilities, including those located in California and Mexicali, Mexico, are located near major earthquake fault lines. We maintain earthquake insurance with a $40 million deductible with respect to these facilities. We also maintain property insurance for wind damage, including hurricanes and tornados, for our facilities. This insurance covers physical damage to property and any resulting business interruption. All losses are subject to a $5 million deductible with certain exceptions that could affect the deductible.

Item 3. Legal Proceedings.

On August 12, 2004 the United States District Court for the Northern District of Texas favorably ruled on our motion for summary judgment and dismissed the complaint of BAE Systems Electronics Limited (BAE) filed against us on April 7, 2003 alleging a single count of patent infringement involving certain head-up display (HUD) products sold by our Flight Dynamics subsidiary. BAE’s complaint sought an unspecified amount of compensatory damages, reasonable attorneys’ fees and a permanent injunction until August 2005 when the patent expires. The parties settled the case in September 2004 with no material or adverse impact on us.

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In addition, various other lawsuits, claims and proceedings have been or may be instituted or asserted against us relating to the conduct of our business, including those pertaining to product liability, intellectual property, environmental, safety and health, contract and employment matters. Although the outcome of litigation cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably to us, management believes the disposition of matters that are pending or asserted will not have a material adverse effect on our business or financial condition, but could possibly be material to the results of operations or cash flows of any one period.

Item 4. Submission of Matters to a Vote of Security Holders.

No matters were submitted to a vote of security holders during the fourth quarter of 2004.

Item 4A. Executive Officers of the Company.

The name, age, office and position held with us, and principal occupations and employment during the past five years of each of our executive officers as of November 2, 2004 are as follows:

Name, Office and Position, and Principal Occupations and Employment	Age
Clayton M. Jones — Chairman of the Board of Rockwell Collins since June 2002; President and Chief Executive Officer of Rockwell Collins since June 2001; Senior Vice President of Rockwell (electronic controls and communications) and President of Rockwell Collins, Inc., a subsidiary of Rockwell, from January 1999 to May 2001; Executive Vice President of Rockwell Collins, Inc. prior thereto	55
Barry M. Abzug — Senior Vice President, Corporate Development of Rockwell Collins since October 2001; President and General Manager, Aerospace/Communications Division of ITT Industries, Inc. (engineering and manufacturing) from October 1998 to August 2000; Vice President and Director, Communications Systems Business Unit of the Aerospace/Communications Division of ITT Industries, Inc. prior thereto	52
Patrick E. Allen — Senior Vice President and Chief Financial Officer of Rockwell Collins effective January 2005; Vice President and Controller of Rockwell Collins’ Commercial Systems business since January 2004; Vice President, Finance and Treasurer of Rockwell Collins from June 2001 to February 2004; Vice President and Treasurer of Rockwell from June 2000 to May 2001; Vice President, Financial Planning and Analysis of Rockwell from June 1999 to May 2000; Assistant Controller of Rockwell prior thereto	40
John-Paul E. Besong — Senior Vice President of e-Business & Lean Electronics of Rockwell Collins since February 2003; Vice President of e-Business & Lean Electronics of Rockwell Collins from January 2002 to February 2003; Vice President of e-Business of Rockwell Collins from January 2000 to January 2002; Program Executive of the Enterprise Resource Planning system of Rockwell Collins, Inc., a subsidiary of Rockwell, prior thereto	51
David H. Brehm — Vice President, Finance and Controller of Rockwell Collins since February 2004; Vice President, Investor Relations of Rockwell Collins from July 2001 to January 2004; Chief Financial Officer of In-Flight Network, LLC (a former joint venture between Rockwell Collins and News Corporation to provide on-board digital broadband communication and entertainment services to airline passengers) from April 2000 to June 2001; Assistant Treasurer, Domestic of Rockwell prior thereto	50

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Name, Office and Position, and Principal Occupations and Employment	Age
Gary R. Chadick — Senior Vice President, General Counsel and Secretary of Rockwell Collins since July 2001; Assistant General Counsel, Operations of Litton Industries, Inc. (advanced electronics, information systems, electronic components and ship systems) from September 1999 to July 2001; Group Counsel, Litton’s Advanced Electronics Systems Group prior thereto	43
Robert M. Chiusano — Executive Vice President and Chief Operating Officer, Commercial Systems of Rockwell Collins since May 2002; Executive Vice President and Chief Operating Officer, Government Systems of Rockwell Collins from June 2001 to May 2002; Vice President and General Manager, Government Systems of Rockwell Collins, Inc., a subsidiary of Rockwell, prior thereto	54
Gregory S. Churchill — Executive Vice President and Chief Operating Officer, Government Systems of Rockwell Collins since May 2002; Vice President and General Manager of Business and Regional Systems for Commercial Systems of Rockwell Collins from June 2001 to May 2002; Vice President of Business Development for Government Systems of Rockwell Collins, Inc., a subsidiary of Rockwell, from February 2000 to June 2001; Vice President, Integrated Applications and Navigation Programs of Rockwell Collins, Inc. from October 1999 to February 2000; Vice President, Program Management of Rockwell Collins, Inc. prior thereto	47
Lawrence A. Erickson — Senior Vice President and Chief Financial Officer of Rockwell Collins from June 2001 to December 2004; Vice President and Controller, Finance and Strategic Development of Rockwell Collins, Inc., a subsidiary of Rockwell, from October 1999 to May 2001; Vice President and Controller of Rockwell Collins, Inc. prior thereto	55
Harry L. Gregory — Senior Vice President and General Manager of Rockwell Collins Aviation Services since February 2003; Vice President and General Manager of Collins Aviation Services prior thereto	60
Ronald W. Kirchenbauer — Senior Vice President, Human Resources, of Rockwell Collins since April 2003; Senior Vice President, Employee and Workplace Services, of Cadence Design Systems, Inc. (electronic design technologies and services) prior thereto	57
Nan Mattai — Senior Vice President, Engineering and Technology of Rockwell Collins since November 2004; Vice President, Government Systems Engineering of Rockwell Collins from June 2001 to October 2004; Senior Director, Tactical Communications, Government Systems of Rockwell Collins, Inc. a subsidiary of Rockwell, from June 2000 to May 2001; Director, Wide Band Communications Engineering of Rockwell Collins, Inc. prior thereto	52
Kent L. Statler — Senior Vice President of Operations of Rockwell Collins since January 2003; Vice President of Manufacturing Operations of Rockwell Collins from January 2002 to January 2003; Vice President Lean Electronics of Rockwell Collins from January 2001 to January 2002; Vice President of Collins Maintenance Operations for Collins Aviation Services of Rockwell Collins, Inc., a subsidiary of Rockwell, from September 1999 to January 2001; Director of Collins Service Centers of Collins Subsidiary & Service Business of Rockwell Collins, Inc. prior thereto	39
Douglas E. Stenske —Treasurer of Rockwell Collins since February 2004; Senior Director, Risk and Asset Management of Rockwell Collins from June 2001 to January 2004; Manager, Risk Management and Special Projects of Rockwell prior thereto	38

There are no family relationships, as defined, between any of the above executive officers and any other executive officer or any director. No officer was selected pursuant to any arrangement or understanding between the officer and any person other than us. All executive officers are elected annually.

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PART II

Item 5. Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

Our Common Stock, par value $.01 per share, is listed on the New York Stock Exchange and trades under the symbol “COL”. On October 31, 2004, there were 35,997 shareowners of record of our Common Stock.

The following table sets forth the high and low sales price of our Common Stock on the New York Stock Exchange—Composite Transactions reporting system during each quarter of our years ended September 30, 2004 and 2003:

	2004				2003
Fiscal Quarters	High		Low		High		Low
First	$	30.10	$	25.18	$	24.08	$	19.60
Second		35.25		29.16		23.99		17.20
Third		34.35		29.24		25.05		18.11
Fourth		38.08		32.02		27.67		24.43

Dividends

The following table sets forth the cash dividends per share paid by us during each quarter of our years ended September 30, 2004 and 2003:

Fiscal Quarters	2004		2003
First	$	0.09	$	0.09
Second		0.09		0.09
Third		0.09		0.09
Fourth		0.12		0.09

We anticipate that we will pay quarterly cash dividends which, on an annual basis, will equal $0.48 per share. The declaration and payment of dividends by us, however, will be at the sole discretion of our Board of Directors.

Repurchases

Our Board of Directors has authorized certain repurchases of our common stock. During 2004, we repurchased approximately 5.8 million shares of our common stock in open-market transactions at a total cost of approximately $179 million, which resulted in an average cost of $31.16 per share. During 2003, we repurchased approximately 6.8 million shares in open-market transactions at a total cost of approximately $154 million, which resulted in an average cost of $22.56 per share.

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The following table provides information with respect to purchases made by or on behalf of us or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934) of shares of our common stock during the three months ended September 30, 2004:

Period	(a) Total Number of Shares Purchased	(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Appropriate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs1
July 1, 2004 through July 31, 2004	104,250	$	32.92	104,250	$	206.6 million
August 1, 2004 through August 31, 2004	510,000	$	33.94	510,000	$	189.3 million
September 1, 2004 through September 30, 2004	685,000	$	36.10	685,000	$	164.5 million
Total	1,299,250	$	35.00	1,299,250	$	164.5 million

¹ On December 13, 2001, the Company announced a $200 million share repurchase program that had been approved by our Board of Directors. From time to time thereafter, our Board of Directors has authorized the periodic repurchase of additional shares of our common stock under the program. On June 30, 2004 our Board approved an additional $200 million of repurchases. These authorizations have no stated expiration dates.

Item 6. Selected Financial Data.

See the information in the table captioned Selected Financial Data in the 2004 Annual Report.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

See the discussion and analysis under the caption Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2004 Annual Report.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

See the discussion and analysis under the caption Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2004 Annual Report.

Item 8. Financial Statements and Supplementary Data.

See Report of Independent Registered Public Accounting Firm, Consolidated Statement of Financial Position, Consolidated Statement of Operations, Consolidated Statement of Cash Flows, Consolidated Statement of Shareowners’ Equity and Comprehensive Income (Loss), and Notes to Consolidated Financial Statements in the 2004 Annual Report.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

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Item 9A. Controls and Procedures.

As required by Rule 13a-15 under the Securities Exchange Act of 1934, we carried out an evaluation of the effectiveness, as of September 30, 2004, of the design and operation of our disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are adequate and effective as of September 30, 2004 to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. There were no significant changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information.

In September 2004 our Compensation Committee, in consultation with our Board of Directors, established company performance goals for fiscal year 2005 annual incentives for most of our employees, including our executive officers, under our existing annual cash incentive plans. These incentive plans are an integral part of the company’s total compensation program. The plans are designed to align employees’ interests with those of our shareowners and to closely tie pay with performance. The performance goals for the 2005 annual incentives are sales, earnings per share and working capital as a percentage of sales. Bonus payout levels are designed to be reduced if company performance is below target performance goals and increased if company performance is above those goals and, as a result, bonus payouts generally range from 0% to 200% of target. Adjustments for reporting unit performance and individual performance may be made to the bonus payouts for management personnel pursuant to the terms of our incentive plans. Bonus payments under our shareowner approved Annual Incentive Compensation Plan for Senior Executive Officers (applicable to our Chief Executive Officer and our other four “named executive officers”) may not exceed a pre-established percentage of our net earnings.

PART III

Item 10. Directors and Executive Officers of the Company.

See the information under the captions Election of Directors and Information as to Nominees for Directors and Continuing Directors in the 2005 Proxy Statement. See also the information with respect to executive officers of the Company under Item 4A of Part I.

No nominee for director was selected pursuant to any arrangement or understanding between the nominee and any person other than us pursuant to which such person is or was to be selected as a director or nominee.

The members of the Audit Committee of our board of directors are: Joseph F. Toot, Jr., Anthony J. Carbone and Richard J. Ferris. The board of directors has determined that Messrs. Toot, Carbone and Ferris are “audit committee financial experts” and “independent” as defined under applicable SEC and New York Stock Exchange rules. The Board’s affirmative determination with respect to Messrs. Toot and Ferris was based upon their extensive experience as chief executive officers of public companies in actively supervising chief financial officers and their extensive audit committee experience. The Board’s affirmative determination with respect to Mr. Carbone was based upon his twenty-four years in various executive positions at the Dow Chemical Company, including four years as an Executive Vice President in which he actively supervised business unit controllers and actively reviewed business unit financial statements, his eight years serving on Dow’s Finance Committee where Dow’s financial statements were reviewed and analyzed on a quarterly basis, and the more than three years he has served on our Audit Committee during which he reviewed and analyzed our financial statements.

We have adopted a handbook entitled “Ethics is Good Business and Integrity is the Bottom Line” and the Rockwell Collins Standards of Business Conduct Policy (collectively, the “code of ethics”), a code of ethics that applies to our Chief Executive Officer, Chief Financial Officer, Vice President, Finance and Controller (who serves as our principal accounting officer), as well as to all of our other employees and to the members of our Board of Directors.

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The code of ethics is publicly available on our website at www.rockwellcollins.com. If we make any amendments to the code of ethics or grant any waiver, including any implicit waiver, from a provision of the code applicable to our Chief Executive Officer, Chief Financial Officer or principal accounting officer requiring disclosure under applicable SEC rules, we intend to disclose the nature of such amendment or waiver on our website.

Item 11. Executive Compensation.

See the information under the caption Compensation of Directors in the 2005 Proxy Statement and under the captions Executive Compensation, Option Grants, Long-Term Incentive Plans – Awards in Last Fiscal Year, Aggregated Option Exercises and Fiscal Year-End Values, Retirement Benefits, Compensation Committee Report on Executive Compensation and Shareowner Return Performance Presentation in the 2005 Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

See the information under the captions Voting Securities and Equity Ownership of Certain Beneficial Owners and Management in the 2005 Proxy Statement.

The following table gives information about our Common Stock that may be issued upon the exercise of options, warrants and rights under all of our existing equity compensation plans as of September 30, 2004, including our 2001 Stock Option Plan, 2001 Long-Term Incentives Plan and Directors Stock Plan:

Equity Compensation Plan Information ⁽¹⁾

Plan Category	(a) Number of securities to be issued upon exercise of outstanding options, warrants and rights	(b) Weighted-average exercise price of outstanding options, warrants and rights		(c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders(2)	13,311,541	$	24.37	13,402,450
Equity compensation plans not approved by security holders	None		None	None
Total	13,311,541	$	24.37	13,402,450

(1) Columns (a) and (b) and a portion of column (c) relate to our 2001 Long-Term Incentives Plan, 2001 Stock Option Plan and Directors Stock Plan. Column (c) also includes shares available under our Employee Stock Purchase Plan, which allows all of our domestic employees to have withheld up to 15 percent of their base compensation toward the purchase of our Common Stock. Under this plan, shares may be purchased at six-month intervals at 85 percent of the lower of the fair market value on the first or the last day of the six month offering period. Under this plan, 6 million shares are available as of September 30, 2004 for future grant. This plan was approved by our sole shareowner at the time, Rockwell, prior to the Distribution.

(2) Our 2001 Stock Option Plan was approved by our sole shareowner at the time, Rockwell, prior to the Distribution. Options to purchase 12.9 million shares of our Common Stock were issued under this plan in connection with the conversion of Rockwell options in the Distribution. No further stock options may be granted under this plan.

Item 13. Certain Relationships and Related Transactions.

See the information under the caption Corporate Governance; Board of Directors and Committees and Certain Transactions and Other Relationships in the 2005 Proxy Statement.

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Item 14. Principal Accountant Fees and Services.

See the information under the caption Proposal to Approve the Selection of Auditors in the 2005 Proxy Statement.

PART IV

Item 15. Exhibits and Financial Statement Schedules.

(a) Financial Statements, Financial Statement Schedules and Exhibits.

(1) Financial Statements (all financial statements listed below are those of the Company and its consolidated subsidiaries and are incorporated by reference in Item 8 of this Form 10-K from the 2004 Annual Report).

Consolidated Statement of Financial Position, as of September 30, 2004 and 2003.

Consolidated Statement of Operations, years ended September 30, 2004, 2003 and 2002.

Consolidated Statement of Cash Flows, years ended September 30, 2004, 2003 and 2002.

Consolidated Statement of Shareowners’ Equity and Comprehensive Income (Loss), years ended September 30, 2004, 2003 and 2002.

Notes to Consolidated Financial Statements.

Report of Independent Registered Public Accounting Firm.

(2) Financial Statement Schedule for the years ended September 30, 2004, 2003 and 2002.

	Page
Report of Independent Registered Public Accounting Firm	S-1
Schedule II — Valuation and Qualifying Accounts	S-2

Schedules not filed herewith are omitted because of the absence of conditions under which they are required or because the information called for is shown in the financial statements or notes thereto.

(3) Exhibits

3-a-1	Restated Certificate of Incorporation of the Company, as amended, filed as Exhibit 3-a-1 to the Company’s Form 10-K for year ended September 30, 2001, is incorporated herein by reference.
3-a-2	Certificate of Merger effecting name change of the Company from “New Rockwell Collins, Inc.” to “Rockwell Collins, Inc.”, filed as Exhibit 3-a-2 to the Company’s Form 10-K for year ended September 30, 2001, is incorporated herein by reference.
3-b-1	Amended By-Laws of the Company filed as Exhibit 3-b-1 to the Company’s Form 10-Q for quarter ended June 30, 2004, is incorporated herein by reference.
4-a-1	Rights Agreement dated as of June 28, 2001 by and between the Company and Mellon Investor Services LLC, as Rights Agent, filed as Exhibit 4.1 to the Company’s current report on Form 8-K dated July 11, 2001, is incorporated herein by reference.
4-a-2	Indenture dated as of November 1, 2001 between the Company and Citibank, N.A., as Trustee, filed as Exhibit 4.b to the Company’s Registration Statement on Form S-3 (No. 333-72914), is incorporated herein by reference.

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4-a-3	Form of certificate for the Company’s 4 ¾% Notes due 2013, filed as Exhibit 4-a to the Company’s current report on Form 8-K dated November 21, 2003, is incorporated herein by reference.
*10-a-1	The Company’s 2001 Long-Term Incentives Plan, adopted by the Company’s Board of Directors on June 1, 2001 and approved by the Company’s shareowners at the 2002 Annual Meeting of Shareowners, filed as Exhibit 4.5 to the Company’s Registration Statement on Form S-8 (No. 333-63120), is incorporated herein by reference.
*10-a-2	Forms of Stock Option Agreements under the Company’s 2001 Long-Term Incentives Plan, filed as Exhibit 10-a-2 to the Company’s Form 10-K for year ended September 30, 2001, are incorporated herein by reference.
*10-a-3	Form of Stock Option Agreement under the Company’s 2001 Long-Term Incentives Plan for stock option grants to the non-executive Chairman of the Board of Directors, filed as Exhibit 10-a-3 to the Company’s Form 10-K for year ended September 30, 2001, is incorporated herein by reference.
*10-a-4	Form of Restricted Stock Agreement under the Company’s 2001 Long-Term Incentives Plan for restricted stock grants to the non-executive Chairman of the Board of Directors, filed as Exhibit 10-a-4 to the Company’s Form 10-K for year ended September 30, 2001, is incorporated herein by reference.
*10-b-1	The Company’s Directors Stock Plan, adopted by the Company’s Board of Directors on June 1, 2001 and approved by the Company’s shareowners at the 2002 Annual Meeting of Shareowners, filed as Exhibit 10.2 to the Company’s Registration Statement on Form 10 (File No. 001-16445) (the “Form 10”), is incorporated herein by reference.
*10-b-2	Form of Stock Option Agreement under the Company’s Directors Stock Plan, filed as Exhibit 10-b-2 to the Company’s Form 10-K for year ended September 30, 2001, is incorporated herein by reference.
*10-b-3	Form of Restricted Stock Agreement under the Company’s Directors Stock Plan, filed as Exhibit 10-b-3 to the Company’s Form 10-K for year ended September 30, 2001, is incorporated herein by reference.
*10-c-1	The Company’s Annual Incentive Compensation Plan for Senior Executive Officers, adopted by the Company’s Board of Directors on June 1, 2001 and approved by the Company’s shareowners at the 2002 Annual Meeting of Shareowners, filed as Exhibit 10.4 to the Form 10, is incorporated herein by reference.
*10-d-1	The Company’s Incentive Compensation Plan, adopted by the Company’s Board of Directors on June 11, 2003, filed as Exhibit 10-d-1 to the Company’s Form 10-Q for quarter ended June 30, 2003, is incorporated herein by reference.
*10-e-1	The Company’s 2001 Stock Option Plan, adopted by the Company’s Board of Directors on June 1, 2001, filed as Exhibit 10.3 to the Form 10, is incorporated herein by reference.
*10-f-1	The Company’s Deferred Compensation Plan, adopted by the Company’s Board of Directors on June 13, 2001, filed as Exhibit 10-f-1 to the Company’s Form 10-K for year ended September 30, 2001, is incorporated herein by reference.
*10-g-1	The Company’s Non-Qualified Savings Plan, adopted by the Company’s Board of Directors on June 13, 2001, filed as Exhibit 10-g-1 to the Company’s Form 10-K for year ended September 30, 2001, is incorporated herein by reference.
*10-h-1	The Company’s Non-Qualified Pension Plan, adopted by the Company’s Board of Directors on June 13, 2001, filed as Exhibit 10-h-1 to the Company’s Form 10-K for year ended September 30, 2001, is incorporated herein by reference.
*10-h-2	The Company’s Memorandum of Proposed Amendments to the Non-Qualified Pension Plan, adopted by the Company’s Board of Directors on November 6, 2003, filed as Exhibit 10-h-2 to the Company’s Form 10-Q for quarter ended December 31, 2003, is incorporated herein by reference.

23

*10-i-1	The Company’s Master Trust — Deferred Compensation and Non-Qualified Savings and Non-Qualified Pension Plans, adopted by the Company’s Board of Directors on June 13, 2001, filed as Exhibit 10-i-1 to the Company’s Form 10-K for year ended September 30, 2001, is incorporated herein by reference.
10-j-1	Five-Year Credit Agreement dated as of May 30, 2001 among the Company, the Banks listed therein and The Chase Manhattan Bank, as Agent, filed as Exhibit 10.9.2 to the Form 10, is incorporated herein by reference.
10-k-1	Distribution Agreement dated as of June 29, 2001 by and among Rockwell International Corporation, the Company and Rockwell Scientific Company LLC, filed as Exhibit 2.1 to the Company’s current report on Form 8-K dated July 11, 2001, is incorporated herein by reference.
10-l-1	Employee Matters Agreement dated as of June 29, 2001 by and among Rockwell International Corporation, the Company and Rockwell Scientific Company LLC, filed as Exhibit 2.2 to the Company’s current report on Form 8-K dated July 11, 2001, is incorporated herein by reference.
10-m-1	Tax Allocation Agreement dated as of June 29, 2001 by and between Rockwell International Corporation and the Company, filed as Exhibit 2.3 to the Company’s current report on Form 8-K dated July 11, 2001, is incorporated herein by reference.
*10-n-1	Form of Change of Control Agreement between the Company and certain executives of the Company, filed as Exhibit 10.7.1 to the Form 10, is incorporated herein by reference.
*10-n-2	Amended Schedule identifying executives of the Company who are party to a Change of Control Agreement in the form filed as Exhibit 10.7.1 to the Form 10.
*10-n-3	Form of Change of Control Agreement between the Company and certain executives of the Company, filed as Exhibit 10.8.1 to the Form 10, is incorporated herein by reference.
*10-n-4	Amended Schedule identifying executives of the Company who are party to a Change of Control Agreement in the form filed as Exhibit 10.8.1 to the Form 10, filed as Exhibit 10.n.4 to the Company’s Form 10-Q for quarter ended March 31, 2004, is incorporated herein by reference.
10-o-1	364-day Credit Agreement dated as of May 29, 2002 among the Company, the Banks listed therein and JPMorgan Chase Bank, as Agent, filed as Exhibit 10-p-1 to the Company’s Form 10-Q for quarter ended June 30, 2002, is incorporated herein by reference.
10-o-2	Amendment No. 1 to 364-day Credit Agreement dated as of May 28, 2003 among the Company, the Banks listed therein and JP Morgan Chase Bank, as Agent, filed as Exhibit 10-o-2 to the Company’s Form 10-Q for quarter ended June 30, 2003, is incorporated herein by reference.
10-o-3	Amendment No. 2 to the 364-day Credit Agreement dated as of May 26, 2004 among the Company, the Banks listed therein and JP Morgan Chase Bank, as Agent, filed as Exhibit 10-o-3 to the Company’s Form 10-Q for quarter ended June 30, 2004, is incorporated herein by reference.
*10-p-1	Form of Three-Year Performance Unit Agreement for Persons With a Change of Control Agreement.
*10-p-2	Form of Three-Year Performance Unit Agreement for Persons Not With a Change of Control Agreement.
*10-p-3	Form of Performance Unit Agreement for FY03-05 for Persons With a Change of Control Agreement, filed as Exhibit 10-p-3 to the Company’s Form 10-K for year ended September 30, 2002, is incorporated herein by reference.
*10-p-4	Form of Performance Unit Agreement for FY03-05 for Persons Not With a Change of Control Agreement, filed as Exhibit 10-p-4 to the Company’s Form 10-K for year ended September 30, 2002, is incorporated herein by reference.
*10-p-5	Form of Performance Unit Agreement for FY04-06 for Persons With a Change of Control Agreement, filed as Exhibit 10-p-5 to the Company’s Form 10-Q for quarter ended December 31, 2003, is incorporated herein by reference.

24

*10-p-6	Form of Performance Unit Agreement for FY04-06 for Persons Not With a Change of Control Agreement, filed as Exhibit 10-p-6 to the Company’s Form 10-Q for quarter ended December 31, 2003, is incorporated herein by reference.
10-r-1	Transition Agreement between the Company and Donald R. Beall dated July 9, 2002, filed as Exhibit 10-s-1 to the Company’s Form 10-Q for quarter ended June 30, 2002, is incorporated herein by reference.
*10-s-1	Directors’ Compensation Summary.
12	Statement re: Computation of Ratio of Earnings to Fixed Charges.
13	Portions of the 2004 Annual Report to Shareowners of the Company incorporated herein by reference.
21	List of subsidiaries of the Company.
23	Consent of Independent Registered Public Accounting Firm.
24	Powers of Attorney authorizing certain persons to sign this Annual Report on Form 10-K on behalf of certain directors and officers of the Company.
31.1	Section 302 Certification of Chief Executive Officer.
31.2	Section 302 Certification of Chief Financial Officer.
32.1	Section 906 Certification of Chief Executive Officer.
32.2	Section 906 Certification of Chief Financial Officer.

* Management contract or compensatory plan or arrangement.

25

SIGNATURES

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

ROCKWELL COLLINS, INC.
By	/s/ Gary R. Chadick
	Gary R. Chadick
	Senior Vice President, General Counsel and Secretary

Dated: December 8, 2004

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on the 8^th day of December, 2004 by the following persons on behalf of the registrant and in the capacities indicated.

/s/ Clayton M. Jones Clayton M. Jones	Chairman of the Board, President and Chief Executive Officer (principal executive officer)
DONALD R. BEALL*	Director
ANTHONY J. CARBONE*	Director
MICHAEL P.C. CARNS*	Director
CHRIS A. DAVIS*	Director
RICHARD J. FERRIS*	Director
CHERYL L. SHAVERS*	Director
JOSEPH F. TOOT, JR.*	Director
/s/ Lawrence A. Erickson Lawrence A. Erickson	Senior Vice President and Chief Financial Officer (principal financial officer)
/s/ David H. Brehm David H. Brehm	Vice President, Finance and Controller (principal accounting officer)

*By	/s/ Gary R. Chadick
	Gary R. Chadick, Attorney-in-fact**

** By authority of the powers of attorney filed herewith.

26

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareowners of Rockwell Collins, Inc.

We have audited the consolidated financial statements of Rockwell Collins, Inc. and subsidiaries (the “Company”) as of October 1, 2004 and September 30, 2003, and for each of the three years in the period ended October 1, 2004, and have issued our report thereon dated November 2, 2004; such financial statements and report are included in your 2004 Annual Report to Shareowners and are incorporated herein by reference. Our audits also included the consolidated financial statement schedule of the Company, listed in Item 15(a)(2). This financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ DELOITTE & TOUCHE LLP

Chicago, Illinois

November 2, 2004

S-1

SCHEDULE II

ROCKWELL COLLINS, INC.

VALUATION AND QUALIFYING ACCOUNTS

For the Years Ended September 30, 2004, 2003 and 2002

(in millions)

Description	Balance at Beginning of Year (a)		Charged to Costs and Expenses			Other (b)		Deductions (c)			Balance at End of Year (a)
Year ended September 30, 2004:
Allowance for doubtful accounts	$	17	$	3		$	—	$	(4	)	$	16
Allowance for excess and obsolete inventories		98		32			—		(28	)		102
Year ended September 30, 2003:
Allowance for doubtful accounts		16		4			—		(3	)		17
Allowance for excess and obsolete inventories		102		18			—		(22	)		98
Year ended September 30, 2002:
Allowance for doubtful accounts		20		(3	)		—		(1	)		16
Allowance for excess and obsolete inventories		113		33			3		(47	)		102

(a) Includes allowances for trade and other long-term receivables.

(b) Consists principally of amounts relating to businesses acquired and businesses disposed of.

(c) Amounts written off.

S-2

EXHIBIT INDEX

Exhibit Number	Description
*10-n-2	Amended Schedule identifying executives of the Company who are party to a Change of Control Agreement.
*10-p-1	Form of Three-Year Performance Unit Agreement for Persons With a Change of Control Agreement.
*10-p-2	Form of Three-Year Performance Unit Agreement for Persons Not With a Change of Control Agreement.
*10-s-1	Directors’ Compensation Summary.
12	Statement re: Computation of Ratio of Earnings to Fixed Charges.
13	Portions of the 2004 Annual Report to Shareowners of the Company incorporated herein by reference.
21	List of subsidiaries of the Company.
23	Consent of Independent Registered Public Accounting Firm.
24	Powers of Attorney authorizing certain persons to sign this Annual Report on Form 10-K on behalf of certain directors and officers of the Company.
31.1	Section 302 Certification of Chief Executive Officer.
31.2	Section 302 Certification of Chief Financial Officer.
32.1	Section 906 Certification of Chief Executive Officer.
32.2	Section 906 Certification of Chief Financial Officer.

* Management contract or compensatory plan or arrangement.

E-1

EX-10.N.2

Exhibit 10-n-2

Amended schedule of Executives of the Company who are a party to a Change of Control Agreement:

1.   C. M. Jones

2.   B. M. Abzug

3.   P. E. Allen

4.   J. E. Besong

5.   D. H. Brehm

6.   G. R. Chadick

7.   R. M. Chiusano

8.   G. S. Churchill

9.   L. A. Erickson

10. H. L. Gregory

11. R. W. Kirchenbauer

12. N. Mattai

13. K. L. Statler

EX-10.P.1

Exhibit 10-p-1

For Persons With a Change of Control Agreement

ROCKWELL COLLINS, INC.

PERFORMANCE UNIT AGREEMENT

[Date]

Target Payment:

PERSONAL AND CONFIDENTIAL

[Name]

Identification # (SSN or Employee #)

Dear [Nickname]:

We are pleased to confirm that, as a key employee of Rockwell Collins, Inc. and its subsidiaries (“Rockwell Collins” or the “Company”), you have been granted a performance unit award payable in a lump sum amount in cash and/or in stock (as defined in paragraph 4) under the Rockwell Collins 2001 Long-Term Incentives Plan (the “Plan”). Any payout of your performance unit is based on the achievement by Rockwell Collins of the goals for Cumulative Sales and Return on Sales for its fiscal years of              through              [covering three fiscal years] (the “Performance Period”) as set forth in the matrix attached as Exhibit A (the “Matrix”). Any payout based on performance pursuant to the Matrix is to be further adjusted based on Shareowners Return as specified below. The terms and conditions of your award are as set forth in more detail below.

1. Confirmation of Award. Together with any letter transmitting this document to you, this performance unit agreement (this “Agreement”) confirms your award in accordance with the terms as set forth herein.

2. Amount Payable Pursuant to Award. Subject to the provisions of paragraphs 5 through 12, the amount payable to you pursuant to your award shall be determined as follows:

(a) The percentage of target award earned will be the percentage found at the intersection in the Matrix of the final results achieved for Cumulative Sales and for Return on Sales for the Performance Period (as determined pursuant to paragraph 3).

(b) If the final results achieved for the Performance Period fall between the levels of performance specified in the Matrix, the percentage of target award payable will be interpolated consistent with the range in which the Cumulative Sales and Return on Sales falls as conclusively determined by the Committee (as defined below).

(c) No amount shall be payable for the Performance Period if the Cumulative Sales or Return on Sales (as determined pursuant to paragraph 3) for the Performance Period is less than the minimum level for the Performance Period as indicated in the Matrix.

(d) The payment as determined for achievement against goals for Cumulative Sales and for Return on Sales for the Performance Period will be further adjusted for the Company’s Total Shareowners Return performance (as determined pursuant to paragraph 3) relative to the 10 peer companies listed on Exhibit B. If relative performance is among the top 3 of the peer companies, the payment will be adjusted upward by 20%. If relative performance is among the middle 4 of the peer companies, there will be no adjustment to the payment. If relative performance is among the lowest 3 of the peer companies, the payment will be reduced by 20%. If the relative performance is not one of the top 3 companies or one of the lowest 3 companies, it will be deemed to be in the middle group of companies.

Subject to the provisions of paragraphs 5 through 12, the amount payable to you pursuant to this performance award with respect to the Performance Period shall be paid in a lump sum, less applicable taxes, by Rockwell Collins as soon as practicable after the end of the Performance Period and after receipt of the accountants’ letter for the Performance Period pursuant to paragraph 13.

3. Definitions and Determination of Financial Performance. “Cumulative Sales” means, for the Performance Period, the total Sales as reported by the Company in its audited financial statements. “Return on Sales” means, for the Performance Period, the rate determined by dividing Net Income by Sales. Both Net Income and Sales will be the three year cumulative values as reported in the Company’s audited financial statements after adjusting for extraordinary income and expense items. The foregoing definitions and measures will exclude major acquisitions and divestitures, however, they will include post-acquisition growth.

“Shareowners Return” is measured by adding (i) the total stock price growth for the Performance Period, measured by comparing the average stock price during October 20     to the average stock price during September 20    , and (ii) dividends paid, measured as if reinvested in stock at the payment date. In the event of substantial changes causing an inability to calculate Shareowners Return for one or more of the peer companies listed on Exhibit B (or in the event of spinoffs or similar transactions causing a peer company to split into two or more peer companies), the list of peer companies shall be adjusted accordingly to take such events into account and the new group of peer companies shall for purposes of paragraph 2(d) be divided into a top, middle and lowest third; provided, however, that if such new group of peer companies is not equally divisible into three parts, then the excess number of peer companies shall be assigned to the middle third.

In connection with the receipt of the accountants’ letter for the Performance Period pursuant to paragraph 13, the committee of the Board of Directors of Rockwell Collins administering the Plan (which committee is herein called the “Committee” and which, on the date hereof, is the Compensation Committee) shall determine the Cumulative Sales, Return on Sales and the Shareowners Return results and ranking for the Performance Period after taking into account any adjustment as contemplated in paragraph 10.

4. Payment of Award. The award is payable in cash and/or in Common Stock of the Company. The Committee will determine whether payment will be made in stock and whether such payment in Common Stock will be automatic or elected at the discretion of each recipient. The number of shares of Common Stock of the Company to be issued pursuant to the payment made in the form of Common Stock is to be determined by dividing (1) the payment amount, net of income tax withholdings (which are to be paid in cash), to be paid in the form of Common Stock of the Company by (2) the Fair Market Value (as defined in the Plan) of the Common Stock of the Company on the day immediately preceding the payout date for the Performance Unit.

5. Transferability of Award. This performance award shall not be transferable by you except by will or by the laws of descent and distribution.

6. Termination of Employment for Death, Disability, Retirement or Elimination of Position. If your employment by the Company terminates during the Performance Period by reason of your death, disability, retirement under a retirement plan of the Company or the elimination of your position, you will be entitled to receive as soon as practicable after the end of the Performance Period and after receipt of the accountants’ letter for the Performance Period pursuant to paragraph 13 a payment, if any, that would otherwise be payable pursuant to paragraph 2, but such amount shall be pro rated for the portion of the Performance Period that elapsed prior to this termination of employment.

7. Termination of Employment for Other Reasons. Except as otherwise provided in paragraphs 9 through 12, if your employment by the Company terminates during the Performance Period other than by reason of your death, disability, retirement under a retirement plan of the Company or the elimination of your position, you will not be entitled to any payment pursuant to paragraph 2 with respect to the Performance Period.

8. Forfeiture of Award for Detrimental Activity. If you engage in detrimental activity (as defined in this paragraph 8) at any time (whether before or after termination of your employment), you will not be entitled to any payment hereunder and you will forfeit all rights with respect to the performance award under this Agreement. For purposes of this paragraph 8, “detrimental activity” shall mean willful, reckless or grossly negligent activity that is determined by the Committee to be detrimental to or destructive of the business or property of the Company. Any such determination of the Committee shall be final and binding for all purposes. Notwithstanding the foregoing, no payment hereunder shall be forfeited or become not payable by virtue of this paragraph 8 on or after the date of a Change of Control (as defined in the Plan) unless the “Cause” standard set forth in paragraph 11(b) is satisfied.

9. Transfer of Employment; Leave of Absence. For the purposes of this Agreement, (a) a transfer of your employment from Rockwell Collins to a subsidiary or vice versa, or from one subsidiary of Rockwell Collins to another, without an intervening period, shall not be deemed a termination of employment, and (b) if you are granted in writing a leave of absence, you shall be deemed to have remained in the employ of Rockwell Collins or a subsidiary of Rockwell Collins during such leave of absence. If your level of employment changes, the Company may adjust your target payment hereunder to pro rate the portion of the Performance Period that elapses (i) prior to the change in employment status at the old target payment level and (ii) after the change at the new target payment level, if any. Any promotion to the ranks of “Designated Senior Executive” requires committee action to adjust the target payment hereunder.

10. Adjustments. (a) Adjustments (which may be increases or decreases) may be made by the Committee in the Cumulative Sales and Return on Sales as well as in the Shareowners Return and list of peer companies, to take into account changes in law and accounting and tax rules and to make such adjustments as the Committee deems necessary or appropriate to reflect the inclusion or exclusion of the impact of extraordinary or unusual items, events or circumstances, including, without limitation, acquisitions or divestitures by or other material changes in the Company or peer companies, provided that no adjustment shall be made which would result in an increase in your compensation if your compensation is subject to the limitation on deductibility under Section 162(m) of the Internal Revenue Code, as amended, or any successor provision, for the year with respect to which the adjustment occurs.

(b) Subject to the provisions of paragraph 11, the determination of the Committee as to the terms of any adjustment made pursuant to this paragraph 10 shall be binding and conclusive upon you and any other person or persons who are at any time entitled to receipt of any payment pursuant to the award.

11. Change of Control. (a) Notwithstanding any other provision, in the event that during the Performance Period your employment is terminated on or after a Change of Control (as defined in the Plan) (i) by the Company other than for Cause (as defined in paragraph 11(b)) or (ii) by you for Good Reason (as defined in paragraph 11(c)), your award shall become nonforfeitable and shall be paid out on the date your employment is so terminated as if the Performance Period hereunder had been completed or satisfied and as if the Cumulative Sales and Return on Sales as well as Shareowners Return for the Company for the Performance Period were sufficient to enable a payment to you pursuant to paragraph 2 of the amount that is equal to your 360% of your “Target Payment” set forth on the first page of this letter.

(b) For purposes of paragraphs 8 and 11(a), termination for “Cause” shall mean:

(i) your willful and continued failure to perform substantially your duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to you by the Board or the Chief Executive Officer of the Company which specifically identifies the manner in which the Board or the Chief Executive Officer of the Company believes that you have not substantially performed your duties, or

(ii) your willful engaging in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company.

For purposes of this provision, no act or failure to act, on the part of you, shall be considered “willful” unless it is done, or omitted to be done, by you in bad faith or without reasonable belief that your action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by you in good

faith and in the best interests of the Company. The cessation of employment of you shall not be deemed to be for Cause unless and until there shall have been delivered to you a copy of the resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at the meeting of the Board called and held for such purpose (after reasonable notice is provided to you and you are given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, you are guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail.

(c) For purposes of this Agreement, “Good Reason” shall mean:

(i) the assignment to you of any duties inconsistent in any respect with your position (including status, offices, titles and reporting requirements), authority, duties or responsibilities generally in effect prior to any Change of Control, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by you;

(ii) any failure by the Company to maintain your compensation at a level consistent with that generally in effect prior to any Change of Control, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by you;

(iii) the Company’s requiring you to be based at any office or location other than as provided on the day preceding the Change of Control hereof or the Company’s requiring you to travel on Company business to a substantially greater extent than required immediately prior to the Change of Control;

(iv) any purported termination by the Company of your employment otherwise than for Cause; or

(v) any failure by the Company to comply with and satisfy Section 17(b) of this Agreement.

For purposes of this paragraph 11(c), any good faith determination of “Good Reason” made by you shall be conclusive. Anything in this Agreement to the contrary notwithstanding, a termination by you for any reason during the 30-day period immediately following the first anniversary of the Change of Control shall be deemed to be a termination for Good Reason for all purposes of this Agreement.

(d) Notwithstanding any other provision, if a Change of Control (as defined in the Plan) occurs during the Performance Period the Cumulative Sales and Return on Sales for the Company for the Performance Period shall be deemed to be not less than the 100% level set forth in the attached Matrix and the Company’s Shareowners Return shall be deemed to rank among the top 3 of the peer companies.

12. Divestiture. In the event that your principal employer is a subsidiary of Rockwell Collins that ceases to be such, then your employment shall be deemed to be terminated for all purposes as of the date on which your principal employer ceases to be a subsidiary of

Rockwell Collins (herein called the Divestiture Date) and your award shall become nonforfeitable and shall be paid out on the Divestiture Date (x) as if the Performance Period hereunder had been completed or satisfied and as if the Cumulative Sales and Return on Sales as well as Shareowners Return for the Company for the Performance Period were sufficient to enable a payment to you pursuant to paragraph 2 of the amount that is equal to 100% of your “Target Payment” set forth on the first page of this letter, but (y) pro rated for the portion of the Performance Period that elapsed prior to the Divestiture Date, all as conclusively determined by the Committee.

13. Accountants’ Letter. As soon as practicable after the end of the Performance Period, the Committee shall obtain a letter or other communication from the Company’s Senior Vice President and Chief Financial Officer or the Vice President, Finance and Controller, or one of their successors or designees, to the effect that such person has reviewed the determination for the Performance Period of the Cumulative Sales and Return on Sales as well as Shareowners Return results and ranking of the Company and that in such person’s opinion such determinations have been made in accordance with paragraph 3.

13. Employment Rights. You shall not have any rights of continued employment with the Company as a result of this award, other than the payment rights expressly contemplated herein.

14. Tax Withholding. Upon any payment to you of cash and/or Common Stock of the Corporation hereunder, Federal income and other tax withholding (and state and local income tax withholding, if applicable) may be required by the Company in respect of taxes on income realized by you. The Company may withhold such required amounts from your payments.

15. Governing Law. This Agreement and the award provided for hereunder shall be governed by and construed in accordance with the laws of the State of Iowa.

16. Successors.

(a) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns.

(b) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, “Company” shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise.

17. Entire Agreement. This Agreement and the other terms applicable to performance units granted under the Plan embody the entire agreement and understanding between Rockwell Collins and you with respect to the performance units, and there are no representations, promises, covenants, agreements or understandings with respect to the performance units other than those expressly set forth in this Agreement and the Plan.

Sincerely yours,

ROCKWELL COLLINS, INC.

Gary R. Chadick

Senior Vice President,

General Counsel and Secretary

Rockwell Collins, Inc.

400 Collins Road NE, M/S 124-323

Cedar Rapids, IA 52498-0001

EX-10.P.2

Exhibit 10-p-2

For Persons Not With a Change of Control Agreement

ROCKWELL COLLINS, INC.

PERFORMANCE UNIT AGREEMENT

[Date]

Target Payment:

PERSONAL AND CONFIDENTIAL

[Name]

Dear [Nickname]:

We are pleased to confirm that, as a key employee of Rockwell Collins, Inc. and its subsidiaries (“Rockwell Collins” or the “Company”), you have been granted a performance unit award payable in a lump sum amount in cash and/or in stock (as defined in paragraph 4) under the Rockwell Collins 2001 Long-Term Incentives Plan (the “Plan”). Any payout of your performance unit is based on the achievement by Rockwell Collins of the goals for Cumulative Sales and Return on Sales for its fiscal years of              through              [covering three fiscal years] (the “Performance Period”) as set forth in the matrix attached as Exhibit A (the “Matrix”). Any payout based on performance pursuant to the Matrix is to be further adjusted based on Shareowners Return as specified below. The terms and conditions of your award are as set forth in more detail below.

1. Confirmation of Award. Together with any letter transmitting this document to you, this performance unit agreement (this “Agreement”) confirms your award in accordance with the terms as set forth herein.

2. Amount Payable Pursuant to Award. Subject to the provisions of paragraphs 5 through 12, the amount payable to you pursuant to your award shall be determined as follows:

(a) The percentage of target award earned will be the percentage found at the intersection in the Matrix of the final results achieved for Cumulative Sales and for Return on Sales for the Performance Period (as determined pursuant to paragraph 3).

(b) If the final results achieved for the Performance Period fall between the levels of performance specified in the Matrix, the percentage of target award payable will be interpolated consistent with the range in which the Cumulative Sales and Return on Sales falls as conclusively determined by the Committee (as defined below).

(c) No amount shall be payable for the Performance Period if the Cumulative Sales or Return on Sales (as determined pursuant to paragraph 3) for the Performance Period is less than the minimum level for the Performance Period as indicated in the Matrix.

(d) The payment as determined for achievement against goals for Cumulative Sales and for Return on Sales for the Performance Period will be further adjusted for the Company’s Total Shareowners Return performance (as determined pursuant to paragraph 3) relative to the 10 peer companies listed on Exhibit B. If relative performance is among the top 3 of the peer companies, the payment will be adjusted upward by 20%. If relative performance is among the middle 4 of the peer companies, there will be no adjustment to the payment. If relative performance is among the lowest 3 of the peer companies, the payment will be reduced by 20%. If the relative performance is not one of the top 3 companies or one of the lowest 3 companies, it will be deemed to be in the middle group of companies.

Subject to the provisions of paragraphs 5 through 12, the amount payable to you pursuant to this performance award with respect to the Performance Period shall be paid in a lump sum, less applicable taxes, by Rockwell Collins as soon as practicable after the end of the Performance Period and after receipt of the accountants’ letter for the Performance Period pursuant to paragraph 13.

3. Definitions and Determination of Financial Performance. “Cumulative Sales” means, for the Performance Period, the total Sales as reported by the Company in its audited financial statements. “Return on Sales” means, for the Performance Period, the rate determined by dividing Net Income by Sales. Both Net Income and Sales will be the three year cumulative values as reported in the Company’s audited financial statements after adjusting for extraordinary income and expense items. The foregoing definitions and measures will exclude major acquisitions and divestitures, however, they will include post-acquisition growth.

“Shareowners Return” is measured by adding (i) the total stock price growth for the Performance Period, measured by comparing the average stock price during October 20     to the average stock price during September 20    , and (ii) dividends paid, measured as if reinvested in stock at the payment date. In the event of substantial changes causing an inability to calculate Shareowners Return for one or more of the peer companies listed on Exhibit B (or in the event of spinoffs or similar transactions causing a peer company to split into two or more peer companies), the list of peer companies shall be adjusted accordingly to take such events into account and the new group of peer companies shall for purposes of paragraph 2(d) be divided into a top, middle and lowest third; provided, however, that if such new group of peer companies is not equally divisible into three parts, then the excess number of peer companies shall be assigned to the middle third.

In connection with the receipt of the accountants’ letter for the Performance Period pursuant to paragraph 13, the committee of the Board of Directors of Rockwell Collins administering the Plan (which committee is herein called the “Committee” and which, on the date hereof, is the Compensation Committee) shall determine the Cumulative Sales, Return on Sales and the Shareowners Return results and ranking for the Performance Period after taking into account any adjustment as contemplated in paragraph 10.

4. Payment of Award. The award is payable in cash and/or in Common Stock of the Company. The Committee will determine whether payment will be made in stock and whether such payment in Common Stock will be automatic or elected at the discretion of each

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recipient. The number of shares of Common Stock of the Company to be issued pursuant to the payment made in the form of Common Stock is to be determined by dividing (1) the payment amount, net of income tax withholdings (which are to be paid in cash), to be paid in the form of Common Stock of the Company by (2) the Fair Market Value (as defined in the Plan) of the Common Stock of the Company on the day immediately preceding the payout date for the Performance Unit.

5. Transferability of Award. This performance award shall not be transferable by you except by will or by the laws of descent and distribution.

6. Termination of Employment for Death, Disability, Retirement or Elimination of Position. If your employment by the Company terminates during the Performance Period by reason of your death, disability, retirement under a retirement plan of the Company or the elimination of your position, you will be entitled to receive as soon as practicable after the end of the Performance Period and after receipt of the accountants’ letter for the Performance Period pursuant to paragraph 13 a payment, if any, that would otherwise be payable pursuant to paragraph 2, but such amount shall be pro rated for the portion of the Performance Period that elapsed prior to this termination of employment.

7. Termination of Employment for Other Reasons. Except as otherwise provided in paragraphs 9 through 12, if your employment by the Company terminates during the Performance Period other than by reason of your death, disability, retirement under a retirement plan of the Company or the elimination of your position, you will not be entitled to any payment pursuant to paragraph 2 with respect to the Performance Period.

8. Forfeiture of Award for Detrimental Activity. If you engage in detrimental activity (as defined in this paragraph 8) at any time (whether before or after termination of your employment), you will not be entitled to any payment hereunder and you will forfeit all rights with respect to the performance award under this Agreement. For purposes of this paragraph 8, “detrimental activity” shall mean willful, reckless or grossly negligent activity that is determined by the Committee to be detrimental to or destructive of the business or property of the Company. Any such determination of the Committee shall be final and binding for all purposes. Notwithstanding the foregoing, no payment hereunder shall be forfeited or become not payable by virtue of this paragraph 8 on or after the date of a Change of Control (as defined in the Plan) unless the “Cause” standard set forth in paragraph 11(b) is satisfied.

9. Transfer of Employment; Leave of Absence. For the purposes of this Agreement, (a) a transfer of your employment from Rockwell Collins to a subsidiary or vice versa, or from one subsidiary of Rockwell Collins to another, without an intervening period, shall not be deemed a termination of employment, and (b) if you are granted in writing a leave of absence, you shall be deemed to have remained in the employ of Rockwell Collins or a subsidiary of Rockwell Collins during such leave of absence. If your level of employment changes, the Company may adjust your target payment hereunder to pro rate the portion of the Performance Period that elapses (i) prior to the change in employment status at the old target payment level and (ii) after the change at the new target payment level, if any. Any promotion to the ranks of “Designated Senior Executive” requires committee action to adjust the target payment hereunder.

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10. Adjustments. (a) Adjustments (which may be increases or decreases) may be made by the Committee in the Cumulative Sales and Return on Sales as well as in the Shareowners Return and list of peer companies, to take into account changes in law and accounting and tax rules and to make such adjustments as the Committee deems necessary or appropriate to reflect the inclusion or exclusion of the impact of extraordinary or unusual items, events or circumstances, including, without limitation, acquisitions or divestitures by or other material changes in the Company or peer companies, provided that no adjustment shall be made which would result in an increase in your compensation if your compensation is subject to the limitation on deductibility under Section 162(m) of the Internal Revenue Code, as amended, or any successor provision, for the year with respect to which the adjustment occurs.

(b) Subject to the provisions of paragraph 11, the determination of the Committee as to the terms of any adjustment made pursuant to this paragraph 10 shall be binding and conclusive upon you and any other person or persons who are at any time entitled to receipt of any payment pursuant to the award.

11. Change of Control. (a) Notwithstanding any other provision, in the event that during the Performance Period your employment is terminated on or after a Change of Control (as defined in the Plan) (i) by the Company other than for Cause (as defined in paragraph 11(b)) or (ii) by you for Good Reason (as defined in paragraph 11(c)), your award shall become nonforfeitable and shall be paid out on the date your employment is so terminated as if the Performance Period hereunder had been completed or satisfied and as if the Cumulative Sales and Return on Sales as well as Shareowners Return for the Company for the Performance Period were sufficient to enable a payment to you pursuant to paragraph 2 of the amount that is equal to your 360% of your “Target Payment” set forth on the first page of this letter.

(b) For purposes of paragraphs 8 and 11(a), termination for “Cause” shall mean:

(i) your willful and continued failure to perform substantially your duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to you by the Company which specifically identifies the manner in which the Company believes that you have not substantially performed your duties, or

(ii) your willful engaging in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company.

For purposes of this provision, no act or failure to act, on the part of you, shall be considered “willful” unless it is done, or omitted to be done, by you in bad faith or without reasonable belief that your action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by you in good faith and in the best interests of the Company.

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(c) For purposes of this Agreement, “Good Reason” shall mean:

(i) the assignment to you of any duties inconsistent in any respect with your position (including status, offices, titles and reporting requirements), authority, duties or responsibilities generally in effect prior to any Change of Control, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by you;

(ii) any failure by the Company to maintain your compensation at a level consistent with that generally in effect prior to any Change of Control, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by you;

(iii) the Company’s requiring you to be based at any office or location other than as provided on the day preceding the Change of Control hereof or the Company’s requiring you to travel on Company business to a substantially greater extent than required immediately prior to the Change of Control;

(iv) any purported termination by the Company of your employment otherwise than for Cause; or

(v) any failure by the Company to comply with and satisfy Section 17(b) of this Agreement.

For purposes of this paragraph 11(c), any good faith determination of “Good Reason” made by you shall be conclusive.

(d) Notwithstanding any other provision, if a Change of Control (as defined in the Plan) occurs during the Performance Period the Cumulative Sales and Return on Sales for the Company for the Performance Period shall be deemed to be not less than the 100% level set forth in the attached Matrix and the Company’s Shareowners Return shall be deemed to rank among the top 3 of the peer companies.

12. Divestiture. In the event that your principal employer is a subsidiary of Rockwell Collins that ceases to be such, then your employment shall be deemed to be terminated for all purposes as of the date on which your principal employer ceases to be a subsidiary of Rockwell Collins (herein called the Divestiture Date) and your award shall become nonforfeitable and shall be paid out on the Divestiture Date (x) as if the Performance Period hereunder had been completed or satisfied and as if the Cumulative Sales and Return on Sales as well as Shareowners Return for the Company for the Performance Period were sufficient to enable a payment to you pursuant to paragraph 2 of the amount that is equal to 100% of your “Target Payment” set forth on the first page of this letter, but (y) pro rated for the portion of the Performance Period that elapsed prior to the Divestiture Date, all as conclusively determined by the Committee.

13. Accountants’ Letter. As soon as practicable after the end of the Performance Period, the Committee shall obtain a letter or other communication from the Company’s Senior Vice President and Chief Financial Officer or the Vice President, Finance and Controller, or one of their successors or designees, to the effect that such person has reviewed the determination for

5

the Performance Period of the Cumulative Sales and Return on Sales as well as Shareowners Return results and ranking of the Company and that in such person’s opinion such determinations have been made in accordance with paragraph 3.

13. Employment Rights. You shall not have any rights of continued employment with the Company as a result of this award, other than the payment rights expressly contemplated herein.

14. Tax Withholding. Upon any payment to you of cash and/or Common Stock of the Corporation hereunder, Federal income and other tax withholding (and state and local income tax withholding, if applicable) may be required by the Company in respect of taxes on income realized by you. The Company may withhold such required amounts from your payments.

15. Governing Law. This Agreement and the award provided for hereunder shall be governed by and construed in accordance with the laws of the State of Iowa.

16. Successors.

(a) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns.

(b) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, “Company” shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise.

17. Entire Agreement. This Agreement and the other terms applicable to performance units granted under the Plan embody the entire agreement and understanding between Rockwell Collins and you with respect to the performance units, and there are no representations, promises, covenants, agreements or understandings with respect to the performance units other than those expressly set forth in this Agreement and the Plan.

Sincerely yours,

ROCKWELL COLLINS, INC.

Gary R. Chadick

Senior Vice President,

General Counsel and Secretary

Rockwell Collins, Inc.

400 Collins Road NE, M/S 124-323

Cedar Rapids, IA 52498-0001

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EX-10.S.1

Exhibit 10-s-1

DIRECTORS’ COMPENSATION SUMMARY

Our non-employee directors receive a retainer at the rate of $74,000 per year for service on our board of directors, payable as follows: $37,000 of the retainer is paid in cash (in quarterly installments of $9,250 at the beginning of each quarter) and $37,000 of the retainer is paid as restricted shares of our common stock valued at the closing price of our common stock on the New York Stock Exchange Composite Transactions reporting system on the date this annual retainer payment is made (usually on October 1). Under the Directors Stock Plan, which has been approved by our shareowners, each non-employee director is granted an option to purchase 10,000 shares of our common stock effective upon election as a director. In addition, each non-employee director is granted an option to purchase 5,000 shares of our common stock on an annual basis immediately after each annual meeting of our shareowners beginning with the shareowners’ meeting following the first anniversary of Board service. Each director will have the option each year to determine whether to defer all or any part of the cash portion of his or her retainer by electing to receive additional restricted shares of our common stock valued at the closing price of our common stock on the New York Stock Exchange Composite Transactions reporting system on the date the cash portion of the retainer payment would otherwise be paid.

EX-12

Exhibit 12

ROCKWELL COLLINS, INC.

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

YEAR ENDED SEPTEMBER 30, 2004

(in millions, except ratio)

	2004			2003			2002			2001			2000
Earnings available for fixed charges:
Income before income taxes	$	430		$	368		$	341		$	224		$	399
Adjustments:
(Income) loss from equity affiliates		(8	)		(5	)		(4	)		(2	)		3
Equity affiliate distributions		5			1			—			4			—
		427			364			337			226			402
Add fixed charges included in earnings:
Interest expense		8			3			6			3			—
Interest element of rentals		9			8			8			7			6
Total earnings available for fixed charges	$	444		$	375		$	351		$	236		$	408
Fixed charges:
Fixed charges included in earnings	$	17		$	11		$	14		$	10		$	6
Capitalized Interest		—			—			—			—			—
Total fixed charges	$	17		$	11		$	14		$	10		$	6
Ratio of earnings to fixed charges (1)		26.1			34.1			25.1			23.6			68.0

(1) In computing the ratio of earnings to fixed charges, earnings are defined as income before income taxes, adjusted for income or loss attributable to minority interests in subsidiaries, undistributed earnings of less than majority owned subsidiaries, and fixed charges excluding capitalized interest. Fixed charges are defined as interest on borrowings (whether expensed or capitalized) and that portion of rental expense applicable to interest. Our ratio of earnings to combined fixed charges and preferred stock dividends for the period above are the same as our ratio of earnings to fixed charges because we had no shares of preferred stock outstanding for the period presented and currently have no shares of preferred stock outstanding.

EX-13

Exhibit 13

Portions of the Rockwell Collins, Inc. – 2004 Annual Report to Shareowners

Incorporated by reference in our Form 10-K

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our consolidated financial statements and notes thereto as well as our Annual Report on Form 10-K for the year ended September 30, 2004 filed with the Securities and Exchange Commission (SEC). The following discussion and analysis contains forward-looking statements and estimates that involve risks and uncertainties. Actual results could differ materially from these estimates. Factors that could cause or contribute to differences from estimates include those discussed under “Cautionary Statement” below and under “Certain Business Risks” in our Annual Report on Form 10-K for the year ended September 30, 2004.

Prior to 2004, we operated on a fiscal year basis with the fiscal year ending on September 30. Beginning with the 2004 fiscal year, we changed to a 52/53 week fiscal year ending on the Friday closest to September 30, which for 2004 was October 1. This change resulted in one additional day of operations reflected in our fiscal 2004 results. All date references contained herein relate to our fiscal year unless otherwise stated. For ease of presentation, September 30 is utilized consistently throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations.

OVERVIEW AND OUTLOOK

In the two years leading up to 2004, our balanced business model between our defense and commercial businesses produced stability in revenue streams while our aggressive cost containment initiatives produced moderate increases in profitability. We emerged from these challenging times as a leaner and stronger company ready to leverage growth in sales volumes into higher profitability. Sales growth did return in 2004 on increasing strength in our defense business and the initial stages of a recovery in our commercial market that was stronger than anticipated. More importantly, these volume increases translated into higher profitability with diluted earnings per share increasing at a faster rate than our sales growth. Financial highlights for 2004 are as follows:

• Sales increased 15 percent to $2.93 billion. Excluding our acquisition of NLX, organic sales growth was 11 percent. Our Government Systems business grew 21 percent, or 13 percent organically, and our Commercial Systems business grew 10 percent.

• Earnings per share increased 17 percent to $1.67. The growth in profitability was even higher at 21 percent when we exclude the items affecting comparability of our financial results, discussed herein.

• Operating cash flow increased to $401 million. Strong cash flow and a solid balance sheet provided us with the resources to make strategic investments, and to return value to our shareowners through dividends and share repurchases:

• We acquired NLX, a provider of integrated training and simulation systems, for $126 million.

• We increased our quarterly dividend rate by 33 percent to 12 cents per share.

• We repurchased 5.8 million shares for $179 million

Looking forward, we believe our company is poised for additional growth as our defense business will benefit from the U.S. government’s continued effort to transform the armed services and our expectation is that our commercial business will continue to benefit from the ongoing recovery in the commercial aerospace market. We also believe additional increases in sales volume will produce higher profitability as we leverage our lean cost structure. A summary of our 2005 anticipated results is as follows:

• Total sales of approximately $3.2 billion.

• Diluted earnings per share in the range of $1.85 to $1.95.

• Government Systems’ sales of approximately 54 percent of total sales with operating margins of approximately 18 percent.

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Management’s Discussion and Analysis (continued)

• Commercial Systems’ sales of approximately 46 percent of total sales with operating margins of approximately 16 percent.

• Cash provided by operating activities in the range of $350 million to $400 million.

• Capital expenditures of approximately $115 million.

• Total company and customer-funded research and development expenditures of approximately $575 million or about 18 percent of total sales.

RESULTS OF OPERATIONS

The following management discussion and analysis of results of operations is based on reported financial results for 2002 through 2004 and should be read in conjunction with our consolidated financial statements and the notes thereto.

Consolidated Financial Results

Sales

(dollars in millions)	2004			2003			2002
Domestic	$	2,051		$	1,667		$	1,602
International		879			875			890
Total	$	2,930		$	2,542		$	2,492
Percent increase		15	%		2	%

Total sales in 2004 increased $388 million, or 15 percent, compared to 2003. Our NLX acquisition accounted for $105 million of this sales increase. Excluding our NLX acquisition, total sales increased $283 million in 2004, which represents an organic growth rate of 11 percent over 2003. Domestic sales growth was driven by strong demand from the U.S. government for defense related products and the beginning of a recovery in the commercial aerospace market, which resulted in increased sales of commercial avionics products and services.

Total sales in 2003 increased $50 million, or 2 percent, compared to 2002. Our acquisition of Airshow contributed $50 million of the sales increase. Excluding our Airshow acquisition, total sales in 2003 were flat when compared with 2002. Sales growth of $155 million in our Government Systems business resulting from higher demand for defense related products was entirely offset by a $155 million decline in sales of commercial avionics products and services in our Commercial Systems business stemming from weakness in the commercial aerospace market that was adversely impacted by the SARS virus and the war in Iraq.

Cost of Sales

Total cost of sales is summarized as follows:

(dollars in millions)	2004			2003			2002
Total cost of sales	$	2,144		$	1,866		$	1,863
Percent of total sales		73.2	%		73.4	%		74.8	%

Cost of sales consists of all costs incurred to design and manufacture our products and includes research and development, raw material, labor, facility, product warranty and other related expenses. The improvement in cost of sales as a percentage of total sales in 2004 in comparison to 2003 is due to increasing sales volumes combined with our continued focus on containing cost growth, partially offset by increases in payroll, incentive compensation, and pension expenses as well as lower margins generated from development contracts and the NLX business acquired in early 2004.

The improvement in cost of sales as a percentage of sales in 2003 in comparison to 2002 results primarily from a favorable mix of products sold and lower company funded research and development expense.

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Management’s Discussion and Analysis (continued)

Research and development (R&D) expense is included as a component of cost of sales and is summarized as follows:

(dollars in millions)	2004			2003			2002
Company-funded	$	218		$	216		$	253
Customer-funded		327			259			231
Total	$	545		$	475		$	484
Percent of total sales		19	%		19	%		19	%

R&D expense consists primarily of payroll-related expenses of employees engaged in research and development activities, engineering related product materials and equipment, and subcontracting costs. Total research and development expense as a percent of sales has remained consistent at 19 percent, with the customer-funded portion increasing over the past two years primarily due to several defense-related programs that are in their development phases, including the Joint Strike Fighter (JSF), Joint Tactical Radio System (JTRS), and the Future Combat Systems (FCS) programs. Looking forward to 2005, total research and development expenditures are expected to be about 18 percent of sales, or approximately $575 million, of which about 10 percentage points are expected to relate to customer-funded initiatives. Significant areas of spending in 2005 are expected to include the Boeing 7E7, JTRS, and FCS programs.

Selling, General and Administrative Expenses

(dollars in millions)	2004			2003			2002
Selling, general and administrative expenses	$	356		$	341		$	307
Percent of total sales		12.2	%		13.4	%		12.3	%

Selling, general and administrative (SG&A) expenses consist primarily of personnel, facility, and other expenses related to employees not directly engaged in manufacturing, research or development activities. These activities include marketing and business development, finance, legal, information technology, and other administrative and management functions. SG&A expenses increased $15 million in 2004 as compared to 2003, due primarily to higher payroll, incentive compensation, and pension expenses as well as our acquisition of NLX. When measured as a percentage of sales, SG&A expenses in 2004 decreased to 12.2 percent as compared to 13.4 percent in 2003 as the growth in sales volume outpaced the increase in SG&A expenses.

Higher SG&A expenses in 2003 in comparison to 2002, both in absolute dollars and as a percentage of sales, were primarily due to increases in marketing and pension costs. The increased marketing costs were primarily attributable to the costs associated with the positioning of our commercial businesses during the initial stages of a commercial market recovery.

Interest Expense

(in millions)	2004		2003		2002
Interest Expense	$	8	$	3	$	6

On November 20, 2003, we issued $200 million of 4.75 percent fixed rate unsecured debt due December 1, 2013. The proceeds were used primarily to fund our pension plan and our acquisition of NLX. This debt issuance is the primary reason for the increased interest expense in 2004 as compared to 2003, slightly offset by lower average short-term borrowings.

The decrease in interest expense in 2003 from 2002 was the result of decreased interest rates and lower average short-term borrowings outstanding as strong operating cash flows were used to pay down commercial paper borrowings.

Other Income, Net

(in millions)	2004			2003			2002
Other income, net	$	(8	)	$	(36	)	$	(25	)

For information regarding the fluctuations in other income, net, see Note 15 of the consolidated financial statements.

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Management’s Discussion and Analysis (continued)

Income Tax Expense

(dollars in millions)	2004			2003			2002
Income tax expense	$	129		$	110		$	105
Effective income tax rate		30	%		30	%		31	%

The effective income tax rate differed from the United States statutory tax rate for the reasons set forth below:

	2004		2003		2002
Statutory tax rate	35.0	%	35.0	%	35.0	%
Research and development credit	(2.4	)	(3.6	)	(3.1	)
Extraterritorial income exclusion	(2.3	)	(2.3	)	(2.3	)
State and local income taxes	(0.1	)	1.5		0.9
Other	(0.2	)	(0.6	)	0.5
Effective income tax rate	30.0	%	30.0	%	31.0	%

The difference between our effective tax rate and the statutory tax rate is primarily the result of the tax benefits derived from the Research and Development Tax Credit (“R&D Tax Credit”), which provides a tax benefit on certain incremental R&D expenditures, and the Extraterritorial Income Exclusion (“ETI”), which provides a tax benefit on export sales. Inclusive of the items discussed herein, we currently expect our effective income tax rate to be approximately 30 percent in 2005.

Our effective tax rate for the year ended September 30, 2004 includes only nine months of the R&D Tax Credit as this tax benefit expired on June 30, 2004. In October 2004, the Working Families Tax Relief Act of 2004 was signed into law which extended the R&D Tax Credit through December 31, 2005 on a retroactive basis back to June 30, 2004. As a result, our effective income tax rate for 2005 is expected to include a R&D Tax Credit for 15 months of qualified R&D expenditures incurred between June 30, 2004 and September 30, 2005.

In October 2004, the American Jobs Creation Act of 2004 (“the Act”) was signed into law. The Act repeals and replaces the ETI with a new deduction for income generated from qualified production activities by U.S. manufacturers. The ETI will be phased out through calendar 2006 and the new deduction under the Act will be phased in between calendar 2005 and 2009. The ETI repeal and replacement under the Act is not expected to have a significant impact on our effective income tax rate in 2005. We are evaluating the impact of the ETI repeal and replacement under the Act on our effective income tax rate in years beyond 2005.

The Act also provides for a possible lower tax rate on funds repatriated into the U.S. from non-U.S. subsidiaries through September 30, 2006. We are evaluating the merits of repatriating funds under this new law. We have not provided for income taxes on unremitted earnings generated by our non-U.S. subsidiaries given our to-date continuing intent to permanently invest these earnings abroad. As a result, additional income taxes may be required to be recorded for any funds repatriated under the Act. Our estimate of the 2005 effective income tax rate does not include the potential tax effects of repatriating funds under the Act.

Net Income and Diluted Earnings Per Share

(dollars and shares in millions, except per share amounts)	2004			2003			2002
Net Income	$	301		$	258		$	236
Net income as a percent of sales		10.3	%		10.1	%		9.5	%
Diluted earnings per share	$	1.67		$	1.43		$	1.28
Weighted average diluted common shares		180.0			180.1			184.1

Net income in 2004 increased 17 percent to $301 million, or 10.3 percent of sales, from net income in 2003 of $258 million, or 10.1 percent of sales. Incremental margins contributed by the higher sales volumes along with continuing cost containment initiatives combined to produce these increases, partially offset by the impact of the items affecting comparability in 2004 and 2003 as detailed below. Commensurate with the 17 percent increase in net income in 2004, diluted earnings per share also increased 17 percent in 2004 to $1.67 compared to the $1.43 in 2003. Diluted earnings per share for our 2005 fiscal year is currently expected to be in the range of $1.85 to $1.95.

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Management’s Discussion and Analysis (continued)

Net income in 2003 increased 9 percent to $258 million, or 10.1 percent of sales, from net income in 2002 of $236 million, or 9.5 percent of sales. These increases were driven by improved gross margins resulting from cost containment initiatives, lower interest expense resulting from lower outstanding debt, a lower effective income tax rate, and the items affecting comparability in 2003 and 2002 as detailed below, which more than offset increases in SG&A expenses. Diluted earnings per share increased 12 percent to $1.43 in 2003 compared to $1.28 in 2002 on higher net income and lower diluted shares outstanding as a result of our share repurchase program.

Net income and diluted earnings per share were impacted by the items affecting comparability summarized in the table below. The identification of these items is important to the understanding of our results of operations.

(dollars in millions, except per share amounts)	2004			2003			2002
Contract dispute settlement (A)	$	7		$	—		$	—
Insurance settlements (B)		5			—			—
Loss on equity investment (C)		(7	)		—			—
Gain on life insurance reserve fund (D)		—			20			—
Legal matters, net (E)		—			—			12
Restructuring adjustment (F)		—			—			4
Impact on income before income taxes		5			20			16
Impact on income tax provision		(2	)		(8	)		(6	)
Impact on net income	$	3		$	12		$	10
Impact on diluted earnings per share	$	.02		$	.07		$	.05
Net income as a percent of sales, excluding the above items		10.2	%		9.7	%		9.1	%

(A) The contract dispute settlement gain relates to the resolution of a legal matter from a divested business.

(B) The insurance settlements gain consists of favorable settlements related to insurance matters.

(C) The loss on equity investment relates to our investment in Tenzing (see Note 8 to the consolidated financial statements).

(D) The gain on life insurance reserve fund relates to a favorable tax ruling from the Internal Revenue Service regarding an over funded life insurance reserve trust fund. The ruling allowed us to use funds from the trust to pay for other employee health and welfare benefits without incurring an excise tax.

(E) Legal matters, net includes a $22 million cash gain and a $4 million reversal of a reserve associated with favorable resolutions of legal matters related to an in-flight entertainment acquisition in 1998 and the sale of a business several years ago, respectively, partially offset by reserves for other legal matters.

(F) The restructuring adjustment of $4 million in 2002 was due to lower than expected severance costs resulting from higher than expected employee attrition related to the restructuring plan announced in 2001.

Segment Financial Results

Government Systems

Overview and Outlook:

Our Government Systems business supplies defense communications systems and products as well as defense electronics systems and products, which include subsystems, navigation and displays, to the U.S. Department of Defense, other government agencies, civil agencies, defense contractors and foreign ministries of defense. Key indicators of near and long-term performance of our Government Systems business include the amount and prioritization of defense spending by the U.S. and foreign governments, which are generally based on the underlying political landscape, security environment and budgetary considerations.

The past few years have seen significant increases in the U. S. defense budget that have driven higher demand for the products supplied by our Government Systems business. More importantly, an increasing amount of the U.S. defense budget is being allocated to transformation and modernization activities that are focused on increasing capabilities in such areas as joint interoperability communications equipment, precision guided munitions, situational awareness, signals intelligence, surveillance, and other communications equipment. Many of the technologies that are required to achieve transformation and modernization objectives overlap with our core competencies and product offerings. Key program wins over the past few years that have validated our strengths in these areas include Clusters One, Five,

5

Management’s Discussion and Analysis (continued)

and AMF (Airborne and Maritime/Fixed) of the JTRS program; communications and display equipment for the JSF program; integrated computer systems for the FCS program; defense advanced GPS receivers (DAGRs) for primary use by the U.S. Army; and mission avionics for the E-6B systems upgrade program.

Looking ahead, we expect that the overall U.S. defense budget will likely begin to moderate in the coming years; however, we believe the portion of the defense budget allocated to expenditures for transformation and modernization activities will remain strong. We believe that this budgetary backdrop, combined with key positions on major programs that are expected to enter full-scale production phases over the next few years, will drive continued growth in our Government Systems business. Risks affecting future performance of our Government Systems business include, but are not limited to, the potential impacts of geopolitical events, the overall funding and prioritization of the U.S. defense budget, and our ability to develop products and execute on programs pursuant to contractual requirements.

For 2005, we expect sales in our Government Systems business to increase 10 to 12 percent and operating earnings are expected to be approximately 18 percent of sales.

Government Systems’ Sales:

The following table represents Government Systems’ sales by product category:

(dollars in millions)	2004			2003			2002
Defense electronics	$	956		$	767		$	664
Defense communications		579			503			451
Total	$	1,535		$	1,270		$	1,115
Percent increase		21	%		14	%

Sales increased $265 million, or 21 percent, in 2004 compared to 2003. Our acquisition of NLX in December 2003 contributed $105 million of this sales increase. Excluding our NLX acquisition, sales increased $160 million, or 13 percent, in 2004 compared to 2003. This sales growth is the result of a continuation of ongoing defense transformation and modernization initiatives by the U.S. government. Significant drivers include initiating deliveries under the DAGR program, higher development contract sales on the JTRS, JSF, FCS, and Advanced Communications programs, as well as higher ARC-210 / 220 radio and C-130 aircraft retrofit program sales.

In 2003, sales increased $155 million, or 14 percent, compared to 2002. The sales increase resulted primarily from the JTRS and JSF development programs and higher sales in GPS navigation and electronic warfare products. In addition, integrated applications for the KC-135 aircraft, the C-130 aircraft, and several helicopter programs also contributed to the sales growth.

Government Systems’ Segment Operating Earnings:

(dollars in millions)	2004			2003			2002
Segment operating earnings	$	282		$	250		$	193
Percent of sales		18.4	%		19.7	%		17.3	%

Government Systems operating earnings increased $32 million, or 13 percent, in 2004 compared to 2003 due primarily to increased sales volumes. The decrease in operating earnings as a percent of sales in 2004 compared to 2003 is primarily the result of lower margin sales from NLX as well as increased sales from lower margin development contracts such as those for the JTRS, JSF, and FCS programs. These decreases were partially offset by incurring lower company-funded R&D and lower operating expenses as a percent of sales as the growth in sales volume outpaced moderate growth in marketing and other operating expenses.

Operating earnings in 2003 increased $57 million, or 30 percent, compared to 2002. Operating earnings as a percent of sales increased to 19.7 percent in 2003 compared to 17.3 percent in 2002. These increases were a result of the business holding its operating expenses relatively flat on growing sales volume along with a shift from company-funded to customer-funded research and development on new programs, primarily JTRS and JSF. In addition, favorable warranty experience of $7 million was partially offset by higher production start-up costs on several navigation and display products.

6

Management’s Discussion and Analysis (continued)

Commercial Systems

Overview and Outlook:

Our Commercial Systems business is a supplier of aviation electronics to customers located throughout the world. The customer base is comprised of original equipment manufacturers (OEMs) of commercial air transport, regional and business aircraft, commercial airlines, fractional operators and business jet operators. Key indicators of the near and long-term performance of our Commercial Systems business include general worldwide economic health, commercial airline flight hours, the financial condition of airlines worldwide, as well as corporate profits. After two years of weak industry conditions driven by an economic slow down and various geopolitical events, 2004 provided clear indications that we entered the initial phases of the recovery of the commercial aerospace market. Increased public confidence in air travel and improving economic conditions translated into airlines around the world adding aircraft back into their fleets, increasing aircraft utilization, and making improvements in profitability. As predicted, this first phase of the recovery drove higher service, support and retrofit activity in the aftermarket. The improving economy and resultant improved corporate profitability, combined with the stimulus provided by bonus depreciation on the purchase of new business jets, led to an accelerated recovery in this portion of the market as well. We believe the next phase of the commercial aerospace market recovery will manifest itself over the next few years to include higher production rates of new air transport aircraft. Risks to continuing the commercial aerospace market’s recovery, or the pace of the recovery, include the current high level of fuel prices that are having an impact on the profitability of our airline and other aircraft operator customers and the continued poor financial condition of certain of the major U.S. airlines. Risks related to our ability to capitalize on the commercial aerospace market recovery include, among other things, our ability to develop products and execute on programs pursuant to contractual requirements, such as the development of products for the Boeing 7E7 and the completion of our eTES in-flight entertainment system.

Looking forward to 2005, we expect Commercial Systems’ sales to increase 6 to 8 percent over 2004 with operating earnings of approximately 16 percent of sales. Market dynamic assumptions that are expected to impact Commercial Systems revenues in 2005 are as follows:

• New aircraft production by Boeing and Airbus is expected to increase by slightly more than 10 percent.

• Production of new business jets is expected to increase as improved corporate profitability and bonus depreciation continue to stimulate demand. Production of regional jets will remain approximately flat as slowing demand for 50 seat aircraft is replaced by higher demand for larger capacity aircraft.

• Anticipated 4 to 6 percent improvement in global airline flight hours; improved corporate profitability; stabilization and improvement in airline profitability; and dealer optimism about retrofit opportunities are expected to generate increased aftermarket activity in the commercial aerospace market.

Commercial Systems’ Sales:

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

(dollars in millions)	2004			2003			2002
Air transport aviation electronics	$	798		$	746		$	860
Business and regional jet aviation electronics		597			526			517
Total	$	1,395		$	1,272		$	1,377
Percent increase (decrease)		10	%		(8	)%

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

(dollars in millions)	2004		2003		2002
Original equipment	$	657	$	633	$	782
Aftermarket		738		639		595
Total	$	1,395	$	1,272	$	1,377

7

Management’s Discussion and Analysis (continued)

Sales increased $123 million, or 10 percent, in 2004 compared to 2003. This sales increase was fueled by increased demand for the production of new business jets and aftermarket service, support and retrofit activity. Air transport aviation electronics sales improved 7 percent over last year as year-over-year growth in global flight hours combined with improving airline profitability in some areas of the world led to higher aftermarket activity, while original equipment sales to air transport OEM’s and airline customers were approximately flat. Business and regional jet aviation electronics sales were 13 percent higher than last year as improved aircraft utilization and corporate profitability led to increased aftermarket and business jet OEM customer sales, while sales to regional jet OEM’s declined as production rates of 50-seat capacity jets began to slow.

Commercial Systems sales declined $105 million, or 8 percent, in 2003 compared to 2002. Incremental sales from the Airshow acquisition amounted to $50 million in 2003. Excluding our Airshow acquisition, sales decreased $155 million, or 11 percent, from 2002 to 2003. This decrease was due primarily to declines in OEM sales which resulted from lower aircraft build rates in the air transport and business jet markets. These declines in 2003 were partially offset by higher regional jet OEM sales and an increase in aftermarket sales.

Commercial Systems’ Segment Operating Earnings:

(dollars in millions)	2004			2003			2002
Segment operating earnings	$	200		$	137		$	174
Percent of sales		14.3	%		10.8	%		12.6	%

Commercial Systems operating earnings increased 46 percent, or $63 million, in 2004 compared to 2003. In addition, operating earnings as a percentage of sales increased from 10.8 percent in 2003 to 14.3 percent in 2004. The higher sales volume combined with the effects of cost containment and productivity improvement initiatives were the primary factors contributing to the improvement in 2004 over 2003. In addition, improving in-flight entertainment profitability as a result of lower product warranty costs and lower contract loss reserves contributed to the current year improvement.

Operating earnings declined $37 million in 2003 to $137 million, or 10.8 percent of sales, from operating earnings of $174 million, or 12.6 percent of sales, in 2002. These declines resulted from lower sales volumes, higher marketing costs, higher warranty expense and $9 million in loss reserves related to in-flight entertainment products, and the absence of a retiree medical curtailment gain that benefited the prior year. These decreases were partially offset by operating cost reductions resulting from restructuring actions completed in 2002.

General Corporate, Net

(in millions)	2004			2003			2002
General corporate, net	$	(47	)	$	(20	)	$	(26	)

Items affecting other income, net, as described in Note 15 to the consolidated financial statements, are the primary drivers for fluctuations in general corporate, net. In addition, the change in 2004 compared to 2003 is also due to increases in incentive compensation and pension expenses.

Retirement Plans

Net benefit expense for pension benefits and other retirement benefits is as follows:

(in millions)	2004		2003		2002
Pension benefits	$	31	$	20	$	6
Other retirement benefits		19		19		19
Curtailment gain on other retirement benefits		—		—		(14	)
Net benefit expense	$	50	$	39	$	11

8

Management’s Discussion and Analysis (continued)

Pension Benefits

We provide pension benefits to most of our employees in the form of defined benefit pension plans. Over the past few years, the cost of providing retirement benefits under a defined benefit structure has become increasing volatile due to the weak stock market and falling discount rates. In response, we made significant contributions to our pension plans during 2003 and amended our U.S. qualified and non-qualified pension plans 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. Concurrently, we plan to replace this benefit by supplementing our existing defined contribution savings plan to include an additional company contribution effective October 1, 2006. We believe this new benefit structure will achieve our objective of providing benefits that are both valued by our employees and whose costs and funding requirements are more consistent and predictable over the long term.

Pension expense for the years ended September 30, 2004, 2003, and 2002 was $31 million, $20 million, and $6 million, respectively. Decreases in the funded status of our pension plans in prior years drove these increases in pension expense, with pension expense in 2004 partially benefiting from the 2003 plan amendment. During 2004, the funded status of our pension plans improved to a deficit of $386 million at September 30, 2004 from a deficit of $763 million at September 30, 2003 due to strong investment performance, a 25 basis point increase in the discount rate used to measure our pension obligation, and $200 million in voluntary contributions since our June 30, 2003 actuarial valuation. This improvement in the funded status of our pension plans is expected to decrease pension expense in 2005 to approximately $30 million.

See Note 11 in the consolidated financial statements for a description of the Company’s objectives for funding its pension plans. We believe our strong financial position continues to provide us the opportunity to make discretionary contributions to our pension fund without inhibiting our ability to pursue other strategic investments.

Other Retirement Benefits

We provide retiree medical and life insurance benefits to substantially all of our employees. We have undertaken two major actions over the past few years with respect to these benefits that have lowered both the current and future costs of providing these benefits:

• As a result of the Medicare Prescription Drug, Improvement and Modernization Act of 2003, we amended our retiree medical plans on June 30, 2004 to discontinue post-65 prescription drug coverage effective January 1, 2008. Upon termination of these benefits, post-65 retirees will have the option of receiving these benefits through Medicare. On average, we expect that the prescription drug benefit to be provided by Medicare will be better than the benefit provided by our current post-65 drug plan as a result of the fixed contribution plan design implemented in 2002.

• In July of 2002, the pre-65 and post-65 retiree medical plans were amended to establish a fixed contribution to be paid by the company. Additional premium contributions will be required from participants for all costs in excess of this fixed contribution amount. This amendment has eliminated the risk to our company related to health care cost escalations for retiree medical benefits going forward as additional contributions will be required from retirees for all costs in excess of our fixed contribution amount.

Additional information related to these plan amendments as well as the $14 million curtailment gain recorded in 2002 is contained within Note 11 in the consolidated financial statements. We expect the expense related to other retirement benefits to decrease to $1 million in 2005, due primarily to the plan amendment to eliminate post-65 prescription drug coverage.

9

Management’s Discussion and Analysis (continued)

FINANCIAL CONDITION AND LIQUIDITY

Cash Flow Summary

We are able to continue to execute our growth strategies and return value to our shareowners in part due to our ability to generate significant cash flow from operating activities and access the credit markets. Our ability to generate cash flow from operating activities is due primarily to working capital initiatives that began in 2002. These initiatives included a renewed focus on timely collections of accounts receivable and improved inventory management aided by the successful deployment of our enterprise resource planning system. During 2004, significant cash expenditures aimed at future growth and enhanced shareowner value were as follows:

• $126 million acquisition of NLX

• $69 million of dividend payments, including a 33 percent increase in quarterly cash dividends from 9 cents per share to 12 cents per share beginning with the dividend paid September 7, 2004

• $179 million in share repurchases

Operating Activities

(in millions)	2004		2003		2002
Cash provided by operating activities	$	401	$	374	$	453

In 2004 we continued our strong performance in operating cash flows driven by ongoing working capital initiatives and the highest net income in our company’s history. The increase in cash flows provided by operating activities of $27 million in 2004 compared to 2003 is attributed primarily to higher cash flows from increased sales volumes.

The decrease in cash flows provided by operating activities of $79 million in 2003 compared to 2002 was primarily the result of flat year-over-year sales, higher voluntary pension contributions, and the absence of the initial benefits from working capital initiatives that were realized in 2002.

Investing Activities

(in millions)	2004			2003			2002
Cash used for investing activities	$	(230	)	$	(71	)	$	(239	)

The increase in cash used for investing activities of $159 million from 2003 to 2004 is due primarily to the following:

• $126 million acquisition of NLX.

• Increases in expenditures for capital and intangible assets of $33 million to support upcoming programs.

The decrease in cash used for investment activities of $168 million from 2002 to 2003 is due primarily to the absence of $193 million of acquisition activity in 2002. Partially offsetting the impact of the acquisition activity was $15 million in proceeds from the disposition of a business in 2002 and an increase in capital expenditures of $10 million from 2002 to 2003.

In 2005 we expect capital expenditures to increase to approximately $115 million driven primarily by increases in demand for new machinery and equipment to support increased sales volumes. We also will continue to evaluate acquisition opportunities and expect to continue to acquire businesses and capabilities as an integral component of our overall growth strategy.

Financing Activities

(in millions)	2004			2003			2002
Cash used for financing activities	$	(37	)	$	(279	)	$	(221	)

The decrease in cash used for financing activities in 2004 compared to 2003 is due primarily to $198 million in proceeds from long-term debt and lower payments on commercial paper borrowings, partially offset by increased

10

Management’s Discussion and Analysis (continued)

treasury stock repurchases. Proceeds from long-term debt were used primarily to fund our pension plan and our acquisition of NLX. Strong cash flow from operations has enabled us to pay off our commercial paper borrowings in 2004, continue our share repurchase program, and increase dividend payments.

The increase in cash used for financing activities in 2003 compared to 2002 primarily results from increased treasury stock repurchases and payments on short-term borrowings. Strong cash flow from operations provided funds to repurchase our common stock as well as reduce our outstanding commercial borrowings by $90 million in 2003.

Share Repurchase Program

Strong cash flow from operations provided funds for repurchasing our common stock under our share repurchase program as follows:

(in millions, except per share amounts)	2004		2003		2002
Amount of share repurchases	$	179	$	154	$	102
Number of shares repurchased		5.8		6.8		4.5
Average price per share	$	31.16	$	22.56	$	22.74

We plan to continue repurchasing shares of our common stock up to the current Board of Directors approved amount as our cash flow allows. As of September 30, 2004, we can repurchase up to $165 million in additional shares. Historically, we have executed share repurchases when cash flow from operations is not being used for other investing or financing activities, such as acquisitions or short-term debt reduction.

Dividends

We declared and paid cash dividends of $69 million, $64 million, and $66 million in 2004, 2003, and 2002, respectively. On June 30, 2004, our Board of Directors approved an increase in the quarterly cash dividend to 12 cents per share beginning with the dividend paid September 7, 2004. We expect annual dividends to be $0.48 per share in 2005 and expect to fund these dividends using cash generated from operations. The declaration and payment of dividends, however, will be at the sole discretion of the Board of Directors.

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 $850 million of committed credit facilities with several banks (Revolving Credit Facilities). Our current ratings as provided by Moody’s Investors Service (Moody’s), Standard & Poor’s and Fitch, Inc. are
A-2 / A / A, respectively, for long-term debt and P-1 / A-1 / F-1, respectively, for short-term debt. Moody’s, Standard & Poor’s and Fitch, Inc. 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 variable 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 available for working capital needs and other general corporate purposes. There were no commercial paper borrowings outstanding at September 30, 2004.

Our Revolving Credit Facilities consist of a five-year $500 million portion expiring in May 2006 and a 364-day $350 million portion expiring in May 2005. The Revolving Credit Facilities exist primarily to support our commercial paper program, but are 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 Facilities requires that we maintain a consolidated debt to total capitalization ratio of not greater than 60 percent. Our debt to total capitalization ratio at September 30, 2004 was 15 percent. At our election, the 364-day portion of the Revolving Credit Facilities can be converted to a one-year term loan. The Revolving Credit Facilities do not contain any rating downgrade triggers that would accelerate the maturity of our indebtedness. In addition, short-term credit facilities available to foreign subsidiaries amounted to $37 million as of September 30, 2004. There were no significant commitment fees or compensating balance requirements under these facilities. At September 30, 2004, there were no borrowings outstanding under any of the Company’s credit facilities.

11

Management’s Discussion and Analysis (continued)

In addition to our credit facilities and commercial paper program, we have a shelf registration statement filed with the Securities and Exchange Commission covering up to $750 million in 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) under the shelf registration statement. The Notes contain covenants that require the Company to satisfy certain conditions in order to incur debt secured by liens, engage in sale/leaseback transactions, or merge or consolidate with another entity. At September 30, 2004, $550 million of the shelf registration was available for future use.

If our credit ratings were to be adjusted downward by the rating agencies, the implications of such actions could include elimination of access to the commercial paper market and an increase in the cost of borrowing. In the event that we do not have access to the commercial paper market, alternative sources of funding could include borrowings under the Revolving Credit Facilities, funds available from the issuance of securities under our shelf registration, and potential asset securitization strategies.

Contractual Obligations

The following table summarizes certain of our contractual obligations as of September 30, 2004, as well as when these obligations are expected to be satisfied:

	Payments Due by Period
(in millions)	Total		Less than 1 Year		1 - 3 Years		4 - 5 Years		Thereafter
Long-term debt	$	200	$	—	$	—	$	—	$	200
Interest on long-term debt		90		10		20		20		40
Non-cancelable operating leases		78		20		25		12		21
Purchase obligations:
Purchase orders		600		460		114		24		2
Purchase contracts		20		9		11		—		—
Total	$	988	$	499	$	170	$	56	$	263

Interest payments under long-term debt obligations exclude the potential effects of related interest rate swap contracts.

We lease certain office and manufacturing facilities as well as certain machinery and equipment under various lease contracts with terms that meet the accounting definition of operating leases. Our commitments under these operating leases, in the form of non-cancelable future lease payments, are not reflected as a liability on our Statement of Financial Position.

Purchase obligations include purchase orders and purchase contracts. Purchase orders are executed in the normal course of business and may or may not be cancelable. Purchase contracts include agreements with suppliers under which there is a commitment to buy a minimum amount of products or pay a specified amount regardless of actual need. Generally, items represented in purchase obligations are not reflected as liabilities on our Statement of Financial Position.

We also have obligations with respect to pension and other post-retirement benefit plans. See Note 11 of the consolidated financial statements.

ENVIRONMENTAL

For information related to environmental claims, remediation efforts and related matters, see Note 20 of the consolidated financial statements.

CRITICAL ACCOUNTING POLICIES

The preparation of 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 consolidated financial statements as well as affect the related disclosure of assets and liabilities contingent upon future events.

12

Management’s Discussion and Analysis (continued)

Understanding the critical accounting policies discussed below and related risks is important in evaluating the financial condition and results of operations of Rockwell Collins. We believe the following accounting policies used in the preparation of the consolidated financial statements are critical to our financial condition and results of operations as they involve a significant use of management judgment on matters that are inherently uncertain. If actual results differ significantly from management’s estimates, there could be a material effect on our financial condition, results of operations and cash flows. Management regularly discusses the identification and development of these critical accounting policies with the Audit Committee of the Board of Directors.

Accounting for Long-Term Contracts

A substantial portion of our sales to government customers and certain of our sales to commercial customers are made pursuant to long-term contracts requiring development and delivery of products over several years and often contain fixed-price purchase options for additional products. Certain of these contracts are accounted for under the percentage-of-completion method of accounting under the American Institute of Certified Public Accountants’ Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts (SOP 81-1). Sales and earnings under these contracts are recorded either as products are shipped under the units-of-delivery method (for production effort), or based on the ratio of actual costs incurred to total estimated costs expected to be incurred related to the contract under the cost-to-cost method (for development effort).

The percentage-of-completion method of accounting requires management to estimate the profit margin for each individual contract and to apply that profit margin on a uniform basis as sales are recorded under the contract. The estimation of profit margins requires management to make projections of the total sales to be generated and the total costs that will be incurred under a contract. These projections require management to make numerous assumptions and estimates relating to items such as the complexity of design and related development costs, performance of subcontractors, availability and cost of materials, labor productivity and cost, overhead and capital costs, and manufacturing efficiency. These contracts often include purchase options for additional quantities and customer change orders for additional or revised product functionality. Sales and costs related to profitable purchase options are included in our estimates only when the options are exercised while sales and costs related to unprofitable purchase options are included in our estimates when exercise is determined to be probable. Sales related to change orders are included in profit estimates only if they can be reliably estimated and collectibility is reasonably assured. Purchase options and change orders are accounted for either as an integral part of the original contract or separately depending upon the nature and value of the item. Anticipated losses on contracts are recognized in full in the period in which losses become probable and estimable.

Estimates of profit margins for contracts are typically reviewed by management on a quarterly basis. Assuming the initial estimates of sales and costs under a contract are accurate, the percentage-of-completion method results in the profit margin being recorded evenly as revenue is recognized under the contract. Changes in these underlying estimates due to revisions in sales and cost estimates, the combining of contracts, or the exercise of contract options may result in profit margins being recognized unevenly over a contract as such changes are accounted for on a cumulative basis in the period estimates are revised. Significant changes in estimates related to accounting for long-term contracts may have a material effect on our results of operations in the period in which the revised estimate is made.

Income Taxes

At the end of each quarterly reporting period, we estimate an effective income tax rate that is expected to be applicable for the full fiscal year. The estimate of our effective income tax rate involves significant judgments resulting from uncertainties in the application of complex tax regulations across many jurisdictions, implementation of tax planning strategies, and estimates as to the jurisdictions where income is expected to be earned. These estimates may be further complicated by new laws, new interpretations of existing laws, and rulings by taxing authorities. Due to the subjectivity and complex nature of these underlying issues, our actual effective income tax rate and related tax liabilities may differ from our initial estimates. Differences between our estimated and actual effective income tax rates and related liabilities are recorded in the period they become known. The resulting adjustment to our income tax expense could have a material effect on our results of operations in the period the adjustment is recorded. A one percentage point change in our effective income tax rate would change our annual net income by approximately $4 million.

Deferred tax assets and liabilities are recorded for tax carryforwards and the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. Management

13

Management’s Discussion and Analysis (continued)

believes it is more likely than not that the current and long-term deferred tax assets will be realized through the reduction of future taxable income. See Note 16 of the consolidated financial statements for further detail regarding deferred taxes and the factors considered in evaluating deferred tax asset realization.

Goodwill and Indefinite-Lived Intangible Assets

As of September 30, 2004, we had $419 million of goodwill resulting from various acquisitions and $17 million of indefinite-lived intangible assets consisting of trademarks and tradenames (herein referred to as “trademarks”). We perform impairment tests on both goodwill and indefinite-lived intangible assets on an annual basis during the second quarter of each fiscal year, or on an interim basis if events or circumstances indicate that it is more likely than not that impairment has occurred.

Goodwill is potentially impaired if the carrying value of the “reporting unit” that contains the goodwill exceeds its estimated fair value. The fair values of our reporting units are determined with the assistance of third-party valuation experts using a combination of an “income approach”, which estimates fair value based upon future discounted cash flows, and a “market approach”, which estimates fair value using market multiples, ratios, and valuations of a set of comparable public companies within our industry. An indefinite-lived intangible asset is impaired if its carrying value exceeds its fair value. The fair values of our trademarks are determined with the assistance of third-party valuation experts using a “royalty savings” method, which is based upon a hypothetical royalty rate that would be charged by a licensor of the trademarks against discounted projected revenues attributable to products using those trademarks.

The valuation methodology and underlying financial information that is used to estimate the fair value of our reporting units and trademarks requires significant judgments to be made by management. These judgments include, but are not limited to, the long-term projections of future financial performance, the selection of appropriate discount rates used to present value future cash flows, and the determination of appropriate royalty rates. Our five-year strategic operating plan serves as the basis for these valuations and represents our best estimate of future business conditions in our industry as well as our ability to compete. Discount rates are determined based upon the weighted average cost of capital for a set of comparable companies adjusted for risks associated with our different operations. Royalty rates used for the trademark valuations are determined by considering market competition, customer base, the age of the trademark, quality, absolute and relative profitability, and market share. Our goodwill and indefinite-lived intangible asset impairment tests that were performed in the second quarter of 2004 yielded no impairments. If there was a significant downturn in our business, or if our plans with respect to utilization of acquired trademarks changed significantly, we could incur an impairment of one or more of these intangible assets.

Warranty

Accrued liabilities are recorded on our Statement of Financial Position to reflect our contractual obligations relating to warranty commitments to our customers. We provide warranty coverage of various lengths and terms to our customers depending on standard offerings and negotiated contractual agreements. We record an estimate for warranty expense at the time of sale based on historical warranty return rates and repair costs. We believe our primary source of warranty risk relates to our in-flight entertainment products and extended warranty terms across all businesses. At September 30, 2004, we have recorded $154 million of warranty liabilities. Should future warranty experience differ materially from our historical experience, we may be required to record additional warranty liabilities which could have a material adverse effect on our results of operations and cash flows in the period in which these additional liabilities are required.

Pension Benefits

We provide retirement benefits to most of our employees in the form of defined benefit pension plans. Accounting standards require the cost of providing these pension plans be measured on an actuarial basis. These accounting standards will generally reduce, but not eliminate, the volatility of the reported pension obligation and related pension expense as actuarial gains and losses resulting from both normal year-to-year changes in valuation assumptions and the differences from actual experience are deferred and amortized. The application of these accounting standards requires management to make numerous assumptions and judgments that can significantly affect these measurements. Critical assumptions made by management in performing these actuarial valuations include the selection of discount rates and expectations on the future rate of return on pension plan assets.

Discount rates are used to determine the present value of our pension obligation and also affect the amount of pension expense recorded in any given period. We estimate this discount rate based on the rates of return of high quality,

14

Management’s Discussion and Analysis (continued)

fixed-income investment indexes with maturity dates that reflect the expected time horizon that benefits will be paid, primarily the Moody’s AA Index. Changes in the discount rate could have a material effect on our reported pension obligation and related pension expense.

The expected rate of return is our estimate of the long-term earnings rate on our pension plan assets and is based upon both historical long-term actual and expected future investment returns considering the current investment mix of plan assets. Differences between the actual and expected rate of return on plan assets can impact our expense for pension benefits.

Holding all other factors constant, the estimated impact on 2004 pension expense caused by hypothetical changes to key assumptions is as follows:

(dollars in millions)	Change in Assumption
Assumption	25 Basis Point Increase	25 Basis Point Decrease
Pension obligation discount rate	$7 pension expense decrease	$7 pension expense increase
Expected rate of return on plan assets	$5 pension expense decrease	$5 pension expense increase

Inventory Valuation Reserves

Inventory valuation reserves are recorded in order to report inventories at the lower of cost or market value on our Statement of Financial Position. The determination of inventory valuation reserves requires management to make estimates and judgments on the future salability of inventories. Valuation reserves for excess, obsolete, and slow-moving inventory are estimated by comparing the inventory levels of individual parts to both future sales forecasts or production requirements and historical usage rates in order to identify inventory that is unlikely to be sold above cost. Other factors that management considers in determining these reserves include overall market conditions and other inventory management initiatives. Management can generally react to reduce the likelihood of severe excess and slow-moving inventory issues by changing purchasing behavior and practices provided there are no abrupt changes in market conditions.

Management believes its primary source of risk for excess and obsolete inventory is derived from the following:

• Our in-flight entertainment inventory, which tends to experience quicker technological obsolescence than our other products. In-flight entertainment inventory at September 30, 2004 was $120 million.

• Life-time buy inventory, which consists of inventory that is typically no longer being produced by our vendors but for which we purchase multiple years of supply in order to meet production and service requirements over the life span of a product. Total life-time buy inventory on hand at September 30, 2004 was $98 million.

At September 30, 2004, we had $102 million of inventory valuation reserves recorded on $808 million of total inventory on hand. Although management believes these reserves are adequate, any abrupt changes in market conditions may require us to record additional inventory valuation reserves which could have a material adverse effect on our results of operations in the period in which these additional reserves are required.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Interest Rate Risk

In addition to using cash provided by normal operating activities, we utilize a combination of short-term and long-term debt to finance operations. Our operating results and cash flows are exposed to changes in interest rates that could adversely affect the amount of interest expense incurred and paid on debt obligations in any given period. In addition, changes in interest rates can affect the fair value of our debt obligations. Such changes in fair value are only relevant to the extent these debt obligations are settled prior to maturity. We manage our exposure to interest rate risk by maintaining an appropriate mix of fixed and variable rate debt and when considered necessary, we may employ financial instruments in the form of interest rate swaps to help meet our objectives.

15

Management’s Discussion and Analysis (continued)

At September 30, 2004, we had $200 million of 4.75 percent fixed rate long-term debt obligations outstanding with a carrying value of $201 million and fair value of $200 million. We converted $100 million of this fixed rate debt to floating rate debt bearing interest at six-month LIBOR less 7.5 basis points by executing receive fixed, pay variable interest rate swap contracts. Inclusive of the effect of the interest rate swaps, a hypothetical 10 percent increase or decrease in average market interest rates would not have a material effect on our results of operations or cash flows. This same hypothetical 10 percent change in market interest rates would have increased or decreased the fair value of our long-term debt, exclusive of the effects of the interest rate swap contracts, by $6 million. The $100 million notional value of interest rate swap contracts had a carrying and fair value of $1 million at September 30, 2004. A hypothetical 10 percent increase or decrease in average market interest rates would decrease or increase the fair value of our interest rate swap contracts by $3 million and $5 million, respectively. For more information related to outstanding debt obligations and derivative financial instruments, see Notes 9 and 17 of the consolidated financial statements.

Foreign Currency Risk

We transact business in various foreign currencies which subjects our cash flows and earnings to exposure related to changes to foreign currency exchange rates. We attempt to manage this exposure through operational strategies and use of foreign currency forward exchange contracts (foreign currency contracts). All foreign currency contracts are executed with creditworthy banks and are denominated in currencies of major industrial countries. It is our policy not to enter into derivative financial instruments for speculative purposes. Notional amounts of outstanding foreign currency forward exchange contracts were $96 million and $101 million at September 30, 2004 and 2003, respectively. Notional amounts are stated in U.S. dollar equivalents at spot exchange rates at the respective dates. Principal currencies that are hedged include the European Euro, British Pound Sterling, and Japanese Yen. Duration of foreign currency contracts are generally 12 months or less. The net fair value of these foreign currency contracts at September 30, 2004 and 2003 were net liabilities of $3 million and $2 million, respectively. If the US Dollar increased in value against all currencies by a hypothetical 10 percent, the effect on the fair value of the foreign currency contracts would not be significant at September 30, 2004. This same hypothetical increase would not have a material effect on our results of operations, cash flows, or financial condition.

For more information related to outstanding foreign currency forward exchange contracts, see Note 17 of the consolidated financial statements.

CAUTIONARY STATEMENT

This Annual Report to Shareowners, and documents that are incorporated by reference to our Annual Report on Form 10-K filed with the SEC, 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, the continued recovery of the commercial aerospace industry and the continued strength of the military communications and electronics industry; the impact of oil prices on the commercial aerospace industry; domestic and foreign government spending, budgetary and trade policies favorable to our businesses; market acceptance of new and existing products and services; reliability of and customer satisfaction with our products and services; potential cancellation or termination of contracts, delay of orders or changes in procurement practices or program priorities by our customers; customer bankruptcies and profitability; recruitment and retention of qualified personnel; performance of our suppliers and subcontractors which we are highly dependent upon for timely, high quality and specification compliant products and services; risks inherent in fixed price contracts, particularly the risk of cost overruns; risk of significant and prolonged disruption to air travel; our ability to execute to our internal performance plans such as our continuous productivity improvement and cost reduction initiatives; achievement of our acquisition and related integration plans; continuing to maintain our planned effective tax rates; favorable outcomes of certain customer procurements, congressional approvals and regulatory mandates; and the uncertainties of the outcome of litigation, as well as other risks and uncertainties, including but not limited to those detailed from time to time in our Securities and Exchange Commission filings. Any forward-looking statement covering a period of more than one year presents additional risks and uncertainties that actual results may differ materially from those projected due to the increased likelihood of favorable and unfavorable changes in circumstances that occur over an extended period of time. These forward-looking statements are made only as of the date hereof and the company assumes no obligation to update any forward-looking statement.

16

MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS

We, the management team of Rockwell Collins, are responsible for the preparation, integrity and objectivity of the financial statements and other financial information we have presented in this report. The financial statements were prepared in accordance with accounting principles generally accepted in the United States of America, applying our estimates and judgments.

Our internal controls are designed to provide reasonable assurance as to the integrity and reliability of the financial statements and to adequately safeguard, verify and maintain accountability of assets. These controls are based on established written policies and procedures, are implemented by trained, skilled personnel with an appropriate segregation of duties and are monitored through a comprehensive internal audit program. Rockwell Collins is committed to maintaining high ethical standards and business practices wherever we operate.

Deloitte & Touche LLP, our independent auditors, are retained to audit our financial statements. Their accompanying report is based on audits conducted in accordance with auditing standards of the Public Company Accounting Oversight Board in the United States of America, which include the consideration of our internal controls to establish a basis for reliance in determining the nature, timing and extent of audit tests to be applied.

Our Board of Directors exercises its responsibility for these financial statements through its Audit Committee, which consists entirely of independent, non-management Board members. The Audit Committee meets regularly with the independent auditors and with the Company’s internal auditors, both privately and with management present, to review accounting, auditing, internal controls and financial reporting matters.

/s/ Clayton M. Jones	/s/ Lawrence A. Erickson
Clayton M. Jones	Lawrence A. Erickson
Chairman, President &	Senior Vice President &
Chief Executive Officer	Chief Financial Officer

17

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareowners of

Rockwell Collins, Inc.

We have audited the accompanying consolidated statement of financial position of Rockwell Collins, Inc. and subsidiaries (the “Company”) as of October 1, 2004 and September 30, 2003, and the related consolidated statements of operations, of cash flows, and of shareowners’ equity and comprehensive income (loss) for each of the three years in the period ended October 1, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of October 1, 2004 and September 30, 2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended October 1, 2004, in conformity with accounting principles generally accepted in the United States of America.

Chicago, Illinois

November 2, 2004

18

ROCKWELL COLLINS, INC.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

(in millions, except per share amounts)

	September 30
	2004			2003
ASSETS
Current Assets:
Cash	$	196		$	66
Receivables		616			516
Inventories		650			618
Current deferred income taxes		165			171
Income taxes receivable		10			17
Other current assets		26			23
Total current assets		1,663			1,411
Property		418			401
Intangible Assets		131			110
Goodwill		419			330
Other Assets		243			339
TOTAL ASSETS	$	2,874		$	2,591
LIABILITIES AND SHAREOWNERS’ EQUITY
Current Liabilities:
Short-term debt	$	—		$	42
Accounts payable		240			202
Compensation and benefits		235			198
Income taxes payable		18			3
Product warranty costs		154			144
Other current liabilities		317			292
Total current liabilities		964			881
Long-Term Debt		201			—
Retirement Benefits		521			812
Other Liabilities		55			65
Shareowners’ Equity:
Common stock ($0.01 par value; shares authorized: 1,000; shares issued: 183.8)		2			2
Additional paid-in capital		1,228			1,213
Retained earnings		492			273
Accumulated other comprehensive loss		(397	)		(516	)
Common stock in treasury, at cost (shares held: 2004, 6.8; 2003, 6.0)		(192	)		(139	)
Total shareowners’ equity		1,133			833
TOTAL LIABILITIES AND SHAREOWNERS’ EQUITY	$	2,874		$	2,591

See Notes to Consolidated Financial Statements.

19

ROCKWELL COLLINS, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

(in millions, except per share amounts)

	Year Ended September 30
	2004			2003			2002
Sales:
Product sales	$	2,604		$	2,271		$	2,238
Service sales		326			271			254
Total sales		2,930			2,542			2,492
Costs, expenses and other:
Product cost of sales		1,913			1,665			1,678
Service cost of sales		231			201			185
Selling, general and administrative expenses		356			341			307
Interest expense		8			3			6
Other income, net		(8	)		(36	)		(25	)
Total costs, expenses and other		2,500			2,174			2,151
Income before income taxes		430			368			341
Income tax expense		129			110			105
Net income	$	301		$	258		$	236
Earnings per share:
Basic	$	1.70		$	1.44		$	1.29
Diluted	$	1.67		$	1.43		$	1.28
Weighted average common shares:
Basic		177.4			179.1			183.1
Diluted		180.0			180.1			184.1
Cash dividends per share	$	0.39		$	0.36		$	0.36

See Notes to Consolidated Financial Statements.

20

ROCKWELL COLLINS, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(in millions)

	Year Ended September 30
	2004			2003			2002
Operating Activities:
Net income	$	301		$	258		$	236
Adjustments to arrive at cash provided by operating activities:
Depreciation		92			93			98
Amortization of intangible assets		17			12			7
Pension plan contributions		(132	)		(123	)		(46	)
Compensation and benefits paid in common stock		57			37			10
Deferred income taxes		38			105			50
Tax benefit from exercise of stock options		15			7			4
Changes in assets and liabilities, excluding effects of acquisitions, divestiture, and foreign currency adjustments:
Receivables		(65	)		3			123
Inventories		(32	)		40			78
Accounts payable		23			(8	)		(34	)
Income taxes		21			(34	)		5
Compensation and benefits		36			2			(9	)
Other assets and liabilities		30			(18	)		(69	)
Cash Provided by Operating Activities		401			374			453
Investing Activities:
Acquisition of businesses, net of cash acquired		(126	)		2			(193	)
Property additions		(94	)		(72	)		(62	)
Acquisition of intangible assets		(11	)		—			—
Proceeds from disposition of property		1			4			6
Investment in equity affiliates		—			(5	)		(5	)
Proceeds from the disposition of a business		—			—			15
Cash Used for Investing Activities		(230	)		(71	)		(239	)
Financing Activities:
Net proceeds from the issuance of long-term debt		198			—			—
Purchases of treasury stock		(179	)		(154	)		(102	)
Cash dividends		(69	)		(64	)		(66	)
Proceeds from exercise of stock options		55			29			17
Decrease in short-term borrowings, net		(42	)		(90	)		(70	)
Cash Used for Financing Activities		(37	)		(279	)		(221	)
Effect of exchange rate changes on cash		(4	)		(7	)		(4	)
Net Change in Cash		130			17			(11	)
Cash at Beginning of Year		66			49			60
Cash at End of Year	$	196		$	66		$	49

See Notes to Consolidated Financial Statements.

21

ROCKWELL COLLINS, INC.

CONSOLIDATED STATEMENT OF SHAREOWNERS’ EQUITY

AND COMPREHENSIVE INCOME (LOSS)

(in millions)

	Year Ended September 30
	2004			2003			2002
Common Stock
Beginning and ending balance	$	2		$	2		$	2
Additional Paid-In Capital
Beginning balance		1,213			1,208			1,201
Shares issued under stock option and benefit plans		15			7			5
Other		—			(2	)		2
Ending balance		1,228			1,213			1,208
Retained Earnings
Beginning balance		273			91			(65	)
Net income		301			258			236
Cash dividends		(69	)		(64	)		(66	)
Shares issued under stock option and benefit plans		(13	)		(12	)		(14	)
Ending balance		492			273			91
Accumulated Other Comprehensive Income (Loss)
Beginning balance		(516	)		(252	)		(28	)
Minimum pension liability adjustment		114			(273	)		(229	)
Currency translation gain		6			9			5
Foreign currency cash flow hedge adjustment		(1	)		—			—
Ending balance		(397	)		(516	)		(252	)
Common Stock in Treasury
Beginning balance		(139	)		(62	)		—
Share repurchases		(179	)		(154	)		(102	)
Shares issued from treasury		126			77			40
Ending balance		(192	)		(139	)		(62	)
Total Shareowners’ Equity	$	1,133		$	833		$	987
Comprehensive Income (Loss)
Net income	$	301		$	258		$	236
Other comprehensive income (loss), net of deferred taxes (2004, $(67); 2003, $160; 2002, $135)		119			(264	)		(224	)
Comprehensive income (loss)	$	420		$	(6	)	$	12

See Notes to Consolidated Financial Statements.

22

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Business Description and Basis of Presentation

Rockwell Collins, Inc. (the Company or Rockwell Collins) provides design, production and support of communications and aviation electronics solutions for commercial and military customers worldwide.

Prior to 2004, the Company operated on a fiscal year basis with the fiscal year ending on September 30. Beginning with the 2004 fiscal year, the Company changed to a 52/53 week fiscal year ending on the Friday closest to September 30, which for 2004 was October 1. This change resulted in one additional day of operations reflected in the Company’s fiscal 2004 results. All date references contained herein relate to the Company’s fiscal year unless otherwise stated. For ease of presentation, September 30 is utilized consistently throughout these financial statements and notes to represent the fiscal year end date.

Certain prior year amounts have been reclassified to conform to the current year presentation.

2. Significant Accounting Policies

Consolidation

The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. The Company’s investments in entities it does not control but has the ability to exercise significant influence are accounted for under the equity method and are classified as Other Assets. All intercompany transactions are eliminated.

Revenue Recognition

The Company enters into sales arrangements that may provide for multiple deliverables to a customer. The Company identifies all goods and/or services that are to be delivered separately under a sales arrangement and allocates revenue to each deliverable based on relative fair values. Fair values are generally established based on the prices charged when sold separately by the Company. In general, revenues are separated between hardware, maintenance services, and installation services. The allocated revenue for each deliverable is then recognized using appropriate revenue recognition methods.

Sales related to long-term contracts requiring development and/or delivery of products over several years are accounted for under the percentage-of-completion method of accounting under the American Institute of Certified Public Accountants’ Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts (SOP 81-1). Sales and earnings under these contracts are recorded either as products are shipped under the units-of-delivery method (for production effort), or based on the ratio of actual costs incurred to total estimated costs expected to be incurred related to the contract under the cost-to-cost method (for development effort). Sales and costs related to profitable purchase options are included in estimates only when the options are exercised while sales and costs related to unprofitable purchase options are included in estimates when exercise is determined to be probable. Change orders are accounted for either as an integral part of the original contract or separately depending upon the nature and value of the item. Sales related to change orders are included in profit estimates only if they can be reliably estimated and collectibility is reasonably assured. Anticipated losses on contracts are recognized in full in the period in which losses become probable and estimable. Changes in estimates of profit or loss on contracts are included in earnings on a cumulative basis in the period the estimate is changed.

Sales related to long-term separately priced product maintenance or warranty contracts are accounted for based on the terms of the underlying agreements. Certain contracts are fixed price contracts with sales recognized ratably over the contractual life, while other contracts have a fixed hourly rate with sales recognized based on actual labor or flight hours incurred. The cost of providing these services is expensed as incurred.

The Company recognizes sales for all other products or services when all of the following criteria are met: an agreement of sale exists, product delivery and acceptance has occurred or services have been rendered, pricing is fixed or determinable, and collection is reasonably assured.

23

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Research and Development

The Company performs research and development activities relating to the development of new products and the improvement of existing products. Company-funded research and development programs are expensed as incurred and included in Cost of Sales. Customer-funded research and development expenditures are generally accounted for as contract costs within Cost of Sales, and the reimbursement is accounted for as a sale.

Cash

Cash includes time deposits and certificates of deposit with original maturity dates of three months or less.

Allowance for Doubtful Accounts

Allowances are established in order to report receivables at net realizable value on the Company’s Statement of Financial Position. The determination of these allowances requires management of the Company to make estimates and judgments as to the collectibility of customer account balances. These allowances are estimated for customers who are considered credit risks by reviewing the Company’s collection experience with those customers as well as evaluating the customers’ financial condition. The Company also considers both current and projected economic and market conditions. Special attention is given to accounts with invoices that are past due, which is defined as any invoice for which payment has not been received by the due date specified on the billing invoice. The uncollectible portion of receivables is charged against the allowance for doubtful accounts when collection efforts have ceased. Recoveries of receivables previously charged-off are recorded when received.

Inventories

Inventories are stated at the lower of cost or market using costs which approximate the first-in, first-out method, less related progress payments received. Inventoried costs include direct costs of manufacturing, certain engineering costs and allocable overhead costs. The Company regularly compares inventory quantities on hand on a part level basis to estimated forecasts of product demand and production requirements as well as historical usage. Based on these comparisons, management establishes an excess and obsolete inventory reserve on an aggregate basis.

The Company defers certain pre-production engineering costs in connection with long-term supply arrangements that contain contractual guarantees for reimbursement from customers. Such customer guarantees typically take the form of a minimum order quantity with specifically quantified reimbursement amounts if the minimum order quantity is not taken by the customer. Such costs are amortized as a component of Cost of Sales as revenue is recognized on the minimum order quantity. All pre-production engineering costs incurred pursuant to customer contracts that do not contain customer guarantees for reimbursement are expensed as incurred.

Progress Payments

Progress payments relate to both receivables and inventories and represent cash collected from U.S. Government-related contracts whereby the U.S. Government has a legal right of offset related to the receivable or legal title to the work-in-process inventory.

Property

Property is stated at acquisition cost. Depreciation of property is generally provided using accelerated and straight-line methods over the following estimated useful lives: buildings and improvements, fifteen to forty years; machinery and equipment, eight to ten years; and information systems software and hardware, three to ten years. Depreciation methods and lives are reviewed periodically with any changes recorded on a prospective basis.

Significant renewals and betterments are capitalized and replaced units are written off. Maintenance and repairs, as well as renewals of minor amounts, are charged to expense in the period incurred. The fair value of liabilities associated with the retirement of property is recorded when there is a legal or contractual requirement to incur such costs. Upon the initial recognition of a contractual or legal liability for an asset retirement obligation, the Company capitalizes the asset retirement cost by increasing the carrying amount of the property by the same amount as the liability. This asset retirement cost is then depreciated over the estimated useful life of the underlying property. The Company has no significant asset retirement obligations as of September 30, 2004.

24

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Goodwill and Intangible Assets

Goodwill and intangible assets generally result from business acquisitions. Business acquisitions are accounted for under the purchase method by assigning the purchase price to tangible and intangible assets acquired and liabilities assumed, including research and development projects which have not yet reached technological feasibility and have no alternative future use (purchased research and development). Assets acquired and liabilities assumed are recorded at their fair values; the appraised value of purchased research and development is immediately charged to expense; and the excess of the purchase price over the amounts assigned is recorded as goodwill. Assets acquired and liabilities assumed are allocated to the Company’s “reporting units” based on the Company’s integration plans and internal reporting structure. Purchased intangible assets with finite lives are amortized over their estimated useful lives. Goodwill and intangible assets with indefinite lives are not amortized, but reviewed at least annually for impairment.

Impairment of Long-Lived Assets

Long-lived assets are reviewed for impairment when management plans to dispose of assets or when events or circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. Assets held for disposal are reported at the lower of the carrying amount or fair value less cost to sell. Management determines fair value using a discounted future cash flow analysis or other accepted valuation techniques. Long-lived assets held for use are reviewed for impairment by comparing the carrying amount of an asset to the undiscounted future cash flows expected to be generated by the asset over its remaining useful life. If an asset is considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds its fair value.

Goodwill and indefinite lived intangible assets are tested annually for impairment with more frequent tests performed if indications of impairment exist. The Company’s annual impairment testing date is in the second quarter of each fiscal year. Impairment for intangible assets with indefinite lives exists if the carrying value of the intangible asset exceeds its fair value. Goodwill is potentially impaired if the carrying value of a “reporting unit” exceeds its estimated fair value. Management determines fair value using a discounted future cash flow analysis or other accepted valuation techniques. The Company’s annual impairment testing in 2004, 2003, and 2002 yielded no impairments.

Advance Payments from Customers

Advance payments from customers represent cash collected from customers in advance of revenue recognition.

Customer Incentives

Rockwell Collins provides sales incentives to certain commercial customers in connection with sales contracts. These incentives are recognized as a reduction of the sales price for cash payments or customer account credits or charged to cost of sales for products or services to be provided, when the related sale is recorded. The liability for these incentives is included in Other Current Liabilities.

Environmental

Liabilities for environmental matters are recorded in the period in which it is probable that an obligation has been incurred and the cost can be reasonably estimated. At environmental sites in which more than one potentially responsible party has been identified, the Company records a liability for its estimated allocable share of costs related to its involvement with the site as well as an estimated allocable share of costs related to the involvement of insolvent or unidentified parties. At environmental sites in which the Company is the only responsible party, the Company records a liability for the total estimated costs of remediation. Costs of future expenditures for environmental remediation obligations do not consider inflation and are not discounted to present values. If recovery from insurers or other third parties is determined to be probable, the Company records a receivable for the estimated recovery.

25

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Income Taxes

Current tax liabilities and assets are based upon an estimate of taxes payable or refundable in the current year for each of the jurisdictions in which the Company transacts business. As part of the determination of its tax liability, management exercises considerable judgment in assessing the positions taken by the Company in its tax returns and establishes reserves for probable tax exposures. These reserves represent the best estimate of amounts expected to be paid and are adjusted over time as more information regarding tax audits becomes available. Deferred tax assets and liabilities are recorded for the estimated future tax effects attributable to temporary differences between the carrying amounts of assets and liabilities used for financial reporting purposes and their respective carrying amounts for income tax purposes. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Stock-Based Compensation

The Company accounts for employee stock-based compensation using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). As the Company’s various incentive plans require stock options to be granted at prices equal to or above the fair market value of the Company’s common stock on the grant dates, no compensation expense is recognized in connection with stock options granted to employees.

The fair value method is an alternative method of accounting for stock-based compensation that is permitted by Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation (SFAS 123). Under the fair value method, compensation expense is recorded over the vesting periods based on the estimated fair value of the stock-based compensation. The following table illustrates the effect on net income and earnings per share if the Company had accounted for its stock-based compensation plans using the fair value method:

(in millions, except per share amounts)	2004			2003			2002
Net income, as reported	$	301		$	258		$	236
Stock-based employee compensation expense included in reported net income, net of tax		—			—			—
Stock-based employee compensation expense determined under the fair value method, net of tax		(15	)		(15	)		(18	)
SFAS 123 pro forma net income	$	286		$	243		$	218
Earnings per share:
Basic – as reported	$	1.70		$	1.44		$	1.29
Basic – SFAS 123 pro forma	$	1.62		$	1.36		$	1.19
Diluted – as reported	$	1.67		$	1.43		$	1.28
Diluted – SFAS 123 pro forma	$	1.59		$	1.35		$	1.18

The weighted average fair value of options granted by the Company was $9.55, $8.01, and $7.65 per option in 2004, 2003, and 2002, respectively. The fair value of each option granted by the Company was estimated using the Black-Scholes pricing model and the following weighted average assumptions:

	2004 Grants		2003 Grants		2002 Grants
Risk-free interest rate	3.37	%	3.27	%	3.61	%
Expected dividend yield	1.51	%	1.73	%	1.73	%
Expected volatility	0.40		0.40		0.40
Expected life	5 years		6 years		6 years

26

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Derivative Financial Instruments

The Company uses derivative financial instruments in the form of foreign currency forward exchange contracts and interest rate swap contracts for the purpose of minimizing exposure to changes in foreign currency exchange rates on business transactions and interest rates, respectively. The Company’s policy is to execute such instruments with creditworthy banks and not to enter into derivative financial instruments for speculative purposes. These derivative financial instruments do not subject the Company to undue risk as gains and losses on these instruments generally offset gains and losses on the underlying assets, liabilities, or anticipated transactions that are being hedged.

All derivative financial instruments are recorded at fair value in the Statement of Financial Position. For a derivative that has not been designated as an accounting hedge, the change in the fair value is recognized immediately through earnings. For a derivative that has been designated as an accounting hedge of an existing asset or liability (a fair value hedge), the change in the fair value of both the derivative and underlying asset or liability is recognized immediately through earnings. For a derivative designated as an accounting hedge of an anticipated transaction (a cash flow hedge), the change in the fair value is recorded on the Statement of Financial Position as a component of Accumulated Other Comprehensive Income (Loss) to the extent the derivative is effective in mitigating the exposure related to the anticipated transaction. The amount recorded within Accumulated Other Comprehensive Income (Loss) is reclassified in earnings in the same period during which the underlying hedged transaction affects earnings. The Company does not exclude any amounts from the measure of effectiveness for both fair value and cash flow hedges. The change in the fair value related to the ineffective portion of a hedge, if any, is immediately recognized in earnings.

Use of Estimates

The financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. Estimates are used in accounting for, among other items, long-term contracts, allowances for doubtful accounts, inventory obsolescence, product warranty cost liabilities, customer incentive liabilities, retirement benefits, income taxes, environmental matters, recoverability of long-lived assets and contingencies. Estimates and assumptions are reviewed periodically and the effects of changes, if any, are reflected in the Statement of Operations in the period that they are determined.

Concentration of Risks

The Company’s products and services are concentrated within the aerospace and defense industries with customers consisting primarily of commercial and military aircraft manufacturers, commercial airlines, and the United States and foreign governments. As a result of this industry focus, the Company’s current and future financial performance is largely dependent upon the overall economic conditions within these industries. In particular, the commercial aerospace market has been historically cyclical and subject to downturns during periods of weak economic conditions which could be prompted by or exacerbated by political or other domestic or international events. The defense market may be affected by changes in budget appropriations, procurement policies, political developments both domestically and abroad, and other factors. While management believes the Company’s product offerings are well positioned to meet the needs of its customer base, any material deterioration in the economic and environmental factors that impact the aerospace and defense industries could have a material adverse effect on the Company’s results of operations, financial position or cash flows.

In addition to the overall business risks associated with the Company’s concentration within the aerospace and defense industries, the Company is also exposed to a concentration of collection risk on credit extended to commercial airlines. Accounts receivable due from commercial airlines at September 30, 2004 was approximately $132 million. The Company performs ongoing credit evaluations on the financial condition of all of its commercial airline customers and maintains allowances for uncollectible accounts receivable based on expected collectibility. Although management believes its allowances are adequate, the Company is not able to predict with certainty the changes in the financial stability of its customers. Any material change in the financial status of any one or group of customers could have a material adverse effect on the Company’s results of operations, financial position or cash flows.

27

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. Acquisitions and Divestiture of Businesses

During the years ended September 30, 2004, 2003 and 2002, the Company completed three acquisitions that are summarized as follows:

						Intangible Assets
(dollars in millions)	Fiscal Year Acquired	Cash Purchase Price		Goodwill		Finite Lived		Weighted Average Life in Years
NLX Holding Corporation	2004	$	126	$	102	$	17	5
Airshow, Inc.	2002		160		106		50	9
Communication Solutions, Inc	2002		24		14		5	8

In December 2003, the Company acquired NLX Holding Corporation (NLX), a provider of integrated training and simulation systems. NLX provides simulators ranging from full motion full flight simulators to desktop simulators, training, upgrades, modifications, and engineering and technical services primarily to branches of the United States military. The acquisition of NLX extends the Company’s capabilities in the areas of training and simulation and enables the Company to provide a more complete service offering to its customers. The excess purchase price over net assets acquired reflects the Company’s view that there are significant opportunities to expand its market share in the areas of simulation and training. Approximately 20 percent of the goodwill resulting from this acquisition is tax deductible. Goodwill is included within the assets of the Government Systems segment.

In August 2002, Rockwell Collins acquired Airshow, Inc. (Airshow), a provider of integrated cabin electronics system solutions for business aircraft, including cabin environment controls, passenger information and entertainment, and business support systems. The acquisition of Airshow expands the Company’s capabilities for providing airborne electronics solutions to business aviation and commercial aircraft, and increases the Company’s ability to provide integrated solutions that bridge flight deck and cabin electronics. Goodwill resulting from the acquisition is deductible for tax purposes. Goodwill is included within the assets of the Commercial Systems segment.

In March 2002, Rockwell Collins acquired Communication Solutions, Inc. (ComSol), a provider of signals intelligence technology that is used worldwide in defense and security-related applications. The acquisition of ComSol expands the Company’s product portfolio in the areas of signals intelligence and surveillance solutions and enhances the electronic warfare capabilities of Rockwell Collins. Goodwill resulting from this acquisition is not tax deductible. Goodwill is included within the assets of the Government Systems segment.

The results of operations of these acquired businesses are included in the Statement of Operations since their respective dates of acquisition. Pro forma financial information is not presented as the combined effect of these acquisitions is not material to the Company’s results of operations.

In March 2002, Rockwell Collins sold Kaiser Fluid Technologies, Inc. (KFT) for $15 million in cash. KFT’s products included valves, actuators and dampers for landing gear, brake, engine, bleed air, flight control and utility control systems for aircraft. There was no gain or loss recorded by the Company in connection with this divestiture. Prior to the divestiture, KFT generated sales for the Government Systems segment in the amount of $8 million in 2002.

28

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. Receivables

Receivables are summarized as follows:

	September 30
(in millions)	2004			2003
Billed	$	493		$	460
Unbilled		202			174
Less progress payments		(63	)		(101	)
Total		632			533
Less allowance for doubtful accounts		(16	)		(17	)
Receivables	$	616		$	516

As of September 30, 2004 and 2003, the portion of receivables outstanding that are not expected to be collected within the next twelve months is not significant.

Unbilled receivables principally represent sales recorded under the percentage-of-completion method of accounting that have not been billed to customers in accordance with applicable contract terms.

5. Inventories

Inventories are summarized as follows:

	September 30
(in millions)	2004			2003
Finished goods	$	141		$	155
Work in process		243			215
Raw materials, parts, and supplies		322			322
Total		706			692
Less progress payments		(56	)		(74	)
Inventories	$	650		$	618

In accordance with industry practice, inventories include amounts which are not expected to be realized within one year. These amounts primarily relate to life-time buy inventory, which is inventory that is typically no longer being produced by the Company’s vendors but for which multiple years of supply are purchased in order to meet production and service requirements over the life span of a product. Life-time buy inventory was $98 million and $106 million at September 30, 2004 and 2003, respectively.

6. Property

Property is summarized as follows:

	September 30
(in millions)	2004			2003
Land	$	25		$	25
Buildings and improvements		232			222
Machinery and equipment		603			566
Information systems software and hardware		230			226
Construction in progress		39			25
Total		1,129			1,064
Less accumulated depreciation		(711	)		(663	)
Property	$	418		$	401

29

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. Goodwill and Intangible Assets

Changes in the carrying amount of goodwill for the years ended September 30, 2004 and 2003 are summarized as follows:

(in millions)	Government Systems			Commercial Systems			Total
Balance at September 30, 2002	$	143		$	189		$	332
Airshow purchase price adjustment		—			(2	)		(2	)
Balance at September 30, 2003		143			187			330
NLX acquisition		102			—			102
Resolution of Kaiser pre-acquisition tax contingency (Note 16)		(8	)		(5	)		(13	)
Balance at September 30, 2004	$	237		$	182		$	419

Intangible assets are summarized as follows:

	September 30, 2004						September 30, 2003
	Accum						Accum
(in millions)	Gross		Amort		Net		Gross		Amort		Net
Intangible assets with finite lives:
Developed technology and patents	$	116	$	35	$	81	$	109	$	24	$	85
License agreements		21		4		17		3		3		—
Customer relationships		12		3		9		—		—		—
Trademarks and tradenames		10		3		7		9		1		8
Intangible assets with indefinite lives:
Trademarks and tradenames		18		1		17		18		1		17
Intangible assets	$	177	$	46	$	131	$	139	$	29	$	110

During the year ended September 30, 2004, the Commercial Systems segment acquired license agreements for $18 million, of which $11 million was paid. These license agreements relate primarily to a strategic agreement with The Boeing Company to provide a global broadband connectivity solution for business aircraft through the Company’s Collins eXchange product.

Amortization expense for intangible assets for the years ended September 30, 2004, 2003 and 2002 was $17 million, $12 million and $7 million, respectively. Annual amortization expense for intangible assets for 2005, 2006, 2007, 2008, and 2009 is expected to be $16 million, $16 million, $17 million, $21 million, and $15 million, respectively.

8. Other Assets

Other assets are summarized as follows:

	September 30
(in millions)	2004		2003
Long-term deferred income taxes (Note 16)	$	95	$	180
Investments in equity affiliates		68		71
Exchange and rental assets, net of accumulated depreciation of $79 at September 30, 2004 and $67 at September 30, 2003		41		56
Other		39		32
Other assets	$	243	$	339

Investments in Equity Affiliates

Investments in equity affiliates includes investments in three joint ventures, each of which is 50 percent owned by the Company and accounted for under the equity method. The Company’s joint ventures consist of Rockwell Scientific Company, LLC (RSC), Vision Systems International, LLC (VSI), and Data Link Solutions, LLC (DLS).

30

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

RSC is a joint venture with Rockwell Automation, Inc. (Rockwell Automation) and is engaged in advanced research and development of technologies in electronics, imaging and optics, material and computational sciences and information technology. The Company shares equally with Rockwell Automation in providing a $6 million line-of-credit to RSC, which bears interest at the greater of the Company’s or Rockwell Automation’s commercial paper borrowing rate. At September 30, 2004, no borrowings were due from RSC under this line-of-credit. RSC performed research and development efforts on behalf of the Company in the amounts of $9 million, $9 million, and $8 million for the years ended September 30, 2004, 2003, and 2002, respectively.

VSI is a joint venture with Elbit Systems, Ltd. for the joint pursuit of helmet mounted cueing systems for the worldwide military fixed wing aircraft.

DLS is a joint venture with BAE Systems, plc for the joint pursuit of the worldwide military data link market.

Investments in equity affiliates also includes a 16 percent investment in Tenzing Communications, Inc. (Tenzing), a developer of passenger connectivity solutions for commercial aircraft. This investment is accounted for under the equity method. In July 2004, Tenzing entered into a non-binding letter of intent with Airbus and Sita, Inc. to form a new entity which will offer aircraft data and voice connectivity. This potential transaction is likely to be completed in the first quarter of 2005, at which time the Company’s ownership percentage in the new entity is expected to be approximately 3 percent. The terms of this transaction indicated the fair value of the Company’s investment in Tenzing was lower than the carrying amount recorded. This decline in value was believed to be other-than-temporary in nature and accordingly, the Company recorded a $7 million loss related to this investment during the three months ended June 30, 2004. This loss is reflected in Other Income, Net (Note 15) in the Company’s Consolidated Statement of Operations and General Corporate, Net for segment performance reporting (Note 22). Exclusive of this loss, the Company’s share of earnings or losses of Tenzing are included in the operating results of the Commercial Systems’ operating segment.

Under the equity method of accounting for investments, the Company’s proportionate share of the earnings or losses of its equity affiliates are included in net income and classified as Other Income, Net in the Statement of Operations. For segment performance reporting purposes, Rockwell Collins’ share of earnings or losses of VSI and DLS are included in the operating results of the Government Systems’ operating segment. RSC is considered a corporate-level investment.

In the normal course of business or pursuant to the underlying joint venture agreements, the Company may sell products or services to equity affiliates. The Company defers a portion of the profit generated from these sales equal to its ownership interest in the equity affiliates until the underlying product is ultimately sold to an unrelated third party. Sales to equity affiliates were $123 million, $109 million, and $65 million for the years ended September 30, 2004, 2003, and 2002, respectively. As of September 30, 2004 and 2003, the deferred profit related to sales generated from equity affiliates was not significant.

Exchange and Rental Assets

Exchange and rental assets consist of Company products that are either loaned or rented to customers on a short-term basis in connection with warranty and other service related activities or under operating leases. These assets are recorded at acquisition or production cost and depreciated using the straight-line method over their estimated lives which range from three to eleven years. Depreciation methods and lives are reviewed periodically with any changes recorded on a prospective basis.

9. Debt

Short-term Debt

Under the Company’s commercial paper program, the Company 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 will have a maturity of not more than 364 days from the time of issuance. There were no short-term commercial paper borrowings outstanding at September 30, 2004. At September 30, 2003, short-term commercial paper borrowings outstanding were $42 million with a weighted average interest rate and maturity period of 1.08 percent and 66 days, respectively.

31

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Revolving Credit Facilities

As of September 30, 2004, the Company has $850 million of senior unsecured revolving credit facilities with various banks consisting of a five-year $500 million facility expiring in May of 2006, and a 364-day $350 million facility expiring in May of 2005. The Revolving Credit Facilities exist primarily to support the Company’s commercial paper program, but may be used for other corporate purposes in the event access to the commercial paper market is impaired or eliminated. These credit facilities include one financial covenant requiring the Company to maintain a consolidated debt to total capitalization ratio of not greater than 60 percent. The ratio was 15 percent as of September 30, 2004. Borrowings under these credit facilities bear interest at the London Interbank Offered Rate (LIBOR) plus a variable margin based on the Company’s unsecured long-term debt rating or, at the Company’s option, rates determined by competitive bid. In addition, short-term credit facilities available to foreign subsidiaries was $37 million as of September 30, 2004. There were no significant commitment fees or compensating balance requirements under these facilities. At September 30, 2004, there were no borrowings outstanding under any of the Company’s credit facilities.

Long-term Debt

The Company has a shelf registration statement filed with the Securities and Exchange Commission covering up to $750 million in 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, the Company issued $200 million of 4.75 percent fixed rate unsecured debt under the shelf registration due December 1, 2013 (the Notes). Interest payments on the Notes are due on June 1 and December 1 of each year, commencing June 1, 2004. The Notes contain certain covenants and events of default, including requirements that the Company satisfy certain conditions in order to incur debt secured by liens, engage in sale/leaseback transactions, or merge or consolidate with another entity. The Company entered into interest rate swap contracts which effectively converted $100 million aggregate principal amount of the Notes to floating rate debt based on six-month LIBOR less 7.5 basis points. See Note 17 for additional information relating to the interest rate swap contracts.

Long-term debt is summarized as follows:

	September 30
(in millions)	2004		2003
Notes due December 1, 2013	$	200	$	—
Fair value adjustment (Note 17)		1		—
Long-term debt	$	201	$	—

Interest paid on short and long-term debt for the years ended September 30, 2004, 2003, and 2002 was $7 million, $3 million and $6 million, respectively.

10. Other Current Liabilities

Other current liabilities are summarized as follows:

	September 30
(in millions)	2004		2003
Advance payments from customers	$	128	$	92
Customer incentives		105		91
Contract reserves		39		56
Other		45		53
Other current liabilities	$	317	$	292

32

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. Retirement Benefits

The Company sponsors defined benefit pension (Pension Benefits) and other postretirement (Other Retirement Benefits) plans covering substantially all of its U.S. employees and certain employees in foreign countries which provide monthly pension and other benefits to eligible employees upon retirement. The components of expense for Pension Benefits and Other Retirement Benefits are summarized below:

	Pension Benefits									Other Retirement Benefits
(in millions)	2004			2003			2002			2004			2003			2002
Service cost	$	39		$	38		$	38		$	5		$	4		$	5
Interest cost		135			140			132			24			26			24
Expected return on plan assets		(175	)		(166	)		(168	)		(1	)		(1	)		(2	)
Amortization:
Prior service cost		(14	)		1			2			(30	)		(30	)		(18	)
Net actuarial loss		46			7			2			21			20			10
Net benefit expense	$	31		$	20		$	6		$	19		$	19		$	19

The Company also recognized a curtailment gain of $14 million related to Other Retirement Benefits during the year ended September 30, 2002 in connection with workforce reductions resulting from the Company’s 2001 comprehensive restructuring plan.

The following table reconciles the projected benefit obligations, plan assets, funded status, and net asset (liability) for the Company’s Pension Benefits and the Other Retirement Benefits:

	Pension Benefits						Other Retirement Benefits
(in millions)	2004			2003			2004			2003
Projected benefit obligation at beginning of year	$	2,315		$	2,062		$	418		$	497
Service cost		39			38			5			4
Interest cost		135			140			24			26
Discount rate change		(77	)		285			(4	)		35
Actuarial losses (gains)		14			59			(9	)		(2	)
Medicare Reform Act		—			—			(8	)		—
Plan amendments		—			(172	)		(92	)		(119	)
Benefits paid		(115	)		(101	)		(32	)		(39	)
Other		3			4			—			16
Projected benefit obligation at end of year		2,314			2,315			302			418
Plan assets at beginning of year		1,552			1,580			14			15
Actual return on plan assets		279			22			1			1
Company contributions		207			48			31			37
Benefits paid		(115	)		(101	)		(32	)		(39	)
Other		5			3			—			—
Plan assets at end of year		1,928			1,552			14			14
Funded status of plans		(386	)		(763	)		(288	)		(404	)
Contributions after measurement date		—			75			—			—
Unamortized amounts:
Prior service cost		(155	)		(170	)		(252	)		(189	)
Net actuarial loss		873			1,087			290			331
Net asset (liability) in the Statement of Financial Position	$	332		$	229		$	(250	)	$	(262	)
Net asset (liability) consists of:
Deferred tax asset	$	234		$	301		$	—		$	—
Accrued benefit liability		(301	)		(585	)		(250	)		(262	)
Accumulated other comprehensive loss		399			513						—
Net asset (liability) in the Statement of Financial Position	$	332		$	229		$	(250	)	$	(262	)

33

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The accumulated benefit obligation for all defined benefit pension plans was $2,229 million and $2,212 million at September 30, 2004 and 2003, respectively.

Actuarial Assumptions

Plan assets and benefit obligations as of September 30 as well as net periodic benefit expense for the following fiscal year are measured on an annual basis using a measurement date of June 30 each year. Significant assumptions used in determining the benefit obligations and related expense are as follows:

	Pension Benefits				Other Retirement Benefits
	2004		2003		2004		2003
Assumptions used to determine benefit obligations at September 30:
Discount rate	6.25	%	6.00	%	6.25	%	6.00	%
Compensation increase rate	4.50	%	4.50	%	—		—
Assumptions used to determine net benefit expense for years ended September 30:
Discount rate	6.00	%	7.00	%	6.00	%	7.00	%
Expected return on plan assets	8.75	%	9.00	%	8.75	%	9.00	%
Compensation increase rate	4.50	%	4.50	%	—		—
Pre-65 health care cost gross trend rate*	—		—		11.00	%	7.80	%
Post-65 health care cost gross trend rate*	—		—		11.00	%	9.30	%
Ultimate trend rate	—		—		5.5	%	5.5	%
Year that trend reaches ultimate rate	—		—		2009		2018

* Due to the effect of the fixed Company contribution, the net impact of any change in trend rate is zero.

Discount rates are based on the rates of return of high quality, fixed-income investment indexes with maturity dates that reflect the expected time horizon that benefits will be paid, primarily the Moody’s AA Index. Expected return on plan assets is based upon both historical long-term actual and expected future investment returns considering the current investment mix of plan assets.

Actuarial gains and losses in excess of 10 percent of the greater of the projected benefit obligation or market-related value of assets are amortized on a straight-line basis over the average remaining service period of active participants. Prior service costs resulting from plan amendments are amortized in equal annual amounts over the average remaining service period of affected active participants or over the remaining life expectancy of affected retired participants. The Company uses a five-year, market-related value asset method of amortizing the difference between actual and expected returns on plan assets.

Pension Benefits

The Company provides pension benefits to substantially all of its U.S. employees in the form of non-contributory, defined benefit plans that are considered qualified plans under applicable laws. The benefits provided under these plans for salaried employees are generally based on years of service and average compensation. The benefits provided under these plans for hourly employees are generally based on specified benefit amounts and years of service. In addition, the Company sponsors an unfunded non-qualified defined benefit plan for certain employees. The Company also maintains two pension plans in foreign countries, one of which is unfunded.

In June 2003, the Company’s U.S. qualified and non-qualified defined benefit pension plans were amended to discontinue benefit accruals for salary increases and services rendered after September 30, 2006. These changes will affect all of the Company’s domestic pension plans covering salaried and hourly employees not covered by collective bargaining agreements. The effect of this amendment was to both reduce the benefit obligation and increase the funded status of the Company’s pension plans by $172 million at September 30, 2003. Concurrently, the Company plans to supplement its existing defined contribution savings plan effective October 1, 2006 to include additional Company contributions.

34

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended September 30, 2004 and 2003, the Company made contributions to its pension plans as follows:

(in millions)	2004		2003
Discretionary contributions to qualified plans	$	125	$	115
Contributions to non-qualified plans		7		8
Total	$	132	$	123

The Company’s objective with respect to the funding of its pension plans is to provide adequate assets for the payment of future benefits. Pursuant to this objective, the Company will fund its pension plans as required by governmental regulations and may consider discretionary contributions as conditions warrant. During 2004 and 2003, the Company made discretionary contributions to its qualified pension plans of $125 million and $115 million, respectively. These contributions were deductible for tax purposes which reduced the total income taxes paid during 2004 and 2003 by approximately $89 million. These contributions resulted in a reduction of previously established deferred taxes and as a result, there was no effect on the Company’s effective income tax rate or related income tax expense during 2004 and 2003.

The Company is not required to make any contributions to its qualified pension plans in 2005 pursuant to governmental regulations and current projections indicate that none will be required in 2006; however, future funding requirements are difficult to estimate as such estimates are dependent upon market returns and interest rates, which can be volatile. The Company currently has no plans to make additional discretionary contributions to its qualified pension plans. Contributions to the Company’s unfunded, non-qualified plans are expected to approximate $7 million in 2005.

Other Retirement Benefits

Other retirement benefits consist of retiree health care and life insurance benefits that are provided to substantially all of the Company’s domestic employees and covered dependents. Employees generally become eligible to receive these benefits if they retire after age 55 with at least 10 years of service. Most plans are contributory with retiree contributions generally based upon years of service and adjusted annually by the Company. Retiree medical plans pay a stated percentage of expenses reduced by deductibles and other coverage, principally Medicare. The amount the Company will contribute toward retiree medical coverage is fixed. Retiree life insurance plans provide coverage at a flat dollar amount or as a multiple of salary. With the exception of certain bargaining unit plans, Other Retirement Benefits are funded as expenses are incurred.

On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Medicare Reform Act) was signed into law. The effect of the Medicare Reform Act was to reduce the Company’s benefit obligation for Other Retirement Benefits by $8 million in 2004. The effect on the Company’s Other Retirement Benefits expense in 2004 was not material. This is a direct result of the Company’s fixed contribution plan design. As a result of the Medicare Reform Act, the Company amended its retiree medical plans on June 30, 2004 to discontinue post-65 prescription drug coverage effective January 1, 2008. The effect of this plan amendment was to reduce the benefit obligation of the Company’s Other Retirement Benefits by $92 million in 2004.

In July of 2002, the pre-65 and post-65 retiree medical plans were amended to establish a fixed contribution by the Company. Additional premium contributions will be required from participants for all costs in excess of the Company’s fixed contribution amount. As the plan amendment occurred subsequent to the Company’s normal annual June 30 measurement date in 2002, the effect of this plan amendment on the Company’s benefit plan obligation is reflected in 2003 based upon a remeasurement of the Company’s obligation that occurred in July of 2002. The effect of the plan amendment was to reduce the benefit plan obligation by $119 million in 2003. This amendment limits the Company’s net cost of providing these benefits. As a result, increasing or decreasing the health care cost gross trend rate by one percentage point would not have an impact on the Company’s net cost of providing these benefits.

35

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Plan Assets

Total plan assets for Pension Benefits and Other Retirement Benefits as of September 30, 2004 and 2003 were $1,942 million and $1,566 million, respectively. The Company has established investment objectives that seek to preserve and maximize the amount of plan assets available to pay plan benefits. These objectives are achieved through investment guidelines requiring diversification and allocation strategies designed to maximize the long-term returns on plan assets while maintaining a prudent level of investment risk. These investment strategies are implemented using actively managed and indexed assets. Target and actual asset allocations as of September 30 are as follows:

	Target Mix	2004		2003
Equities	40% - 70%	67	%	62	%
Fixed income	25% - 60%	28	%	33	%
Alternative assets	0% - 15%	—		—
Cash	0% - 5%	5	%	5	%

Alternative investments may include real estate, hedge funds, venture capital, and private equity. There were no plan assets invested in the securities of the Company as of September 30, 2004 and 2003 or at any time during the years then ended. Target and actual asset allocations are periodically rebalanced between asset classes in order to mitigate investment risk and maintain asset classes within target allocations.

Benefit Payments

The following table reflects estimated benefit payments to be made to eligible participants for each of the next five years and the following five years in aggregate:

(in millions)	Pension Benefits		Other Retirement Benefits
2005	$	122	$	36
2006		126		31
2007		131		29
2008		137		25
2009		142		23
2010 - 2014		802		108

Substantially all of the Pension Benefit payments relate to the Company’s qualified funded plans which are paid from the pension trust. Estimated benefit payments for Other Retirement Benefits are presented net of $10 million of federal subsidies that the Company expects to receive under the Medicare Reform Act between 2006 and 2008.

12. Shareowners’ Equity

Common Stock

The Company is authorized to issue one billion shares of common stock, par value $0.01 per share, and 25 million shares of preferred stock, without par value, of which 2.5 million shares are designated as Series A Junior Participating Preferred Stock for issuance in connection with the exercise of preferred share purchase rights. At September 30, 2004, 13.4 million shares of common stock were reserved for issuance under various employee incentive plans.

Preferred Share Purchase Rights

Each outstanding share of common stock provides the holder with one Preferred Share Purchase Right (Right). The Rights will become exercisable only if a person or group acquires, or offers to acquire, without prior approval of the Board of Directors, 15 percent or more of the Company’s common stock. However, the Board of Directors is authorized to reduce the 15 percent threshold for triggering the Rights to not less than 10 percent. Upon exercise, each Right entitles the holder to 1/100^th of a share of Series A Junior Participating Preferred Stock of the Company (Junior Preferred Stock) at a price of $125, subject to adjustment.

36

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Upon acquisition of the Company, each Right (other than Rights held by the acquirer) will generally be exercisable for $250 worth of either common stock of the Company or common stock of the acquirer for $125. In certain circumstances, each Right may be exchanged by the Company for one share of common stock or 1/100^th of a share of Junior Preferred Stock. The Rights will expire on June 30, 2011, unless earlier exchanged or redeemed at $0.01 per Right. The rights have the effect of substantially increasing the cost of acquiring the Company in a transaction not approved by the Board of Directors.

Treasury Stock

The Company repurchased shares of its common stock as follows:

(in millions)	2004		2003		2002
Amount of share repurchases	$	179	$	154	$	102
Number of shares repurchased		5.8		6.8		4.5

At September 30, 2004, the Company is authorized to repurchase an additional $165 million of outstanding common stock.

Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss consists of the following:

	September 30
(in millions)	2004			2003
Minimum pension liability adjustment, net of taxes of $234 for 2004 and $301 for 2003	$	(399	)	$	(513	)
Foreign currency translation adjustments		3			(3	)
Foreign currency cash flow hedge adjustment		(1	)		—
Accumulated other comprehensive loss	$	(397	)	$	(516	)

13. Stock-Based Compensation

Stock Options

Options to purchase common stock of the Company have been granted under various incentive plans to directors, officers and other key employees. All of the Company’s stock-based incentive plans require options to be granted at prices equal to or above the fair market value of the common stock on the dates the options are granted. The plans provide that the option price for certain options granted under the plans may be paid by the employee in cash, shares of common stock utilizing a third-party broker arrangement, or a combination thereof. Stock options generally expire ten years from the date they are granted and vest over three years except approximately 2.0 million performance-vesting options that vest at the earlier of (a) the date the market price of the Company’s common stock reaches a specific level for a pre-determined period of time or certain other financial performance criteria are met, or (b) a period of six to nine years from the date they were granted.

Under the Company’s 2001 Long-Term Incentives Plan and Directors Stock Plan, up to 14.3 million shares of common stock may be issued by the Company as non-qualified options, incentive stock options, performance units, stock appreciation rights, and restricted stock. Shares available for future grant or payment under these plans were 7.4 million at September 30, 2004.

37

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following summarizes the activity of the Company’s stock options for 2004, 2003, and 2002:

	2004				2003				2002
(shares in thousands)	Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
Number of shares under option:
Outstanding at beginning of year	14,208		$	22.93	16,286		$	22.37	15,787		$	22.14
Granted	1,983			28.24	110			22.10	1,997			20.88
Exercised	(2,791	)		19.72	(1,745	)		16.85	(1,142	)		15.00
Canceled or expired	(89	)		27.14	(443	)		26.06	(356	)		26.33
Outstanding at end of year	13,311			24.37	14,208			22.93	16,286			22.37
Exercisable at end of year	10,014			23.34	10,618			22.89	9,952			21.91

The following table summarizes the status of the Company’s stock options outstanding at September 30, 2004:

	Options Outstanding				Options Exercisable
(shares in thousands; remaining life in years)		Weighted Average				Weighted Average Exercise Price
Range of Exercise Prices	Shares	Remaining Life	Exercise Price		Shares
$15.16 to $20.81	2,848	4.9	$	18.12	2,802	$	18.11
$20.82 to $26.47	5,401	5.8		22.20	4,729		22.35
$26.48 to $32.12	2,807	6.8		27.96	962		27.97
$32.13 to $37.78	2,255	4.6		32.99	1,521		33.11
Total	13,311	5.6		24.37	10,014		23.34

Dilutive stock options outstanding resulted in an increase in average outstanding shares of 2.6 million for 2004 and 1.0 million per year for 2003 and 2002. The average outstanding shares calculation excludes options with an exercise price that exceeds the average market price of shares during the year. Approximately 2.3 million, 4.2 million, and 8.4 million stock options were excluded from the average outstanding shares calculation in 2004, 2003, and 2002, respectively.

Other Stock-Based Compensation

The Company offers an Employee Stock Purchase Plan (ESPP) which allows employees to have withheld up to 15 percent of their base compensation toward the purchase of the Company’s stock. Under the ESPP, shares of the Company’s common stock may be purchased at six-month intervals at 85 percent of the lower of the fair market value on the first or the last day of the offering period. There are two offering periods during the year, each lasting six months, beginning on December 1 and June 1. The Company is authorized to issue 9.0 million shares under the ESPP, of which 6.0 million shares are available for future grant at September 30, 2004. The ESPP is considered a non-compensatory plan under APB 25 and accordingly no compensation expense is recorded in connection with this benefit.

The Company also sponsors a defined contribution savings plan that is available to a majority of its employees. The plan allows employees to contribute a portion of their compensation on a pre-tax and/or after-tax basis in accordance with specified guidelines. The Company matches a percentage of employee contributions using common stock of the Company up to certain limits. Employees may transfer at any time all or a portion of their balance in Company common stock to any of the alternative investment options offered within the plan. The Company’s expense related to the savings plan was $33 million for 2004 and $30 million for each of 2003 and 2002.

During 2004, 2003, and 2002, 2.2 million, 1.8 million, and 0.7 million shares, respectively, of Company common stock were issued to employees under the Company’s employee stock purchase and defined contribution savings plans at a value of $57 million, $37 million and $10 million for the respective periods. These transactions are non-cash transactions.

38

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14. Research and Development

Research and development expense is summarized as follows:

(in millions)	2004		2003		2002
Company-funded	$	218	$	216	$	253
Customer-funded		327		259		231
Total research and development	$	545	$	475	$	484

15. Other Income, Net

Other income, net is summarized as follows:

(in millions)	2004			2003			2002
Contract dispute settlement (A)	$	(7	)	$	—		$	—
Insurance settlements (B)		(5	)		—			—
Loss on equity investment (C)		7			—			—
Gain on life insurance reserve fund (D)		—			(20	)		—
Legal matters, net (E)		—			—			(12	)
Royalty income		(4	)		(9	)		(5	)
Earnings from equity affiliates		(8	)		(5	)		(4	)
Interest income		(2	)		(2	)		(2	)
Other, net		11			—			(2	)
Other income, net	$	(8	)	$	(36	)	$	(25	)

(A) The contract dispute settlement gain relates to the resolution of a legal matter from a divested business.

(B) The insurance settlements gain consists of favorable settlements related to insurance matters.

(C) The loss on equity investment relates to the Company’s investment in Tenzing (Note 8).

(D) The gain on life insurance reserve fund relates to a favorable tax ruling from the Internal Revenue Service regarding an over funded life insurance reserve trust fund. The ruling allowed the Company to use funds from the trust to pay for other employee health and welfare benefits without incurring an excise tax.

(E) Legal matters, net includes a $22 million cash gain and a $4 million reversal of a reserve associated with favorable resolutions of legal matters related to an in-flight entertainment acquisition in 1998 and the sale of a business several years ago, respectively, partially offset by reserves for other legal matters.

16. Income Taxes

The components of income tax expense are as follows:

(in millions)	2004			2003			2002
Current:
United States	$	85		$	(1	)	$	51
Non-United States		7			10			5
State and local		(1	)		(4	)		(1	)
Total current		91			5			55
Deferred:
United States		39			95			42
Non-United States		(2	)		(1	)		2
State and local		1			11			6
Total deferred		38			105			50
Income tax expense	$	129		$	110		$	105

39

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Net current deferred income tax benefits consist of the tax effects of temporary differences related to the following:

	September 30
(in millions)	2004		2003
Inventory	$	44	$	51
Product warranty costs		52		51
Customer incentives		23		16
Contract reserves		14		17
Compensation and benefits		13		14
Other, net		19		22
Current deferred income taxes	$	165	$	171

Net long-term deferred income tax benefits included in Other Assets consist of the tax effects of temporary differences related to the following:

	September 30
(in millions)	2004			2003
Retirement benefits	$	206		$	282
Property		(58	)		(52	)
Other, net		(53	)		(50	)
Long-term deferred income taxes	$	95		$	180

Management believes it is more likely than not that the current and long-term deferred tax assets will be realized through the reduction of future taxable income. Significant factors considered by management in its determination of the probability of the realization of the deferred tax assets include: (a) the historical operating results of Rockwell Collins ($452 million of United States taxable income over the past three years), (b) expectations of future earnings, and (c) the extended period of time over which the retirement benefit liabilities will be paid.

During 2004, the Company reversed $13 million of income tax reserves as a result of expirations in certain statutes of limitation related to tax contingencies assumed in connection with its acquisition of Kaiser. This adjustment was recorded as a reduction to the goodwill balance attributable to Kaiser and had no effect on income tax expense or net income.

The effective income tax rate differed from the United States statutory tax rate for the reasons set forth below:

	2004		2003		2002
Statutory tax rate	35.0	%	35.0	%	35.0	%
Research and development credit	(2.4	)	(3.6	)	(3.1	)
Extraterritorial income exclusion	(2.3	)	(2.3	)	(2.3	)
State and local income taxes	(0.1	)	1.5		0.9
Other	(0.2	)	(0.6	)	0.5
Effective income tax rate	30.0	%	30.0	%	31.0	%

Income tax expense was calculated based on the following components of income before income taxes:

(in millions)	2004		2003		2002
United States income	$	413	$	339	$	318
Non-United States income		17		29		23
Total	$	430	$	368	$	341

No provision has been made for United States federal or state, or additional foreign income taxes related to approximately $81 million of undistributed earnings of foreign subsidiaries which have been or are intended to be permanently reinvested.

Income taxes paid in 2004, 2003 and 2002 totaled $51 million, $28 million and $51 million, respectively.

40

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company is currently under audit by the Internal Revenue Service (IRS) for tax returns filed for fiscal years 2003 and 2002 as well as the short period return filed for the three months ended September 30, 2001. Rockwell Automation retains responsibility for all tax returns filed related to periods prior to the Company’s June 30, 2001 spin-off, with the exception of international jurisdictions and all tax returns related to our Kaiser subsidiary. Although the ultimate outcome is unknown, management believes that adequate amounts have been provided for and any adjustments that may result from the current IRS audits are not likely to have a material adverse effect on the Company’s results of operations, financial condition, or cash flows.

17. Financial Instruments

Fair Value of Financial Instruments

The carrying amounts and fair values of the Company’s financial instruments are as follows:

	Asset (Liability)
	September 30, 2004						September 30, 2003
(in millions)	Carrying Amount			Fair Value			Carrying Amount			Fair Value
Cash	$	196		$	196		$	66		$	66
Short-term debt		—			—			(42	)		(42	)
Long-term debt		(201	)		(200	)		—			—
Interest rate swaps		1			1			—			—
Foreign currency forward exchange contracts		(3	)		(3	)		(2	)		(2	)

The fair value of cash and short-term debt approximate their carrying value due to the short-term nature of these instruments. Fair value information for long-term debt and interest rate swaps is obtained from third parties and is based on current market interest rates and estimates of current market conditions for instruments with similar terms, maturities, and degree of risk. The fair value of foreign currency forward exchange contracts is estimated based on quoted market prices for contracts with similar maturities. These fair value estimates do not necessarily reflect the amounts the Company would realize in a current market exchange.

Interest Rate Swaps

The Company manages its exposure to interest rate risk by maintaining an appropriate mix of fixed and variable rate debt, which over time should moderate the costs of debt financing. When considered necessary, the Company may use financial instruments in the form of interest rate swaps to help meet this objective. On November 20, 2003, the Company entered into two interest rate swap contracts (the Swaps) which expire on December 1, 2013 and effectively convert $100 million of 4.75 percent fixed rate long-term notes payable to floating rate debt based on six-month LIBOR less 7.5 basis points. The Company has designated the Swaps as fair value hedges and uses the “short-cut” method for assessing effectiveness. Accordingly, changes in the fair value of the Swaps are assumed to be entirely offset by changes in the fair value of the underlying debt that is being hedged with no net gain or loss recognized in earnings. At September 30, 2004, the Swaps are recorded at a fair value of $1 million within Other Assets, offset by a $1 million fair value adjustment to Long-Term Debt (Note 9). Cash payments or receipts between the Company and counterparties to the Swaps are recorded as an adjustment to interest expense.

Foreign Currency Forward Exchange Contracts

The Company transacts business in various foreign currencies which subjects the Company’s cash flows and earnings to exposure related to changes in foreign currency exchange rates. These exposures arise primarily from purchases or sales of products and services from third-parties and intercompany inventory and royalty transactions. The Company has established a program that utilizes foreign currency forward exchange contracts (foreign currency contracts) that attempts to minimize its exposure to fluctuations in foreign currency exchange rates relating to these transactions. Foreign currency contracts provide for the exchange of currencies at specified future prices and dates and reduce exposure to currency fluctuations by generating gains and losses that are intended to offset gains and losses on the underlying transactions. Principal currencies that are hedged include the European Euro, British Pound Sterling, and Japanese Yen. The duration of foreign currency contracts is generally 12 months or less. The maximum duration of a foreign currency contract at September 30, 2004 was 24 months. Almost all of the Company’s non-functional currency firm and anticipated receivables and payables that are denominated in major currencies that can be traded on open markets are hedged using foreign currency contracts. The Company does not manage exposure to net investments in foreign subsidiaries.

41

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Notional amounts of outstanding foreign currency forward exchange contracts were $96 million and $101 million at September 30, 2004 and 2003, respectively. Notional amounts are stated in U.S. dollar equivalents at spot exchange rates at the respective dates. As of September 30, 2004 and 2003, the foreign currency forward exchange contracts are recorded at their fair values in Other Current Assets in the amounts of $2 million and $2 million, respectively, and Other Current Liabilities in the amounts of $5 million and $4 million, respectively. Net losses of $1 million were deferred within Other Comprehensive Loss relating to cash flow hedges at September 30, 2004. There were no such deferrals related to cash flow hedges at September 30, 2003. The Company expects to reclassify approximately $1 million of these net losses into earnings over the next 12 months. There was no significant impact to the Company’s earnings related to the ineffective portion of any hedging instruments during the three years ended September 30, 2004. Gains and losses related to all foreign currency contracts are recorded in Cost of Sales.

18. Guarantees and Indemnifications

Product Warranty Costs

Accrued liabilities are recorded to reflect the Company’s contractual obligations relating to warranty commitments to customers. Warranty coverage of various lengths and terms is provided to customers depending on standard offerings and negotiated contractual agreements. An estimate for warranty expense is recorded at the time of sale based on historical warranty return rates and repair costs.

Changes in the carrying amount of accrued product warranty costs are summarized as follows:

	September 30
(in millions)	2004			2003
Balance at previous September 30	$	144		$	152
Warranty costs incurred		(55	)		(59	)
Product warranty accrual		67			52
Pre-existing warranty adjustments		(2	)		(1	)
Balance at September 30	$	154		$	144

Lease Guarantee

The Company guarantees fifty percent of a lease obligation of a RSC facility. The Company’s portion of the guarantee totals $3 million and expires ratably through December 2011. Should RSC fail to meet its lease obligations, this guarantee may become a liability of the Company. This guarantee is not reflected as a liability on the Company’s Statement of Financial Position.

Letters of Credit

The Company has contingent commitments in the form of commercial letters of credit. Outstanding letters of credit are issued by banks on the Company’s behalf to support certain contractual obligations to its customers. If the Company fails to meet these contractual obligations, these letters of credit may become liabilities of the Company. Total outstanding letters of credit at September 30, 2004 were $93 million. These commitments are not reflected as liabilities on the Company’s Statement of Financial Position.

Indemnifications

The Company enters into indemnifications with lenders, counterparties in transactions such as administration of employee benefit plans, and other customary indemnifications with third parties in the normal course of business. The following are other than customary indemnifications based on the judgment of management.

In connection with agreements for the sale of portions of its business, the Company at times retains the liabilities of a business of varying amounts which relate to events occurring prior to its sale, such as tax, environmental, litigation and employment matters. The Company at times indemnifies the purchaser of a Rockwell Collins’ business in the event that a third party asserts a claim that relates to a liability retained by the Company.

The Company also provides indemnifications of varying scope and amounts to certain customers against claims of intellectual property infringement made by third parties arising from the use of Company products. These indemnifications generally require the Company to compensate the other party for certain damages and costs incurred as a result of third party intellectual property claims arising from these transactions.

42

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In relation to the Company’s spin-off from Rockwell Automation in 2001, the Company is generally obligated to indemnify and defend Rockwell Automation and its affiliates and representatives for all damages, liabilities or actions arising out of or in connection with Rockwell Automation’s Avionics and Communications business, including with respect to former operations, and the liabilities assumed by the Company as part of the separation. This indemnity obligation continues indefinitely and without any maximum limitation.

The amount the Company could be required to pay under its indemnification agreements is generally limited based on amounts specified in the underlying agreements, or in the case of some agreements, the maximum potential amount of future payments that could be required is not limited. When a potential claim is asserted under these agreements, the Company considers such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. A liability is recorded when a potential claim is both probable and estimable. The nature of these agreements prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay should counterparties to these agreements assert a claim; however, the Company currently has no material claims pending related to such agreements.

19. Contractual Obligations and Other Commitments

The following table reflects certain of the Company’s non-cancelable contractual commitments as of September 30, 2004:

	Payments Due By Period
(in millions)	2005		2006		2007		2008		2009		Thereafter		Total
Non-cancelable operating leases	$	20	$	15	$	10	$	7	$	5	$	21	$	78
Purchase contracts		9		8		3		—		—		—		20
Long-term debt		—		—		—		—		—		200		200
Interest on long-term debt		10		10		10		10		10		40		90
Total	$	39	$	33	$	23	$	17	$	15	$	261	$	388

Non-cancelable Operating Leases

The Company leases certain office and manufacturing facilities as well as certain machinery and equipment under various lease contracts with terms that meet the accounting definition of operating leases. Some leases include renewal options, which permit extensions of the expiration dates at rates approximating fair market rental rates. Rent expense for the years ended September 30, 2004, 2003, and 2002 was $26 million, $23 million, and $24 million, respectively. The Company’s commitments under these operating leases, in the form of non-cancelable future lease payments, are not reflected as a liability on its Statement of Financial Position.

Purchase Contracts

The Company may enter into purchase contracts with suppliers under which there is a commitment to buy a minimum amount of products or pay a specified amount. These commitments are not reflected as a liability on the Company’s Statement of Financial Position.

Interest on Long-term Debt

Interest payments under long-term debt obligations exclude the potential effects of the related interest rate swap contracts.

43

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

20. Environmental Matters

The Company is subject to federal, state and local regulations relating to the discharge of substances into the environment, the disposal of hazardous wastes, and other activities affecting the environment that have had and will continue to have an impact on the Company’s manufacturing operations. These environmental protection regulations may require the investigation and remediation of environmental impairments at current and previously owned or leased properties. In addition, lawsuits, claims and proceedings have been asserted on occasion against the Company alleging violations of environmental protection regulations, or seeking remediation of alleged environmental impairments, principally at previously owned or leased properties. The Company is currently involved in the investigation or remediation of ten sites under these regulations or pursuant to lawsuits asserted by third parties. Certain of these sites relate to properties purchased in connection with the acquisition of Kaiser. Rockwell Collins has certain rights to indemnification from escrow funds set aside at the time of the Kaiser acquisition that management believes are sufficient to address the Company’s potential liability relating to the Kaiser related environmental matters. As of September 30, 2004, management estimates that the total reasonably possible future costs the Company could incur from these matters to be approximately $15 million. The Company has recorded environmental reserves for these matters of $5 million as of September 30, 2004, which represents management’s best estimate of the probable future cost for these matters.

To date, compliance with environmental regulations and resolution of environmental claims have been accomplished without material effect on the Company’s liquidity and capital resources, competitive position or financial condition. Management believes that expenditures for environmental capital investment and remediation necessary to comply with present regulations governing environmental protection and other expenditures for the resolution of environmental claims will not have a material adverse effect on the Company’s business or financial position, but could possibly be material to the results of operations or cash flows of any one period. Management cannot assess the possible effect of compliance with future environmental regulations.

21. Litigation

On August 12, 2004 the United States District Court for the Northern District of Texas favorably ruled on our motion for summary judgment and dismissed the complaint of BAE Systems Electronics Limited (BAE) filed against us on April 7, 2003 alleging a single count of patent infringement involving certain head-up display (HUD) products sold by our Flight Dynamics subsidiary. BAE’s complaint sought an unspecified amount of compensatory damages, reasonable attorneys’ fees and a permanent injunction until August 2005 when the patent expires. The parties settled the case in September 2004 with no material or adverse impact on the Company.

In addition, various other lawsuits, claims and proceedings have been or may be instituted or asserted against the Company relating to the conduct of the Company’s business, including those pertaining to product liability, intellectual property, safety and health, contract and employment matters. Although the outcome of litigation cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably to the Company, management believes the disposition of matters that are pending or asserted will not have a material adverse effect on the Company’s business or financial position, but could possibly be material to the results of operations or cash flows of any one period.

22. Business Segment Information

Rockwell Collins provides design, production and support of communications and aviation electronics for commercial and military customers worldwide. The Company has two operating segments consisting of the Government Systems and Commercial Systems businesses.

The Government Systems business supplies defense communications systems and products as well as defense electronics systems and products, which include subsystems, navigation and displays, to the U.S. Department of Defense, other government agencies, civil agencies, defense contractors and foreign ministries of defense. These product lines support airborne, ground, and shipboard applications.

44

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Products sold by the Commercial Systems business include air transport aviation electronics systems and products as well as business and regional aviation electronics systems and products. These systems and products include communications, navigation, surveillance, displays and automatic flight control and flight management systems, as well as in-flight entertainment, cabin electronics and information management systems. Customers include manufacturers of commercial air transport, business and regional aircraft, commercial airlines, fractional operators and business jet operators.

Sales made to the United States Government were 43 percent, 39 percent, and 36 percent of total sales for the years ended September 30, 2004, 2003, and 2002, respectively.

The following table reflects the sales and operating results for each of the Company’s operating segments:

(in millions)	2004			2003			2002
Sales:
Government Systems	$	1,535		$	1,270		$	1,115
Commercial Systems		1,395			1,272			1,377
Total sales	$	2,930		$	2,542		$	2,492
Segment operating earnings:
Government Systems	$	282		$	250		$	193
Commercial Systems		200			137			174
Total segment operating earnings		482			387			367
Interest expense		(8	)		(3	)		(6	)
Earnings from corporate-level equity affiliate		3			4			2
Restructuring adjustment		—			—			4
General corporate, net		(47	)		(20	)		(26	)
Income before income taxes	$	430		$	368		$	341

The restructuring adjustment of $4 million in 2002 was due to lower than expected severance costs resulting from higher than expected employee attrition related to the restructuring plan announced in 2001.

The Company evaluates performance and allocates resources based upon, among other considerations, segment operating earnings before income taxes; unallocated general corporate expenses; interest expense; gains and losses from the disposition of businesses; non-recurring charges resulting from purchase accounting such as purchased research and development charges; earnings and losses from corporate-level equity affiliates; special charges related to comprehensive restructuring actions; and other special items as identified by management from time to time. Intersegment sales are not material and have been eliminated. The accounting policies used in preparing the segment information are consistent with the policies described in Note 2.

The following tables summarize the identifiable assets and investments in equity affiliates at September 30, as well as the provision for depreciation and amortization, the amount of capital expenditures for property, and earnings (losses) from equity affiliates for each of the three years ended September 30, for each of the operating segments and Corporate:

(in millions)	2004			2003			2002
Identifiable assets:
Government Systems	$	1,057		$	823		$	817
Commercial Systems		1,290			1,278			1,334
Corporate		527			490			404
Total identifiable assets	$	2,874		$	2,591		$	2,555
Investments in equity affiliates:
Government Systems	$	10		$	9		$	7
Commercial Systems		1			8			5
Corporate		57			54			50
Total investments in equity affiliates	$	68		$	71		$	62
Depreciation and amortization:
Government Systems	$	45		$	38		$	34
Commercial Systems		64			67			71
Total depreciation and amortization	$	109		$	105		$	105
Capital expenditures for property:
Government Systems	$	43		$	32		$	23
Commercial Systems		51			40			39
Total capital expenditures for property	$	94		$	72		$	62
Earnings (losses) from equity affiliates:
Government Systems	$	6		$	3		$	2
Commercial Systems		(1	)		(2	)		—
Corporate		3			4			2
Total earnings from equity affiliates	$	8		$	5		$	4

45

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The majority of the Company’s businesses are centrally located and share many common resources, infrastructures and assets in the normal course of business. Certain assets have been allocated between the operating segments primarily based on occupancy or usage, principally property, plant and equipment. Identifiable assets at Corporate consist principally of cash, net deferred income tax assets and the investment in RSC.

The following table summarizes sales by product category for the years ended September 30:

(in millions)	2004		2003		2002
Defense electronics	$	956	$	767	$	664
Defense communications		579		503		451
Air transport aviation electronics		798		746		860
Business and regional aviation electronics		597		526		517
Total	$	2,930	$	2,542	$	2,492

Product line disclosures for defense-related products are delineated based upon their underlying technologies while the air transport and business and regional aviation electronics product lines are delineated based upon the difference in underlying customer base, size of aircraft, and markets served.

The following table reflects sales for the years ended September 30 and property at September 30 by geographic region:

	Sales						Property
(in millions)	2004		2003		2002		2004		2003		2002
United States	$	2,051	$	1,667	$	1,602	$	387	$	372	$	383
Europe		508		503		425		21		18		17
Asia-Pacific		149		168		201		7		8		8
Canada		146		164		174		—		—		—
Africa / Middle East		55		25		70		—		—		—
Latin America		21		15		20		3		3		3
Total	$	2,930	$	2,542	$	2,492	$	418	$	401	$	411

Sales are attributed to the geographic regions based on the country of destination.

46

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

23. Quarterly Financial Information (Unaudited)

Quarterly financial information for the years ended September 30, 2004 and 2003 is summarized as follows:

	2004 Quarters
(in millions, except per share amounts)	First		Second		Third		Fourth		Total
Sales	$	628	$	719	$	744	$	839	$	2,930
Cost of sales		455		526		547		616		2,144
Net income		68		71		76		86		301
Earnings per share:
Basic		0.38		0.40		0.43		0.49		1.70
Diluted		0.38		0.39		0.42		0.48		1.67

Net income in the first quarter of 2004 includes a gain of $3 million ($5 million before taxes), or 2 cents per share related to the favorable settlements of insurance matters.

Net income in the third quarter of 2004 includes a gain of $4 million ($7 million before taxes) related to the resolution of a legal matter brought by the Company which was offset by a loss of $4 million ($7 million before taxes) related to our investment in Tenzing (see Note 8).

	2003 Quarters
(in millions, except per share amounts)	First		Second		Third		Fourth		Total
Sales	$	561	$	618	$	620	$	743	$	2,542
Cost of sales		416		455		451		544		1,866
Net income		49		59		77		73		258
Earnings per share:
Basic		0.27		0.33		0.43		0.41		1.44
Diluted		0.27		0.33		0.43		0.40		1.43

Net income in the third quarter of 2003 includes a gain of $12 million ($20 million before taxes), or 7 cents per share related to a favorable tax ruling on an overfunded life insurance reserve fund as described in Note 15.

47

Selected Financial Data.

The following selected financial data should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this annual report. The Statement of Operations, Statement of Financial Position and other data has been derived from our audited financial statements.

	Years Ended September 30
	2004(a)		2003(b)		2002(c)		2001(d)		2000
	(in millions, except per share amounts)
Statement of Operations Data:
Sales	$	2,930	$	2,542	$	2,492	$	2,820	$	2,510
Cost of sales		2,144		1,866		1,863		2,108		1,845
Selling, general and administrative expenses		356		341		307		351		274
Goodwill and asset impairment charges (e)		—		—		—		149		—
Income before income taxes		430		368		341		224		399
Net income		301		258		236		139		269
Diluted earnings per share		1.67		1.43		1.28		—		—
Statement of Financial Position Data:
Working capital (f)	$	699	$	530	$	402	$	504	$	508
Property		418		401		411		439		393
Goodwill and intangible assets		550		440		456		285		148
Total assets		2,874		2,591		2,555		2,637		2,100
Short-term debt		—		42		132		202		—
Long-term debt		201		—		—		—		—
Shareowners’ equity		1,133		833		987		1,110		908
Other Data:
Capital expenditures	$	94	$	72	$	62	$	110	$	98
Goodwill amortization		—		—		—		18		6
Other depreciation and amortization		109		105		105		120		100
Dividends per share		0.39		0.36		0.36		0.09		—
Stock Price:
High	$	38.08	$	27.67	$	27.70	$	24.23	$	—
Low		25.18		17.20		12.99		11.80		—
Pro Forma Financial Information: (g)
Net income	$	—	$	—	$	—	$	149	$	262
Diluted earnings per share		—		—		—		0.80		1.38

(a) Includes (a) $5 million gain ($3 million after taxes) related to favorable insurance settlements, (b) $7 million gain ($4 million after taxes) related to the resolution of a legal matter brought by us, and (c) $7 million loss ($4 million after taxes) related to our investment in Tenzing Communications, Inc.

(b) Includes a $20 million gain ($12 million after taxes) related to a favorable tax ruling on an overfunded life insurance reserve trust fund.

(c) Includes (a) $12 million net gain ($7 million after taxes) related to certain legal matters, and (b) $4 million ($2 million after taxes) reversal of a portion of the 2001 restructuring charge.

(d) Includes (a) $149 million ($108 million after taxes) of goodwill and asset impairment charges, and (b) a restructuring charge of $34 million ($22 million after taxes).

(e) Goodwill and asset impairment charges of $149 million ($108 million after taxes) include $136 million related to long-lived assets recorded in connection with the Sony Trans Com and Hughes-Avicom acquisitions and $13 million related to certain software license agreements.

(f) Working capital consists of all current assets and liabilities, including cash and short-term debt.

(g) We became an independent, publicly held company on June 29, 2001, when Rockwell International Corporation, renamed Rockwell Automation, Inc. (Rockwell), spun off its former avionics and communications business (Avionics and Communications) and certain other assets and liabilities of Rockwell by means of a distribution (the Distribution) of all our outstanding shares of common stock to the shareowners of Rockwell in a tax-free spin-off. Pro forma financial information is presented as if the adoption of SFAS No. 141, Business Combinations (SFAS 141), SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142) and the Distribution occurred on October 1, 1999. Pro forma adjustments related to the adoption of SFAS 141 and SFAS 142 include the elimination of amortization expense related to goodwill, assembled workforce, and trademarks and tradenames with indefinite lives as these intangibles are no longer being amortized. Pro forma adjustments related to the Distribution include interest expense on $300 million of commercial paper borrowings used to fund a pre-Distribution dividend to Rockwell and income and costs related to employee benefit plan obligations related to active and former Rockwell employees not associated with the Avionics and Communications business that were assumed by us in connection with the Distribution.

48

EX-21

Exhibit 21

List of Subsidiaries of Rockwell Collins, Inc.

Name	State/Country of Incorporation
Intertrade Limited	Iowa
K-Systems, Inc.	California
Kaiser Aerospace & Electronics Corporation	Nevada
(d/b/a Kaiser Electroprecision)
Kaiser Electro-Optics, Inc.	California
Kaiser Optical Systems, Inc.	Michigan
NLX Holding Corporation	Delaware
Rockwell Collins Aerospace & Electronics, Inc.	Delaware
(d/b/a Flight Dynamics and Kaiser Electronics)
Rockwell Collins Simulation & Training Solutions LLC	Delaware
Rockwell Collins Technologies LLC	Delaware
Rockwell-Collins France S.A.S.	France
Rockwell-Collins (U.K.) Limited	United Kingdom

Listed above are certain consolidated subsidiaries included in the consolidated financial statements of the Company. Unlisted subsidiaries, considered in the aggregate, do not constitute a significant subsidiary.

EX-23

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement Nos. 333-63100, 33-63120, 333-72814, and 333-102047 on Form S-3 and Nos. 333-63142 and 333-72194 on Form S-8 of Rockwell Collins, Inc. and subsidiaries (the “Company”) of our reports dated November 2, 2004, appearing in and incorporated by reference in this Annual Report on Form 10-K of the Company for the year ended September 30, 2004.

/s/ DELOITTE & TOUCHE LLP

Chicago, Illinois

December 6, 2004

EX-24

Exhibit 24

POWER OF ATTORNEY

I, the undersigned Director of Rockwell Collins, Inc., a Delaware corporation (the “Company”), hereby constitute GARY R. CHADICK, LAWRENCE A. ERICKSON and DAVID H. BREHM, and each of them singly, my true and lawful attorneys with full power to them and each of them to sign for me, and in my name and in the capacity or capacities indicated below, the Company’s Annual Report on Form 10-K for the fiscal year ended October 1, 2004, and any amendments thereto.

Signature	Title	Date
/s/ Donald R. Beall	Director	October 27, 2004
Donald R. Beall
/s/ Anthony J. Carbone	Director	November 2, 2004
Anthony J. Carbone
/s/ Michael P.C. Carns	Director	November 2, 2004
Michael P.C. Carns
/s/ Chris A. Davis	Director	November 2, 2004
Chris A. Davis
/s/ Richard J. Ferris	Director	November 2, 2004
Richard J. Ferris
/s/ Cheryl L. Shavers	Director	November 2, 2004
Cheryl L. Shavers
/s/ Joseph F. Toot, Jr.	Director	October 28, 2004
Joseph F. Toot, Jr.

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Clayton M. Jones, Chairman, President and Chief Executive Officer of Rockwell Collins, Inc., certify that:

1. I have reviewed the annual report on Form 10-K ended September 30, 2004 of Rockwell Collins, Inc.;

2. Based on my knowledge, this annual 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 annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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)) for the registrant and we 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 annual report is being prepared;

b) 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

c) 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 (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

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 function):

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: December 8, 2004	/s/ Clayton M. Jones
	Clayton M. Jones
	Chairman, President and
	Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Lawrence A. Erickson, Senior Vice President and Chief Financial Officer of Rockwell Collins, Inc., certify that:

1. I have reviewed the annual report on Form 10-K for September 30, 2004 of Rockwell Collins, Inc.;

2. Based on my knowledge, this annual 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 annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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)) for the registrant and we 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 annual report is being prepared;

b) 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

c) 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 (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

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 function):

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.

	/s/ Lawrence A. Erickson
Date: December 8, 2004	Lawrence A. Erickson
	Senior Vice President and
	Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION BY CHIEF EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Rockwell Collins, Inc. (the “Company”) on Form 10-K for the fiscal year ended September 30, 2004 (the “Report”) filed with the Securities and Exchange Commission, I, Clayton M. Jones, Chairman, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1) The Company’s Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: December 8, 2004	/s/ Clayton M. Jones
	Clayton M. Jones
	Chairman, President and
	Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION BY CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Rockwell Collins, Inc. (the “Company”) on Form 10-K for the fiscal year ended September 30, 2004 (the “Report”) filed with the Securities and Exchange Commission, I, Lawrence A. Erickson, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1) The Company’s Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: December 8, 2004	/s/ Lawrence A. Erickson
	Lawrence A. Erickson
	Senior Vice President and
	Chief Financial Officer