ITT INDUSTRIES INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT

(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
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COMMISSION FILE NO. 1-5627
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ITT INDUSTRIES, INC.

INCORPORATED IN THE STATE OF INDIANA 13-5158950
(I.R.S. EMPLOYER
IDENTIFICATION NO.)

4 WEST RED OAK LANE, WHITE PLAINS, NY 10604
(PRINCIPAL EXECUTIVE OFFICE)

TELEPHONE NUMBER: (914) 641-2000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT, ALL OF WHICH ARE
REGISTERED ON THE NEW YORK STOCK EXCHANGE, INC.:
COMMON STOCK, $1 PAR VALUE (ALSO REGISTERED ON PACIFIC STOCK EXCHANGE)
SERIES A PARTICIPATING CUMULATIVE PREFERRED STOCK PURCHASE RIGHTS (ALSO
REGISTERED ON PACIFIC STOCK EXCHANGE)
8 7/8% SENIOR DEBENTURES DUE JUNE 2003
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 (sec.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of 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 registration is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes.... No....
X

The aggregate market value of the Common Stock of the registrant held by
non-affiliates of the registrant on June 30, 2002 was approximately $6.5
billion.

As of February 28, 2003, there were outstanding 91,846,834 shares of Common
Stock, $1 par value, of the registrant.

DOCUMENTS INCORPORATED BY REFERENCE

The registrant's definitive proxy statement filed or to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A involving the
election of directors at the annual meeting of the shareholders of the
registrant scheduled to be held on May 13, 2003, is incorporated by reference in
Part III of this Form 10-K.
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TABLE OF CONTENTS

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* Included pursuant to Instruction 3 to Item 401(b) of Regulation S-K.

PART I

ITEM 1. BUSINESS

ITT Industries, Inc., with 2002 sales of approximately $4.99 billion, is a
global multi-industry company engaged directly and through its subsidiaries in
the design and manufacture of a wide range of engineered products and the
provision of related services. Our four principal business segments are Fluid
Technology, Defense Electronics & Services, Motion & Flow Control, and
Electronic Components. Prior to January 1, 2002 these segments were named Pumps
& Complementary Products, Defense Products & Services, Specialty Products and
Connectors & Switches. Also prior to January 1, 2002, Engineered Valves, now
part of our Fluid Technology Segment, reported into Specialty Products (now,
Motion & Flow Control). Material herein is presented on a basis consistent with
those business segment changes.

Our World Headquarters is located at 4 West Red Oak Lane, White Plains, NY
10604. We have approximately 38,000 employees based in 48 countries. Unless the
context otherwise indicates, references herein to "ITT Industries," the
"Company," and such words as "we," "us," and "our" include ITT Industries, Inc.
and its subsidiaries. ITT Industries, Inc. was incorporated on September 5, 1995
in Indiana. Reference is made to "-- COMPANY HISTORY AND CERTAIN RELATIONSHIPS."
Our telephone number is (914) 641-2000.

1

The table below shows, in percentage terms, our consolidated sales and
revenues and operating income attributable to each of our ongoing lines of
business for the last three years. Operating income percentages for 2001 and
2000 are adjusted to exclude the impact of goodwill amortization:

BUSINESS AND PRODUCTS

FLUID TECHNOLOGY

Fluid Technology, with sales and revenues of approximately $1.96, billion,
$1.83 billion, and $1.83 billion for 2002, 2001 and 2000, respectively, is
engaged in the design, development, production, sale, and after-sale support of
products, systems and services used to move, measure, and manage fluids. Fluid
Technology is a leading worldwide supplier of a broad range of pumps, mixers,
heat exchangers, valves, and systems for municipal, industrial, residential,
agricultural, and commercial applications. Major production and assembly
facilities are located in Argentina, Australia, Austria, Canada, China, England,
Germany, Italy, Malaysia, Mexico, the Philippines, South Korea, Sweden, and the
United States. Principal customers are in North America, Europe, the Middle
East, Africa, Latin America, and the Asia/Pacific region. No single customer
accounted for more than 2% of 2002 sales for Fluid Technology. Sales are made
directly and through independent distributors and representatives.

Fluid Technology offers a wide range of product and system solutions for
the water, wastewater, building trades, industrial and process market areas and
biopharm market.

Water

Goulds Pumps ("Goulds") provides pumps and accessories for residential,
agriculture, irrigation, sewage, and drainage. In the residential market, Goulds
offers a wide range of water systems products, including state-of-the-art
submersible and jet pumps, pressure tanks, controls and special use pumps for
the home water well industry. Over one quarter of all well water pumps in North
America are supplied by Goulds.

Other products serving the water market are supplied by Lowara. Its pumps
are used in residential, agriculture, and irrigation applications. Lowara is a
leader in stainless steel manufacturing technology.

Submersible pumps and line shaft turbine pumps provide for the pumping
needs of agriculture, aquaculture, golf courses, and similar applications.

Wastewater

Our Flygt Group is the world's originator and largest manufacturer of
submersible pumps and mixers. These pumps and mixers form the heart of many of
the world's sewage and wastewater treatment facilities. As the world's leading
producer of fluid handling pumps and related products for treating and recycling
wastewater, ITT Industries actively promotes more efficient use and re-use of
water and endeavors to raise the level of awareness of the need to preserve and
protect the earth's water resources.

We are, through our Sanitaire(R) and ABJ(TM) brands, leaders in aeration
products and systems for municipal and industrial wastewater treatment. This
broad range of products includes ceramic and membrane fine bubble diffusers,
stainless steel coarse bubble diffusers, in-place cleaning systems, and complete
activated sludge plants. Combining Flygt's submersible pumps and mixers with
Sanitaire and ABJ products provides a solution to customers' needs for complete
system solutions in wastewater treatment. Dry mount pumps from A-C Pump provide
an alternative technical solution to submersible pumps. Typical application
areas are sewage and sludge handling, circulating water applications for power
plants, desalinization, and flood control.

Building Trades

Through our Fluid Handling Division, which includes leading brands such as
Bell & Gossett(R), McDonnell & Miller(R), Hoffman Specialty(R),

2

and ITT Standard(R), we provide a broad variety of products for environmental
control in buildings and for building service and utility applications. For our
group of products, we are market leaders in liquid-based heating and air
conditioning systems and in liquid level control and steam trap products for
boiler and steam systems.

Our wide range of submersible drainage pumps from Flygt serves the
construction market by dewatering construction sites on a global basis. A-C Pump
has been in the forefront of developing, designing and custom building a wide
range of fire pump systems, including prefabricated, turnkey fire pump packages,
and house units that meet every fire protection need.

Industrial & Process

In the industrial & process business, Fluid Technology offers a broad line
of industrial pumps for moving abrasives, corrosives, slurries, solids or other
liquids. We are the ANSI standard process pump market leader. Our chemical
process pumps and valves are available in a wide variety of alloys. Other unique
non-metallic pumps and valves provide advantages when handling severe
corrosives. A line of "sealless" magnetic drive pumps from our Goulds and
Richter units is offered for services where leakage cannot be tolerated. In
mining and mineral applications, our pumps and valves provide a wide range of
corrosion and abrasion resistance. The pumps are designed for vertical,
horizontal, and submersible situations for coal prep plants, mine slurries, and
dewatering applications. Vertical turbine pumps, API process pumps, vertical can
pumps for low NPSH, fire pumps and submersibles as well as high performance
valves are available for the oil refining and gas processing industries. Our
heavy duty stock pumps and a complete line of double suction and LoPulse(R) fan
pumps are designed for pulp and paper applications.

BioPharm

The biopharm market and other similar hygienic applications such as food
and cosmetics processing is served entirely by our Engineered Valves Division
with a wide array of valve and turnkey systems that are at the heart of
extremely demanding manufacturing processes, especially of biological and
pharmaceutical compounds.

Engineered Valves designs and manufactures precision valves under the brand
name Pure-Flo(R). The design, engineering, fabrication, and installation of high
purity process piping systems and stainless steel vessels for the biopharm and
hygienic industries are served through Engineered Valves' Pure-Flo Cotter and
Pure-Flo Precision lines. Turnkey systems from Pure-Flo Cotter include process
skid systems for CIP, chromatography, fermentation, and UF, flow transfer
panels.

Life Cycle Costing

Life cycle cost is the total system cost over the life of that system. It
includes installation, energy costs, maintenance, decommissioning, as well as
the original purchase price -- which generally is a small fraction of the
overall life cycle cost. ITT Industries is focused on improving the total life
cycle cost for customers through the application of technology. With energy
conservation becoming increasingly important from a cost control as well as an
environmental perspective, life cycle costing initiatives create another factor
in market differentiation.

Global Service and Customer Care

ITT Fluid Technology is building a global network of service centers for
aftermarket customer care. Our aftermarket capabilities include the repair and
service of all brands of pumps and rotating equipment, engineering upgrades,
contract maintenance, and inventory management services. We offer field service
solutions for troubleshooting, disassembly, on-site repairs, and emergency
service.

ITT Fluid Technology -- On-Line

Electronic commerce at ITT Industries is exemplified by the web site of our
Bell & Gossett unit. On this website, contractors and specifying engineers are
now able to view products, select and quote complex pumping systems, use
software for pipe sizing and pressure drop analysis, as well as engage in
helpful on-line engineering dialogue.

3

The following table illustrates the percentage of sales and revenues for
the listed categories for the periods specified:

Our management believes that Fluid Technology has a solid technology base
and proven expertise in designing its products to meet customer needs.
Management believes that the continuing development of new products will enable
Fluid Technology to maintain and build market leadership positions in served
markets.

Order backlog for Fluid Technology was $339.8 million in 2002, compared
with $297.6 million in 2001 and $278.0 million in 2000.

Brand names include ABJ(TM), A-C(TM) Pump, Bell & Gossett(R), Flygt(R),
Goulds Pumps(R), Hoffman Specialty(R), ITT Standard(R), Lowara(R), McDonnell &
Miller(R), Richter(R), Sanitaire(R), and Vogel(R).

The level of activity in Fluid Technology is dependent upon economic
conditions in the markets served, weather conditions, in the case of municipal
markets, the ability of municipalities to fund projects for our products and
services, and other factors. See "-- COMPETITION."

Fluid Technology companies have an aggregate of approximately 11,600
employees and have 300 facilities in 137 countries.

DEFENSE ELECTRONICS & SERVICES

Defense Electronics & Services, with sales and revenues of approximately
$1.51 billion, $1.30 billion, and $1.33 billion for 2002, 2001 and 2000,
respectively, develops, manufactures, and supports high technology electronic
systems and components for worldwide defense and commercial markets as well as
provides communications systems and engineering and applied research. Operations
are in North America, Europe, and the Middle East.

Defense Electronics & Services consists of the two major areas of (i)
systems and services and (ii) defense electronics. Systems and services consists
of our systems business and our advanced engineering and sciences business.
Defense electronics consists of our aerospace and communications business, our
night vision business, our radar business, and our avionics business.

Systems and Services

The Systems Division is involved in support services and systems
engineering. The business provides support services including operations and
maintenance services for surveillance systems, communications electronics
including sensors, radars and command and control, and combat service support,
and base support and range support for government sites around the world.

The Advanced Engineering & Sciences Division designs and manufactures
advanced digital communications and sensor products and systems, and is involved
in engineering and applied research. This business provides advanced technology
services and customized products to governmental, industrial, and commercial
customers in the areas of information technology, consulting and technical
assistance, military systems effects and analysis, and hardware design, test,
and evaluation.

Defense Electronics

The ITT Aerospace/Communications Division ("A/CD") designs and manufactures
wireless networking products and software that facilitate communications in the
forward area battlefield. A/CD produces the Single Channel Ground and Airborne
Radio System ("SINCGARS") and has a contract to produce the Near Term Digital
Radio ("NTDR"), a wideband networking radio which has data transmission capacity
twenty times greater than SINCGARS. A/CD is the provider of the combat net radio
and the high capacity data radio for the UK Bowman program. A/CD is developing a
communications system for the U.S. Army that will provide audio, video and data
networking to soldiers on the battlefield. A/CD is also developing air traffic
control radios for the Federal Aviation Administration. A/CD also produces
sophisticated sounding and imaging instruments such as those used by the
National Oceanographic and Atmospheric Agency in remote sensing space payloads
to track hurricanes, tornadoes, and other weather patterns. In addition, A/CD
provides navigation payloads for the Global Positioning System ("GPS")
navigation satellite.

4

The Night Vision Division provides advanced night vision products for
airborne and ground applications enabling United States and allied military
forces to conduct night combat operations. Night Vision is the leading full
service supplier of Generation III night vision products to the United States
and allied military forces. Night Vision also produces a commercial line of
night vision products, supplying high-performance night vision devices to
federal, state and local law enforcement officers in support of Homeland
Security. It also offers night vision products for consumer recreational
applications.

The Avionics Division produces information and electronic warfare
technologies for a broad range of military aircraft to help protect aircraft
from radar-guided weapons. Avionics is developing for the United States Army and
Special Operation Forces the next-generation fully integrated airborne
electronic warfare system for rotary wing aircraft called a Suite of Integrated
Radio Frequency Countermeasures ("SIRFC"). In addition, the company has
developed a SIRFC based system for fixed wing aircraft such as the F-16, and is
also the supplier for the United States Integrated Defensive Countermeasures
("IDECM") system for fixed wing aircraft such as the F/A-18 E/F fighter fleet.
The Avionics Division is a co-developer of the integrated communications,
navigation and identification system for the U.S. Air Force F-22 Raptor.

The ITT Gilfillan Division produces and installs ship and air defense radar
and air traffic control systems both in the United States and internationally.

The following table illustrates the percentage of sales and revenues for
the listed categories for the periods specified:

Defense Electronics & Services sells its products to a wide variety of
governmental and non-governmental entities located throughout the world.
Approximately 97% of 2002 sales and revenues of Defense Electronics & Services
was to governmental and international entities, of which approximately 73% was
to the United States Government (principally in defense programs).

A substantial portion of the work of Defense Electronics & Services is
performed in the United States under prime contracts and subcontracts, some of
which by statute are subject to profit limitations and all of which are subject
to termination by the United States Government. Apart from the United States
Government, international customers and commercial customers accounted for
approximately 23% and 3%, respectively, of 2002 sales and revenues for Defense
Electronics & Services.

Sales and revenues to non-governmental entities as a percentage of total
sales and revenues for Defense Electronics & Services were 3% in 2002, 4% in
2001 and 3% in 2000. Certain products sold by Defense Electronics & Services
have particular commercial application, including night vision devices. In
addition, Defense Electronics & Services, in partnership with California
Commercial Spaceport, Inc. in a venture known as Spaceport Systems
International, provides full service payload processing and launch capability
for small to medium satellite systems in low polar earth orbits.

Funded order backlog for Defense Electronics & Services was $2.85 billion
in 2002, compared with $2.58 billion in 2001 and $2.41 billion in 2000.

The level of activity in Defense Electronics & Services is affected by
overall defense budgets, the portion of those budgets devoted to products and
services of the type provided by Defense Electronics & Services, demand and
budget availability for such products and services in areas other than defense,
and other factors. See "-- COMPETITION."

Defense Electronics & Services companies have an aggregate of approximately
9,700 employees and are present in 149 facilities in 21 countries.

MOTION & FLOW CONTROL

Motion & Flow Control, with sales and revenues of approximately $935.5
million,

5

$898.7 million and $888.9 million, for 2002, 2001 and 2000, respectively,
comprises a group of units operating in the motion control and flow control
market segments. Operations are located principally in North America and Europe,
with sales in Latin America and Asia supported through joint ventures or
distribution arrangements. Motion & Flow Control consists of Fluid Handling
Systems, Galfer, Jabsco, Koni, Aerospace Controls, HydroAir, and Conoflow.

ITT Fluid Handling Systems designs and produces engineered tubing systems
and connectors for use in applications such as braking systems, fuel supply, and
other fluid transfer applications in transportation or industrial uses. Fluid
Handling Systems' principle customers are the major North American and European
automotive makers, their key Tier 1 suppliers, and other similar customers.
Ford, General Motors, and Daimlar Chrysler, with their respective affiliates,
account for approximately 27%, 14%, and 10%, respectively, of the 2002 sales of
this unit. Fluid Handling Systems also owns 50% of a joint venture with Sanoh
Industrial Co. of Japan that supplies similar products to the major Japanese
transplant manufacturers in the United States.

Galfer designs and manufactures quality friction pads and backplates for
braking applications on vehicles. From three facilities in Italy, Galfer
services most European OEM auto makers and also operates a substantial facility
for research and testing of new materials. Approximately 61% of Galfer's 2002
business is in aftermarket activity.

The Jabsco Division is the world's leading producer of pumps and related
products for the leisure marine market. Products are sold worldwide under the
brand names Jabsco(R), Rule(R), Flojet(R), and Danforth(R). Flojet is also a
leading producer of pumps and components for beverage applications. Both Jabsco
and Flojet also produce pumps for other specialty industrial fluid dispensing
applications.

Koni designs and markets adjustable shock absorbers under the brand name
KONI(R) for high performance vehicles, trucks, buses, and railways. Customers
are principally in Europe, North America, and Asia.

ITT Aerospace Controls designs switches, valves, and controls for aerospace
applications. Principal customers are North American aircraft manufacturers
where the quality and performance required for FAA certification is a key
factor. This unit also sells switches to industrial customers for service
applications.

The HydroAir Division designs and manufacturers jets, pumps and other
components for manufacturers of whirlpool baths and hot tub spas.

ITT Conoflow markets pressure regulators and diaphragm seals for industrial
applications and natural gas vehicles.

The following table illustrates the percentage of sales and revenues for
the listed categories for the periods specified:

The level of activity for Motion & Flow Control depends upon economic
conditions in the served markets, particularly the automotive, airplane, and
marine and leisure markets. See "-- COMPETITION." Order backlog is not a
significant factor in this segment.

Motion & Flow Control companies have an aggregate of approximately 5,800
employees and have 36 facilities located in 10 countries.

ELECTRONIC COMPONENTS

Electronic Components, with sales and revenues of approximately $583.5
million, $647.0 million, $774.6 million, for 2002, 2001, and 2000, respectively,
develops and manufactures connectors, interconnects, cable assemblies, switches,
key pads, multi-function grips, panel switch assemblies, dome arrays,
input/output (I/O) card kits, smart card systems, LAN components,
high-speed/high-bandwidth network systems, and related services.

Electronic Components consists of products and services for the areas of
communications, industrial, transportation, military/aerospace, commercial
aircraft, computer, and consumer uses.

6

In the communications area, Electronic Components designs products and
provides services specifically for today's transmission and networking
industries. These products and services include connectors, interconnects, cable
assemblies, keypads, switches, panel switch assemblies, I/O card kits, smart
card systems, and LAN components, as well as high-speed/high-bandwidth network
systems and services. They are used in wireless, carrier networks, enterprise
networks, datacommunications, transmission, and switching applications.
In the industrial area, Electronic Components' products are incorporated in
various industrial equipment and control products, including DL zero insertion
force connectors, cable assemblies, electromechanical switches, and device
control interfaces. They are used in industrial controls, production equipment,
and instrument applications. Medical applications include robotic surgical,
ultrasound, and other diagnostic equipment.

In the transportation area, Electronic Components' products are
incorporated in off-highway, heavy-vehicle, and automotive applications. The
products include high reliability connectors, multi-function control assemblies,
and switches used in powertrain, instrument controls, and chassis applications.

In the military/aerospace area, Electronic Components supplies products for
mission-critical applications ranging from below the ocean to deep in space. The
products include circular, microminiature, fiber optic, and "special" connectors
used in military electronics, missiles, and space applications.

In the commercial aircraft area, Electronic Components supplies highly
reliable light, space-saving products for technically advanced aircraft. The
products include rack and panel, circular, and fiber optic connectors. Their
applications range from avionics (flight control, communications and navigation)
to passenger in-flight entertainment systems.

In the computer area, Electronic Components supplies keypads, connectors,
and switches for computers and computer peripherals.

In the consumer area, Electronic Components primarily supplies keypads for
remote control devices.

The following table illustrates the percentage of sales and revenues for
the listed categories for the periods specified:

Order backlog for Electronic Components was $143.9 million in 2002 compared
with $154.6 million in 2001 and $207.9 million in 2000.

Electronic Components products are marketed primarily under the Cannon(R)
brand name.

The level of activity for Electronic Components is affected by overall
economic conditions in the markets served and the competitive position with
respect to price, quality, technical expertise, and customer service. See
"-- COMPETITION."

Electronic Components companies have an aggregate of approximately 10,600
employees and have 22 facilities located in 9 countries.

See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" and see Note 23, "BUSINESS SEGMENT INFORMATION," in the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for further details with respect to
business segments.

ACQUISITIONS, DIVESTITURES, RESTRUCTURING, AND RELATED MATTERS

We have been involved in an ongoing program of acquiring businesses that
provide a rational fit with businesses we presently conduct and divesting
businesses that do not enhance that fit.

During 2002, we acquired the business and assets of a number of companies
for our Fluid Technology segment. These include the Pure Water division of
Waterlink, Inc. which designs and manufactures commercial, industrial and
municipal water purification systems. We also acquired the assets of PCI
Membranes from Thames Water. PCI Membranes products add chlorination
disinfection and membrane technology to Sanitaire's filtration and disinfection
businesses. In the municipal and wastewater area, we purchased the business and
assets of the

7

Royce Instrument Corporation relating to manufacture, monitoring and control
instrumentation and sensors for municipal and industrial wastewater treatment.
We also acquired the business and assets of Precision Stainless, Inc. which
provides process vessels for biopharmaceutical companies and we purchased the
business and assets of the Biopharm Manufacturing Division of Martin Petersen
Company, Inc., a manufacturer of process systems for the biopharmaceutical
industry. In wastewater applications, we acquired Svedala Robot B.V., a
manufacturer of high quality submersible pumps and pump systems used in
wastewater applications. We also acquired Flowtronex PSI Inc., a leading global
manufacturer of modular pumping systems for golf courses and other turf
irrigation, sports fields, municipal and commercial properties for our Fluid
Technology segment.

For Defense Electronics & Services, we acquired the business and assets of
Xybion Electronic Systems (XES), a designer and manufacturer of intensified
imaging systems, digital and complimentary metal-oxide semiconductor (CMOS)
cameras on December 12, 2002 and during 2002 we sold a defense related joint
venture

On January 31, 2003 we acquired the VEAM/TEC division of Northrop Grumman's
Component Technologies sector, which manufactures cylindrical, filter and fiber
optic connectors for the military/aerospace, industrial, transit, entertainment
and nuclear markets for our Electronics Components segment.

During 2001, we acquired the business and assets of a number of companies
for our Fluid Technology segment. These include Cotter Corporation, which
manufactures modular processing systems and subsystems; the Water Systems
Division of The Marley Company, which manufactures water pumping equipment;
Production Castings Incorporated, American Alloy Products, Inc., Production
Machine Inc., and Impeller Repair Services, Inc., these last four being in the
business of producing pump parts and cast repair parts. Also for our Fluid
Technology segment, during 2001, we purchased the stock of 1448170 Ontario
Limited, which sells repair parts and repairs pumps, rotating equipment and
other production and factory equipment. In 2001 we purchased the business and
assets of BIW Connector Systems, LLC, a designer and manufacturer of power
connectors for harsh environments, for our Electronic Components segment.

During 2000, we acquired C&K Components, Inc., a designer and manufacturer
of switches for the communications, computer, and electronic equipment markets.
We also acquired the Man Machine Interface business of TRW, a manufacturer of
multi-layer switch components and assemblies for the wireless mobile handset
market. Both acquisitions are for our Electronic Components segment. In
addition, we acquired the business of Aerotherm Corporation, a company that
makes guidance systems for target missiles, and sold our GaAsTEK business, both
with respect to our Defense Electronics & Services segment. In addition, we
acquired the business of HydroAir International for our Motion & Flow Control
segment.

See Note 4, "RESTRUCTURING AND ASSET IMPAIRMENT CHARGES," in the NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS regarding restructuring matters. See also
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- LIQUIDITY AND CAPITAL RESOURCES -- STATUS OF RESTRUCTURING
ACTIVITIES."

See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- RISKS AND UNCERTAINTIES -- SALES OF AUTOMOTIVE
BUSINESSES" AND NOTE 5, "DISCONTINUED OPERATIONS," in the NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS for information regarding the resolution of certain
disputes relating to the sales of automotive businesses during 1998 and further
information regarding discontinued operations.

GEOGRAPHIC MARKETS

The geographic sales base of Fluid Technology is broad. In 2002,
approximately 56% of the sales and revenues of Fluid Technology was derived from
North America, while approximately 30% was derived from Europe. The geographic
sales mix differs among products and among divisions of Fluid Technology. Our
management anticipates growth opportunities in Eastern Europe, Central Asia,
Africa/Middle East, Latin America, and the Asia/Pacific region. In China, Fluid
Technology has manufacturing and distribution facilities to produce and sell
submersible pumps for the sewage handling and mining markets and a joint venture
that produces vertical turbine pumps and includes a foundry operation. It also
has joint venture sales and manufacturing and other operations in Eastern
Europe, Latin America, Africa/Middle East, and other locations in the
Asia/Pacific region.

8

The geographic sales base of Defense Electronics & Services is
predominantly the United States, which accounted for approximately 77% of 2002
sales and revenues. Management of Defense Electronics & Services has been in the
process of increasing its international defense business and anticipates growth
opportunities in the Asia/Pacific region, Europe, and the Middle East.

The geographic sales base of Motion & Flow Control is predominantly in
North America and Europe. In 2002, approximately 60% of sales and revenues of
Motion & Flow Control were to customers in North America, and approximately 37%
of sales were to customers in Europe. Management of ITT Industries sees growth
opportunities in North America, Europe and Asia.

The geographic sales base of Electronic Components in Europe accounted for
35% of 2002 sales and revenues, North America accounted for 39% of 2002 sales
and revenues, and the Asia/Pacific region accounted for 24% of 2002 sales and
revenues. Electronic Components has manufacturing facilities within North
America, Europe, and the Asia/Pacific region. These operations supply connectors
across a broad market spectrum, including carrier networks, wireless,
transportation, military/aerospace, commercial aircraft, computer, industrial
and consumer sectors.

See Note 23, "BUSINESS SEGMENT INFORMATION," in the NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS for further geographical information concerning sales and
revenues and long-lived assets.

COMPETITION

Substantially all of our operations are in highly competitive businesses.
The nature of the competition varies across all business segments. A number of
large companies engaged in the manufacture and sale of similar lines of products
and the provision of similar services are included in the competition, as are
many small enterprises with only a few products or services. Technological
innovation, price, quality, reliability, and service are primary factors in the
markets served by the various segments of our businesses.

The Fluid Technology segment is affected by strong competition, changing
economic conditions, industry overcapacity that leads to intense pricing
pressures, and public bidding in some markets. Management of Fluid Technology
responds to competitive pressures by utilizing strong distribution networks,
strong brand names, broad product lines focused on market niches, a global
customer base, a continuous stream of new products developed from a strong
technology base, a focus on quality and customer service, and through continuous
cost improvement programs and life cycle cost initiatives.

In Defense Electronics & Services, government defense budgets, particularly
in the United States, generally have begun to increase after years of
significant declines. Business consolidations continue to change the competitive
environment. We have adjusted to these changes by focusing on the defense
electronics and services markets, by making process improvements, and through
capacity rationalization. In most of the markets served by Defense Electronics &
Services, competition is based primarily upon price, quality, technological
expertise, cycle time, and service.

In Motion & Flow Control, competition is a significant factor which has
resulted in increased pressure to reduce prices and, therefore, costs. Product
capability, quality, engineering support, and experience are also important
competitive factors.

In Electronic Components, competitive pressures continue on a global basis.
In most of the markets served, competition is based primarily upon price,
quality, technical expertise, and customer service.

EXPOSURE TO CURRENCY FLUCTUATIONS

Our companies conduct operations worldwide. We, therefore, are exposed to
the effects of fluctuations in relative currency values. Although our companies
engage in various hedging strategies with respect to their foreign currency
exposure where appropriate, it is not possible to hedge all such exposure.
Accordingly, our operating results may be impacted by fluctuations in relative
currency values.

See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- MARKET RISK EXPOSURES" and Note 18, "FINANCIAL
INSTRUMENTS," in the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

9

CYCLICALITY

Many of the markets in which our businesses operate are cyclical and can be
affected by general economic conditions in those markets. Since we manufacture
and sell products used in historically cyclical industries, such as the
construction, mining and minerals, transportation, automotive, and aerospace
industries, as well as other industries served by our Electronic Components
business, we could be adversely affected by negative cycles affecting those and
other industries.

GOVERNMENTAL REGULATION AND RELATED MATTERS

A number of our businesses are subject to governmental regulation by law or
through contractual arrangements. Our Defense Electronics & Services businesses
perform work under contracts with the United States Department of Defense and
similar agencies in certain other countries. These contracts are subject to
security and facility clearances under applicable governmental regulations,
including regulations requiring background investigations for high-level
security clearances for our executive officers. Most of such contracts are
subject to termination by the respective governmental parties on various
grounds, although such terminations have rarely occurred in the past.

ENVIRONMENTAL MATTERS

We are subject to stringent environmental laws and regulations concerning
air emissions, water discharges and waste disposal. In the United States such
environmental laws and regulations include the Federal Clean Air Act, the Clean
Water Act, the Resource, Conservation and Recovery Act, and the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA" or
"Superfund"). Environmental requirements are significant factors affecting all
operations. Management believes that our companies closely monitor all of their
respective environmental responsibilities, together with trends in environmental
laws. We have established an internal program to assess compliance with
applicable environmental requirements for all of our facilities, both domestic
and overseas. The program is designed to identify problems in a timely manner,
correct deficiencies and prevent future noncompliance. Over the past several
years we have conducted regular, thorough audits of our major operating
facilities. As a result, management believes that our companies are in
substantial compliance with current environmental regulations. Management does
not believe, based on current circumstances, that we will incur compliance costs
pursuant to such regulations that will have a material adverse effect on our
financial position, results of operations or cash flows. In addition, we have
purchased insurance protection against certain unknown risks.

See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- RISKS AND UNCERTAINTIES -- ENVIRONMENTAL MATTERS" and
"LEGAL PROCEEDINGS".

RAW MATERIALS

All of our businesses require various raw materials (e.g., metals and
plastics), the availability and prices of which may fluctuate. Although some
cost increases may be recovered through increased prices to customers, our
operating results are exposed to such fluctuations. We attempt to control such
costs through purchasing and various other programs. In recent years, our
businesses have not experienced significant difficulties in obtaining an
adequate supply of raw materials necessary for our manufacturing processes.

RESEARCH, DEVELOPMENT, AND ENGINEERING

Our businesses require substantial commitment of resources for research,
development, and engineering activities to maintain significant positions in the
markets we serve. Such activities are conducted in laboratory and engineering
facilities at several of our major manufacturing locations. Although most of our
funds dedicated to research, development, and engineering activities are applied
to areas of high technology, such as aerospace and applications involving
electronic components, these activities are important in all of our business
segments. Expenditures by ITT Industries for research, development, and
engineering relating to our on-going lines of business totaled $519.1 million in
2002, $424.7 million in 2001 and $391.2 million in 2000. Of those amounts 78.0%
in 2002, 76.4% in 2001 and 74.6% in 2000, was expended pursuant to customer
contracts.

INTELLECTUAL PROPERTY

While we own and control a number of patents, trade secrets, confidential
information, trademarks, trade names, copyrights, and other intellectual
property rights which, in the aggre-
10

gate, are of material importance to our business, management believes that our
business, as a whole, is not materially dependent upon any one intellectual
property or related group of such properties. We are licensed to use certain
patents, technology, and other intellectual property rights owned and controlled
by others, and, similarly, other companies are licensed to use certain patents,
technology, and other intellectual property rights owned and controlled by us.

Patents, patent applications, and license agreements will expire or
terminate over time by operation of law, in accordance with their terms or
otherwise. Such expiration or termination of patents, patent applications, and
license agreements is not expected by our management to have a material adverse
effect on our financial position, results of operations or cash flows.

At the time of the Distribution (see -- "COMPANY HISTORY AND CERTAIN
RELATIONSHIPS"), we obtained from ITT Destinations certain exclusive rights and
licenses to use the "ITT" name, mark, and logo. In 1999, we acquired all right,
title, and interest in and to the "ITT" name, mark, and logo and an assignment
of certain agreements granting The Hartford and ITT Educational Services, Inc.
(ESI) limited rights to use the "ITT" name, mark, and logo in their businesses.
These agreements are perpetual, and the licenses are subject to maintenance of
certain quality standards by both The Hartford and ESI.

EMPLOYEES

As of December 31, 2002, ITT Industries and its subsidiaries employed an
aggregate of approximately 38,000 people. Of this number, approximately 17,961
are employees in the United States, of whom approximately 30% are represented by
labor unions. Generally, labor relations have been maintained in a normal and
satisfactory manner.

COMPANY HISTORY AND CERTAIN RELATIONSHIPS

ITT Industries, Inc. is an Indiana corporation incorporated on September 5,
1995 as ITT Indiana, Inc. It is the successor pursuant to a statutory merger of
ITT Corporation, a Delaware corporation ("ITT Delaware"), into ITT Indiana, Inc.
effective December 20, 1995, whereupon its name became ITT Industries, Inc. ITT
Delaware, originally incorporated in Maryland in 1920 as International Telephone
and Telegraph Corporation, was reincorporated in Delaware in 1968. It changed
its name to ITT Corporation in 1983. On December 19, 1995, ITT Delaware made a
distribution (the "Distribution") to its stockholders consisting of all the
shares of common stock of ITT Destinations, Inc., a Nevada corporation ("ITT
Destinations"), and all the shares of common stock of ITT Hartford Group, Inc.,
a Delaware corporation (now known as The Hartford Financial Services Group, Inc.
or "The Hartford"), both of which were wholly-owned subsidiaries of ITT
Delaware. In connection with the Distribution, ITT Destinations changed its name
to ITT Corporation. On February 23, 1998, ITT Corporation was acquired by
Starwood Hotels & Resorts Worldwide, Inc.

ITT Delaware, ITT Destinations, and The Hartford entered into a
Distribution Agreement (the "Distribution Agreement") providing for, among other
things, certain corporate transactions required to effect the Distribution and
other arrangements among the three parties subsequent to the Distribution.

The Distribution Agreement provides for, among other things, assumptions of
liabilities and cross-indemnities generally designed to allocate the financial
responsibility for the liabilities arising out of or in connection with (i) the
former automotive, defense & electronics, and fluid technology segments to ITT
Industries and its subsidiaries, (ii) the hospitality, entertainment, and
information services businesses to ITT Destinations and its subsidiaries, and
(iii) the insurance businesses to The Hartford and its subsidiaries. The
Distribution Agreement also provides for the allocation of the financial
responsibility for the liabilities arising out of or in connection with former
and present businesses not described in the immediately preceding sentence to or
among ITT Industries, ITT Destinations, and The Hartford on a shared basis. The
Distribution Agreement provides that neither ITT Industries, ITT Destinations
nor The Hartford will take any action that would jeopardize the intended tax
consequences of the Distribution.

ITT Industries, ITT Destinations, and The Hartford also entered into
agreements in connection with the Distribution relating to intellectual
property, tax, and employee benefit matters.

One member of the Board of Directors of ITT Industries also serves on the
Board of Directors of The Hartford.

11

INTERNET ADDRESS AND INTERNET ACCESS TO CURRENT AND PERIODIC REPORTS

ITT Industries' website address is http:/ /www.itt.com. ITT Industries
makes available free of charge on or through http:/ /www.itt. com/
ir/secfilings frameset.html our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and all amendments to those reports as soon as reasonably practicable after
such material is electronically filed with or furnished to the Securities and
Exchange Commission (the "SEC").
------------------------

See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- FORWARD-LOOKING STATEMENTS" for information regarding
forward-looking statements and cautionary statements relating thereto.
------------------------

ITEM 2. PROPERTIES

Our principal executive offices are in leased premises located in White
Plains, NY. We consider the many offices, plants, warehouses, and other
properties that we own or lease to be in good condition and generally suitable
for the purposes for which they are used. These properties are located in
several states in the United States, as well as in numerous countries throughout
the world. See "BUSINESS" for further information with respect to properties in
each of our business segments, including the numbers of facilities and countries
in which they are located. See also Note 15, "Leases and Rentals," in the Notes
to Consolidated Financial Statements for further information.

ITEM 3. LEGAL PROCEEDINGS

ITT Industries and its subsidiaries are responsible, in whole or in part,
or are alleged to be responsible for environmental investigation and remediation
at approximately 104 sites in various countries. Of those sites, ITT Industries
has received notice that it is considered a Potentially Responsible Party
("PRP") at a limited number of sites by the United States Environmental
Protection Agency ("EPA") and/or a similar state agency under CERCLA or its
state equivalent. Other situations generally involve either actions brought by
private parties relating to sites formerly owned or operated by subsidiaries of
the Company seeking to recoup incurred costs or shift environmental liability to
ITT Industries pursuant to contractual language, or situations discovered by ITT
Industries through its internal environmental assessment program.

In Glendale, California ITT Industries has been involved in an
environmental proceeding relating to the San Fernando Valley aquifer. ITT
Industries is one of numerous PRPs who are alleged by the EPA to have
contributed to the contamination of the aquifer. In January 1999, the EPA filed
a complaint in the United States District Court for the Central District of
California against ITT Industries and Lockheed Martin Corporation, United States
v. ITT Industries, Inc. and Lockheed Martin Corp. CV99-00552 SVW AIJX, to
recover costs it has incurred in connection with the foregoing. In May 1999, the
EPA and the PRPs, including ITT Industries and Lockheed Martin, reached a
settlement, and a consent decree requiring the PRPs to perform additional
remedial activities was entered in August 2000. Under the settlement, the PRPs
including the Company, have constructed and are operating a water treatment
system. The PRPs have agreed to operate the system for an additional 10 years.

ITT operated a facility in Madison County Florida from 1968 until 1991. In
1995, elevated levels of contaminants were detected at the site. Since then, ITT
has been investigating the site in coordination with state and federal
environmental authorities. A remedy for the site has not yet been selected.

ITT has been involved with a number of PRPs regarding property in the City
of Bronson, Michigan operated by a former subsidiary of ITT, Higbie
Manufacturing, prior to the time ITT acquired the company. ITT and other PRPs
are investigating and remediating discharges of industrial waste which occurred
in the 1930's.

In a suit filed several years ago by ITT Industries in the California
Superior Court, Los Angeles County, ITT Corporation, et al. v. Pacific Indemnity
Corporation et al. against its insurers, ITT Industries is seeking recovery of
costs it had incurred in connection with its environmental liabilities including
the three listed above. In April 1999, the California Superior Court granted
partial summary judgment under California law, dismissing certain claims in the
California action. The California Court of Appeals accepted ITT Industries'
petition for review of the California Superior Court's order and, in March 2001,
dismissed the petition without prejudice, allowing ITT Industries to reassert
two of its

12

arguments in the California Superior Court. ITT Industries presented those
arguments to the Court and in January 2002, the Court dismissed a number of
sites from the California case. ITT appealed and the matter is before the
California Court of Appeals from a decision by the California Superior Court
dismissing claims where the costs incurred were due solely to administrative
(versus judicial) actions. ITT Industries has negotiated settlements with
certain defendant insurance companies, is engaged in negotiations with others,
and is prepared to pursue its legal remedies where reasonable negotiations are
not productive.

ITT and its subsidiary Goulds have been joined as defendants with numerous
other industrial companies in product liability lawsuits alleging injury due to
asbestos. These actions against the Company have been managed by our historic
product liability insurance carriers, and all claims, including all defense and
settlement costs, have been covered by those same carriers. These claims stem
primarily from products sold prior to 1985 that contained a part manufactured by
a third party, e.g., a gasket, which allegedly contained asbestos. The asbestos
was encapsulated in the gasket (or other) material and was non-friable. In
certain other cases, it is alleged that ITT companies were distributors for
other manufacturers' products that may have contained asbestos.

Frequently, the plaintiffs are unable to demonstrate any injury or do not
identify any ITT or Goulds product as a source of asbestos exposure. During the
past 12 months, ITT and Goulds resolved approximately 800 cases through
settlement or dismissal. The average amount of settlement per claim has been
nominal.

The Company is involved in two actions, Cannon Electric, Inc. et al. v. Ace
Property & Casualty Company et al. Superior Court, County of Los Angeles, CA,
Case No. BC 290354, and Pacific Employers Insurance Company et al., v. ITT
Industries, Inc., et al., Supreme Court, County of New York, N.Y., Case No.
03600463, both of which commenced after December 31, 2002. The parties in both
cases are seeking an appropriate allocation of responsibility for the Company's
historic asbestos liability exposures among its insurers. The California action
is filed in the same venue where the Company's environmental insurance recovery
litigation has been pending for several years. The Company is continuing to
receive insurance payments during the pendency of these actions. The Company
does not believe that the existence or pendency of these actions will have any
impact on the Company's consolidated financial position, results of operations,
or cash flows.

The Company has received notice of a suit filed in El Paso, Texas relating
to its Gilfillian Division, Bund zur Unterstutzung Radargeschadigter et al. v.
ITT Industries et al., Sup. Ct., El Paso, Texas C.A. No. 2002-4730. This
Complaint, filed by both U.S. and German citizens, alleges that ITT and four
other major companies failed to warn the plaintiffs of the dangers associated
with exposure to x-ray radiation from radar devices. The Complaint also seeks
the certification of a class of similarly injured persons. The Company's insurer
has accepted the defense of this matter.

The Company has received notice of a product liability suit filed in
Superior Court of New York, Danis v. Rule Industries et al., Sup. Ct. N.Y., C.A.
No. 115975-02, seeking damages for injuries sustained in a boat explosion. The
suit contains a number of causes of action against various defendants including
the boat manufacturer, the marina operator, and individuals working at the
marina. As to the Company, the Complaint alleges that a fume detector,
manufactured by ITT's subsidiary Rule Industries, Inc. prior to the date the
Company acquired Rule, malfunctioned. The Company's insurer has accepted the
defense of this matter.

The Company has received a Notice of Claim from Rayonier, Inc., a former
subsidiary of the Company's predecessor ITT Corporation. This claim stems from
the 1994 Distribution Agreement for the spinoff of Rayonier by ITT Corporation
and seeks an allocation of proceeds from certain settlements in connection with
the Company's environmental insurance recovery litigation. The parties are
currently in negotiations.

The Company and its subsidiaries from time to time are involved in legal
proceedings that are incidental to the operation of their businesses. Some of
these proceedings allege damages against the Company relating to, environmental
liabilities (including toxic tort, property damage and remediation),
intellectual property matters (including patent, trademark and copyright
infringement, and licensing disputes), personal injury claims (including
injuries due to product failure, design or warnings issues, asbestos expo-

13

sure, or other product liability related matters), employment and pension
matters, government contract issues and commercial or contractual disputes,
sometimes related to acquisitions or divestitures. The Company will continue to
vigorously defend itself against all claims. Although the ultimate outcome of
any legal matter cannot be predicted with certainty, based on present
information including the Company's assessment of the merits of the particular
claim, as well as its current reserves and insurance coverage, the Company does
not expect that such legal proceedings will have any material adverse impact on
the cash flow, results of operations, or financial condition of the Company on a
consolidated basis in the foreseeable future.

Reference is made to "BUSINESS -- COMPANY HISTORY AND CERTAIN
RELATIONSHIPS" for information concerning the allocation of certain liabilities
among the parties to the Distribution Agreement.

Other Legal Proceedings

In 2002, the SEC announced that it would review the annual reports on Form
10-K submitted by all Fortune 500 companies during the year. As a result, the
Company's annual report on Form 10-K for the year ended December 31, 2001 was
reviewed by the SEC and we received a comment letter from the SEC following its
review. The comments in the SEC letter primarily focused on supplemental
disclosure for items related to the divestiture of the majority of our
automotive components business in 1998, an expanded discussion of restructuring
activities, references to non-GAAP measures and further segmentation of revenues
and working capital. The Company submitted detailed responses to the SEC's
initial comment letter and two follow-up letters. Since submitting its last
response on February 10, 2003, the Company has not received further comments
from the SEC and it does not anticipate receiving any further comments.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS

No matter was submitted to a vote of our shareholders during the fourth
quarter of the fiscal year covered by this report.

EXECUTIVE OFFICERS OF THE REGISTRANT

The following information is provided regarding the executive officers of
ITT Industries:

Each of the above-named officers was elected to his or her present position
to serve at the pleasure of the Board of Directors.

Throughout the past five years, all of the above-named officers have held
executive positions with ITT Industries bearing at least sub-

14

stantially the same responsibilities as those borne in their present offices,
except that (i) Mr. Anderson, prior to his election as Senior Vice President and
Chief Financial Officer (1999), was Senior Vice President and Chief Financial
Officer of Newport News Shipbuilding (1996); (ii) Mr. Ayers, prior to his
election as Senior Vice President (2001), was Vice President (1998) and
President of Fluid Technology (1999), and, prior to that, was President of
Sulzer Bingham Pumps Inc. (1990); (iii) Mr. Crum, prior to his election as
Senior Vice President (2002) was Corporate Vice President, Motorola Corporation
Broadband Communications Sector (2000) and Senior Vice President for
Administration and Employee Resources at General Instrument Corporation (1997);
(iv) Mr. Driesse, prior to his election as Senior Vice President (2001), was
Vice President and President of Defense (2000), and, prior to that, was
President of ITT Avionics (1991); (v) Mr. Foley, prior to his election as Senior
Vice President, (2003), was Vice President, Treasurer, Director of Taxes. Mr.
Foley was elected Vice President and Treasurer in 1996, and was named to the
position of Director of Taxes in 2001; (vi) Mr. Gendron, prior to his election
as Senior Vice President (2001), was Vice President (1998), and President of
Cannon Worldwide (1997); (viii) Mr. Giuliano, prior to his election as Chairman,
President, Chief Executive Officer and Director (2001), was President and Chief
Operating Officer (1998), and, prior to that, was Senior Vice President (1995);
(ix) Mr. Martin, prior to his election as Senior Vice President, Director of
Corporate Relations (1999), was Vice President, Director of Corporate Relations
(1996); (x) Ms. Reichelderfer, prior to her election as Senior Vice President
and President of Motion & Flow Control (2002), was Vice President and President
Motion & Flow Control and held other executive positions with ITT Industries;
and (xi) Mr. Williams, prior to his election as Senior Vice President (2001),
was Vice President and Corporate Controller (1998), and, prior to that, was Vice
President and Controller of our Defense & Electronics business.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS

COMMON STOCK -- MARKET PRICES AND DIVIDENDS

The above table reflects the range of market prices of our common stock as
reported in the consolidated transaction reporting system of the New York Stock
Exchange, the principal market in which this security is traded (under the
trading symbol "ITT"). During the period from January 1, 2003 through February
28, 2003, the high and low reported market prices of our common stock were
$62.09 and $54.11, respectively.

We declared dividends of $.15 per share of common stock in each of the four
quarters of 2001 and 2002. In the first quarter of 2003, we declared a dividend
of $.16 per share.

Dividend decisions are subject to the discretion of our Board of Directors
and will be based on, and affected by, a number of factors, including operating
results and financial requirements. Therefore, there can be no assurance as to
what level of dividends, if any, will be paid in the future.

There were approximately 33,243 holders of record of our common stock on
February 28, 2003.

ITT Industries common stock is listed on the following exchanges:
Frankfurt, London, Midwest, New York, Pacific, and Paris.

15

ITEM 6. SELECTED FINANCIAL DATA

- ------------
(a) Operating income (loss) and income (loss) from continuing operations in
2002, 2001, 1999 and 1998 includes income (expense) of $3.5, $(97.7), $4.6
and $(399.4) pretax, respectively, or $2.4, $(63.5), $2.9 and $(243.6),
after-tax, respectively, for restructuring and asset impairment charges. See
Note 4 "Restructuring and Asset Impairment Charges," in the Notes to
Consolidated Financial Statements for additional information on these
topics.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

- ---------------

* The Company adopted Statement of Financial Accounting Standards No. 142 and
discontinued the amortization of goodwill as of January 1, 2002 (see Footnote
2, "Changes in Accounting Pronouncements," for further detail). Total costs
and expenses for 2001 and 2000 exclude goodwill amortization expense for
comparative purposes.

17

YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE YEAR ENDED DECEMBER 31, 2001:

Sales and revenues in 2002 were $4.99 billion, an increase of $309.6
million, or 6.6%, from 2001. Cost of sales and revenues for the year ended
December 31, 2002 increased $167.4, or 5.5% from 2001. The increases were
primarily attributable to increased sales in the Defense Electronics & Services,
Fluid Technology, and Motion & Flow Control segments partially offset by volume
declines in the Electronic Components segment.

Selling, general and administrative ("SG&A") expenses in 2002 were $720.2
million, an increase of $48.9 million, or 7.3%, from 2001. The increase was
primarily attributable to increased marketing expenses in the Fluid Technology
segment and costs associated with process improvement initiatives, increased
information technology spending and increased other administrative expenses
across all businesses.

Research, development and engineering ("RD&E") expenses increased $94.4
million, or 22.2% in 2002 compared to 2001, primarily due to increased spending
in the Defense Electronics & Services segment.

During 2002 management conducted quarterly progress reviews of the
Company's remaining restructuring actions and determined that $13.1 million of
planned cash expenditures would not be incurred. Accordingly, $13.1 million of
restructuring accruals, primarily relating to the 2001 Restructuring Plan, were
reversed into income. Also, during the fourth quarter of 2002, the Company
recorded a restructuring charge of $9.6 million related to the termination of
292 persons and the closure of two facilities. During 2001 the Company recorded
a $97.7 million restructuring and asset impairment charge to reduce structural
costs and improve profitability. Refer to the section entitled "Status of
Restructuring and Asset Impairments" and Note 4, "Restructuring and Asset
Impairment Charges," in the Notes to Consolidated Financial Statements for
additional information regarding these matters.

Operating income of $537.6 million in 2002 was $140.8 million, or 35.5%,
higher than the prior year (excluding goodwill amortization expense the increase
was $100.1 million, or 22.9%). Operating margin of 10.8%, was 230 basis points
higher than the margin for 2001 (approximately 140 basis points higher than
2001, excluding goodwill amortization expense). Excluding goodwill amortization
expense, the increases were primarily due to the $97.7 million restructuring and
asset impairment charge recorded in 2001 and increased segment volume, these
items partially offset by lower operating margins in the Electronic Components
segment, reflecting higher SG&A expenses. Increased corporate expenditures
reflecting the cost of process improvement initiatives, increased information
technology spending, and increased administrative expenses, also offset the
improved margin.

Interest expense of $32.4 million (net of interest income of $11.0 million)
decreased $29.6 million from 2001 primarily due to a favorable change in average
interest rates and lower average debt levels as a result of increased cash from
operations.

The effective income tax rate for 2002 was 25.3% compared to 35.0% for
2001. The decrease in the 2002 effective tax rate is due to approximately $31
million of tax gains related to a capital loss carryback and the benefit of
several foreign tax planning initiatives initiated in 2002 and 2001 to reduce
the structural rate. The elimination of goodwill expense, pursuant to the
adoption of Statement of Financial Accounting Standards ("SFAS") No. 142
"Goodwill and Other Intangible Assets" ("SFAS No. 142") also contributed to the
decline in the effective tax rate.

Income from continuing operations in 2002 was $379.9 million, or $4.06 per
diluted share, compared to $216.7 million, or $2.39 per diluted share. The
increase was due to higher operating income and lower interest expense. These
items were partially offset by higher income tax expense.

During the fourth quarter of 2001, the Company reassessed accruals for
discontinued operations, determined that activities related to those accruals
would be completed for $60.0 million less than originally estimated and reversed
the related accruals into income. The excess was primarily related to favorable
foreign tax rulings. See the section entitled "Discontinued Operations" and Note
5, "Discontinued Operations," in the Notes to Consolidated Financial Statements
for additional information.

18

YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000:

Sales and revenues in 2001 were $4.68 billion, a decrease of $153.7
million, or 3.2%, from 2000. Cost of sales and revenues for the year ended
December 31, 2001 decreased $150.8 million, or 4.7% from 2000. The decreases
were primarily attributable to the downturn in the communications and industrial
connectors markets of Electronic Components and the scheduled wind down of
certain Defense Electronics & Services contracts. These declines were partially
offset by new contract revenue at Defense Electronics & Services and revenues
from acquisitions made in 2000.

SG&A expenses in 2001 were $671.3 million, a decrease of $42.3 million, or
5.9%, from 2000. The decrease is primarily attributable to lower marketing
expenses at Fluid Technology and Electronic Components and reduced
administrative expenses at Electronic Components. RD&E expenses increased $33.5
million, or 8.6%, in 2001 compared to 2000, primarily due to increased spending
in the Defense Electronics & Services segment.

In December 2001, the Company announced a restructuring program to reduce
structural costs and improve profitability. Accordingly, a charge of $83.3
million was recorded. In addition, based on a review of long lived assets in the
Electronic Components segment, the Company recorded an impairment charge of
$14.4 million. Refer to the section entitled "Status of Restructuring and Asset
Impairments" and Note 4, "Restructuring and Asset Impairment Charges," in the
Notes to Consolidated Financial Statements for additional information on these
topics. There were no restructuring or asset impairment charges recorded in
2000.

Operating income of $396.8 million in 2001 was $96.3 million, or 19.5%,
lower than the prior year due to the $97.7 million restructuring and asset
impairment charges taken in 2001. Operating margin of 8.5%, was approximately
170 basis points lower than the margin for 2000. The decrease is primarily due
to the above mentioned restructuring and asset impairment charges and lower
sales volume. These items were partially offset by cost reduction efforts
related to non-production purchases and savings from headcount reductions,
primarily reflecting normal employee attrition. Improved product mix also
partially offset the decline.

Interest expense of $62.0 million (net of interest income of $6.8 million)
decreased $13.2 million from 2000 due to a favorable change in average interest
rates and increased cash from operations, partially offset by higher average
debt in the first half of 2001 associated with several acquisitions made in
2000.

The effective income tax rate for 2001 was 35.0% compared to 37.0% for
2000. The decrease in the 2001 effective tax rate was due to several initiatives
taken in 2001 and 2000 to reduce the structural rate.

Income from continuing operations in 2001 was $216.7 million or $2.39 per
diluted share compared to $264.5 million, or $2.94 per diluted share. The
decrease in net income, was primarily due to restructuring and asset impairment
charges discussed above, partially offset by a decrease in interest expense and
the lower effective tax rate.

During the fourth quarter of 2001, the Company reassessed accruals for
discontinued operations, determined that activities related to those accruals
would be completed for $60.0 million less than originally estimated and reversed
the related accruals into income. The excess was primarily related to favorable
foreign tax rulings. See the section entitled "Discontinued Operations" and Note
5, "Discontinued Operations," in the Notes to Consolidated Financial Statements
for additional information.

BUSINESS SEGMENT INFORMATION

YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE YEAR ENDED DECEMBER 31, 2001:

Fluid Technology sales and revenues of $1.96 billion increased $126.6
million, or 6.9%, from 2001. Cost of sales and revenues increased $82.6 million,
or 6.9%. The increases reflect increased volume in the Water/Wastewater and
Engineered Process Solutions Group businesses, and the contribution of 2002
acquisitions, partially offset by volume declines in the Industrial Pump
business. SG&A expenses increased $20.3 million, or 5.8%, during 2002 primarily
due to increased marketing costs. During 2002, management conducted quarterly
progress reviews of the remaining restructuring actions and reversed $1.5
million of the segment's restructuring accruals that were deemed unnecessary.
Additionally, during the fourth quarter of 2002, the Fluid Technology segment
recorded a restructuring charge of $6.0 million,
19

primarily for the reduction of 147 employees and the closure of one facility.
During the fourth quarter of 2001, the segment recorded a $16.0 million
restructuring charge. Refer to the section entitled "Status of Restructuring and
Asset Impairments" and Note 4, "Restructuring and Asset Impairment Charges," in
the Notes to Consolidated Financial Statements for additional information on
this topic. Operating income, excluding goodwill amortization expense increased
$30.9 million, or 14.0%, due to the factors discussed above.

Defense Electronics & Services sales and revenues of $1.51 billion
increased $209.1 million, or 16.0%, compared to 2001. Cost of sales and revenues
increased $99.8 million, or 13.4% from 2001. The increases were primarily
attributable to increased volume across all businesses. SG&A expenses were flat
with prior year. RD&E costs increased $86.8 million, or 26.5%, in 2002 due to
the fulfillment of increased expenditures related to customer contracts across
all businesses. During the fourth quarter of 2002, management reviewed the
remaining restructuring actions and reversed $1.0 million of the segment's
restructuring accruals that were deemed unnecessary. Refer to the section
entitled "Status of Restructuring and Asset Impairments" and Note 4,
"Restructuring and Asset Impairment Charges," in the Notes to Consolidated
Financial Statements for additional information on this topic. Operating income
for 2002 was $21.9 million, or 16.6%, greater than 2001 operating income,
excluding goodwill amortization, due to the factors mentioned above. The Defense
Electronics & Services segment's total backlog was $2.8 billion and $2.6 billion
at December 31, 2002 and 2001, respectively. The Company generally records new
contract awards into backlog when funding has been authorized and appropriated
by the customer. Management utilizes the backlog measurement when analyzing the
operations of the Defense Electronics & Services segment and believes that it is
a good indicator of the future performance of our defense businesses.

Motion & Flow Control recorded sales and revenues of $935.5 million and
cost of sales and revenues of $692.8 million for the year, representing
increases of $36.8 million, or 4.1%, and $26.5 million, or 4.0%, respectively,
over 2001. The increases were primarily due to increased volume in the
automotive fluid handling systems business due to higher North American build
rates in 2002, market share gains in the friction materials business and market
growth in the leisure marine business, partially offset by declines at Aerospace
Controls. SG&A expenses increased $4.9 million, or 6.0%, due to higher marketing
expense and fixed asset losses during 2002, partially offset by decreased
administrative expenses. During the second half of 2002, management reviewed the
remaining restructuring actions and reversed $1.5 million of the segment's
restructuring accruals that were deemed unnecessary. Additionally, during the
fourth quarter of 2002, the Motion & Flow Control segment recorded a
restructuring charge of $3.0 million, primarily for the reduction of 140
employees, the closure of one facility, and the consolidation of selected
functions. During the fourth quarter of 2001, the segment recorded a
restructuring charge of $8.1 million. Refer to the section entitled "Status of
Restructuring and Asset Impairments" and Note 4, "Restructuring and Asset
Impairment Charges," in the Notes to Consolidated Financial Statements for
additional information on this topic. Excluding goodwill amortization expense,
operating income of $122.4 million increased $8.3 million, or 7.3%, from 2001
due to the above mentioned factors.

Electronic Components sales and revenues and cost of sales and revenues
declined $63.5 million, or 9.8%, and $41.8 million, or 9.6%, respectively, from
2001. The declines reflect general softness in all of the segment's markets.
SG&A expenses increased $11.8 million, or 13.5%, during 2002 due to increased
general and administrative costs. During the second half of 2002, management
reviewed the remaining restructuring actions and reversed $8.7 million of the
segment's restructuring accruals that related to favorable completion of planned
actions and the determination that certain planned actions were not economically
feasible. Additionally, during the fourth quarter of 2002, the segment recorded
a restructuring charge of $0.6 million. During 2001, the Company recorded
restructuring and asset impairment charges of $55.2 million and $14.4 million,
respectively. Refer to the section entitled "Status of Restructuring and Asset
Impairments" and Note 4, "Restructuring and Asset Impairment Charges," in the
Notes to Consolidated Financial Statements for additional information on these
topics. Excluding goodwill amortization expense, operating income of $70.4
million was up $44.6 million from 2001 due to the above mentioned factors.
20

YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000:

Fluid Technology sales and revenues of $1.83 billion declined $4.5 million,
or 0.2%, from 2000. Cost of sales and revenues declined $1.6 million, or 0.1%.
The decreases reflect the impact of foreign currency translation and continued
weakness in the industrial pump markets partially offset by higher volume within
the water and wastewater markets. SG&A expenses decreased $11.2 million, or
3.1%, during 2001 due to cost reduction initiatives, and lower marketing
expense. Additionally, during the fourth quarter of 2001, the Fluid Technology
segment recorded a restructuring charge of $16.0 million. Refer to the section
entitled "Status of Restructuring and Asset Impairments" and Note 4,
"Restructuring and Asset Impairment Charges," in the Notes to Consolidated
Financial Statements for additional information on this topic. Operating income
decreased $3.8 million, or 1.8%, due to the factors discussed above.

Defense Electronics & Services sales and revenues of $1.30 billion
decreased $29.8 million, or 2.2%, compared to 2000. The decline was primarily
due to the scheduled wind down of certain large contracts partially offset by
the contribution of new contract revenue. Cost of sales and revenues decreased
$75.2 million, or 9.1%, from 2000 due to lower sales volume, improved margins on
certain mature contracts and higher profitability on new contracts. SG&A
expenses of $98.1 million increased $6.1 million, or 6.6% due to higher
administrative costs. RD&E costs increased $33.0 million, or 11.2%, in 2001 due
to increased spending in most businesses. Operating income for 2001 was $6.3
million, or 5.4%, greater than 2000 operating income due to the factors
mentioned above. The Defense Electronics & Services segment's total backlog was
$2.6 billion and $2.4 billion at December 31, 2001 and 2000, respectively. The
Company generally records new contract awards into backlog when funding has been
authorized and appropriated by the customer. Management utilizes the backlog
measurement when analyzing the operations of the Defense Electronics & Services
segment and believes that it is a good indicator of the future performance of
our defense businesses.

Motion & Flow Control recorded sales and revenues of $898.7 million in
2001, representing an increase of $9.8 million, or 1.1%, over 2000. The increase
is due to automotive market share gains in Europe and North America and sales
growth in the Aerospace Controls business partially offset by softness in the
leisure marine market, the impact of the decline in North American automotive
build rates and the impact of foreign currency translation. During 2001, cost of
sales and revenues increased $12.1 million, or 1.8%, due to increased volume and
start-up costs associated with new European programs at Fluid Handling Systems
partially offset by process improvements at North American Fluid Handling
Systems. SG&A expenses increased $2.1 million, or 2.7%, due to increased
administrative expenses. During 2001, the segment recorded an $8.1 million
restructuring charge. Refer to the section entitled "Status of Restructuring and
Asset Impairments" and Note 4, "Restructuring and Asset Impairment Charges," in
the Notes to Consolidated Financial Statements for additional information on
this topic. Operating income of $109.6 million declined $14.7 million, or 11.8%,
from 2000 due to the above mentioned factors.

Electronic Components sales and revenues were $647.0 million in 2001,
representing a decrease of $127.6 million, or 16.5%, from 2000. The decrease
reflects a downturn in the communications and industrial markets and the
negative impact of foreign currency translation partially offset by revenues
from acquisitions made in 2000 (which combined added approximately $64 million
of incremental sales). Cost of sales and revenues decreased $86.3 million, or
16.5%, during 2001 due to lower sales volume. SG&A expenses declined $34.9
million, or 28.5%, during 2001 due to cost reduction actions and headcount
reductions resulting from normal employee attrition. RD&E expenses of $28.6
million in 2001 increased $2.1 million, or 7.9% due to increased spending. Also,
during 2001, the Company recorded restructuring and asset impairment charges of
$55.2 million and $14.4 million, respectively. Refer to the section entitled
"Status of Restructuring and Asset Impairments" and Note 4, "Restructuring and
Asset Impairment Charges," in the Notes to Consolidated Financial Statements for
additional information on these topics. Operating income of $16.3 million was
down $82.7 million, or 83.5%, from 2000 due to the above mentioned factors.

21

STATUS OF RESTRUCTURING
AND ASSET IMPAIRMENTS

2002 RESTRUCTURING ACTIVITIES
During the fourth quarter of 2002 the Company recorded a $9.6 million
restructuring charge primarily for the closure of two facilities and the
severance of 292 persons. Severance of $8.5 million represents a majority of the
charge and lease payments and other costs represent the remainder.

Listed below, by business segment, is background information on the 2002
restructuring plan (in millions).

The actions within the Fluid Technology segment represent a reduction of
its cost structure that management deemed necessary in response to continued
weakness within certain of the segment's markets. Planned measures include the
closure of one facility in Fairfield, N.J. and the termination of 147 persons,
comprised of 78 office workers, 65 factory workers and four management
employees.

The restructuring plan within the Motion & Flow Control segment was driven
by the anticipated loss of certain platforms in the automotive fluid handling
systems business during 2003 and the resulting excess capacity. Planned actions
include the closure of one facility in Rochester, N.Y., the consolidation of
manufacturing and administrative processes, and the termination of 140
employees, comprised of 40 office workers, 97 factory workers and three
management employees.

The actions within the Electronic Components segment represent cost control
actions required by continuing difficult market conditions. These actions
include the termination of five employees, comprised of three office workers and
two management employees.

The following table displays a rollforward of the restructuring accruals
for the 2002 restructuring program (in millions):

As of December 31, 2002, remaining actions under restructuring activities
announced during 2002 were to close two facilities, and reduce headcount by 232
persons. All of the actions contemplated by the 2002 restructuring program will
be completed in 2003. Some severance run-off payments will occur in 2004 and
closed facility costs will continue through 2007. Future restructuring
expenditures will be funded with cash from operations, supplemented, as
required, with commercial paper borrowings.

The projected future cash savings from the 2002 restructuring plan are
approximately $7 million in 2003 and approximately $46 million between 2004 and
2007. The savings represents lower salary and wage expenditures and decreased
facility operating costs. The impact will be reflected in cost of sales and
revenues and selling, general and administrative expenses.

2001 RESTRUCTURING ACTIVITIES

On December 14, 2001, the Company announced a restructuring program to
reduce structural costs and improve profitability whereby the Company recorded a
charge of $83.3 million related to the closure of five facilities, the
discontinuance of 21 products (10 in the Switch product group and 11 in the
Connectors group), the severance of 3,400 persons and other asset impairments.
The cash portion of the charge of $61.0 million primarily relates to severance
and lease termination costs. The non-cash portion of the charge of $22.3 million
primarily relates to machinery and equipment that became impaired as a result of
the announced plans.

22

Listed below, by business segment, is background information on the 2001
restructuring plan (in millions).

In 2001, sales in the Electronic Components segment decreased $127.6
million, or 16.5%, and operating income, excluding restructuring, decreased
$13.1 million, or 13.2%. Excluding the contribution of acquisitions made in
2001, sales decreased approximately $192 million. The decrease was primarily due
to a downturn in the communication and industrial markets. In addition,
management expected further sales declines in 2002, specifically in the
communications, industrial, and commercial aircraft markets.

The combination of the downturn in these markets and the businesses
acquired in 2000 and late 1999 resulted in excess capacity and prompted
management to seek opportunities to reduce costs. As a result of this review,
management decided to consolidate manufacturing functions as well as other
administrative tasks throughout the segment. These planned actions included the
outsourcing of production operations from Weinstadt, Germany to third party
suppliers in Poland and Hungary, the transfer of ten product lines from five
locations in North America and Europe (Loveland, Colorado; Santa Ana,
California; Weinstadt, Germany; Basingstoke, UK; and Dole, France) to two
locations in China (Shenzhen and Tianjin), the consolidation of European
administrative functions, the transfer of production operations from Santa Ana,
California to Nogales, Mexico, the closure of manufacturing facilities in Eden
Prairie, Minnesota and Watertown, Massachusetts and other smaller actions
consisting primarily of the elimination of administrative functions. In
addition, management also decided to discontinue 21 older connector and switch
products. Revenue in 2001 from these products totaled $29.3 million.

The above planned actions included the termination of 2,753 persons,
comprised of 2,395 factory workers, 348 office workers and 10 management
employees, and resulted in a cash charge of $37.0 million (which included $33.0
million for severance) and an asset impairment charge of $18.2 million
(primarily for machinery and equipment that will be disposed of as a result of
the restructuring activities).

Actions within the Fluid Technology segment, the Motion & Flow Control
segment and Corporate Headquarters were identified as cost improvement
opportunities. Processes and functions were identified that could be outsourced,
performed at other existing facilities, or eliminated as redundant. These
measures were prompted primarily by management's efforts to reduce costs and
their projections of no recovery in the Industrial Pumps businesses and
anticipated declines in worldwide automotive build rates.

The planned actions within the Fluid Technology segment included the
outsourcing of manufacturing functions in City of Industry, California, Seneca
Falls, New York and Ashland, Pennsylvania to third party suppliers in the United
States, Mexico and China, the consolidation of tasks throughout the segment and
the closure of a foundry in Nanjing, China. These actions incorporated the
termination of 436 persons, comprised of 236 factory workers, 189 office workers
and 11 management employees, and resulted in a cash charge of $13.1 million
(which included $10.5 million for severance) and asset impairment charges of
$2.9 million (primarily for machinery and equipment that was scrapped).

The planned actions in the Motion & Flow Control segment included the
closure of a manufacturing facility in Costa Mesa, California, where the
operations were to be consolidated into three existing facilities, the closure
of a

23

manufacturing facility in Saffron Walden, England, where the operations were to
be consolidated into a facility in Denmark, the closure of a sales office in
Germany and the consolidation of other administrative tasks. These actions
included the projected termination of 183 persons comprised of 144 factory
workers, 28 office workers and 11 management employees and resulted in a cash
charge of $7.3 million (which included $4.9 million for severance) and asset
impairment charges of $0.8 million (primarily for machinery and equipment that
was discarded).

The planned actions at the Company's corporate headquarters and other
shared service facilities consisted of the consolidation of administrative tasks
which included the termination of 28 persons comprised of 26 office workers and
two management employees and resulted in a cash charge of $3.6 million (which
included $3.5 million for severance) and an asset impairment charge of $0.4
million.

During 2002 and 2001 the Company funded restructuring activities with cash
from operations. The Company plans to fund future cash requirements for
restructuring activities with cash from operations, supplemented, as required,
by commercial paper borrowings.

The following table displays a rollforward of the restructuring accruals
for the 2001 restructuring program (in millions):

During the third and fourth quarters of 2002, $1.7 million and $10.1
million of restructuring accruals were reversed into income as a result of
quarterly reviews of the Company's remaining restructuring actions,
respectively. The reversals primarily reflect less than anticipated severance
costs on completed actions at each of the segments, the decision not to transfer
five product lines (from Santa Ana, California; Weinstadt, Germany; Dole,
France, and Basingstoke, UK, to Shenzhen and Tianjin, China), as supply chain
issues eliminated the financial viability of the transfers, and the decision to
continue partial operations at one of the Electronic Component's facilities. In
addition, management determined that one facility within the Fluid Technology
segment would remain operational as a suitable outsource supplier could not be
identified.

During 2002, the Company reduced headcount by 855 persons and closed three
facilities. As of December 31, 2002, remaining actions under the 2001
restructuring program include the closure of one facility and the termination of
24 persons. Severance run-off payments will occur in 2003 and closed facility
expenditures will continue to be incurred through 2004. Revised future cash and
non-cash savings are projected to be approximately $281 million and $25 million,
respectively, for the period from 2003 to 2006.

OTHER ASSET IMPAIRMENTS

In the fourth quarter of 2001, the Company initiated a full review of
long-lived assets in the Electronic Components segment because of significant
volume declines and pricing pressures in the business and because management
expected further volume declines in 2002, specifically in the communications
market and the industrial and commercial aircraft markets. As a result of this
review, the Company recorded impairments on machinery and equipment of $13.9
million and an impairment of $0.5 million on a cost based investment. The
applicable assets were written down to their fair values based on management's
comparison of projected future discounted cash flows generated

24

by each asset to the applicable asset's carrying value. These impairments were
unrelated to the Company's restructuring activities.

SUMMARY OF 2001 RESTRUCTURING ACTIVITIES AND OTHER ASSET IMPAIRMENTS

The total impact of the restructuring initiative and the asset impairment
review was a charge of $97.7 million, or $63.5 million after-tax recorded in
2001. The revised projected aggregate future cash and non-cash savings of the
above mentioned actions are approximately $281 million and $25 million,
respectively, for the period from 2003 to 2006. These figures include total
savings of $78.6 million in 2003. The savings will be reflected primarily in
cost of sales and revenues and selling, general and administrative expenses.
Actual savings approximated plan in 2002. During the second half of 2002
management reviewed the progress of the Company's remaining restructuring
actions and determined that $11.8 million of cash expenditures would not be
incurred. Accordingly, $11.8 million of restructuring accruals relating to the
2001 Restructuring Plan were reversed into the restructuring and asset
impairments line of the Consolidated Income Statements.
In connection with the restructuring activities and the asset impairment
charge, the Company identified assets with a total book value of $26.2 million,
primarily machinery and equipment, for disposal. The Electronic Components
segment identified $22.0 million, the Fluid Technology segment identified $3.4
million and the Motion & Flow Control segment identified $0.8 million for
disposal. All assets will be disposed of by the end of 2003.

1999 RESTRUCTURING ACTIVITIES

In the fourth quarter of 1999, the Company recorded $20.2 million of
charges related to restructuring activities, primarily for the closure of four
facilities and severance of 324 persons. Listed below, by business segment, is
background information on the 1999 restructuring plan (in millions).

In the fourth quarter of 1999 management in the Fluid Technology segment
concluded that continued weakness in the industrial markets represented more
than a temporary decline. As a result, to reduce excess capacity, factories in
Guelph, Canada and Maracay, Venezuela were closed, along with related sales
offices, with the functions moved to existing facilities. In addition, a
warehouse in Nottingham, England was closed and consolidated into other European
warehouses. Other positions were also determined redundant and were eliminated.
These actions resulted in the termination of 175 persons comprised of 80 factory
workers, and 95 office workers and resulted in a cash charge of $6.9 million
(which included $5.1 million for severance) and an asset impairment charge of
$3.2 million (primarily to reduce the building and related equipment to their
fair market value).

In the Electronic Components segment, a facility was closed in Meaux,
France with the operations consolidated into existing facilities or outsourced.
The closure decision was based on sales declines of two of the major products
manufactured at the facility and management's determination that it would be
more cost effective to transfer the product line to a third party.

The closure of the Meaux facility resulted in the termination of 103
persons, comprised of 76 factory workers, 26 office workers and one management
employee, and resulted in a cash charge of $5.7 million (which included $5.4
million for severance) and an asset impairment charge of $1.1 million (primarily
for machinery

25

and equipment that will be disposed of as a result of the restructuring
activities).

The restructuring actions at Defense Electronics & Services segment amount
to $0.3 million and related to severance of five individuals whose positions
were deemed redundant and were eliminated.

The actions within the Motion & Flow Control segment primarily related to
headcount reductions at the Hockenheim, Germany factory and other headcount
reductions. The decisions were part of an ongoing effort to reduce costs through
consolidation of functions. The actions resulted in the termination of 43
persons comprised of 42 factory workers, and one office worker and resulted in a
cash charge of $1.9 million (which included $1.3 million for severance) and an
asset impairment charge of $1.1 million.

The following table displays a rollforward of the restructuring accruals
for the 1999 restructuring program (in millions):

As of December 31, 2002, the 1999 restructuring plan was completed.

OTHER ASSET IMPAIRMENTS

During the fourth quarter of 1999 the Company recorded $20.0 million of
goodwill impairments at the Fluid Technology and Defense Electronics & Services
segments. The goodwill impairments at the Fluid Technology segment related to an
unprofitable Far East operation. The goodwill impairments at the Defense
Electronics & Services segment related to a product line sold in January 2000.
Both impairments were calculated based on management's future cash flow
projections of the businesses.

SUMMARY OF 1999 RESTRUCTURING AND ASSET IMPAIRMENT ACTIVITIES

In the fourth quarter of 1999, the Company recorded $20.2 million of
charges related to restructuring activities, primarily for the closure of four
facilities and severance of 326 persons. The Company also recorded $20.0 million
of goodwill write-offs at the Fluid Technology and Defense Electronics &
Services segments.

In the fourth quarter of 1999, the Company determined that $44.8 million of
accruals relating to 1998 restructuring plans was not going to be utilized and
should be reversed into income during the quarter. The major components of the
reversal amounts consisted of savings related to severance payments ($14.9
million), asset disposal costs ($15.4 million), and professional fees ($10.3
million) and other ($4.2 million). In the fourth quarter of 2002 the Company
reversed $0.3 million and $1.0 million related to the 1999 and 1998
restructuring plans, respectively, as it was determined that these expenditures
would not be incurred. As of
26

December 31, 2002 the 1999 and 1998 restructuring plans were complete.

DISCONTINUED OPERATIONS

In September of 1998, the Company completed the sales of its automotive
Electrical Systems business to Valeo SA for approximately $1,700 million and its
Brake and Chassis unit to Continental AG of Germany for approximately $1,930
million. These dispositions were treated as discontinued operations. In
connection with the sale of these businesses, the Company established accruals
for taxes of $972.7 million, representation and warranty and contract purchase
price adjustments of $148.8 million, direct costs and other accruals of $102.0
million and environmental obligations of $16.1 million. In addition, the Company
recorded a purchase price adjustment due from Valeo SA of approximately $70
million that related to a purchase price adjustment mechanism in the contract
that called for the Company to pay or receive additional cash consideration
depending upon the actual net assets sold as compared to a target of net assets
specified in the contract.

In 1998 and 1999, the Company received notifications of claims from the
buyers of the automotive businesses requesting post-closing adjustments to the
purchase prices under the provisions of the sales agreements. The Company
assessed the claims and determined that the probable outcome was reflected in
the Company's original estimate recorded at time of sale. During 1999, those
claims were submitted to arbitration.

The following tables display a rollforward of the automotive discontinued
operations accruals from January 1, 1999 to December 31, 2002 (in thousands):

In 1999, the Company disbursed $261.0 million primarily on federal and
foreign tax obligations. The Company also paid $3.0 million to settle two
automotive product recall issues.

In 2000, the Company made payments of $7.5 million for direct costs
incurred in conjunction with the sale of the automotive businesses and for
defense costs related to the claims filed by the buyers.

During the fourth quarter of 2000, with assistance from outside counsel,
the Company determined that it was no longer probable that it would collect
approximately $70 million from Valeo SA. The Company also determined that it was
probable that it would not have to make payments to settle any outstanding Valeo
SA claim. As a result, the Company reversed approximately $70 million of
automotive discontinued operations accruals coincident with the reversal of the
Valeo SA receivable. The net of these actions had no impact to the Consolidated
Income Statement and resulted in the reduction of other liabilities and
receivables, net, in the Consolidated Balance Sheet.

27

In 2001, the Company disbursed approximately $10 million primarily for
legal defense costs related to the claims filed by the buyers. In the second
quarter of 2001, the Company settled the Continental AG claim.

In the fourth quarter of 2001, the arbitration hearing with Valeo SA
concluded. The Company also reassessed its obligations related to the disposal
of the automotive businesses and determined that it would spend $63.3 million
less on the disposition, primarily due to favorable foreign tax rulings. Based
on this assessment, $63.3 million was reversed into the 2001 Consolidated Income
Statement under income from discontinued operations.

In the first quarter of 2002, the arbitrator ruled that Valeo SA must pay
the Company monies to settle the claim related to the sale of the Electrical
Systems business.

At December 31, 2002, the Company has automotive discontinued operations
accruals of $190.0 million that primarily relate to the following: taxes $154.2
million -- which are related to the original transaction and are recorded in
accrued taxes; product recalls $8.0 million -- related to nine potential product
recall issues which are recorded in accrued expenses; environmental obligations
$14.5 million -- for the remediation and investigation of groundwater and soil
contamination at 13 sites which are recorded in other liabilities; employee
benefits $11.5 million -- for workers compensation issues which are recorded in
accrued expenses; and other $1.9 million -- for professional fees of which $0.8
million are recorded in other liabilities and $1.1 million are recorded in
accrued expenses. In 2002, the Company has spent approximately $1 million of the
automotive discontinued operations accruals. The Company expects that it will
cash settle $154.2 million of tax obligations in 2004 or 2005, when the IRS
audit for the applicable year is concluded. The Company projects between $3.0
million and $4.0 million of annual spending related to its remaining automotive
obligations.

LIQUIDITY AND CAPITAL RESOURCES

The Company continues to generate substantial cash from operations and
remains in a strong financial position with resources available for reinvestment
in existing businesses, strategic acquisitions and managing the capital
structure on a short and long-term basis. The Company plans to fund its
anticipated 2003 cash requirements with future cash from operations
supplemented, as required, by commercial paper borrowings. The Company has a
revolving credit agreement with 20 domestic and foreign banks, which provides
aggregate commitments of $1.0 billion and expires in November 2005. The
revolving credit agreement provides backup for the Company's commercial paper
program. Commercial paper borrowings at December 31, 2002 were $264.8 million.
There were no borrowings under the credit agreement at December 31, 2002. The
provisions of this facility require the Company to maintain an interest coverage
ratio, as defined, in excess of 3.75 times. At December 31, 2002, the Company's
interest coverage ratio was well in excess of the minimum requirement.

28

CASH FLOWS:

Cash flows from operating activities were $594.8 million in 2002, an
increase of $118.2 million, or 24.8%, from $476.6 million generated in 2001. The
increase is largely attributable to lower tax payments and reduced spending of
accrued expenses and accounts payable, partially offset by lower cash generated
from accounts receivable and increased pension payments.

STATUS OF RESTRUCTURING ACTIVITIES:

Restructuring payments during 2002 totaled $32.2 million and were comprised
primarily of expenditures related to the 2001 restructuring plan. The Company
forecasts restructuring payments of $14.9 million in 2003, $1.3 million in 2004
and $0.1 million thereafter. All payments are projected to be made with future
cash from operations supplemented, as required by commercial paper borrowings.

See Note 4, "Restructuring and Asset Impairment Charges," in the Notes to
Consolidated Financial Statements for a detailed discussion.

ADDITIONS TO PLANT, PROPERTY AND EQUIPMENT:

Capital expenditures during 2002 were $153.2 million, a decrease of $20.8
million from 2001. Approximately 30% of the 2002 spending occurred at Fluid
Technology primarily related to the expansion of existing product lines, new
product lines and custodial replacement. Approximately 26% was incurred at
Motion & Flow Control for process improvements and custodial replacement.
Approximately 20% was spent at Electronic Components for new product
introductions and manufacturing cost reduction initiatives. Defense Electronics
& Services expended approximately 24% of the 2002 total, primarily related to
the expansion of new and existing product lines, as well as custodial
replacements. At December 31, 2002, contractual commitments have been made for
future expenditures totaling approximately $33 million.

ACQUISITIONS:

During 2002, the Company spent $159.2 million primarily for the acquisition
of nine entities. Eight of the entities were additions to the Fluid Technology
segment and one was within the Defense Electronics & Services segment. The
Company does not believe the acquisitions are material individually or in the
aggregate to its results of operation or financial condition; however the larger
of the acquisitions were as follows:

- - Flowtronex PSI Inc. ("Flowtronex"), a manufacturer of modular pumping systems
for golf courses and other turf irrigation, sports fields, municipal and
commercial properties.

- - PCI Membranes, a provider of membrane filtration and chlorine disinfection
systems for water treatment and industrial water reuse.

- - The Biopharm Manufacturing Division of Martin Petersen Company, Inc., a
leading manufacturer of process systems for the biopharmaceutical industry.

All of the acquisitions were accounted for as purchases and, accordingly,
the results of operations of each acquired company are included in the
consolidated income statement from the date of acquisition. The excess of the
purchase prices over the fair values of net assets acquired of $117.2 million
was recorded as goodwill. The purchase price allocations for the 2002
acquisitions were based on preliminary data and changes are expected as
evaluations are completed and as additional information becomes available.
Additionally, the Company also finalized purchase price allocations related to
the 2001 acquisitions, which resulted in a decrease in goodwill of $9.2 million.

During 2001, the Company spent approximately $91 million for several small
acquisitions and investments, which were not considered material individually or
in the aggregate. The acquisitions were accounted for as purchases and the
excess of the purchase price over the fair values of net assets acquired of
$72.1 million was recorded as goodwill. Additionally during 2001, the Company
completed purchase price allocations related to acquisitions made during 2000,
which resulted in an increase of goodwill of $18.3 million.

During 2000, the Company acquired C&K Components, Inc., Man-Machine
Interface and several other small companies for approximately $192 million. The
acquisitions were accounted for as purchases. Goodwill of $173.9 million was
recorded by the Company in 2000 and amortized over a period of 25 to 30 years
depending on the appropriate life.

29

Effective January 1, 2002, the Company ceased recording goodwill
amortization in accordance with the adoption of Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets"
("SFAS No. 142"). Acquisitions made during the second half of 2001 had no
goodwill amortization in accordance with SFAS No. 142. Goodwill associated with
acquisitions made in the first half of 2001 was amortized over periods up to 40
years (See "Accounting Pronouncements" for further discussion of the impact of
SFAS No. 142). Refer to Note 2, "Changes in Accounting Pronouncements," in the
Notes to Consolidated Financial Statements for further discussion on the impacts
of this statement.
DIVESTITURES:
During 2002, the Company sold its interest in a defense-related joint
venture for approximately $6 million and other property and equipment for $5.6
million. In the second quarter of 2001, the Company sold two corporate planes
for $30.7 million and other plant, property, and equipment across all businesses
for $11.8 million. In 2000, the Company generated divestiture proceeds of $47.6
million. In the first quarter of 2000, the Company sold the net assets of
GaAsTEK, a business in the Defense Electronics & Services segment, for $28.3
million. The remaining $19.3 million of cash proceeds from the sale of assets
represents plant, property and equipment sales across all businesses.

SHARE REPURCHASE:

In 2002, 2001 and 2000, 0.7 million, 3.5 million and 1.7 million shares,
respectively, were repurchased to offset the dilutive effect of exercised stock
options.

DEBT AND CREDIT FACILITIES:

Debt at December 31, 2002 was $791.8 million, compared to $973.4 million at
December 31, 2001. The decrease in debt of $181.6 million was due to strong cash
flows from operating activities partially offset by the increase in the fair
value of the Company's interest rate swaps during 2002.

CONTRACTUAL OBLIGATIONS:

The Company has entered into contractual obligations and commercial
commitments, including long-term debt, capital and operating lease obligations
and lines of credit. The Company leases certain offices, manufacturing
buildings, land, machinery, automobiles, aircraft, computers, and other
equipment. Such leases expire at various dates and may include renewals and
escalations and often require the payment of maintenance, insurance, and tax
expense. Future minimum operating lease payments under long-term operating
leases as of December 31, 2002 are shown below (in millions).

2003.......................................... $ 61.3
2004.......................................... 54.0
2005.......................................... 45.6
2006.......................................... 37.1
2007.......................................... 31.7
2008 and thereafter........................... 169.6
------
Total minimum lease payments.................. $399.3
======

The Company is also required to make principal payments on long-term debt
over the next five years as follows (in millions):

In November 2000, the Company entered into a revolving credit agreement,
which expires in November 2005, with 20 domestic and foreign banks providing
aggregate commitments of $1.0 billion. The interest rate for borrowings under
these agreements is generally based on the London Interbank Offered Rate
("LIBOR"), plus a spread, which reflects the Company's debt rating. The
provisions of these agreements require that the Company maintain an interest
coverage ratio, as defined, of 3.75 times. At December 31, 2002, the Company's
coverage ratio was well in excess of the minimum requirement. The commitment fee
on the revolving credit agreement is .125% of the total commitment, based on the
Company's current debt ratings. The revolving credit agreement serves as backup
for the commercial paper program and is not otherwise restricted.

MARKET RISK EXPOSURES

The Company, in the normal course of doing business, is exposed to the
risks associated with changes in interest rates, currency exchange rates, and
commodity prices. To limit the risks from such fluctuations, the Company enters
into various hedging transactions that have been authorized pursuant to the
Company's policies and procedures. See Note 1,
30

"Accounting Policies," and Note 18, "Financial Instruments," in the Notes to
Consolidated Financial Statements.

To manage exposure to interest rate movements and to reduce its borrowing
costs, the Company has borrowed in several currencies and from various sources.
The Company has several fixed to floating interest rate swap agreements for a
notional amount of $349.4 million. As a result of the swaps, the interest
expense on substantially all of the Company's long-term debt is calculated on a
variable, rather than fixed rate, basis. Terms of the agreements match the terms
of the fixed debt and reference the three-month LIBOR. The carrying value of
these swaps at December 31, 2002 and 2001 was $97.0 million and $46.2 million,
including $4.0 million and $3.7 million of accrued interest, respectively.

At December 31, 2002 and 2001, the Company's short-term and long-term debt
obligations were $791.8 million and $973.4 million, respectively. In addition,
the Company's cash balances at December 31, 2002 and 2001 were $202.2 million
and $121.3 million, respectively. Based on these positions and the Company's
overall exposure to interest rates, changes of 15 and 21 basis points
(equivalent to 10% of the Company's weighted average short-term interest rates,
including the rates associated with the Company's interest rate swaps, at
December 31, 2002 and 2001, respectively) on the Company's cash and marketable
securities, and on its floating rate debt obligations and related interest rate
derivatives, would have a $0.8 million and $1.7 million effect on the Company's
pretax earnings for the years ended December 31, 2002 and 2001, respectively.
Increases of 78 and 79 basis points in long-term interest rates (equivalent to
10% of the Company's weighted average long-term interest rates at December 31,
2002 and 2001, respectively) would have a $2.8 million and $3.6 million effect
on the fair value of the Company's fixed rate debt for the years ended December
31, 2002 and 2001, respectively.

The multinational operations of the Company are exposed to foreign currency
exchange rate risk. The Company utilizes foreign currency denominated forward
contracts to hedge against adverse changes in foreign exchange rates. Such
contracts generally have durations of less than one year. The Company has
utilized foreign currency denominated derivative instruments to selectively
hedge its net long-term investments in foreign countries. During 2002, the
Company's largest exposures to foreign exchange rates exist primarily with the
Euro, Swedish Krona, and British Pound against the U.S. Dollar. At December 31,
2002, the Company had nine foreign currency derivatives outstanding for a total
notional amount of $109.1 million. A 10% adverse change in currency exchange
rates for the Company's foreign currency derivatives and other foreign currency-
denominated financial instruments, held as of December 31, 2002, would have an
impact of approximately $4.3 million on the fair value of such instruments.
During 2001, the Company's largest exposures to foreign exchange rates exist
primarily with the Euro, Swedish Krona, and British Pound against the U.S.
Dollar. At December 31, 2001, the Company had seven foreign currency derivatives
outstanding for a total notional amount of $50.3 million. A 10% adverse change
in currency exchange rates for the Company's foreign currency derivatives and
other foreign currency-denominated financial instruments, held as of December
31, 2001, would have an impact of approximately $1.2 million on the fair value
of such instruments. The Company uses derivative instruments to hedge exposures,
and as such, the quantification of the Company's market risk for foreign
exchange financial instruments does not account for the offsetting impact of the
Company's underlying investment and transactional positions.

INCOME TAXES

FOREIGN TAX CREDITS:

As a global company, the Company makes provisions for, and pays taxes in,
numerous jurisdictions, some of which impose income taxes in excess of
equivalent U.S. domestic rates. Credit for such taxes is generally available
under U.S. tax laws when earnings are remitted, or deemed to be remitted, to the
United States. The Company expects to fully utilize credits generated through
December 31, 2002 for income taxes paid in foreign jurisdictions.

DEFERRED TAX ASSETS:

The Company had net deferred tax assets of $532.9 million and $297.6
million at December 31, 2002 and 2001, respectively. The deferred tax assets for
both periods are composed of U.S., foreign, state and local deferred tax assets.
These net deferred tax assets arise

31

from temporary differences between assets and liabilities for financial
reporting and tax purposes and primarily relate to the timing of accrual
payments, employee benefits, and accelerated depreciation. It is management's
expectation that the Company will have sufficient future taxable income from
continuing operations to utilize its deductions in future periods.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported value of assets and liabilities and the
disclosure of contingent assets and liabilities.

The Company has identified three accounting policies where estimates are
used that require assumptions or factors that are of an uncertain nature, or
where a different estimate could have been reasonably utilized or changes in the
estimate are reasonably likely to occur from period to period.

ENVIRONMENTAL:

Accruals for environmental matters are recorded on a site by site basis
when it is probable that a liability has been incurred and the amount can be
reasonably estimated. The Company calculates the liability by utilizing a cost
estimating and weighting matrix that separates costs into recurring and
non-recurring categories. The Company then uses internal and external experts to
assign confidence levels based on the site's development stage, type of
contaminant found, applicable laws, existing technologies and the identification
of other potentially responsible parties. This methodology produces a range of
estimates, including a best estimate. At December 31, 2002, the Company's best
estimate is $113 million, which approximates the accrual, related to the
remediation of ground water and soil. The low range estimate for environmental
liabilities is $85 million and the high range estimate is $174 million. On an
annual basis the Company spends between $11 million and $14 million on its
environmental remediation liabilities. These estimates are reviewed periodically
and updated for progress of remediation efforts and changes in facts and legal
circumstances. Liabilities for environmental expenditures are recorded on an
undiscounted basis.

The Company is currently involved in the environmental investigation and
remediation of 104 sites, including certain instances where it is considered to
be a potentially responsible party by the United States Environmental Protection
Agency ("EPA") or similar state agency.

At present, the Company is involved in litigation against its insurers for
reimbursement of environmental response costs. Recoveries from insurance
companies or other third parties are recognized in the financial statements when
it is probable that they will be realized.

In the event that future remediation expenditures are in excess of the
amounts accrued, management does not anticipate that they will have a material
adverse effect on the consolidated financial position, results of operations or
liquidity of the Company.

See Note 21, "Commitments and Contingencies," in the Notes to Consolidated
Financial Statements for additional details on environmental matters.

EMPLOYEE BENEFIT PLANS:

The Company sponsors numerous employee pension and welfare benefit plans.
These plans utilize various assumptions in the determination of projected
benefit obligations and expense recognition related to pension and other
postretirement obligations. These assumptions include: discount rates, expected
rates of return on plan assets, rate of future compensation increases,
mortality, termination and health care inflation trend rates, some of which are
disclosed in Note 19, "Employee Benefit Plans," in the Notes to Consolidated
Financial Statements.

Key Pension Assumptions:

Management develops each assumption by using relevant Company experience in
conjunction with market related data for each individual country in which such
plans exist. All assumptions are reviewed periodically with third party
actuarial consultants and adjusted as necessary.

At December 31, 2002, the Company lowered the discount rate on all of its
domestic pension plans, which represent about 92% of the Company's total pension
obligations, from 7.25% to 6.50%. The Company's weighted average discount rate
for all pension plans, including foreign affiliate plans, at December 31, 2002,
is 6.44%.

32

Reflecting lower future expected return on assets, the Company revised
downward its estimate of the long-term rate of return on assets for domestic
pension plans to 9.0%, from 9.75% at December 31, 2002. The revised estimate of
9.0% incorporates downward adjustments from historical levels of the risk-free
rate of return and of the equity risk premium. For reference, the Company's
average annual return on plan assets for domestic pension plans stood at 9.3%,
10.4%, 11.3% and 11.9%, for the past 10, 15, 20, and 25 year periods,
respectively. The Company's weighted average expected return on plan assets for
all pension plans, including foreign affiliate plans, at December 31, 2002, is
8.86%.

Pension Funding:

The Company contributed $50.0 million to the U.S. Master Trust in the
fourth quarter of 2002, and contributed $200 million in the first quarter of
2003. As a result, the Company will not face substantial mandatory contributions
in 2004, under current IRS contribution rules.

Depending on market conditions, and assuming that current IRS contribution
rules continue to apply in the future, the Company estimates that it may be
required to contribute an additional $200 million to $400 million in the 2005 to
2006 timeframe.

The Company's Defense Electronics & Services segment represents
approximately 50% of the active U.S. Salaried Plan participants. As a result,
the Company will seek reimbursement from the Department of Defense for a portion
of its pension costs, in accordance with government regulations.

Funded Status:

Funded status is derived by subtracting the value of the projected benefit
obligations at December 31, 2002 from the end of year fair value of plan assets.

During 2002, the Company's U.S. Salaried Pension Plan assets declined by
$446.7 million to $2,341.8 million at the end of 2002. This decline reflected
primarily a negative return on assets of $291.5 million, payments to plan
beneficiaries of $202.3 million and Company contributions of $50.0 million. In
addition, the projected plan obligation for the U.S. Salaried Pension Plan
increased substantially due to the 75 basis point decrease in the discount rate
at year-end. As a result, funded status for the Company's total pension
obligation, including affiliate plans, deteriorated from $(383.5) million at the
end of 2001 to $(1,323.9) million at the end of 2002.

Funded status at the end of 2003 will depend primarily on the actual return
on assets during the year and the discount rate at the end of the year. The
Company estimates that every 25 basis points change in the discount rate impacts
the funded status of the U.S. Salaried Pension Plan, which represents about 81%
of the Company's pension obligations, by approximately $90 million. Similarly,
every five percentage points in the 2003 rate of return on assets impacts the
same plan by approximately $130 million.

Assuming a range of return on assets of -5% to +5% for 2003, and a range of
the discount rate of 6.25% to 6.75%, the Company estimates that the total
projected benefit obligations will be underfunded by approximately $1.2 billion
to $1.7 billion at December 31, 2003.

Minimum Pension Liability:

SFAS No. 87, "Employers Accounting for Pension," requires that a minimum
pension liability be recorded if a plan's market value of assets falls below the
plan's accumulated benefit obligation. In 2002, the combination of a decline in
assets and a decline in the discount rate caused several of the Company's plans
to show such a deficit. As a result, during 2002, the Company recorded a total
after-tax reduction of $765.5 million to its total shareholders' equity. It is
important to note that this reduction in total equity did not cause a default in
any of the Company's debt covenants. Future recognition of additional minimum
pension liabilities will depend primarily on the rate of return on assets and
the prevailing discount rate.

Pension Expense:

The Company recorded $10.4 million of pension income into its Consolidated
Income Statement in 2002. The Company expects to incur approximately $20 million
of pension expense that will be recorded into its Consolidated Income Statement
in 2003.

33

REVENUE RECOGNITION:

The Company recognizes revenue as services are rendered and when title
transfers for products, subject to any special terms and conditions of specific
contracts. For the majority of the Company's sales, title transfers when
products are shipped. Under certain circumstances, title passes when products
are delivered. In the Defense Electronics & Services segment, certain contracts
require the delivery, installation, testing, certification and customer
acceptance before revenue can be recorded. Further, some sales are recognized
when the customer picks up the product.

The Defense Electronics & Services segment typically recognizes revenue and
anticipated profits under long-term, fixed-price contracts based on units of
delivery or the completion of scheduled performance milestones. Estimated
contract costs and resulting margins are recorded in proportion to recorded
sales. During the performance of such contracts, estimated final contract prices
and costs (design, manufacturing, and engineering and development costs) are
periodically reviewed and revisions are made when necessary. The effect of these
revisions to estimates is included in earnings in the period in which revisions
are made. There were no material revisions to estimates in the covered periods.

Accruals for estimated expenses related to warranties are made at the time
products are sold or services are rendered. These accruals are established using
historical information on the nature, frequency and average cost of warranty
claims and estimates of future costs. Management believes the warranty accruals
are adequate; however, actual warranty expenses could differ from estimated
amounts. The accrual for product warranties at December 31, 2002 and 2001 was
$40.4 million and $37.7 million, respectively. See Note 22, "Guarantees,
Indemnities and Warranties," in the Notes to Consolidated Financial Statements
for additional details.

ACCOUNTING PRONOUNCEMENTS

The Company adopted SFAS No. 141, "Business Combinations" ("SFAS No. 141"),
effective July 1, 2001. SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001
and prohibits the use of the pooling-of-interests method. In addition, SFAS No.
141 requires intangible assets other than goodwill be identified. Such
intangibles are required to be amortized over their economic useful lives. The
adoption of SFAS No. 141, in 2001, did not have a material impact on the
Company's results of operations or financial position.

In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 142, which changes the accounting for goodwill from an amortization method
to an impairment only approach. The amortization of goodwill from past business
combinations ceased upon adoption of this statement on January 1, 2002. In
connection with the adoption of SFAS No. 142, the Company completed a
transitional goodwill impairment test that compared the fair value of each
reporting unit to its carrying value and determined that no impairment existed.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS No. 143"). The standard requires that legal
obligations associated with the retirement of tangible long-lived assets be
recorded at fair value when incurred. The Company adopted SFAS No. 143 effective
January 1, 2003. The adoption of the pronouncement did not have a material
impact on the Company's results of operations or financial position.

The Company adopted SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"), effective January 1, 2002. SFAS
No. 144 outlines accounting and financial reporting guidelines for the sale or
disposal of long-lived assets and discontinued operations. The adoption of the
pronouncement did not have a material impact on the Company's results of
operations or financial position.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized and measured at its fair value in the period it is
incurred and applies prospectively to such activities that are initiated after
December 31, 2002. The provisions of this standard are not expected to have a
material effect on the Company's future results, results of operations or
financial condition.

34

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based
Compensation -- Transition and Disclosure, an amendment of FASB Statement No.
123" ("SFAS No. 148"). SFAS No. 148 provides alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. The Statement also requires prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method on
reported results. The Company adopted the disclosure requirements of SFAS No.
148 effective December 2002 and continues to account for its plans under the
intrinsic value recognition and measurement principles of APB Opinion No. 25,
"Accounting for Stock Issues to Employees."

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires the
recognition of liabilities for guarantees that are issued or modified subsequent
to December 31, 2002. The liabilities should reflect the fair value, at
inception, of the guarantors' obligations to stand ready to perform, in the
event that the specified triggering events or conditions occur. The Company is
currently evaluating the provisions of this interpretation; however, it does not
believe they will have a material effect on the Company's future results of
operations or financial condition. The Interpretation also requires disclosure
of accounting policies and methodologies with respect to warranty accruals, as
well as a reconciliation of the change in these accruals for the reporting
period. Refer to Note 22, "Guarantees, Indemnities and Warranties," in the Notes
to Consolidated Financial Statements for additional information.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 requires unconsolidated variable
interest entities to be consoli-dated by their primary beneficiaries if the
entities do not effectively disperse the risks and rewards of ownership among
their owners and other parties involved. The provisions of FIN 46 are applicable
immediately to all variable interest entities created after January 31, 2003 and
variable interest entities in which an enterprise obtains an interest after that
date, and for variable interest entities created before this date, the
provisions are effective July 1, 2003. The Company is currently evaluating the
provisions of this interpretation; however, we do not believe they will have a
material impact on the Company's results of operations or financial position.

RISKS AND UNCERTAINTIES

ENVIRONMENTAL MATTERS:

The Company is subject to stringent environmental laws and regulations that
affect its operating facilities and impose liability for the cleanup of past
discharges of hazardous substances. In the United States, these laws include the
Federal Clean Air Act, the Clean Water Act, the Resource Conservation and
Recovery Act, and the Comprehensive Environmental Response, Compensation and
Liability Act. Management believes that the Company is in substantial compliance
with these and all other applicable environmental requirements. Environmental
compliance costs are accounted for as normal operating expenses.

In estimating the costs of environmental investigation and remediation, the
Company considers, among other things, regulatory standards, its prior
experience in remediating contaminated sites, and the professional judgment of
environmental experts. It is difficult to estimate the total costs of
investigation and remediation due to various factors, including incomplete
information regarding particular sites and other potentially responsible
parties, uncertainty regarding the extent of contamination and the Company's
share, if any, of liability for such problems, the selection of alternative
remedies, and changes in cleanup standards. When it is possible to create
reasonable estimates of liability with respect to environmental matters, the
Company establishes accruals in accordance with generally accepted accounting
principles. Insurance recoveries are included in other assets when it is
probable that a claim will be realized. Although the outcome of the Company's
various remediation efforts presently cannot be predicted with a high level of
certainty, management does not expect that these matters will have a material
adverse effect on the Company's consolidated financial position, results of
operations, or cash flows. For disclosure of the Company's commitments and
contingencies, see Note 21, "Commitments and Contingencies" in the Notes to
Consolidated Financial Statements.
35

EURO CONVERSION:

The Company successfully implemented its Euro conversion plans and has not
experienced any problems related to the conversion.

2003 OUTLOOK:

The Company does not expect improvement in overall economic conditions in
2003 due to continued low growth and overcapacity, which will continue to dampen
capital spending. Moreover, the Company anticipates continued pricing pressure
in its major commercial segments. The Company believes that Defense spending in
the United States will increase. Overall, the Company expects 2003 revenue to
increase 3% to 5% over 2002 revenue, partially as a result of acquisitions
completed in 2002. Operating margin is expected to be flat with the 2002
operating margin reflecting the increased contribution of the Defense
Electronics & Services segment and the challenging market conditions described
above. Higher taxes, including the absence of a $61.2 million tax refund, are
the primary reason that the Company anticipates lower EPS in 2003 of $3.70 to
$3.90. The Company further expects cash from operating activities to be at least
$370 million, reflecting the $200 million pre-funding of pension obligations.

In the Fluid Technology business, the Company expects continued growth in
its Water & Wastewater businesses and weakness in Industrial Pumps will
translate to revenue growth of 5% to 7% over 2002. In the Defense Electronics &
Services business, the Company believes that its record backlog and program
ramp-up will translate into revenue growth of 5% to 7% over 2002. In the Motion
& Flow Control business, the Company expects that declines in worldwide
automotive and airplane build rates, automotive platform losses and weakness in
the aerospace controls market will translate into a revenue decline of 4% to 6%
from 2002. In the Electronic Components business, the Company believes that
pricing pressures and softness in most end markets will continue. To address
these conditions, the Company will continue shifting its production footprint to
low cost regions. It is anticipated that this will entail restructuring actions
and associated period costs. Despite the challenging conditions, the Company
believes the affect of new products and market penetration will result in
revenue growth of flat to 3% from 2002.

The Company expects to receive tax refunds in 2003, some of which will
favorably impact the effective tax rate and interest expense lines of the
Consolidated Income Statements. The affect of these tax refunds are not included
in the EPS guidance provided above.

FORWARD-LOOKING STATEMENTS

Certain statements contained in this document, including within this
Management's Discussion and Analysis of Financial Condition and Results of
Operations (most particularly, material presented under "Liquidity and Capital
Resources," "Market Risk Exposures," "Critical Accounting Policies" and "Risks
and Uncertainties"), that are not historical facts, constitute "Forward-Looking
Statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements, in general, predict, forecast, indicate or
imply future results, performance or achievements and generally use words so
indicative. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results or performance
of the Company and its businesses to be materially different from that expressed
or implied by such forward-looking statements. Such factors may be described or
referred to from time to time in filings made by the Company with the Securities
and Exchange Commission. Included in those factors are the following: general
economic and business conditions; foreign currency exchange rates; political,
social and economic conditions and local regulations in the countries in which
the Company conducts its businesses; government regulations and compliance
therewith; demographic changes; sales and revenues mix; pricing levels; changes
in sales and revenues to, or the identity of, significant customers; changes in
technology; industry capacity and production rates; ability of outside third
parties to comply with their commitments; competition; capacity constraints;
availability of raw materials and adequate labor; availability of appropriate
professional expertise; availability of liquidity sufficient to meet the
Company's needs; the ability to adapt to changes resulting from acquisitions and
divestitures and to effect cost reduction programs; and various other factors
referenced in this Management's Discussion and Analysis. In some areas the
availability of energy sources may affect our production processes or customer
demand for our products or services. In addition to these factors, our business
seg-

36

ments may be affected by the more specific factors referred to below.

The Fluid Technology business will be affected by factors including global
economic conditions; governmental funding levels; international demand for fluid
management products; the ability to successfully expand into new geographic
markets; weather conditions; and continued demand for replacement parts and
servicing.

The Defense Electronics & Services business will be affected by factors
including the level of defense funding by domestic and foreign governments; our
ability to receive contract awards; and our ability to develop and market
products and services for customers outside of traditional markets.

The Motion & Flow Control business will be affected by the cyclical nature
of the transportation industries; strikes at major auto producers; and
international demand for marine and leisure products.

The Electronic Components business will be affected by the economic
conditions in its major markets, the success of new products and the cyclical
nature of the industry.

The Company assumes no obligation to update forward-looking statements to
reflect actual results or changes in or additions to the factors affecting such
forward-looking statements.

37

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information called for by Item 7A is provided under the caption "Market
Risk Exposures" in Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and in Note 16, "Financial Instruments", to
"Notes to Consolidated Financial Statements" herein.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Index to Consolidated Financial Statements and Schedule herein.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

In April 2002, the Company engaged Deloitte & Touche LLP (Deloitte &
Touche) to serve as ITT's independent auditor for 2002. Prior to that date,
Arthur Andersen LLP (Andersen) had served as the Company's independent public
accountants.

The reports by Andersen on the Company's consolidated financial statements
for the past two years did not contain an adverse opinion or disclaimer of
opinion, nor were they qualified or modified as to uncertainty, audit scope or
accounting principles. Andersen's report on ITT's consolidated financial
statements for 2001 was issued on an unqualified basis in conjunction with the
publication of ITT's 2001 Annual Report to Shareowners and the filing of ITT's
Annual Report on Form 10-K.

During the Company's two most recent fiscal years, and through the date of
the change, there were no disagreements with Andersen on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedures which, if not resolved to Andersen's satisfaction, would
have caused them to make reference to the subject matter in connection with
their report on the Company's consolidated financial statements for such years;
and there were no reportable events, as listed in Item 304(a)(1)(v) of
Regulation S-K.

The decision to change accountants was recommended by the Audit Committee
and approved by the Board of Directors on March 22, 2002.

During 2002, there were no disagreements with Deloitte & Touche on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedures which, if not resolved to Deloitte & Touche's
satisfaction, would have caused them to make reference to the subject matter in
connection with their report on the Company's consolidated financial statements
for 2002 and there were no reportable events, as listed in Item 304(a)(1)(v) of
Regulation S-K.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information called for by Item 10 with respect to directors is
incorporated herein by reference to the definitive proxy statement involving the
election of directors filed or to be filed by ITT Industries with the Securities
and Exchange Commission pursuant to Regulation 14A within 120 days after the end
of the fiscal year covered by this Form 10-K Annual Report.

The information called for by Item 10 with respect to executive officers is
set forth above in Part I under the caption "Executive Officers of the
registrant."

ITT Industries has adopted a written code of ethics, "Code of Corporate
Conduct," which is applicable to all ITT directors, officers and employees,
including the Company's Chief Executive Officer, Chief Financial Officer, and
Principal Accounting Officer and Controller and other executive officers
identified pursuant to this Item 10 (collectively, the "Selected Officers"). In
accordance with the Securities and Exchange Commission's rules and regulations a
copy of the code has been filed as an exhibit to this Form 10-K and has been
posted on our website. ITT Industries intends to disclose any changes in or
waivers from its

38

code of ethics applicable to any Selected Officer or director on its website at
http://www.itt.com.

ITEM 11. EXECUTIVE COMPENSATION

The information called for by Item 11 is incorporated herein by reference
to the definitive proxy statement referred to above in Item 10.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information called for by Item 12 is incorporated herein by reference
to the definitive proxy statement referred to above in Item 10 under the
captions "Beneficial Ownership of ITT Industries Common Stock" and "Equity
Compensation Plan Information".

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information called for by Item 13 is incorporated herein by reference
to the definitive proxy statement referred to above in Item 10.

ITEM 14. CONTROLS AND PROCEDURES

(a) The Chief Executive Officer and Chief Financial Officer of the Company
have evaluated the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-14(c) and 15d-14(c) under the Exchange Act) as of a date
within 90 days prior to the filing date of this annual report (the "Evaluation
Date"). Based on such evaluation, such officers have concluded that, as of the
Evaluation Date, the Company's disclosure controls and procedures are effective
in identifying, on a timely basis, material information required to be disclosed
in our reports filed or submitted under the Exchange Act.

(b) There have been no significant changes in our internal controls or in
other factors that could significantly affect such controls since the Evaluation
Date.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) Documents filed as a part of this report:

1. See Index to Consolidated Financial Statements and Schedule
appearing on page F-1 for a list of the financial statements and schedule
filed as a part of this report.

2. See Exhibit Index appearing on pages II-2, II-3 and II-4 for a list
of the exhibits filed or incorporated herein as a part of this report.

(b) There were no reports on Form 8-K filed by ITT Industries during the
last quarter of the period covered by this report.

39

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULE

F-1

ITT INDUSTRIES, INC. AND SUBSIDIARIES

REPORT OF MANAGEMENT

The management of ITT Industries, Inc. is responsible for the preparation
and integrity of the information contained in the consolidated financial
statements and other sections of this document. The consolidated financial
statements are prepared in accordance with accounting principles generally
accepted in the United States and, where necessary, include amounts that are
based on management's informed judgments and estimates. Other information herein
is consistent with the consolidated financial statements.

ITT Industries' consolidated financial statements are audited by Deloitte &
Touche LLP, independent auditors, whose appointment is ratified by the
shareholders. Management has made ITT Industries' financial records and related
data available to Deloitte & Touche LLP, and believes that the representations
made to the independent auditors are valid and complete.

ITT Industries' system of internal controls is a major element in
management's responsibility to assure that the consolidated financial statements
present fairly the Company's financial condition. The system includes both
accounting controls and the internal auditing program, which are designed to
provide reasonable assurance that the Company's assets are safeguarded, that
transactions are properly recorded and executed in accordance with management's
authorization, and that fraudulent financial reporting is prevented or detected.

ITT Industries' internal controls provide for the careful selection and
training of personnel and for appropriate divisions of responsibility. The
controls are documented in written codes of conduct, policies, and procedures
that are communicated to ITT Industries' employees. Management continually
monitors the system of internal controls for compliance. In addition, based upon
management's assessment of risk, both operational and financial, special reviews
are performed by contracted auditors to periodically test the effectiveness of
selected controls. The independent auditors also consider internal controls and
perform tests of accounting records to enable them to express their opinion on
ITT Industries' consolidated financial statements. They also make
recommendations for improving internal controls, policies, and practices.
Management takes appropriate action in response to each recommendation.

Within the past year ITT Industries established a Disclosure Committee with
responsibility for considering and evaluating the materiality of information and
reviewing disclosure obligations on a timely basis. The Disclosure Committee
meets regularly, reports to the General Counsel and the Chief Financial Officer
and assists the Chief Executive Officer and the Chief Financial Officer in
designing, establishing, reviewing and evaluating the Company's disclosure
controls and procedures.

The Audit Committee of the Board of Directors, composed of independent,
non-employee directors, meets periodically with management and, also separately
and privately, with the independent auditors and contracted auditors to evaluate
the effectiveness of the work performed by them in discharging their respective
responsibilities.

/s/ Louis J. Giuliano /s/ David J. Anderson
Louis J. Giuliano David J. Anderson
Chairman, President and Senior Vice President and
Chief Executive Officer Chief Financial Officer

F-2

INDEPENDENT AUDITORS' REPORT

ITT INDUSTRIES, INC. AND SUBSIDIARIES

To Board of Directors and Shareholders of ITT Industries, Inc., White Plains,
New York

We have audited the accompanying consolidated balance sheet of ITT
Industries, Inc. and subsidiaries ("the Company") as of December 31, 2002, and
the related consolidated statements of income, comprehensive income, changes in
shareholders' equity, and cash flows for the year then ended. 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 audit. The consolidated financial statements of the Company as of December
31, 2001 and for each of the years ended December 31, 2001 and 2000 were audited
by other auditors who have ceased operations. Those auditors expressed an
unqualified opinion on those financial statements in their report dated January
23, 2002.

We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 audit provides a
reasonable basis for our opinion.

In our opinion, such 2002 consolidated financial statements present fairly,
in all material respects, the financial position of ITT Industries, Inc. and
subsidiaries as of December 31, 2002, and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.

As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2002 the Company changed its method of accounting for goodwill to
conform to Statement of Financial Accounting Standards (SFAS) No. 142.

As discussed above, the consolidated financial statements of ITT
Industries, Inc. and subsidiaries as of December 31, 2001, and for each of the
years ended December 31, 2001 and 2000 were audited by other auditors who have
ceased operations. Notes 6, 13 and 17 of these financial statements include
additional disclosures related to 2001 and 2000. The additional disclosures and
the audit procedures performed by us on those additional disclosures are
described below.

Note 6 to the consolidated financial statements for the years ended
December 31, 2001 and 2000 includes additional disclosures relating to the
components comprising sales and revenues and costs of sales and revenues. Our
audit procedures with respect to the disclosures in Note 6 with respect to 2001
and 2000 included (i) agreeing the previously reported sales and revenues and
costs of sales and revenues to previously issued financial statements (ii)
agreeing the product sales, service revenues, costs of product sales and costs
of service revenues to the Company's underlying sales and revenues and costs of
sales and revenues records obtained from management, (iii) agreeing the service
revenues and costs of service revenues by segment to the Company's underlying
service revenues and costs of service revenues records obtained from management,
and (iv) testing the mathematical accuracy of the reconciliation of the product
sales, service revenues, costs of product sales and costs of service revenues.
In our opinion, the disclosures for 2001 and 2000 in Note 6 are appropriate.

As discussed in Note 13 to the consolidated financial statements, the
consolidated financial statements for the years ended December 31, 2001 and 2000
have been revised to include the transitional disclosures required by SFAS No.
142, which was adopted by the Company as of January 1, 2002. Our audit
procedures with respect to the disclosures on the consolidated income statement
and in Note 13 with respect to 2001 and 2000 included (i) agreeing the
previously reported net income to the previously issued financial statements and
the adjustments to reported net income, representing amortization expense
(including any related tax effects) recognized in

F-3

those periods related to goodwill and intangible assets that are no longer being
amortized, to the Company's underlying records obtained from management, (ii)
testing the mathematical accuracy of the reconciliation of reported net income
to adjusted net income, and the related earnings per share amounts, (iii)
agreeing goodwill by reportable segment, as of December 31, 2001, to the
Company's underlying records obtained from management, (iv) agreeing amortized
intangibles, including patents and other intangibles, and accumulated
amortization, and unamortized intangibles, including brands, trademarks, and
pension related intangibles, to the Company's underlying records obtained from
management, and (v) testing the mathematical accuracy of the reconciliation of
amortized intangibles and unamortized intangibles. In our opinion, the
disclosures for 2001 and 2000 on the consolidated income statement and in Note
13 are appropriate.

Note 17 to the consolidated financial statements for the years ended
December 31, 2001 and 2000 includes additional disclosures relating to the cash
flow components comprising the individual changes in receivables, inventories,
and accounts payable and accrued expenses. Our audit procedures with respect to
the disclosures in Note 17 with respect to 2001 and 2000 included (i) agreeing
the previously reported cumulative change in accounts receivables, inventories,
and accounts payable and accrued expenses to previously issued financial
statements (ii) agreeing the change in receivables, change in inventories, and
change in accounts payable and accrued expenses to the Company's underlying
records obtained from management, and (iii) testing the mathematical accuracy of
the reconciliation of the change in receivables, inventories, and accounts
payable and accrued expenses. In our opinion, the disclosures for 2001 and 2000
in Note 17 are appropriate.

We were not engaged to audit, review, or apply any procedures to the 2001
and 2000 consolidated financial statements of the Company other than with
respect to such disclosures mentioned above and, accordingly, we do not express
an opinion or any other form of assurance on the 2001 or 2000 consolidated
financial statements taken as a whole.

Our audit was conducted for the purpose of forming an opinion on the basic
2002 financial statements taken as a whole. The supplemental schedule listed in
the table of contents on page S-1 is presented for the purpose of additional
analysis and is not a required part of the basic financial statements. This
schedule is the responsibility of the Company's management. Such 2002 schedule
has been subjected to the auditing procedures applied in our audit of the basic
financial statements and, in our opinion, is fairly stated in all material
respects when considered in relation to the basic financial statements taken as
a whole. The 2001 and 2000 schedules were subjected to auditing procedures by
other auditors who have ceased operations. Those auditors expressed an
unqualified opinion on those financial statement schedules in their report dated
January 23, 2002.

/s/ Deloitte & Touche LLP
Stamford, Connecticut
January 22, 2003

F-4

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

ITT INDUSTRIES, INC. AND SUBSIDIARIES

To the Shareholders of ITT Industries, Inc.:

We have audited the accompanying consolidated financial statements of ITT
Industries, Inc. (an Indiana corporation) and subsidiaries as of December 31,
2001 and 2000, and for each of the three years in the period ended December 31,
2001, as set forth on the accompanying Index to Consolidated Financial
Statements and Schedule. These financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and schedule based on our
audits.

We conducted our audits in accordance with auditing standards generally
accepted in the 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, the financial statements referred to above present fairly,
in all material respects, the financial position of ITT Industries, Inc. and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the Index to
Consolidated Financial Statements and Schedule is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.

ARTHUR ANDERSEN LLP

STAMFORD, CONNECTICUT
JANUARY 23, 2002

This is a copy of the audit report previously issued by Arthur Andersen LLP
in connection with the Company's 2001 annual report on Form 10-K. This audit
report has not been reissued by Arthur Andersen LLP. Refer to Exhibit 23.2
regarding the implications of the lack of an updated consent from Arthur
Andersen LLP to the use of this audit report.

F-5

ITT INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENTS

The accompanying Notes to Consolidated Financial Statements are an integral part
of the above statements.

F-6

ITT INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

The accompanying Notes to Consolidated Financial Statements are an integral part
of the above statements.

F-7

ITT INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

The accompanying Notes to Consolidated Financial Statements are an integral part
of the above statements.

F-8

ITT INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying Notes to Consolidated Financial Statements are an integral part
of the above statements.

F-9

ITT INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

The accompanying Notes to Consolidated Financial Statements are an integral part
of the above statements.

F-10

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE STATED)

NOTE 1
ACCOUNTING POLICIES

CONSOLIDATION PRINCIPLES:

The consolidated financial statements include the accounts of ITT
Industries, Inc. and all majority owned subsidiaries (the "Company"). The
Company consolidates companies in which it owns more than 50% of the voting
shares. The results of companies acquired or disposed of during the fiscal year
are included in the consolidated financial statements from the effective date of
acquisition or up to the date of disposal. All intercompany transactions have
been eliminated. See Note 23, "Business Segment Information," for a description
of the Company's segments.

SALES AND REVENUE RECOGNITION:

The Company recognizes revenues as services are rendered and when title
transfers for products, subject to any special terms and conditions of specific
contracts. Our Defense Electronics & Services segment generally recognizes sales
and anticipated profits under long-term fixed-price contracts based on the units
of delivery or the completion of scheduled performance milestones. Estimated
contract profits are recorded into earnings in proportion to recorded sales.
During the performance of such contracts, estimated final contract prices and
costs are periodically reviewed and revisions are made as required. The effect
of these revisions to estimates is included in earnings in the period in which
the revisions are made. Sales under cost-reimbursement contracts are recorded as
costs are incurred and include estimated earned fees or profits calculated on
the basis of the relationship between costs incurred and total estimated costs.
For time-and-material contracts, revenue is recognized to the extent of billable
rates times hours incurred plus material and other reimbursable costs incurred.
Anticipated losses on contracts are recorded when first identified by the
Company. Revenue arising from the claims process is not recognized either as
income or as an offset against a potential loss until it can be reliably
estimated and realization is probable.

RESEARCH, DEVELOPMENT AND ENGINEERING:

Significant costs are incurred each year in connection with research,
development, and engineering ("RD&E") programs that are expected to contribute
to future earnings. Such costs are charged to income as incurred, except to the
extent recoverable under existing contracts. Approximately 78.0%, 76.4% and
74.6% of total RD&E costs were expended pursuant to customer contracts for each
of the three years ended December 31, 2002, 2001 and 2000, respectively.

CASH AND CASH EQUIVALENTS:

The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.

INVENTORIES:

Most inventories are valued at the lower of cost (first-in, first-out or
"FIFO") or market. A full absorption policy is employed using standard cost
techniques that are periodically reviewed and adjusted when required. Potential
losses from obsolete and slow-moving inventories are recorded when identified.
Domestic inventories valued under the last-in, first-out ("LIFO") method
represent 11.4% and 13.2% of total 2002 and 2001 inventories, respectively.
There would not have been a material difference in the value of inventories if
the FIFO method had been used by the Company to value all inventories.

LONG-LIVED ASSET IMPAIRMENT LOSSES:

The Company records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets may be
impaired and the undiscounted net cash flows estimated to be generated by those
assets are less than their carrying amounts. When the undiscounted net cash
flows are less than the carrying amount, losses are recorded for the difference
between the discounted net cash flows of the assets and the carrying amount.
Losses recognized in 2001 were recorded in restructuring and asset impairments.
See Note 4, "Restructuring and

F-11

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Asset Impairment Charges," for further discussions on these losses.

PLANT, PROPERTY AND EQUIPMENT:

Plant, property and equipment, including capitalized interest applicable to
major project expenditures, are recorded at cost. For financial reporting
purposes, depreciation is provided on a straight-line basis over the economic
useful lives of the assets involved as follows: buildings and
improvements -- five to 40 years, machinery and equipment -- two to 10 years,
furniture and office equipment -- three to seven years, and other -- five to 40
years. Gains or losses on sale or retirement of assets are included in selling,
general and administrative expenses.

GOODWILL AND OTHER INTANGIBLE ASSETS:

In accordance with Statement of Financial Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), goodwill, the
excess of cost over the fair value of net assets acquired, and indefinite-lived
intangible assets are tested for impairment on an annual basis, or more
frequently if circumstances warrant. As of January 1, 2002, pursuant to SFAS No.
142, the Company ceased amortization of all goodwill and indefinite-lived
assets. During 2001 and 2000, goodwill was amortized on a straight-line basis
over periods not exceeding 40 years, and purchased intangible assets including
patents, trademarks and non-compete agreements were amortized on a straight-line
basis over their economic useful lives not to exceed 40 years. See Note 2,
"Changes in Accounting Pronouncements," for the impact of changes in accounting
pronouncements on goodwill amortization.

INVESTMENTS:

Investments for which the Company does not have the ability to exercise
significant influence and for which there is not a readily determinable market
value are accounted for under the cost method of accounting. The Company
periodically evaluates the carrying value of its investments accounted for under
the cost method of accounting. Such investments were recorded at the lower of
cost or estimated net realizable value as of year-end. For investments in which
the Company owns or controls 20% or more of the voting shares, or over which it
exerts significant influence over operating and financial policies, the equity
method is used. The Company's share of net income or losses of equity
investments is included in miscellaneous (income) expense in the Consolidated
Income Statements and was not material in any period presented. Investments are
included in other assets in the Consolidated Balance Sheets.

FOREIGN CURRENCY TRANSLATION:

Balance sheet accounts are translated at the exchange rate in effect at
each year-end; income accounts are translated at the average rates of exchange
prevailing during the year. Gains and losses on foreign currency translations
are reflected in the cumulative translation adjustments component of
shareholders' equity. The national currencies of the foreign companies are
generally the functional currencies. Net gains from foreign currency
transactions are reported currently in selling, general and administrative
expenses and were $0.3, $2.9 and $2.5 in 2002, 2001, and 2000, respectively.

DERIVATIVE FINANCIAL INSTRUMENTS:

The Company uses a variety of derivative financial instruments, including
interest rate swaps and foreign currency forward contracts and/or swaps, as a
means of hedging exposure to interest rate and foreign currency risks. Changes
in the spot rate of instruments designated as hedges of the net investment in a
foreign subsidiary are reflected in the cumulative translation adjustments
component of shareholders' equity. The Company and its subsidiaries are
end-users and do not utilize these instruments for speculative purposes. The
Company has rigorous standards regarding the financial stability and credit
standing of its major counterparties.

Additionally, all derivative instruments are recorded on the balance sheet
at fair value as derivative assets or derivative liabilities. Subject to certain
specific qualifying conditions in SFAS

F-12

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"), a derivative instrument may be designated either as a hedge of the
fair value of an asset or liability (fair value hedge), or as a hedge of the
variability of cash flows of an asset or liability or forecasted transaction
(cash flow hedge). For a derivative instrument qualifying as a fair value hedge,
fair value gains or losses on the derivative instrument are reported in net
income, together with offsetting fair value gains or losses on the hedged item
that are attributable to the risk being hedged. For a derivative instrument
qualifying as a cash flow hedge, fair value gains or losses associated with the
risk being hedged are reported in other comprehensive income and released to net
income in the period(s) in which the effect on net income of the hedged item is
recorded. Fair value gains and losses on a derivative instrument not qualifying
as a hedge are reported in net income.

Interest rate swaps involve the periodic exchange of payments without the
exchange of underlying principal or notional amounts. Net payments are
recognized as an adjustment to interest. If the swaps were terminated,
unrealized gains or losses would be deferred and amortized over the shorter of
the remaining original term of the hedging instrument or the remaining life of
the underlying debt instrument. Such gains or losses would be reflected in net
interest expense.

ENVIRONMENTAL REMEDIATION COSTS:

Accruals for environmental matters are recorded on a site by site basis
when it is probable that a liability has been incurred and the amount of the
liability can be reasonably estimated, based on current law and existing
technologies. The Company's estimated liability is reduced to reflect the
anticipated participation of other potentially responsible parties in those
instances where it is probable that such parties are legally responsible and
financially capable of paying their respective shares of the relevant costs.
These accruals are adjusted periodically as assessment and remediation efforts
progress or as additional technical or legal information becomes available.
Actual costs to be incurred at identified sites in future periods may vary from
the estimates, given inherent uncertainties in evaluating environmental
exposures. Accruals for environmental liabilities are generally included in
other liabilities in the Consolidated Balance Sheets at undiscounted amounts and
exclude claims for recoveries from insurance companies or other third parties.
Recoveries from insurance companies or other third parties are included in other
assets when it is probable that a claim will be realized.

STOCK-BASED EMPLOYEE COMPENSATION:

At December 31, 2002, the Company has two stock-based employee compensation
plans and one stock-based non-employee director's compensation plan, which are
described more fully in Note 20, "Shareholders' Equity." The Company accounts
for these plans under the intrinsic value recognition and measurement principles
of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations. Had compensation cost for these plans been determined based on
the fair value recognition provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company's net income and earnings per share would
have been reduced to the following pro forma amounts:

The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model and the following weighted-average
assumptions for grants in 2002, 2001 and 2000: dividend yield of 1.65%, 1.89%
and 1.99%, respectively; expected volatility of 28.30%, 27.61% and 26.79%,
respectively; expected life of six years; and risk-free interest rates of 4.78%,
4.91% and 6.73%, respectively.
F-13

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The value of stock based compensation that was recognized in selling,
general and administrative expenses within the Consolidated Income Statements
during the periods ended December 31, 2002, 2001 and 2000 were $0.6, $0.9, and
$1.2, respectively.

EARNINGS PER SHARE:

Basic earnings per share is based on the weighted average number of common
shares outstanding. Diluted earnings per share is based on the weighted average
number of common shares outstanding and potentially dilutive common shares,
which include stock options.

USE OF ESTIMATES:

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Estimates are revised as additional information
becomes available. Actual results could differ from those estimates.

RECLASSIFICATIONS:

Certain amounts in the prior years' consolidated financial statements have
been reclassified to conform to the current year presentation.

NOTE 2
CHANGES IN ACCOUNTING PRONOUNCEMENTS

The Company adopted SFAS No. 133, as amended, effective January 1, 2001.
The adoption of SFAS No. 133 required the Company to record the total fair value
of its interest rate swaps ("the Swaps") in the financial statements, which
caused an increase to other assets and long-term debt of $39.7, bringing the
carrying value of the Swaps to $42.5 at January 1, 2001. The carrying value of
the Swaps at December 31, 2001 was $46.2 of which $42.5 was included in other
assets and long-term debt and the remaining amount represents accrued interest.
The adoption of SFAS No. 133 did not have a material impact on the consolidated
results of operations or cash flows of the Company.

The Company adopted SFAS No. 141, "Business Combinations" ("SFAS No. 141"),
effective July 1, 2001. SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001
and prohibits the use of the pooling-of-interests method. In addition, SFAS No.
141 requires intangible assets other than goodwill be identified. Such
intangibles are required to be amortized over their economic useful lives. The
adoption of SFAS No. 141, in 2001, did not have a significant impact on the
Company's results of operations or financial position.

In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 142, which changes the accounting for goodwill from an amortization method
to an impairment only approach. The amortization of goodwill from past business
combinations ceased upon adoption of this statement on January 1, 2002. In
connection with the adoption of SFAS No. 142, the Company completed a
transitional goodwill impairment test that compared the fair value of each
reporting unit to its carrying value and determined that no impairment existed.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS No. 143"). The standard requires that legal
obligations associated with the retirement of tangible long-lived assets be
recorded at fair value when incurred. The Company adopted SFAS No. 143 effective
January 1, 2003. The adoption of the pronouncement did not have a material
impact on the Company's results of operations or financial position.

The Company adopted SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"), effective January 1, 2002. SFAS
No. 144 outlines accounting and financial reporting guidelines for the sale or
disposal of long-lived

F-14

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

assets and discontinued operations. The adoption of the pronouncement did not
have a material impact on the Company's results of operations or financial
position.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized and measured at its fair value in the period it is
incurred and applies prospectively to such activities that are initiated after
December 31, 2002. The provisions of this standard are not expected to have a
material effect on the Company's future results, results of operations or
financial condition.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based
Compensation -- Transition and Disclosure, an amendment of FASB Statement No.
123" ("SFAS No. 148"). SFAS No. 148 provides alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. SFAS No. 148 also requires prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method on
reported results. The Company adopted the disclosure requirements of SFAS No.
148 effective December 2002 and continues to account for its plans under the
intrinsic value recognition and measurement principles of APB Opinion No. 25,
"Accounting for Stock Issues to Employees."

Effective October 1, 2000, the Company adopted Staff Accounting Bulletin
No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101
provides guidance on the recognition, presentation, and disclosure of revenue in
the financial statements. The adoption of SAB 101 did not have a material impact
on the Company's consolidated results of operations, financial condition, or
cash flows.

Effective January 1, 2000, the Company adopted Emerging Issues Task Force
Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs" ("EITF
00-10"). EITF 00-10 requires that all shipping and handling costs billed to
customers be recorded as sales. Sales and cost of sales in 2000 increased by
approximately $16 due to the adoption of EITF 00-10. The adoption of EITF 00-10
had no effect on operating income, net income, EPS, financial condition or cash
flows of the Company.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires the
recognition of liabilities for guarantees that are issued or modified subsequent
to December 31, 2002. The liabilities should reflect the fair value, at
inception, of the guarantors' obligations to stand ready to perform, in the
event that the specified triggering events or conditions occur. The Company is
currently evaluating the provisions of this interpretation; however, does not
believe they will have a material effect on the Company's future results of
operations or financial condition. FIN 45 also requires disclosure of accounting
policies and methodologies with respect to warranty accruals, as well as a
reconciliation of the change in these accruals for the reporting period. Refer
to Note 22, "Guarantees, Indemnities and Warranties," for additional
information.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 requires unconsolidated variable
interest entities to be consolidated by their primary beneficiaries if the
entities do not effectively disperse the risks and rewards of ownership among
their owners and other parties involved. The provisions of FIN 46 are applicable
immediately to all variable interest entities created after January 31, 2003 and
variable interest entities in which an enterprise obtains an interest in after
that date, and for variable interest entities created before this date, the
provisions are effective July 1, 2003. The Company is currently evaluating the
provisions of this interpretation; however, we do not believe they will have a
material impact on the Company's results of operations or financial position.

F-15

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 3
ACQUISITIONS

During 2002, the Company spent $159.2 primarily for the acquisition of nine
entities. Eight of the entities were additions to the Fluid Technology segment
and one was within the Defense Electronics & Services segment. The Company does
not believe the acquisitions are material individually or in the aggregate to
its results of operations or financial condition; however the larger of the
acquisitions were as follows:

- - Flowtronex PSI Inc. ("Flowtronex"), a manufacturer of modular pumping systems
for golf courses and other turf irrigation, sports fields, municipal and
commercial properties.

- - PCI Membranes, a provider of membrane filtration and chlorine disinfection
systems for water treatment and industrial water reuse.

- - The Biopharm Manufacturing Division of Martin Petersen Company, Inc., a
leading manufacturer of process systems for the biopharmaceutical industry.

The Company recognized $117.2 of goodwill from these acquisitions, of which
approximately $69 was tax deductible. The Fluid Technology segment was assigned
$116.6 of goodwill and the Defense Electronics & Services segment was assigned
the remaining $0.6.

In addition, in 2002, the Company finalized purchase price allocations
associated with a 2001 acquisition which reduced goodwill by $9.2.

During 2001, the Company completed several small acquisitions for a total
of $90.9, none of which exceeded $50.0. The aggregate acquisition costs exceeded
the fair value of the net assets acquired by $72.1 and this excess has been
recorded as goodwill. Goodwill related to acquisitions made before June 30, 2001
was amortized over periods up to 40 years. Goodwill related to acquisitions made
after June 30, 2001 was not amortized, in accordance with SFAS No. 142.

In 2001, the Company also finalized purchase price allocations related to
acquisitions made prior to 2001, which resulted in an increase to goodwill of
$18.3.

During 2000 the Company completed acquisitions for a combined total of
$192.0. The significant acquisitions were as follows:

On November 3, 2000, the Company acquired Man-Machine Interface ("MMI"), a
mobile phone switch producer, from TRW Inc. for $61.9. The purchase price
exceeded the fair value of the net assets acquired by $43.5 and the excess has
been recorded as goodwill, which was amortized over a period of 25 years. MMI is
a manufacturer of multilayer switch components and assemblies for the wireless
mobile handset market. Annual sales of MMI approximated $53 in 2000.

On June 26, 2000, the Company acquired C&K Components Inc. ("C&K"), a
privately held company, for $106.9, net of cash acquired. The purchase price
exceeded the fair value of net assets acquired by $116.2 and the excess has been
recorded as goodwill, which was amortized over a period of 30 years. C&K had
annual sales of approximately $113 in 2000 and is a worldwide leader in the
design and manufacture of switches for the communications, computer and
electronic equipment markets.

All acquisitions were accounted for using the purchase method and
accordingly, the results of operations of each acquired company are included in
the consolidated income statement from the date of acquisition. The purchase
price allocations for the 2002 acquisitions have been prepared on a preliminary
basis and changes are expected as evaluations of assets and liabilities are
completed and as additional information becomes available. The pro forma effect
on the Company's net income and earnings per share for these acquisitions, as
though the acquisitions occurred as of January 1 of each year, is not material
and therefore has not been disclosed herein.

F-16

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 4
RESTRUCTURING AND ASSET IMPAIRMENT CHARGES

Restructuring charges for the year ended December 31, 2002 are detailed in
the following table:

During the fourth quarter of 2002, the Company recorded a $9.6
restructuring charge primarily for the closure of two facilities and the
severance of 292 persons. Severance of $8.5 represents a majority of the charge
and lease payments and other costs represent the remainder. The actions
primarily occurred in Fluid Technology and Motion & Flow Control segments.

The actions within the Fluid Technology segment represent a reduction of
its cost structure that management deemed necessary in response to continued
weakness within certain of the segment's markets. Planned measures include the
closure of the Fairfield, NJ facility and the termination of 147 persons,
comprised of 78 office workers, 65 factory workers and four management
employees.

The restructuring plan within the Motion & Flow Control segment was driven
by the anticipated loss of certain contracts in the Fluid Handling business
during 2003 and the resulting excess capacity. Planned actions include the
closure of the Rochester, NY facility, the consolidation of manufacturing and
administrative processes, and the termination of 140 employees, comprised of 40
office workers, 97 factory workers and three management employees.

The actions within the Electronic Components segment represent cost control
actions and include the termination of five employees, comprised of three office
workers and two management employees.

The projected cash savings from the 2002 restructuring plan total
approximately $53 over the next five years, comprised of approximately $7 in
2003 and approximately $46 between 2004 and 2007. The savings represent lower
salary and wage expenditures and decreased facility operating costs. Savings
will be reflected in "Cost of Sales and Revenues" and "Selling, General and
Administrative Expenses."

During 2003 the Company anticipates $8.2 of restructuring payments
associated with the 2002 restructuring plan and $0.5 thereafter. Future
restructuring payments will be funded with cash from operations, supplemented as
required with commercial paper borrowings.

Restructuring and asset impairment charges for the year ended December 31,
2001 are detailed in the following table:

On December 14, 2001, the Company announced a restructuring program to
reduce structural costs and improve profitability. The program primarily
impacted the Electronic Components segment where a significant decline in sales
volume occurred from 2000 to 2001 and where management expected a further sales
decline in 2002. The restructuring actions at the other locations primarily
related to process improvements. The planned restructuring activities involved
the closure of five facilities, the discontinuance of 21 products and the
termination of approximately 3,400 persons. In the Electronic Components
segment, the planned actions included the closure of two facilities, the
discontinuance of 21 older products, and workforce terminations of 2,753 persons
through the consolidation and outsourcing of functions. Activities in the Fluid
Technology segment consisted of the closure of one facility, and workforce
reductions of 436 persons through the consolidation and outsourcing of
functions. In the Motion & Flow Control segment, planned actions included the

F-17

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

closure of two facilities and workforce reductions of 183 through the
consolidation of functions. In addition, 28 Corporate and shared services
positions were to be eliminated.
Also in the fourth quarter of 2001, the Company recorded asset impairments
amounting to $14.4 for machinery and equipment and a cost based investment.
These assets were written down to their fair values based on management's
projections of the individual future cash flows to be generated by each of the
assets. These assets were reviewed for impairment in the fourth quarter of 2001,
because at that time business events indicated that the carrying amounts of the
assets may not be recovered. Management deemed the market decline experienced in
2001 for certain products to be other than temporary and recognized that there
exists significant pricing pressure in the Electronic Components segment that is
expected to continue.

The cash portion of the restructuring charge included approximately $52 for
severance and $9 of other, primarily for facility carrying costs to be incurred
after the operations cease at the facilities. The non-cash portion of the
restructuring charge represents asset impairments that were recorded based on
management's projection of the cash flows to be generated by the assets until
operations cease.

Revised future cash savings projections for the period 2003 to 2006 are
approximately $281 and consist of decreased facility operating costs and lower
salary and wage expenditures. The projected future non-cash savings for the same
period are approximately $25 and primarily consist of decreased depreciation and
amortization expense.

Restructuring and asset impairment charges for the year ended December 31,
1999 are detailed in the following table:

During 1999, the Company identified facilities to be shut down and
relocated to lower cost areas or consolidated into existing facilities. In the
fourth quarter of 1999, the Company also identified asset impairments at two
facilities. The 1999 restructuring activities involved the closure of facilities
and sales offices and reduction of workforce. In the Electronic Components
segment, a factory was closed with a portion of the business being relocated. In
the Defense Electronics & Services segment, several positions at two divisions
were eliminated. The Fluid Technology segment closed two facilities and related
service offices and also consolidated the operations of one warehouse into
existing facilities. In the Motion & Flow Control segment, a workforce reduction
occurred at one facility and certain assets were deemed impaired. The goodwill
write-off at the Fluid Technology segment related to an unprofitable Far East
operation and was calculated based on management's future cash flow projections
of the business. The goodwill write-off at the Defense Electronics & Services
segment related to a product line sold in January 2000.

During the fourth quarter of 1999, the Company also assessed its 1998
restructuring accruals, determined that activities related to those accruals
would be completed for $44.8 less than originally estimated, and reversed the
related accruals into income. The excess was primarily the result of favorable
experience in employee separations and asset disposal costs that were not
required.

F-18

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table displays a rollforward of the cash restructuring
accruals:

During the third and fourth quarters of 2002, $13.1 of restructuring
accruals were reversed into income as a result of quarterly reviews of the
Company's remaining restructuring actions. The reversals applicable to 2001
planned restructuring actions totaled $11.8 and primarily reflect less than
anticipated severance costs on completed actions at each of the segments, the
decision not to transfer five product lines (from Santa Ana, California;
Weinstadt, Germany; Dole, France, and Basingstoke, UK, to Shenzhen and Tianjin,
China), as supply chain issues eliminated the financial viability of the
transfers, and the decision to continue partial operations at one of the
Electronic Component's facilities. In addition, management determined that one
facility within the Fluid Technology segment would remain operational as a
suitable outsource supplier could not be identified. The remaining $1.3 of
restructuring reversals represents accruals under the 1998 and 1999
restructuring plans that management determined will not be incurred.

As of December 31, 2002, remaining actions announced during 2001 were to
close one facility and the termination of 24 persons. Some severance run-off
will occur in 2003 and closed facility expenditures will continue through 2004.

As of December 31, 2002, the restructuring actions announced in 1998 and
1999 were complete.

NOTE 5

DISCONTINUED OPERATIONS

In September of 1998, the Company completed the sales of its automotive
Electrical Systems business to Valeo SA for approximately $1,700 and its Brake
and Chassis unit to Continental AG of Germany for approximately $1,930. These
dispositions were treated as discontinued operations. In 1998, the Company
received notifications of claims from the buyers of the automotive business
requesting post-closing adjustments to the purchase prices under the provisions
of the sales agreements. In

F-19

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1999, those claims were submitted to arbitration. In 2001 and early in 2002,
both claims were favorably resolved.

During the fourth quarter of 2001 the Company reassessed its automotive
discontinued operations accruals and determined that it had excess accruals on
an after-tax basis of approximately $60. The Company reversed these accruals
into the Consolidated Income Statements under income from discontinued
operations. The excess was primarily related to the favorable foreign tax
rulings.

At December 31, 2002, the Company had automotive discontinued operations
accruals of $190.0 that primarily related to taxes ($154.2), product recalls
($8.0), environmental obligations ($14.5), employee benefits ($11.5) and other
($1.9). In 2002, the Company spent approximately $1.0. The Company expects that
it will cash settle $154.2 of tax obligations in 2004 or 2005.
NOTE 6

SALES AND REVENUES AND
COSTS OF SALES AND REVENUES

Sales and revenues and costs of sales and revenues consist of the
following:

The Defense Electronics & Services segment comprises $627.8, $540.5 and
$451.2 of total service revenues for the years ended December 31, 2002, 2001 and
2000, respectively, and $374.0, $325.2 and $264.9 of total costs of service
revenues, respectively, during the same period. The Fluid Technology segment
comprises the majority of the remaining balances of service revenues and costs
of service revenues.

NOTE 7

INCOME TAXES

Income tax data from continuing operations is as follows:

A reconciliation of the tax provision at the U.S. statutory rate to the
effective income tax expense rate as reported is as follows:

Deferred income taxes are established for temporary differences between the
amount of assets and liabilities recognized for financial reporting purposes and
for tax reporting purposes.

F-20

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Deferred tax assets (liabilities), for which no valuation allowances have
been provided, include the following:

No provision was made for U.S. taxes payable on accumulated undistributed
foreign earnings of certain subsidiaries amounting to approximately $48.6, since
these amounts are permanently reinvested.

As of December 31, 2002, the Company had approximately $23 of foreign tax
credit carryforwards. The credit carryforwards will expire as follows: $0.5 on
December 31, 2003, $0.2 on December 31, 2004, $10.2 on December 31, 2005 and
$12.1 on December 31, 2006.

Shareholders' equity at December 31, 2002 and 2001 reflects tax benefits
related to the stock options exercised in 2002 and 2001 of approximately $40.2
and $30.8, respectively.

The IRS is currently examining the federal consolidated tax returns of the
Company for the years ended December 31, 1996 and December 31, 1997. The IRS has
completed its examination of all years through 1995. As of December 31, 2002,
the Company believes the accrual for income taxes payable is sufficient to cover
potential liabilities arising from these examinations.

NOTE 8

EARNINGS PER SHARE
A reconciliation of the data used in the calculation of basic and diluted
earnings per share computations for income from continuing operations is as
follows:

- ------------

(1) Options to purchase 49,240 shares of common stock at an average price of
$65.60 per share were outstanding at December 31, 2002 but were not included
in the computation of diluted EPS, because the options' exercise prices were
greater than the annual average market price of the common shares. These
options expire in 2012.

(2) Options to purchase 12,923 shares of common stock at an average price of
$45.87 per share were outstanding at December 31, 2001 but were not included
in the computation of diluted EPS, because the options' exercise prices were
greater than the annual average market price of the common shares. These
options expire in 2011.

(3) Options to purchase 3,429,883 shares of common stock at an average price of
$36.34 per share were outstanding at December 31, 2000 but were not included
in the computation of diluted EPS, because the options' exercise prices were
greater than the annual average market price of the common shares. These
options expire between 2008 and 2010.

NOTE 9

RECEIVABLES, NET

Receivables consist of the following:

F-21

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 10

INVENTORIES, NET

Inventories consist of the following:

NOTE 11

OTHER CURRENT ASSETS

At December 31, 2002 and 2001, other current assets consist primarily of
advance payments on contracts, prepaid expenses and capitalized tooling costs.

NOTE 12

PLANT, PROPERTY AND EQUIPMENT, NET

Plant, property and equipment consist of the following:

NOTE 13

GOODWILL AND OTHER INTANGIBLE ASSETS

In June 2001, the FASB issued SFAS No. 141 and SFAS No. 142. SFAS No. 141
eliminates the pooling of interests method of accounting for all business
combinations initiated after June 30, 2001 and addresses the initial recognition
and measurement of goodwill and other intangible assets acquired in a business
combination. The Company adopted SFAS No. 141 as of July 1, 2001.

As of January 1, 2002, the Company adopted SFAS No. 142 which addresses the
financial accounting and reporting standards for the acquisition of intangible
assets outside of a business combination and for goodwill and other intangible
assets subsequent to their acquisition. This accounting standard requires that
goodwill and indefinite-lived intangible assets be tested for impairment on an
annual basis, or more frequently if circumstances warrant, and that they no
longer be amortized. The provisions of the standard also require the completion
of a transitional impairment test in the year of adoption, with any impairments
identified treated as a cumulative effect of a change in accounting principle.
In connection with the adoption of SFAS No. 142, the Company completed a
transitional goodwill impairment test at its 12 identified reporting units and
determined that no impairment exists.

In accordance with SFAS No. 142, goodwill associated with acquisitions
consummated after June 30, 2001 is not amortized and the amortization of
goodwill from business combinations consummated before June 30, 2001 ceased on
January 1, 2002. A reconciliation of previously reported net income and earnings
per share to the amounts adjusted for the exclusion of goodwill amortization is
reflected on the face of the consolidated income statements included herein.

F-22

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Changes in the carrying amount of goodwill for the year ended December 31,
2002 by operating segment are as follows:

Information regarding the Company's other intangible assets follows:

Amortization expense related to intangible assets for the year ended
December 31, 2002 was $0.9. Amortization expense for each of the five succeeding
years will be approximately $1 per year.
NOTE 14

OTHER ASSETS

At December 31, 2002 and 2001, other assets primarily consist of prepaid
pension expense, employee benefit plan costs, investments in unconsolidated
companies, assets held in trusts and other receivables. Assets held in trusts
are restricted for specified reasons, primarily environmental remediation costs
and employee benefits and totaled $44.6 and $57.1 at December 31, 2002 and 2001,
respectively.

Investments in unconsolidated companies consist of the following:

During 2002, 2001 and 2000, the Company recorded sales to unconsolidated
affiliates totaling $24.2, $22.6 and $23.4, respectively. In addition, the
Company provided services to unconsolidated affiliate companies in 2002, 2001
and 2000 and received $0.5, $0.4 and $0.4, respectively, in exchange for these
services. For all investments in unconsolidated companies, the Company's
exposure is limited to the amount of the investment. All investments accounted
for under the cost method represent voting right interests of less than 20%.

The HiSAN joint venture is a brake and fuel line supplier to Asian
transplant OEM's in the United States. Annual sales of HiSAN are approximately
$117. Digital Globe Inc. (formerly known as EarthWatch, Inc.) is a developmental
stage company that recently launched a satellite capable of collecting
high-resolution digital

F-23

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

imagery of the Earth's surface, as well as a comprehensive image collection,
enhancement and digital archive system.

NOTE 15

LEASES AND RENTALS

The Company leases certain offices, manufacturing buildings, land,
machinery, automobiles, aircraft, computers and other equipment. Such leases
expire at various dates and may include renewals and escalations. The Company
often pays maintenance, insurance and tax expense related to leased assets.
Rental expenses under operating leases were $60.2, $50.1 and $55.5 for 2002,
2001 and 2000, respectively. Future minimum operating lease payments under
long-term operating leases as of December 31, 2002 are shown below.

2003................................ $ 61.3
2004................................ 54.0
2005................................ 45.6
2006................................ 37.1
2007................................ 31.7
2008 and thereafter................. 169.6
------
Total minimum lease payments........ $399.3
======

NOTE 16

DEBT

Debt consists of the following:

- ------------

(1) The interest rate for the note/debenture was 1.28% and 2.04% at December 31,
2002 and 2001, respectively.

(2) The weighted average interest rate was 5.24% and 5.50% at December 31, 2002
and 2001, respectively.

Principal payments required on long-term debt for the next five years are:

The weighted average interest rate for short-term borrowings was 1.73% and
2.69% at December 31, 2002 and 2001, respectively. The fair value of the
Company's short-term loans approximates carrying value. The fair value of the
Company's long-term debt is estimated based on comparable corporate debt with
similar remaining maturities. As of December 31, 2002, the fair value of
long-term debt was $517.9, compared to the fair value of $493.1 at December 31,
2001. The year over year increase in fair value reflects the impact of the
decline in interest rates experienced during 2002.

In November 2000, the Company entered into a revolving credit agreement,
which expires in November 2005, with 20 domestic and foreign banks providing
aggregate commitments of $1.0 billion. The interest rate for borrowings under
these agreements is generally based on the London Interbank Offered Rate
("LIBOR"),

F-24

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

plus a spread, which reflects the Company's debt rating. The provisions of these
agreements require that the Company maintain an interest coverage ratio, as
defined, of 3.75 times. At December 31, 2002, the Company's coverage ratio was
well in excess of the minimum requirement. The commitment fee on the revolving
credit agreement is .125% of the total commitment, based on the Company's
current debt ratings. The revolving credit agreement serves as backup for the
commercial paper program and is not otherwise restricted.

Assets pledged to secure indebtedness amounted to $39.9 as of December 31,
2002.

NOTE 17

CASH FLOW INFORMATION

The change in receivables, inventories, payables and accrued expenses
listed on the Consolidated Statements of Cash Flows for the twelve months ended
December 31, 2002, 2001 and 2000 consist of the following:

NOTE 18

FINANCIAL INSTRUMENTS

The Company uses a variety of derivative financial instruments, including
interest rate swaps, foreign currency forward contracts and/or swaps, and on a
limited basis, commodity collar contracts, as a means of hedging exposure to
interest rate, foreign currency and commodity price risks.

The Company's credit risk associated with these derivative contracts is
generally limited to the unrealized gain on those contracts with a positive fair
market value, reduced by the effects of master netting agreements, should any
counterparty fail to perform as contracted. The counterparties to the Company's
derivative contracts consist of a number of major, international financial
institutions. The Company continually monitors the credit quality of these
financial institutions and does not expect non-performance by any counterparty.

FINANCING STRATEGIES AND INTEREST RATE RISK MANAGEMENT:

The Company maintains a multi-currency debt portfolio to fund its
operations. The Company at times uses interest rate swaps to manage the
Company's debt portfolio, the related financing costs and interest rate
structure.

At December 31, 2002 and 2001, the Company had interest rate swaps
outstanding with notional values totaling $349.4. The carrying value of the
swaps at December 31, 2002 and 2001 were $97.0 and $46.2, including $4.0 and
$3.7 of accrued interest, respectively. The swaps were designed to manage the
interest rate exposure associated with certain long-term debt. The swaps mature
at various dates through 2025 and effectively convert much of the long-term debt
mentioned in Note 16 above from fixed to variable rate borrowings. The variable
interest rates are based on three-month LIBOR rates plus a spread, which
reflects the Company's debt rating, and the coupon of the underlying long-term
obligations. The weighted average variable and fixed interest rates were 1.51%
and 7.45% at December 2002. There were no ineffective portions of the interest
rate swaps and no amounts were excluded from the assessment of effectiveness.

FOREIGN CURRENCY RISK MANAGEMENT:

The Company has significant foreign operations and conducts business in
various foreign currencies. The Company may periodically hedge net investments
in currencies other than its own functional currency and non-functional currency
cash flows and obligations, including intercompany financings. Changes in the
spot rate of debt instruments designated as hedges of the net investment in a
foreign subsidiary are reflected in the cumulative translation adjustment
component of shareholders' equity. The Company regularly monitors its foreign
currency exposures and

F-25

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ensures that hedge contract amounts do not exceed the amounts of the underlying
exposures.

There were no foreign currency cash flow hedges outstanding as of December
31, 2002. As of December 31, 2001, the Company had one foreign currency cash
flow hedge that had appreciations of less than $0.1 during 2001. There were no
changes in the forecasted transactions during 2002 or 2001 regarding their
probability of occurring, which would require amounts to be reclassified to
earnings.

The notional amount of the foreign currency forward contract utilized to
hedge cash flow exposures was $1.1 at December 31, 2001. The applicable fair
value at December 31, 2001 was $1.1. There was no ineffective portion of changes
in fair values of cash flow hedge positions reported in earnings for the twelve
month periods ended December 31, 2002 and 2001 and no amounts were excluded from
the measure of effectiveness reported in earnings during the twelve month
periods ended December 31, 2002 and 2001.

At December 31, 2002 and 2001, the Company had foreign forward contracts
with notional amounts of $109.1 and $50.3, respectively, to hedge the value of
recognized assets, liabilities and firm commitments. The fair values of the
contracts were net short positions of $42.3 and $11.5 at December 31, 2002 and
2001, respectively. The ineffective portion of changes in fair values of such
hedge positions reported in operating income during 2002 and 2001 amounted to
$0.1 and $0.6, respectively. There were no amounts excluded from the measure of
effectiveness.

The fair values associated with the foreign currency contracts have been
valued using the net position of the contracts and the applicable spot rates and
forward rates as of the reporting date.

NOTE 19

EMPLOYEE BENEFIT PLANS

PENSION PLANS:

The Company sponsors numerous defined benefit pension plans. The Company
funds employee pension benefits, except in some countries outside the U.S. where
funding is not required. The plans' assets are comprised of a broad range of
domestic and foreign securities, fixed income investments and real estate. In
addition to Company sponsored pension plans, certain employees of the Company
participate in multi-employer pension plans sponsored by local or national
unions. The Company's contribution to such plans amounted to $0.4, $0.4 and $1.5
for the years ended 2002, 2001 and 2000, respectively.

POSTRETIREMENT HEALTH AND LIFE INSURANCE PLANS:

The Company provides health care and life insurance benefits for certain
eligible retired employees. The Company has pre-funded a portion of the health
care and life insurance obligations, where such pre-funding can be accomplished
on a tax effective basis. The plans' assets are comprised of a broad range of
domestic and foreign securities, fixed income investments and real estate.

INVESTMENT AND SAVINGS PLANS:

The Company sponsors numerous defined contribution savings plans, which
allow employees to contribute a portion of their pretax and/or after-tax income
in accordance with specified guidelines. Several of the plans require the
Company to match a percentage of the employee contributions up to certain
limits. Matching contributions charged to income amounted to $25.3, $23.9 and
$19.1 for the years ended 2002, 2001 and 2000, respectively.

F-26

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Changes in the benefit obligations, changes in plan assets, the
weighted-average assumptions and the components of net periodic benefit cost for
the years ended 2002, 2001 and 2000 were as follows:

The assumed rate of future increases in the per capita cost of health care
(the health care trend rate) was 10.0% for 2002. The rate was assumed to be 9.0%
for 2003, decreasing ratably to 5.0% in 2007. Increasing the table of health
care trend rates by one percent per year would have the effect of increasing the
benefit obligation by $33.8 and the aggregate service and interest cost
components by $2.4. A decrease of one percent in the trend rate would

F-27

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

reduce the benefit obligation by $29.8 and the aggregate service and interest
cost components by $2.0. To the extent that actual experience differs from the
inherent assumptions, the effect will be amortized over the average future
service of the covered active employees.

The determination of the assumptions shown in the table above and the
discussion of health care trend rates is based on the provisions of the
applicable Financial Accounting Standards, the review of various indexes,
discussion with our consulting actuaries and the review of competitive surveys
in the geographic areas where the plans are sited. Changes in these assumptions
would affect the financial condition and results of operations of the Company.

NOTE 20

SHAREHOLDERS' EQUITY

CAPITAL STOCK:

The Company has authority to issue an aggregate of 250,000,000 shares of
capital stock, of which 200,000,000 have been designated as "Common Stock"
having a par value of $1 per share and 50,000,000 have been designated as
"Preferred Stock" not having any par or stated value. Of the shares of Preferred
Stock, 300,000 shares have initially been designated as "Series A Participating
Cumulative Preferred Stock" (the "Series A Stock"). Such Series A Stock is
issuable pursuant to the provisions of a Rights Agreement dated as of November
1, 1995 between the Company and The Bank of New York, as Rights Agent (the
"Rights Agreement"). Capitalized terms herein not otherwise defined are as
defined in the Rights Agreement.

The rights issued pursuant to the Rights Agreement (the "Rights") are
currently attached to, and trade with, the Common Stock. The Rights Agreement
provides, among other things, that if any person acquires more than 15% of the
outstanding Common Stock, the Rights will entitle the holders other than the
Acquiring Person (or its Affiliates or Associates) to purchase Series A Stock at
a significant discount to its market value. Rights beneficially owned by the
Acquiring Person, including any of its Affiliates or Associates, become null and
void and non-transferable. Rights generally are exercisable at any time after
the Distribution Date and at, or prior to, the earlier of the 10th anniversary
of the date of the Rights Agreement or the Redemption Date. The Company may,
subject to certain exceptions, redeem the Rights as provided for in the Rights
Agreement. Each 1/1,000th of a share of Series A Stock would be entitled to vote
and participate in dividends and certain other distributions on an equivalent
basis with one share of Common Stock. Under certain circumstances specified in
the Rights Agreement, the Rights become nonredeemable for a period of time and
the Rights Agreement may not be amended during such period.

As of December 31, 2002 and 2001, 53,323,493 and 56,361,307 shares of
Common Stock were held in treasury, respectively.

STOCK INCENTIVE PLANS:

The Company's stock option incentive plans provide for the awarding of
options on common shares to employees, exercisable over ten-year periods, except
in certain instances of death, retirement or disability. Certain options become
exercisable upon the earlier of the attainment of specified market price
appreciation of the Company's common shares or at nine years after the date of
grant. Other options become exercisable upon the earlier of the attainment of
specified market price appreciation of the Company's common shares or over a
three-year period commencing with the date of grant. The exercise price per
share is the fair market value on the date each option is granted. The Company
makes shares available for the exercise of stock options by purchasing shares in
the open market or by issuing shares from treasury.

F-28

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of the status of the Company's stock option incentive plans as of
December 31, 2002, 2001 and 2000, and changes during the years then ended is
presented below (shares in thousands):

The following table summarizes information about the Company's stock
options at December 31, 2002 (shares in thousands):

As of December 31, 2002, 5,866,875 shares were available for future grants.
Effective January 1, 2003, option shares available for future grants increased
by 2,394,942 as a result of the annual limitation formulas established in the
1994 ITT Industries Incentive Stock Plan and the 2002 ITT Industries Stock
Option Plan for Non-Employee Directors. The 1994 incentive stock plan also
provides for awarding restricted stock subject to a restriction period in which
the stock cannot be sold, exchanged or pledged. There were 10,000 restricted
shares awarded in 2002 and no restricted shares awarded in 2001 and 2000.

During 2002, 2001 and 2000, pursuant to the ITT Industries 1996 Restricted
Stock Plan for Non-Employee Directors, the Company awarded 6,098, 7,469 and
13,626 restricted shares with five-year restriction periods, respectively, in
payment of the annual retainer for such directors. Restrictions may lapse
earlier depending on certain circumstances.

NOTE 21

COMMITMENTS AND CONTINGENCIES

The Company and its subsidiaries are from time to time involved in legal
proceedings that are incidental to the operation of their businesses. Some of
these proceedings allege damages against the Company relating to environmental
liabilities (including toxic tort, property damage, and remediation),
intellectual property matters (including patent, trademark and copyright
infringement, and licensing disputes), personal injury claims (including
injuries due to product failure, design or warnings issues, asbestos exposure,
or other product liability related matters), employment and pension matters,
government contract issues and commercial or contractual disputes,

F-29

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

sometimes related to acquisitions or divestitures. The Company will continue to
vigorously defend itself against all claims. Accruals have been established
where the outcome of the matter is probable and can be reasonably estimated.
Although the ultimate outcome of any legal matter cannot be predicted with
certainty, based on present information including the Company's assessment of
the merits of the particular claim, as well as its current reserves and
insurance coverage, the Company does not expect that such legal proceedings will
have any material adverse impact on the cash flow, results of operations or
financial condition of the Company on a consolidated basis in the foreseeable
future.

ENVIRONMENTAL:

The Company has accrued for environmental remediation costs associated with
identified sites consistent with the policy set forth in Note 1, "Accounting
Policies." In management's opinion, the total amount accrued and related
receivables are appropriate based on existing facts and circumstances. It is
difficult to estimate the total costs of investigation and remediation due to
various factors, including incomplete information regarding particular sites and
other potentially responsible parties, uncertainty regarding the extent of
contamination and the Company's share, if any, of liability for such conditions,
the selection of alternative remedies, and changes in clean-up standards. In the
event that future remediation expenditures are in excess of amounts accrued,
management does not anticipate that they will have a material adverse effect on
the consolidated financial position, results of operations or liquidity of the
Company.

In the ordinary course of business, and similar to other industrial
companies, the Company is subject to extensive and changing federal, state,
local, and foreign environmental laws and regulations. The Company has received
notice that it is considered a potentially responsible party ("PRP") at a
limited number of sites by the United States Environmental Protection Agency
("EPA") and/or a similar state agency under the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA" or "Superfund") or its state
equivalent. As of December 31, 2002, the Company is responsible, or is alleged
to be responsible, for 104 environmental investigation and remediation sites in
various countries. In many of these proceedings, the Company's liability is
considered de minimis. At December 31, 2002, the Company calculated a best
estimate of $113.0, which approximates its accrual, related to the cleanup of
soil and ground water. The low range estimate for its environmental liabilities
is $85 and the high range estimate for those liabilities is $174. On an annual
basis the Company spends between $11 and $14 on its environmental remediation
liabilities.

The Company has been involved in an environmental proceeding in Glendale,
California relating to the San Fernando Valley aquifer. The Company is one of
numerous PRPs who are alleged by the EPA to have contributed to the
contamination of the aquifer. In January 1999, the EPA filed a complaint in the
United States District Court for the Central District of California against the
Company and Lockheed Martin Corporation, United States v. ITT Industries, Inc.
and Lockheed Martin Corp. CV99-00552 SVW AIJX, to recover costs it incurred in
connection with the foregoing. In May 1999, the EPA and the PRPs, including the
Company and Lockheed Martin, reached a settlement, embodied in a consent decree,
requiring the PRPs to perform additional remedial activities. Pursuant to the
settlement, the PRPs, including the Company, have constructed and are operating
a water treatment system. The PRPs have agreed to operate the system for an
additional 10 years. ITT and the other PRPs continue to pay their respective
allocated costs of the operation of the water treatment system. Accordingly, at
this time, ITT does not anticipate a default by any of the PRPs which would
increase the Company's allocated share of the liability. As of December 31,
2002, the Company's accrual for this liability was $11.3 representing its best
estimate; its low estimate for the liability is $7.4 and its high estimate is
$16.4.

ITT operated a facility in Madison County, Florida from 1968 until 1991. In
1995, elevated levels of contaminants were detected at the site. Since then, ITT
has been investigating the
F-30

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

site in coordination with state and federal environmental authorities. A remedy
for the site has not yet been selected. Currently, the estimated range for the
costs of the additional investigation and the anticipated remediation is between
$5.6 and $20.1 with a best estimate of $11.9. The Company has accrued $11.9 for
this matter.

ITT has been involved with a number of PRPs regarding property in the City
of Bronson, Michigan operated by a former subsidiary of ITT, Higbie
Manufacturing, prior to the time ITT acquired the company. ITT and other PRPs
are investigating and remediating discharges of industrial waste which occurred
in the 1930's. The Company's current estimates for its exposure are between $3.2
and $6.6. It has an accrual for this matter of $4.6 which represents its best
estimate of its current liabilities. ITT does not anticipate a default on the
part of the other PRPs.

In a suit filed in 1991 by the Company, in the California Superior Court,
Los Angeles County, ITT Corporation, et al. v. Pacific Indemnity Corporation et
al., against its insurers, the Company is seeking recovery of costs it incurred
in connection with its environmental liabilities including the three listed
above. Discovery, procedural matters, changes in California law, and various
appeals have prolonged this case. Currently, the matter is before the California
Court of Appeals from a decision by the California Superior Court dismissing
certain claims of the Company. The dismissed claims were claims where the costs
incurred were solely due to administrative (versus judicial) actions. A hearing
is expected in early 2003. In the event the appeal is successful, the Company
will pursue the administrative claims against its excess insurers. During the
course of the litigation the Company has negotiated settlements with certain
defendant insurance companies and is prepared to pursue its legal remedies where
reasonable negotiations are not productive. A portion of the recoveries from the
insurance settlements have been placed in a trust and are used to reimburse the
Company for its environmental costs.

PRODUCT LIABILITY:

ITT and its subsidiary Goulds Pumps, Inc. ("Goulds") have been joined as
defendants with numerous other industrial companies in product liability
lawsuits alleging injury due to asbestos. These actions against the Company have
been managed by our historic product liability insurance carriers, and all
claims, including all defense and settlement costs, have been covered by those
same carriers. These claims stem primarily from products sold prior to 1985 that
contained a part manufactured by a third party, e.g., a gasket, which allegedly
contained asbestos. The asbestos was encapsulated in the gasket (or other)
material and was non-friable. In certain other cases, it is alleged that ITT
companies were distributors for other manufacturers' products that may have
contained asbestos.

Frequently, the plaintiffs are unable to demonstrate any injury or do not
identify any ITT or Goulds product as a source of asbestos exposure. During the
past 12 months, ITT and Goulds resolved approximately 800 cases through
settlement or dismissal. The average amount of settlement per claim has been
nominal. Based upon past claims experience, available insurance coverage, and
after consultation with counsel, management believes that these matters will not
have a material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.

The Company is involved in two actions, Cannon Electric, Inc. et al. v. Ace
Property & Casualty Company et al. Superior Court, County of Los Angeles, CA.,
Case No. BC 290354, and Pacific Employers Insurance Company et al., v. ITT
Industries, Inc., et al., Supreme Court, County of New York, N.Y., Case No.
03600463, both of which commenced after December 31, 2002. The parties in both
cases are seeking an appropriate allocation of responsibility for the Company's
historic asbestos liability exposure among its insurers. The California action
is filed in the same venue where the Company's environmental insurance recovery
litigation has been pending for several years. The Company is continuing to
receive insurance payments during the pendency of these actions. The Company

F-31

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

does not believe that the existence or pendency of these actions will have any
impact on the Company's consolidated financial position, results of operations
or cash flows.

The Company has received notice of a suit filed in El Paso, Texas relating
to its Gilfillian Division, Bund zur Unterstutzung Radargeschadigter et al. v.
ITT Industries et al., Sup. Ct., El Paso, Texas, C.A. No. 2002-4730. This
Complaint, filed by both U.S. and German citizens, alleges that ITT and four
other major companies failed to warn the plaintiffs of the dangers associated
with exposure to x-ray radiation from radar devices. The Complaint also seeks
the certification of a class of similarly injured persons. The Company's insurer
has accepted the defense of this matter. Management believes that this matter
will not have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.

The Company has received notice of a product liability suit filed in
Superior Court of New York, Danis v. Rule Industries et al., Sup.Ct. N.Y., C.A.
No. 115975-02, seeking damages for injuries sustained in a boat explosion. The
suit contains a number of causes of action against various defendants including
the boat manufacturer, the marina operator, and individuals working at the
marina. As to the Company, the Complaint alleges that a fume detector,
manufactured by ITT's subsidiary Rule Industries, Inc. prior to the date the
Company acquired Rule, malfunctioned. The Company's insurer has accepted the
defense of this matter. Management believes that this matter will not have a
material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.

OTHER:

The Company has received a Notice of Claim from Rayonier, Inc., a former
subsidiary of the Company's predecessor ITT Corporation. This claim stems from
the 1994 Distribution Agreement for the spin-off of Rayonier by ITT Corporation
and seeks an allocation of proceeds from certain settlements in connection with
the Company's environmental insurance recovery litigation. The parties are
currently in negotiations. The Company believes the claim is grossly overstated,
has little merit and will not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.

NOTE 22

GUARANTEES, INDEMNITIES AND WARRANTIES

GUARANTEES & INDEMNITIES:

In September of 1998, the Company completed the sale of its automotive
electrical systems business to Valeo SA for approximately $1,700. As part of the
sale, the Company provided Valeo SA with representations and warranties with
respect to the operations of the Business, including: Conveyance of Title,
Employee Benefits, Tax, Product Liability, Product Recall, Contracts,
Environmental, Intellectual Property, etc. The Company also indemnified Valeo SA
for losses related to a misrepresentation or breach of the representations and
warranties. With a few limited exceptions, the indemnity periods within which
Valeo SA may assert new claims have expired. Under the terms of the sales
contract, the original maximum potential liability to Valeo SA on an
undiscounted basis is $680. However, because of the lapse of time, or the fact
that the parties have resolved certain issues, at December 31, 2002 the Company
has an accrual of $8 which is its best estimate of the potential exposure.

In September of 1998, the Company completed the sale of its brake and
chassis unit to Continental AG for approximately $1,930. As part of the sale,
the Company provided Continental AG with representations and warranties with
respect to the operations of the Business, including: Conveyance of Title,
Employee Benefits, Tax, Product Liability, Product Recall, Contracts,
Environmental, Intellectual Property, etc. The Company also indemnified
Continental AG for losses related to a misrepresentation or breach of the
representations and warranties. With a few limited exceptions, the indemnity
periods within which Continental AG may assert new claims have expired. Under
the terms of the sales contract, the original maximum potential liability

F-32

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

to Continental AG on an undiscounted basis is $950. However, because of the
lapse of time, or the fact that the parties have resolved certain issues, at
December 31, 2002 the Company has an accrual of $14.5 which is its best estimate
of the potential exposure.

Since its incorporation in 1920, the Company has acquired and disposed of
numerous entities. The related acquisition and disposition agreements contain
various representation and warranty clauses and may provide indemnities for a
misrepresentation or breach of the representations and warranties by either
party. The indemnities address a variety of subjects; the term and monetary
amounts of each such indemnity are defined in the specific agreements and may be
affected by various conditions and external factors. Many of the indemnities
have expired either by operation of law or as a result of the terms of the
agreement. The Company does not have a liability recorded for the historic
indemnifications and is not aware of any claims or other information that would
give rise to material payments under such indemnities. The Company has
separately discussed material indemnities provided within the last seven years.

The Company provided three guarantees with respect to its real estate
development activities in Flagler County, Florida. Two of these guarantee bonds
were issued by the Dunes Community Development District (the District). The bond
issuances were used primarily for the construction of infrastructure, such as
water and sewage utilities and a bridge. The Company would be required to
perform under these guarantees if the District failed to provide interest
payments or principal payments due to the bond holders. The maximum amount of
the undiscounted future payments on these guarantees equal $28.9. At December
31, 2002, the Company does not believe that a loss contingency is probable for
these guarantees and therefore does not have an accrual recorded in its
financial statements. The third guaranty is a performance bond in the amount of
$10.0 in favor of Flagler County, Florida. The Company would be required to
perform under this guarantee if certain parties did not satisfy all aspects of
the development order, the most significant aspect being the expansion of a
bridge. The maximum amount of the undiscounted future payments on the third
guarantee equals $10.0. At December 31, 2002, the Company has an accrual related
to the expansion of a bridge in the amount of $10.0.

In December of 2002, the Company entered into a sales-type lease agreement
for its corporate aircraft and then leased the aircraft back under an operating
lease agreement. The Company has provided, under the agreement, a residual value
guarantee to the counterparty in the amount of $46.8, which is the maximum
amount of undiscounted future payments. The Company would have to make payments
under the residual value guarantee only if the fair value of the aircraft was
less than the residual value guarantee upon termination of the agreement. At
December 31, 2002, the Company does not believe that a loss contingency is
probable and therefore does not have an accrual recorded in its financial
statements.

PRODUCT WARRANTIES:

Accruals for estimated expenses related to warranties are made at the time
products are sold or services are rendered. These accruals are established using
historical information on the nature, frequency, and average cost of warranty
claims. The Company warrants numerous products, the terms of which vary widely.
In general, the Company warrants its products against defect and specific non-
performance. In the automotive businesses, liability for product defects could
extend beyond the selling price of the product and could be significant if the
defect shuts down production or results in a recall. At December 31, 2002, the
Company has a product warranty accrual in the amount of $40.4.

PRODUCT WARRANTY LIABILITIES

F-33

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 23

BUSINESS SEGMENT INFORMATION

- ---------------

* Net sales to external customers are attributed to individual regions based
upon the destination of product or service delivery.

F-34

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Sales and revenues by product category, net of intercompany balances, is as
follows:

Defense Electronics & Services had sales and revenues from the United
States government of $1,105.3, $1,104.9 and $1,023.6 for 2002, 2001 and 2000,
respectively. Apart from the United States government, no other government or
commercial customer accounted for 10% or more of sales and revenues for the
Company.

FLUID TECHNOLOGY:

This segment contains the Company's pump businesses, including brands such
as Flygt(R), Goulds(R), Bell & Gossett(R), A-C Pump(R), Lowara(R), Vogel(R), and
Richter(TM) making the Company the world's largest pump producer. Businesses
within this segment also supply mixers, heat exchangers, engineered valves and
related products with brand names such as McDonnell & Miller(R) and ITT
Standard(R) in addition to those mentioned above. This segment comprises
approximately 39% of the Company's sales and revenues and approximately 42% of
its segment operating income for 2002.

DEFENSE ELECTRONICS & SERVICES:

The businesses in this segment are those that directly serve the military
and government agencies with products and services. These include air traffic
control systems, jamming devices that guard military planes against radar guided
missiles, digital combat radios, night vision devices and satellite instruments.
Approximately 41% of the sales and revenues in this segment are generated
through contracts for technical and support services which the Company provides
for the military and other government agencies. Approximately 73%, 85% and 77%
of 2002, 2001 and 2000 Defense Electronics & Services sales and revenues,
respectively, were to the U.S. government. The Defense Electronics & Services
segment comprises about 30% of the Company's sales and revenues and 26% of its
segment operating income in 2002.

MOTION & FLOW CONTROL:

Businesses in the Motion & Flow Control segment produce switches and valves
for industrial and aerospace applications, products for the marine and leisure
markets under the brands Jabsco(R), Rule(R), Flojet(R) and Danforth(R), fluid
handling materials such as tubing systems and connectors for various automotive
and industrial markets, specialty shock absorbers under the brand KONI and brake
components for the transportation industry. The Motion & Flow Control segment
comprises approximately 19% of the Company's sales and revenues and
approximately 20% of its segment operating income for 2002.

ELECTRONIC COMPONENTS:

This business consists of the Company's products marketed under the
Cannon(R) brand. These products include connectors, switches and cabling used in
communications, computing, aerospace and industrial applications as well as
network services. This segment comprises about 12% of the Company's sales and
revenues and 12% of its segment operating income for 2002.

CORPORATE AND OTHER:

This primarily includes the operating results and assets of Corporate
Headquarters.

F-35

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 24

QUARTERLY RESULTS FOR 2002 AND 2001

- ------------
(a) The sum of the quarters' earnings per share does not equal the full year
amounts due to rounding.

The above table reflects the range of market prices of the Company's common
stock for 2002 and 2001. The prices are as reported in the consolidated
transaction reporting system of the New York Stock Exchange, the principal
market in which the Company's common stock is traded, under the symbol "ITT."
The Company's common stock is listed on the following exchanges: Frankfurt,
London, Midwest, New York, Pacific, and Paris.

During the period from January 1, 2003 through February 28, 2003, the high
and low reported market prices of the Company's common stock were $62.09 and
$54.11, respectively. The Company declared dividends of $0.16 per common share
in the first quarter of 2003. There were approximately 33,243 holders of record
of the Company's common stock on February 28, 2003.

F-36

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS
(IN MILLIONS)

S-1

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF SECTION 13 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, AND BY THE UNDERSIGNED IN THE
CAPACITY INDICATED.

ITT INDUSTRIES, INC.

By /s/ EDWARD W. WILLIAMS

-----------------------------------
EDWARD W. WILLIAMS
SENIOR VICE PRESIDENT AND
CORPORATE CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)

March 27, 2003

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.

II-1

CERTIFICATIONS

I, Louis J. Giuliano certify that:

1. I have reviewed this annual report on Form 10-K for the year ended
December 31, 2002 of ITT Industries, 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 officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:

a) designed such disclosure controls and procedures 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 as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent function):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.

By: /s/ LOUIS J. GIULIANO
------------------------------------
Name: Louis J. Giuliano
Title: Chairman, President and
Chief Executive Officer
(Principal executive
officer)

Date: March 27, 2003

II-2

I, David J. Anderson, certify that:

1. I have reviewed this annual report on Form 10-K for the year ended
December 31, 2002 of ITT Industries, 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 officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:

a) designed such disclosure controls and procedures 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 as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent function):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.

By: /s/ DAVE J. ANDERSON
------------------------------------
Name: Dave J. Anderson
Title: Senior Vice President and
Chief Financial Officer
(Principal financial
officer)

Date: March 27, 2003

II-3

EXHIBIT INDEX

II-4

II-5

II-6