ITT INDUSTRIES INC - 10-K Annual Report

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UNITED STATES

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, 2003
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. [ ]

Indicate by check mark whether the registrant 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, 2003 was approximately $6 billion.

As of February 29, 2004, there were outstanding 92,271,319 shares of Common
Stock, $1 par value, of the registrant.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of 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 11, 2004, are 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 2003 sales of approximately $5.63 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 Process
Solutions Group (formerly named Engineered Values) and 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 39,000 employees based in 55 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. The operating income percentage for 2001 is
adjusted to exclude the impact of goodwill amortization:

BUSINESS AND PRODUCTS

FLUID TECHNOLOGY

Fluid Technology is a leading global provider of fluid systems and
solutions for the Water, Wastewater, Treatment, Building Trades, Industrial &
Process and BioPharm markets. Sales and revenues are approximately $2.25
billion, $1.96 billion, and $1.83 billion for 2003, 2002 and 2001, respectively.

Fluid Technology is engaged in the design, development, production, sale,
and after-sale support 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 and South America, and the Asia/Pacific region. No single customer
accounted for more than 2% of 2003 sales for Fluid Technology. Sales are made
directly or through independent distributors and representatives.

As the world's leading producer of fluid handling equipment 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 for the need to preserve and protect the earth's water resources.

Water

ITT's broad range of pumps and accessories for residential, municipal and
commercial applications including water wells, pressure boosters, and
agriculture packages and systems are branded Goulds Pumps, Red Jacket, Marlow,
Lowara, and Vogel.

Both Goulds Pumps and A-C Custom Pump provide municipal and flood control
pump products and Flowtronex package turf irrigation and water booster systems
for municipal, golf and irrigation.

Wastewater

The Flygt Group is the originator and largest manufacturer of submersible
pumps and mixers which form the heart of many of the world's sewage and
wastewater treatment facilities. Combining Flygt's submersible pumps and mixers
with Sanitaire and ABJ products provides a solution to customers' needs for
complete system wastewater treatment. Dry mount pumps from A-C Pump provide an
alternative technical solution to submersible pumps. Flygt and Robot are market
leaders and respected brands for commercial and municipal submersible waste
water pumps. ITT Industries' strong positions in the dewatering market is
generated by Flygt, Robot and Grindex and in the residential effluent and sewage
pumps systems area Goulds Pumps and Lowara are market leaders.

Treatment

Through the Sanitaire(R) and ABJ(TM) brands, ITT is a leader in aeration
systems for municipal and industrial wastewater treatment. The broad range of
products includes ceramic and membrane fine bubble diffusers, and stainless
steel coarse bubble diffusers. WET, C'Treat & PCI provide advanced membrane
filtration engineered systems, reverse osmosis systems and portable disinfection
technology. Flygt's submersible mixers and Sanitaire's diffused aeration systems
play a crucial role in the biological treatment phase ensuring that incoming
flows reach optimal nitrification and prevent sedimentation in the aeration
tank. ABJ is a unique Sequence Batch Reactor (SBR) allowing a continuous inflow.
Through the additions of WET, C'Treat and PCI, ITT Industries offers

2

advanced membrane filtration for both municipal and industrial applications.

Building Trades

Leading brands such as Bell & Gossett(R), McDonnell & Miller(R), and
Hoffman Specialty(R), provide a broad variety of products for environmental
control in buildings and for building service and utility applications including
liquid-based heating and air conditioning systems, liquid level control, and
steam trap products for boiler and steam systems.

Flygt serves the construction market by dewatering construction sites on a
global basis. A-C Fire Pump has been in the forefront of developing, designing
and custom building fire pump systems that meet fire protection needs.

Bell & Gossett and McDonnell & Miller provide packaged systems for variable
and constant speed pumping, heat transfer and pressure boosting, heat
exchangers, and condensate handling equipment. Lowara and Vogel service the
European and Middle East building trade markets with pressure boosting pumps and
A-C Fire-Pump is the global UL/FM Fire pump package provider.

Industrial & Process

Goulds Pumps are available in vertical, horizontal and submersible
centrifugal configurations in a variety of alloys. Goulds is the market leader
for ANSI standard process pumps, including a line of "sealless" magnetic drive
pumps for services where leakage cannot be tolerated. Goulds offers standard as
well as application specific pumps for the industrial marketplace. Examples of
typical applications include general industrial, mining, chemical, pulp and
paper, power, oil refining and gas processing. Fabri-Valve knife gate valves are
unrivaled in their ability to handle demanding applications found in pulp and
paper plants including pulping, recovery and bleaching. Dia-Flo diaphragm valves
and Richter lined valves and pumps are the workhorse of the chemical industry
providing superior value through safe and trouble free operation. ITT Industries
services the industrial market through its premium brands such as Goulds Pumps,
PumpSmart and A-C Pumps for Standard Process (ANSI & ISO Standard), Engineered
Horizontal (API Standard), Vertical and industrial sump pumps and PRO
Services(TM). Fabri-Valve and Dia-Flo are leaders in knife gate and diaphragm
valves and Richter is the preferred supplier of Lined Pumps and valves while ITT
Standard is a supplier of heat exchangers for industrial applications.

BioPharm

Our Pure-Flo brand offers a wide array of valve and turnkey systems that
are at the heart of extremely demanding manufacturing processes, especially of
biological and pharmaceutical compounds. The design, engineering, fabrication,
and installation of high purity process modules, skid systems and stainless
steel vessels for the biopharm and hygienic industries are served by the
Pure-Flo Cotter, Pure-Flo Precision and Pure-Flo MPC units. Richter lined valves
and pumps are utilized in the API (active pharmaceutical ingredient) area of the
manufacturing process.

Global Service and Customer Care

Fluid Technology has 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 service.

System Solutions

Today we are able to provide our global customer base with the systems and
solutions they need to meet their ever increasing demands on cost control and
efficiencies. Through the overarching strategic Value Based Six Sigma program,
we now have in place company wide systems for rapid product development based on
the Voice Of Customer and Value Stream Mapping to ensure that we have short lead
times to better meet our customers needs.

Our strategy to expand down stream to better service our customers has
moved us from a product producer to a solution provider. This strategy has
guided us in our acquisitions. For example, today ITT Industries can extend its
core offering of submersible pumps and mixers with systems to control plant
operation, technologies that analyze the waste stream, and products and systems
to treat water through biological, ozone and UV processes.

In the industrial markets, our pump systems are now supplied with
intelligent control systems. Customers engaging our "total systems approach"
find dramatically lower energy con-

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sumption, maintenance and overall life cycle costs.

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.

Brand names include ABJ(R), A-C Pump(R), 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 11,400
employees and have 45 major facilities in 14 countries.

DEFENSE ELECTRONICS & SERVICES

Defense Electronics & Services, with sales and revenues of approximately
$1.79 billion, $1.51 billion, and $1.30 billion for 2003, 2002 and 2001,
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 avionics business, and our radar 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,
base support and range support for government sites around the world. In 2003,
the Systems Division won a multi-year $580 million contract to provide technical
support for the Deep Space Network, an international network of antennas that
support interplanetary spacecraft missions and radio and radar astronomy
observations for the exploration of the solar system and the universe.

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 devel-

4

oping 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.

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 is also 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 the 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 95% of 2003 sales and revenues of Defense Electronics & Services
was to governmental and international entities, of which approximately 81% 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 20% and 5%, respectively, of 2003 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 5% in 2003, 3% in
2002 and 4% in 2001. 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 $3.19 billion
in 2003 compared with $2.85 billion in 2002 and $2.58 billion in 2001.

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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
10,400 employees and are present in 126 facilities in 24 countries.

MOTION & FLOW CONTROL

Motion & Flow Control, with sales and revenues of approximately $992.3
million, $935.5 million and $898.7 million for 2003, 2002 and 2001,
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 the
Automotive Tubing, Motion Control, Leisure Marine and Flow Control groups.

Automotive Tubing:

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 manufacturers, their key Tier 1 suppliers, and other similar
customers. Fluid Handling Systems also owns 50% of a joint venture with Sanoh
Industrial Co. of Japan that supplies similar products primarily to the major
Asian transplant manufacturers in the United States.

Motion Control:
Galfer designs and manufactures friction pads and backplates for braking
applications on vehicles. From three facilities in Italy, Galfer services most
European "OEM" (Original Equipment Manufacturers) auto makers and also operates
a substantial facility for research and testing of new materials. Approximately
61% of Galfer's 2003 business is in aftermarket activity.

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.

Leisure Marine:

The Jabsco Division is the world's leading producer of pumps and related
products for the leisure marine and recreational vehicle markets. 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.

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

Flow Control:

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.

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 5,600
employees and have 35 facilities located in 10 countries.

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ELECTRONIC COMPONENTS

Electronic Components, with sales and revenues of approximately $600.3
million, $583.5 million, and $647.0 million for 2003, 2002 and 2001
respectively, designs and manufactures connectors, interconnects, cable
assemblies, switches, keypads, 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, medical, transportation, military/aerospace,
commercial aircraft, computer, and consumer uses.

In the communications area, Electronic Components designs products and
provides services specifically for today's telecommunications infrastructure 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 networks, carrier networks, enterprise networks, datacommunications,
and subscriber equipment applications.

In the industrial area, Electronic Components' products are incorporated in
various industrial equipment and process 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, ultrasound, and
other diagnostic equipment.

In the transportation area, Electronic Components' products are
incorporated in off-highway, mass transit, heavy-vehicle, agriculture 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 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:

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 11,500
employees and have 25 facilities located in 10 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

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and divesting businesses that do not enhance that fit.

In the Fluid Technology Segment, on January 19, 2004 we announced the
acquisition of over 81.4% of the outstanding shares of WEDECO AG Water
Technology, which manufactures ultraviolet disinfection and ozone oxidation
systems, and of Shanghai Hengtong Purified Water Development Co. Ltd. and
Shanghai Hengtong Water Treatment Engineering Co. Ltd., a producer of
reverse-osmosis, membrane and other water treatment systems for the power,
pharmaceutical, chemical and manufacturing markets in China.

On February 9, 2004 the Company announced it had entered into a definitive
agreement to acquire Eastman Kodak Company's Remote Sensing Systems business
which provides large scale optical and electro-optical high-resolution satellite
imaging. The acquisition is for the Company's Defense Electronics & Systems
business segment.

During 2003, we acquired the business and assets of Uniserve Wellpoint
Srl., which produces a range of high quality diesel and electric powered, vacuum
primed centrifugal pumps and spear or well point dewatering systems for our
Fluid Technology Segment.

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, mass transit,
entertainment and nuclear markets, for our Electronic Components segment.

In 2003 we sold substantially all of our interest in DigitalGlobe, Inc., a
developmental stage company providing high resolution satellite images to the
commercial markets.

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 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.

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.

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

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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 2003,
approximately 53% of the sales and revenues of Fluid Technology was derived from
North America, approximately 33% was derived from Europe, and the Asia/Pacific
region accounted for approximately 8%. 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. The Company 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.

The geographic sales base of Defense Electronics & Services is
predominantly the United States, which accounted for approximately 80% of 2003
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 2003, approximately 53% of sales and revenues of
Motion & Flow Control were to customers in North America, and approximately 44%
of sales were to customers in Europe and 2% were in Asia. Management of ITT
Industries sees growth opportunities in North America, Europe and Asia.

The geographic sales base of Electronic Components in Europe accounted for
42% of 2003 sales and revenues, North America accounted for 35% of 2003 sales
and revenues, and the Asia/Pacific region accounted for 21% of 2003 sales and
revenues. Electronic Components has manufacturing facilities within North
America, Central 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, medical 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 Company's many
products and services go to market collectively linked by the ITT Industries
brand, the engineered blocks symbol, and the tagline "Engineered for Life." The
brand has been enhanced and strengthened over the years through a coordinated
effort that includes advertising, public relations activities, trade exhibits,
and point of sale material.

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 rationaliza-

9

tion. 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.

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 or
other agencies of the United States government 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 re-
10

cent 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 $559.4 million in
2003, $519.1 million in 2002 and $424.7 million in 2001. Of those amounts 78.3%
in 2003, 78.0% in 2002 and 76.4% in 2001 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 aggregate, 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, 2003, ITT Industries and its subsidiaries employed an
aggregate of approximately 39,000 people. Of this number, approximately 17,500
are employees in the United States, of whom approximately 25% 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
11

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.

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

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, intellectual property matters, copyright infringement, personal
injury claims, employment and pension matters, government contract issues and
commerical 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.

The Company is responsible, in whole or in part, or is alleged to be
responsible for environmental investigation and remediation at 104 sites in
various countries. Of those sites, it 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 the Company pursuant to contractual language,
or situations discovered by the Company through its internal environmental
assessment program.

In Glendale, California the Company has been involved in an environmental
proceeding 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,

12

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. 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 Corporation operated a facility in Madison County, Florida from 1968
until 1991. In 1995, elevated levels of contaminants were detected at the site.
Since then, the Company has completed the investigation of the site and is in
the process of evaluating various remedies in coordination with state and
federal environmental authorities.

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

In a suit filed in 1991 by ITT Corporation 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 2004. 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.

The Company 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 substantially 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
2003, the Company and Goulds resolved approximately 2,000 claims 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. 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 since 1991. Both
actions have been stayed to allow the parties to negotiate an acceptable
allocation arrangement. In addition, Utica National, Goulds historic insurer,
has requested that the Company negotiate a coverage in place agreement to
allocate the Goulds' asbestos liabilities between insurance policies issued by
Utica and others. The parties are currently negotiating the terms of such an
agreement. The Company is continuing to receive insurance payments during the
pendency of these proceedings.

13

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
aviation insurers are contributing to 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 malfunction of a fume detector
manufactured by ITT's subsidiary Rule Industries, Inc., prior to the date the
Company acquired Rule. The Company's insurer is on notice of this matter.

The Company has received a 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 arbitration.

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.

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 substantially the same
responsibilities as those borne in their present offices, except that (i) 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); (ii) Mr. Crum, prior to his
election as Senior

14

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);
(iii) 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); (iv) Mr. Foley, prior to his election as
Senior Vice President (2003), was Vice President, Treasurer and, 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; (v) 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); (vi) Mr. Lang, prior to his election as Vice President
and Corporate Controller (2003), was Vice President and Controller, ITT Fluid
Technology (2002) and Vice President and Controller, ITT Defense Electronics and
Services (1999); prior to that he was Corporate Controller of AMP (1994). (vii)
Ms. Reichelderfer, prior to her election as Senior Vice President (2002) and
President, Electronic Components (2003), was President of Motion & Flow Control
(2002), prior to that she was Vice President and President Motion & Flow Control
and held other executive positions with ITT Industries; and (viii) Mr. Williams,
prior to his appointment as Chief Financial Officer (June 2003), was Senior Vice
President and Corporate Controller (2001), and prior to that was Vice President
and Corporate Controller (1998), and prior to that was Vice President and
Controller of our Defense & Electronics business.

In February 2004, the Company announced that Mr. Giuliano has indicated his
intention to retire as President and Chief Executive Officer of the Company once
a successor has been appointed. Mr. Giuliano has agreed to continue to serve as
Chairman for a period of time that will be decided by the Board.

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, 2004 through February
29, 2004, the high and low reported market prices of our common stock were
$78.52 and $71.26, respectively.

We declared dividends of $0.15 per share of common stock in each of the
four quarters of 2002. We declared dividends of $0.16 per share of common stock
in each of the four quarters of 2003. In the first quarter of 2004, we declared
a dividend of $0.17 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 30,553 holders of record of our common stock on February 29,
2004.

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 and income from continuing operations in 2003, 2002, 2001
and 1999 includes (expense) income of $(30.5), $3.5, $(97.7) and $4.6
pretax, respectively, or $(21.0), $2.4, $(63.5), and $2.9, 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.

(b) The Company adopted Statement of Financial Accounting Standards No. 142 and
discontinued the amortization of goodwill as of January 1, 2002 (see Note 2,
"Changes in Accounting Pronouncements," in the Notes to Consolidated
Financial Statements for additional information). Reported net income for
2001, 2000 and 1999 includes goodwill amortization expense.

16

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 Note 2,
"Changes in Accounting Pronouncements," in the Notes to Consolidated Financial
Statements for additional information). Total costs and expenses for 2001
exclude goodwill amortization expense for comparative purposes.

EXECUTIVE SUMMARY

Consolidated Results

2003 was a year in which the Company met or exceeded most of its financial
goals. The Company's revenues grew almost 13% from prior year results. The
contribution from acquisitions accounted for growth of 3%, while the effects of
foreign currency translation contributed growth of almost 5% of the improvement.
The remaining increase of 5% was generated by the Company's existing businesses
and outpaced initial Company expectations, especially given mixed end market
conditions.

The Company also reported strong operating income performance of $528.5
million. This amount decreased $9.1 million from prior year due to increased
spending on corporate initiatives and increased restructuring expense in 2003 of
$34.0 million. The increased investment in corporate initiatives include: the
Value-Based Six Sigma (VBSS) program, which allows for continuous process
improvement and drives operational excellence throughout the organization; the
Value-Based Leadership Development (VBLD) process, which develops the Company's
leadership, at every level, and allows for more effective strategic and
operational decision making in an organized and decisive manner; and the upgrade
of the Company's information technology infrastructure, including increased
bandwith across ITT's wide area network, enhanced security and the strategic
positioning of global data centers.

In 2003, the Company reported Diluted Earnings per Share (EPS) of $4.29,
which increased $0.23, or 5.7%, from the prior year. It is important to note
that both periods contained special items that Management considers separately
from core operations. These items in-

18

clude: restructuring, tax settlements and related interest, other items and
results from discontinued operations. The net effect of these items accounted
for $0.07 per share of the increase from prior year results.

Cash from Operating Activities of $575.6 million dramatically exceeded
Company expectations for 2003. This amount decreased $19.2 million from the
prior year, but the decrease was largely due to $200.0 million of pension
pre-funding in 2003 versus $50.0 million in 2002. The Company contributed an
additional $100.0 million of pension pre-funding in the first quarter of 2004
and has determined that this pre-funding strategy will allow the Company to
avoid any substantial, mandatory contributions in 2004 and 2005, under current
IRS contribution rules.

BUSINESS SEGMENT HIGHLIGHTS

Fluid Technology

The Fluid Technology segment had a strong year with revenues of $2.25
billion being up 15.0% from 2002. Revenues from acquisitions contributed growth
of 6.0% and foreign currency translation provided growth of 6.7%. The remaining
revenue growth of 2.3% represented contributions from existing businesses.
Water/wastewater businesses were the largest contributor to organic growth. The
reported results reflect the Company's focus, which is to grow existing
businesses through new product introductions and to perform strategic
acquisitions to build on core competencies. The Company anticipates the trend of
revenue growth to continue with strong performances from the water/wastewater
businesses and the impact of WEDECO AG Water Technology ("Wedeco"), a first
quarter 2004 acquisition. Wedeco is projected to add between $125 million and
$140 million of revenue to the segment during 2004. Total segment revenue is
projected to be between $2.45 billion and $2.51 billion in 2004.

Operating income increased 7.9% during 2003 to $271.4 million primarily
reflecting increased volume. Operating income is projected to be between $304
million and $317 million in 2004.

DEFENSE ELECTRONICS & SERVICES

The Defense Electronics & Services segment increased sales 18.3% in 2003 to
$1.79 billion. This increase reflects increased revenues in all businesses,
particularly in the service sectors which includes revenues from Middle East
support and classified programs. The segment's backlog, which management regards
as an important indicator of future performance, increased from $2.85 billion in
2002 to $3.19 billion in 2003. Revenue is projected to grow approximately 20% to
24% in 2004 resulting in revenue between $2.15 billion and $ 2.23 billion. The
largest contributing factor to the forecast increase is the acquisition of
Eastman Kodak Company's Remote Sensing Systems business, which is expected to
provide revenues between $250 million and $275 million after closing the
transaction. Forecast 2004 revenue growth, excluding the perspective 2004
acquisition, is expected to be more in line with the segment's historical
performance (i.e. approximately 6%-9%). This growth will be led by increased
services revenue, reflecting a broader range of offerings.

Operating income was $187.1 million in 2003, or 21.5% higher than 2002.
This increase reflects increased volume. Operating income is projected to be
between $213 million and $229 million in 2004.

MOTION & FLOW CONTROL

Motion & Flow Control revenues were $992.3, or 6.1% greater than 2002. The
improvement was mainly due to increased revenues in the marine and friction
material businesses, as well as the positive contribution of foreign currency
translation. Decreased volume in the automotive fluid handling business,
reflecting certain platform losses, partially offset the above mentioned items.
These platform losses are expected to impact 2004 performance resulting in
revenue between $935 million and $975 million for the segment. New product
revenue from the marine, friction material and shock absorber businesses are
expected to partially offset the 2004 revenue decline in the fluid handling
business.

Operating income increased 10% to $134.7 million. The increase reflects
increased volume and a change in product mix. Operating income is projected to
be between $136 million and $146 million in 2004.

ELECTRONIC COMPONENTS

The Electronic Components segment's revenue increased 2.9% to $600.3
million primarily due to the contribution of an acquisition and the

19

impact of foreign currency translation. These factors were partially offset by
weakness in the telecommunications and aerospace markets. The segment was also
impacted by delays in the introduction of new products. Management believes that
the end markets serviced by the Electronic Components segment are showing signs
of modest growth and that the segment's 2004 performance will reflect industry
performance. This belief is supported by book to bill ratios of 1.02 and 1.05 in
the third and fourth quarters of 2003, respectively. Additionally, new products
introduced late in the fourth quarter of 2003 and expected 2004 introductions
are forecasted to add to the segment's positive momentum. Revenues for 2004 are
projected to be between $600 million and $640 million.

Operating income was $10.0 million in 2003, and operating margin was 1.7%.
The 10.4% decline from 2002 is due to changes in product mix, pricing pressures,
2003 restructuring initiatives and higher marketing and administrative costs.
Operating margin for 2004 is forecast to increase approximately 430 basis points
due to the benefit of 2003 restructuring initiatives, process improvement
initiatives and the introduction of new products. Operating income is projected
to be between $36 million and $45 million in 2004.

YEAR ENDED DECEMBER 31, 2003 COMPARED TO THE YEAR ENDED DECEMBER 31, 2002:

Sales and revenues for the year ended December 31, 2003 were $5.63 billion,
an increase of $641.3 million, or 12.9%, from 2002. Costs of sales and revenues
of $3.68 billion for 2003 increased $471.6 million, or 14.7%, from the
comparable 2002 period. The increases in sales and revenues and costs of sales
and revenues are primarily attributable to higher volume in the Defense
Electronics & Services and Fluid Technology segments, contributions from
acquisitions made by the Fluid Technology and Electronic Components segments and
the impact of foreign currency translation. Product mix changes in the Defense
Electronic & Services and Electronic Components segments also contributed to the
increase in costs of sales and revenues.

Selling, general and administrative ("SG&A") expenses during 2003 were
$824.7 million, an increase of $104.5 million, or 14.5%, from the comparable
prior year period. The increase in SG&A expenses is primarily due to increased
marketing expense in all segments, reflecting expenditures from newly acquired
companies, additional employee benefit costs, costs of process improvement
initiatives and other increased administrative expenses.

Research, development and engineering ("RD&E") expenses for 2003 increased
$40.3 million, or 7.8%, compared to 2002. The increase is attributable to
increased spending in all segments.

During 2003, the Company recorded a $33.8 million restructuring charge to
reduce operating costs and streamline its structure. The charge primarily
reflects the planned reduction of 986 persons. Additionally, management reviewed
the Company's remaining restructuring actions and determined that certain 2003
and 2001 actions would be completed for $4.7 million less than planned at the
Electronic Components segment. Accordingly, restructuring accruals totaling $4.7
million were reversed into income during 2003. The Company also recorded an
asset impairment charge of $1.4 million primarily to write-off a technology
license that will not be utilized in the foreseeable future due to projected
market conditions. During 2002, the Company reversed $13.1 million of
restructuring accruals into income as it was determined that certain 2001
actions would be completed for less than planned. Also, during the fourth
quarter of 2002, the Company recorded a $9.6 million restructuring charge
related to the planned termination of 292 persons and the planned closure of two
facilities. See 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.

Operating income for 2003 was $528.5 million compared to $537.6 million for
2002. The decrease is primarily due to increased SG&A and RD&E expenses and
increased net restructuring and asset impairment charges by $34.0 million,
partially offset by increased sales and revenues at each of the segments.
Segment operating margin for 2003 was 10.7%, or 1.3% below the segment operating
margin for the comparable 2002 period. The decrease reflects changes in product
mix in the Defense Electronics & Services and Electronic Components segments,
increased SG&A expenses and 2003 restructuring and asset impairment charges.

Interest income was $10.1 million (net of interest expense of $20.9
million) for 2003. The

20

Company recognized $32.4 million of interest expense (net of interest income of
$11.0 million) during 2002. The variance between years is primarily due to
interest income of $32.3 million, related to two 2003 tax settlements, and the
collection of interest income from a cost based investment that management had
previously believed would not be received. Upon collection, the Company reversed
the related valuation allowance into income. Additionally, lower average debt
levels also contributed to the variance in interest expense.

Miscellaneous expense was $7.9 million in 2003 compared to $3.6 million of
income in 2002. The $11.5 million increase in expense is primarily due to higher
employee benefit costs for disposed companies.

Income tax expense was $139.8 million in 2003, an increase of $10.9 million
from 2002. The increase is primarily due to $10.1 million of interest income
during 2003 (versus $32.4 million of interest expense in 2002), and a higher
effective tax rate in 2003, partially offset by lower operating income in 2003.
The effective income tax rate for 2003 was 26.3% compared to 25.3% in 2002. The
increase is primarily due to a $61.2 million tax refund received during 2002, of
which $30.6 million was reflected as a reduction of tax expense. Several
favorable 2003 tax settlements partially offset the impact of the 2002 refund.

Income from continuing operations in 2003 was $390.9 million, or $4.15 per
diluted share, compared to $379.9 million or $4.06 per diluted share for 2002.
The increase reflects the results discussed above.

The Company recognized $13.0 million of income from discontinued operations
in 2003. The income primarily relates to the collection of a disputed receivable
related to the Company's disposed automotive businesses. Upon collection, the
Company reversed the related valuation allowances, which had been previously
established for the assets, resulting in the above mentioned income.

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. Costs 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.

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.

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. See 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 were partially offset by lower operating margins in the Electronic
Components segment, reflecting higher SG&A expenses. Increased corporate
expenditures reflecting the

21

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 was 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 in 2001.
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.

BUSINESS SEGMENT INFORMATION

YEAR ENDED DECEMBER 31, 2003 COMPARED TO THE YEAR ENDED DECEMBER 31, 2002:

Fluid Technology sales and revenues of $2.25 billion increased $293.6
million, or 15.0%, from 2002. Costs of sales and revenues increased $209.6
million, or 16.3%, from 2002. Higher volume in the water/wastewater markets,
acquisition revenue from the water/wastewater and engineered process solutions
businesses and the impact of foreign currency translation were the primary
factors for the increases. SG&A expenses during 2003 increased $51.6 million, or
13.8%, compared to 2002, mainly due to increased marketing expenses, reflecting
expenditures from newly acquired companies, and increased administrative costs
in most markets. During 2003, the segment recorded a $13.8 million restructuring
charge mainly related to a planned reduction in headcount. Restructuring charges
recorded during 2002 totaled $6.0 million for workforce reductions.
Additionally, the segment reversed $1.5 million of restructuring accruals in
2002 that management deemed unnecessary. See 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. Operating income for 2003 was up $19.9 million, or 7.9%,
compared to 2002 due to the activity discussed above.

Defense Electronics & Services sales and revenues and costs of sales and
revenues for 2003 increased $277.0 million, or 18.3%, and $199.8 million, or
23.6%, respectively, from the prior year. The increases are due to increased
revenue in all businesses including higher service revenue reflecting Middle
East support and classified programs. Product mix issues also contributed to the
increase in costs of sales and revenues. SG&A expenses increased $12.9 million,
or 12.9%, primarily due to higher marketing expenses and increased employee
benefit and administrative costs in most businesses. During 2003, the segment
recorded a $1.0 million restructuring charge related to the reduction in
headcount. See 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. RD&E
expenses during 2003 increased $29.2 million, or 7.0%, due to increased spending
in most businesses. Operating income for 2003 was $187.1 million, an increase of
$33.1 million, or 21.5%, compared to 2002. The increase reflects the results
discussed above.

Motion & Flow Control recorded sales and revenues and costs of sales and
revenues of $992.3 million and $721.6 million, respectively, during 2003,
reflecting increases of $56.8 million, or 6.1%, and $28.8 million, or 4.2%, from
2002. The increases were mainly due to increased sales in the marine and
friction material businesses and the impact of foreign currency translation,
partially offset by volume declines in

22

the automotive fluid handling business. SG&A expenses increased $9.2 million, or
10.7%, reflecting higher marketing costs in the marine business and increased
administrative costs in most businesses. RD&E expenses were $3.6 million, or
11.0% higher than the comparable 2002 period as spending increased in most
businesses. During 2003, the segment recorded a net restructuring charge of $4.4
million mainly related to a planned reduction in headcount and the closure of
one facility. Restructuring charges recorded during 2002 totaled $3.0 million
primarily for a reduction in headcount and the closure of one facility.
Additionally, the segment reversed $1.5 million of restructuring accruals in
2002 that management deemed unnecessary. See 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. Operating income of $134.7 million was $12.3 million, or
10.0%, higher in 2003 compared to 2002, primarily due to the items mentioned
above.

Electronic Components sales and revenues of $600.3 million and costs of
sales and revenues of $429.9 million in 2003, increased $16.8 million, or 2.9%,
and $36.3 million, or 9.2%, respectively, from the comparable prior year period.
The increases reflect the contribution from an acquisition and the impact of
foreign currency translation, partially offset by weaknesses in the
telecommunication and commercial aerospace markets. Product mix issues also
contributed to the increase in costs of sales and revenues. SG&A expenses
increased $18.5 million due to increased marketing, reflecting expenditures from
a newly acquired company, employee benefit and administrative expenses,
including the impact of a 2003 first quarter acquisition. During 2003, the
segment recorded a $13.2 million restructuring charge primarily relating to
planned headcount reductions and reversed $4.6 million of restructuring accruals
into income as management deemed certain 2003 and 2001 actions would be
completed for less than originally planned. Additionally, in 2003 the segment
recorded a $1.4 million asset impairment charge mainly to write-off a license
agreement for technology, which will not be utilized in the foreseeable future
due to projected market conditions. Restructuring charges recorded by the
segment during 2002 totaled $0.6 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). Operating income for 2003 decreased $60.4 million, or
85.8%, from 2002. The decline was due to the factors discussed above.

Corporate expenses increased $14.0 million during 2003, primarily due to
costs related to process improvement initiatives, a $1.3 million restructuring
charge for planned headcount reductions (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) and increased administrative expenses.

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. Costs 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, 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. See 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 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. Costs of sales and
revenues increased $99.8 million, or 13.4% from 2001. The increases were
primarily

23

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. See 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
costs 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. See 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 for 2002 increased $8.3 million, or 7.3%,
from 2001 due to the above mentioned factors.

Electronic Components sales and revenues and costs 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 segment recorded
restructuring and asset impairment charges of $55.2 million and $14.4 million,
respectively. See 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 for 2002 was up $44.6 million from 2001 due to the above mentioned
factors.

STATUS OF RESTRUCTURING AND ASSET IMPAIRMENTS

2003 RESTRUCTURING ACTIVITIES

As discussed in the "Accounting Pronouncements" section of Management's
Discussion and Analysis of Financial Condition and Results of Operations, the
Company recorded restructuring charges related to 2003 actions in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities." Restructuring actions
initiated prior to January 1, 2003 were recorded in accordance with the
guidelines of Emerging

24

Issues Task Force Issue No. 94 - 3, "Liability Recognition for Certain Employee
Benefits (including Certain Costs Incurred in a Restructuring)."

During the fourth quarter of 2003 the Company announced actions to reduce
operating costs primarily through the reduction of headcount. The new $15.4
million restructuring charge primarily reflects the severance of 301 employees.
The actions by segment are as follows:

- - The Electronic Components segment recorded $1.5 million of the charge for the
termination of 132 employees, including 113 factory workers, 14 office workers
and five management employees.

- - The Fluid Technology segment recognized $12.4 million of the charge for the
severance of 134 employees, including 39 factory workers, 90 office workers
and five management employees. Lease and other costs represent $0.3 million of
the charge. The segment also recorded a $0.2 million charge associated with
the disposal of machinery and equipment.

- - The Defense Electronics & Services segment recorded a $1.0 million charge for
the severance of 35 employees, including seven factory workers, 19 office
workers and nine management employees.

The projected future cash savings from the restructuring actions announced
during the fourth quarter of 2003 are approximately $13 million during 2004 and
$53 million between 2005 and 2008. The savings primarily represents lower salary
and wage expenditures and will be reflected in "Costs of Sales and Revenues" and
"Selling, General and Administrative Expenses".

As of December 31, 2003, the Company had made $4.7 million of payments
attributable to the 2003 fourth quarter restructuring actions. Future
restructuring expenditures will be funded with cash from operations,
supplemented, as required, with commercial paper borrowings.

In addition to the new restructuring actions announced during the fourth
quarter, the Motion & Flow Control segment recognized $0.5 million of severance
and employee benefit costs related to actions announced during the first quarter
and the Electronic Components segment recognized $0.2 million of outplacement
related to actions announced earlier in 2003.

During the third quarter of 2003 the Company announced additional actions
to reduce operating costs primarily through the reduction of headcount. The new
$2.6 million restructuring charge primarily reflects the planned severance of 72
employees. The actions by segment are as follows:

- - The Electronic Components segment recorded $1.2 million of the charge for the
planned termination of 40 employees, including 15 factory workers and 25
office workers. The segment also recorded a $0.1 million charge associated
with the disposal of machinery and equipment.

- - The Fluid Technology segment recognized a $0.5 million charge for the planned
severance of 13 factory workers and 14 office workers. Lease and other costs
represent $0.4 million of the charge.

- - The Motion & Flow Control segment recorded a $0.4 million charge for the
planned severance of one management employee and four factory workers.

The projected future cash savings from the restructuring actions announced
during the third quarter of 2003 are approximately $4 million during 2004 and
$16 million between 2005 and 2008. The savings primarily represents lower salary
and wage expenditures and will be reflected in "Costs of Sales and Revenues" and
"Selling, General and Administrative Expenses."

As of December 31, 2003, the Company had made $1.0 million of payments
attributable to the 2003 third quarter restructuring actions. Future
restructuring expenditures will be funded with cash from operations,
supplemented, as required, with commercial paper borrowings.

In addition to the new restructuring actions announced during the third
quarter, the Motion & Flow Control segment recognized $0.2 million of severance
and employee benefit costs related to actions announced during the first
quarter.

During the second quarter of 2003 the Company continued its program to
reduce structural costs and increase profitability. New restructuring actions
totaling $4.7 million were announced during the period. The charge primarily
reflected the planned severance of 148

25

employees and the cancellation of an operating lease. The actions by segment are
as follows:

- - The Electronic Components segment comprises $2.7 million of the charge and the
actions taken at this segment include the planned termination of six
management employees, 19 factory workers and 71 office workers.

- - The Motion & Flow Control segment recognized $1.0 million for the planned
severance of 50 employees, including six management employees, 31 factory
workers and 13 office workers. Lease termination fees of $0.7 million and
asset disposal costs of $0.1 million were also reflected in the charge.

- - At Corporate Headquarters, a charge of $0.2 million was recorded for the
planned termination of one management employee and one office worker.

The projected future cash savings from the restructuring actions announced
during the second quarter of 2003 are approximately $8 million during 2004 and
$33 million between 2005 and 2008. The savings primarily represents lower salary
and wage expenditures and will be reflected in "Costs of Sales and Revenues" and
"Selling, General and Administrative Expenses."

As of December 31, 2003, the Company had made $2.6 million of payments
attributable to the 2003 second quarter restructuring actions. Future
restructuring expenditures will be funded with cash from operations,
supplemented, as required, with commercial paper borrowings.

In addition to the new restructuring actions announced during the second
quarter, the Motion & Flow Control segment recognized $1.2 million of severance
and employee benefit costs related to actions announced during the first
quarter.
During the first quarter of 2003 the Company recorded a $9.0 million
restructuring charge primarily for the planned severance of 465 persons.
Severance of $8.3 million represents the majority of the charge. The actions by
segment are as follows:

- - The Electronic Components segment recorded $6.8 million of the charge for the
planned termination of 226 persons, comprised of 101 office workers, 116
factory workers and nine management employees. Idle facility costs of $0.3
million and asset disposal costs of $0.4 million were also reflected in the
charge. The actions were prompted by management's projections of continued
weakness in certain businesses.

- - Corporate Headquarters recorded $1.1 million of the charge for the
consolidation of administrative tasks, including the planned termination of
two management employees.

- - The Motion & Flow Control segment recorded $0.4 million of the charge for the
planned termination of 237 employees, comprised of 21 office workers and 216
factory workers. The charge relates to the closure of a manufacturing facility
in Arkansas. The actions will be completed during 2003 and 2004 and the total
estimated charge of approximately $2.6 million will be recognized ratably over
the restructuring period as the terminations become effective. Management
deemed the restructuring actions necessary to address the anticipated loss of
certain platforms during the second half of 2003.

As of December 31, 2003, the Company had made $5.1 million of payments
attributable to the 2003 first quarter restructuring actions. Future
restructuring expenditures will be funded with cash from operations,
supplemented, as required, with commercial paper borrowings.

The projected future cash savings from the restructuring actions announced
during the first quarter of 2003 are approximately $8 million during 2004 and
$38 million between 2005 and 2008. The savings primarily represents lower salary
and wage expenditures and will be reflected in "Costs of Sales and Revenues" and
"Selling, General and Administrative Expenses."

The following table displays a rollforward of the restructuring accruals
for the 2003 restructuring programs (in millions):

During the second half of 2003, $3.5 million of restructuring accruals
related to current year
26

programs were reversed into income as a result of quarterly reviews of the
Company's remaining restructuring actions. The reversals primarily reflect lower
than anticipated severance costs on completed actions and favorable employee
attrition at the Electronic Components segment. Additionally, certain actions
were not completed as they were no longer deemed feasible. The Company also
reversed other non-cash charges totaling $0.2 million.

During 2003 headcount was reduced by 690 persons and the Company
experienced employee attrition, leaving a balance of 192 planned reductions
related to the 2003 restructuring plans. In addition, one facility remains to be
closed related to 2003 restructuring plans. Actions announced during 2003 will
be substantially completed by the end of the third quarter of 2004.

During 2004 the Company anticipates approximately $15 million of
restructuring payments associated with all 2003 restructuring plans. The balance
of restructuring payments of approximately $1 million is planned for 2005.
Future restructuring payments will be funded with cash from operations,
supplemented as required with commercial paper borrowings.

2003 OTHER ASSET IMPAIRMENTS

During 2003, the Company recorded a $1.4 million asset impairment charge
primarily for the write-off of a technology license that will not be utilized
based on management's projections of future market conditions. The applicable
assets were written down to their fair values based on management's comparison
of projected future discounted cash flows generated by each asset to the
applicable asset's carrying value. These impairments were unrelated to the
Company's restructuring activities.

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 planned
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.

27

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

During 2003, the Company closed two facilities, reduced headcount by 205
and experienced employee attrition, leaving a balance of 16 planned headcount
reductions. 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 remaining projected future cash savings from the 2002 restructuring
plan are approximately $12 million in 2004 and approximately $34 million between
2005 and 2007. The savings represents lower salary and wage expenditures and
decreased facility operating costs. The impact will be reflected in "Costs of
Sales and Revenues" and "Selling, General and Administrative Expenses." Actual
savings approximated plan in 2003 and 2002.

During 2004, the Company anticipates $2.0 million of restructuring payments
associated with the 2002 restructuring plan. Future restructuring payments will
be funded with cash from operations, supplemented as required with commercial
paper borrowings.

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.

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

28

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 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 2004, the Company anticipates $1.3 million of restructuring payments
associated with the 2001 restructuring plan. The remaining $0.5 million of
payments are expected to be incurred evenly in 2005 and 2006. Future
restructuring payments will be funded with cash from operations, supplemented as
required with commercial paper borrowings.

29

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

During the second half of 2003, $0.9 million of restructuring accruals were
reversed into income as a result of quarterly reviews of the Company's remaining
restructuring actions. The reversals primarily reflect less than anticipated
severance costs on completed actions at the Electronic Components segment.

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 2003, the Company reduced headcount by 24 persons and closed one
facility, effectively completing all remaining actions contemplated under the
2001 restructuring program. Severance run-off payments will occur in 2004 and
closed facility expenditures will continue to be incurred through 2004.
Remaining future cash and non-cash savings are projected to be approximately
$211 million and $16 million, respectively, for the period from 2004 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 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 remaining projected aggregate future cash and non-cash savings of the
above mentioned actions are approximately $211 million and $16 million,
respectively, for the period from 2004 to 2006. These figures include total
savings of approximately $78 million in 2004. The savings will be reflected
primarily in costs of sales and revenues and

30

selling, general and administrative expenses. Actual savings approximated plan
in 2003 and 2002. As a result of quarterly reviews of the progress of the
Company's remaining restructuring actions, during the second half of 2003 and
2002 management determined that $0.9 million and $11.8 million of cash
expenditures would not be incurred, respectively. Accordingly, $0.9 million and
$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 2003 and 2002, respectively.

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 were disposed of by the end of 2003.

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 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. During 1999, those
claims were submitted to arbitration.

The following tables display a rollforward of the automotive discontinued
operations accruals from January 1, 2001 to December 31, 2003 (in thousands):

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.

31

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.

In 2003, the Company reassessed its obligations related to the disposal of
the automotive businesses and determined that it would spend $2.2 million less
on the disposition, related to favorable spending on professional fees and
adjustments to its environmental exposures. Based on this assessment, $2.2
million was reversed into the 2003 Consolidated Income Statement under income
from discontinued operations.

At December 31, 2003, the Company has automotive discontinued operations
accruals of $186.1 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 $7.8 million -- related to nine potential product
recall issues which are recorded in Accrued Expenses; environmental obligations
$14.3 million -- for the remediation and investigation of groundwater and soil
contamination at thirteen sites which are recorded in Other Liabilities;
employee benefits $9.9 million -- for workers compensation issues which are
recorded in Accrued Expenses. In 2003, the Company has spent approximately $1.8
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. The
Company projects that it will spend between $3.0 million and $4.0 million in
2004 related to its remaining automotive obligations.

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOW OVERVIEW:

The Company generated $575.6 million of cash from operating activities
during 2003. Income from continuing operations plus depreciation and
amortization contributed approximately $579.0 million of cash flow. The
liquidation of approximately $87.0 million of working capital and the deferral
of $167.2 million of tax payments were also positive contributors of cash. Cash
from operating activities during 2003 also reflects a $200.0 million pre-funding
of pension obligations. The Company utilized the cash generated from operating
activities for $153.6 million of capital expenditures, $46.2 million of
strategic acquisitions, and the reduction of debt ($186.8 million).
Additionally, dividend payments totaled $58.0 million and $69.7 million was
utilized to purchase the Company's common stock.

The Company made an additional $100 million pre-funding of pension
obligations in the first quarter of 2004 and anticipates significant tax
payments during 2004. After consideration of these items, cash from operating
activities during 2004 is projected to be between $460 million and $510 million.
For 2004, cash requirements will be funded with future cash from operations
supplemented, as required, by commercial paper borrowings.

CASH FLOWS: COMPARISON OF 2003 TO 2002

Cash flows from operating activities during 2003 decreased $19.2 million,
or 3.2%, from the comparable 2002 period. The decrease is primarily attributable
to $150.0 million of incremental pre-funding of pension obligations ($200.0
million in 2003 vs. $50.0 million in 2002), partially offset by lower tax
payments, increased payable levels and a reduction in inventory levels.

32

CONTRACTUAL OBLIGATIONS:

The Company's commitment to make future payments under long-term
contractual obligations was as follows, as of December 31, 2003.

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

(1) See Note 16, "Debt," in the Notes to Consolidated Financial Statements, for
discussion of the use and availability of debt and revolving credit
agreements.

(2) Refer to Note 15, "Leases and Rentals," in the Notes to Consolidated
Financial Statements, for further discussion of lease and rental agreements.

(3) The unconditional purchase commitments are principally take or pay
obligations related to the purchase of certain raw materials and subcontract
work.

(4) Other long-term liabilities primarily consists of estimated environmental
payments. The Company estimates, based on historical experience, that it
will spend between $8.0 million and $11.0 million per year on environmental
investigation and remediation of its 104 sites. The Company is contractually
required to spend a portion of these monies based on existing agreements
with various governmental agencies and other entities. At December 31, 2003,
ITT has calculated a best estimate to remediate ground water and soil of
$108.0 million and has recorded an accrual that approximates the estimate.

ADDITIONS TO PLANT, PROPERTY AND EQUIPMENT:

Capital expenditures were $153.6 million during 2003, and flat with the
comparable prior year period.

ACQUISITIONS:

During 2003, the Company spent $46.2 million primarily for the acquisition
of two entities, one in the Electronic Components segment and one in the Fluid
Technology segment. The excess of the purchase price over the fair values of net
assets acquired of $30.5 million was recorded as goodwill. 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 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:

- - The VEAM/TEC Division of the Northrop Grumman Corporation, a designer and
manufacturer of cylindrical, filter and fiber optic connectors for the
military/aerospace, industrial, transit, entertainment and nuclear markets.

- - Uniservice Wellpoint Srl., a manufacturer of high quality diesel and electric
powered, vacuum primed centrifugal pumps, along with spear or well point
dewatering systems for the rental market and sale.

The purchase price allocations for the 2003 acquisitions were based on
preliminary data and changes are expected as evaluations are finalized and as
additional information becomes available. Additionally, the Company also
finalized purchase price allocations related to the 2002 acquisitions, which
resulted in a decrease in goodwill of $5.1 million.

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

33

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. 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.

Effective January 1, 2002, the Company ceased recording goodwill
amortization in accordance with the adoption of 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.

SALE OF INVESTMENT:

During 2003, the Company sold substantially all its investment in a defense
related business for $43.5 million.

DIVESTITURES:

During 2003, the Company generated $17.0 million of cash proceeds from the
sale of plant, property and equipment. This is primarily due to the sale of land
for $7.3 million at Defense Electronics & Services and the sale of a building at
Electronic Components for $2.8 million. The remaining $6.9 million of cash
proceeds from the sale of assets represents plant, property and equipment sales
across all businesses.

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.

SHARE REPURCHASE:

In 2003, 2002 and 2001, 1.0 million, 0.7 million and 3.5 million shares,
respectively, were repurchased to offset the dilutive effect of exercised stock
options.

DEBT AND CREDIT FACILITIES:

Debt at December 31, 2003 was $602.4 million, compared with $791.8 million
at December 31, 2002. The change in debt levels primarily reflects the Company's
utilization of cash from operating activities to pay down debt. Cash and cash
equivalents were $414.2 million at December 31, 2003, compared to $202.2 million
at December 31, 2002.

The Company maintains 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, 2003, the Company's coverage ratio was
well in excess of the minimum require-

34

ment. 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. Borrowing through
commercial paper and under the revolving credit agreement may not exceed $1.0
billion in the aggregate outstanding at any time. At December 31, 2003,
commercial paper borrowings were $120.0 million.

STATUS OF AUTOMOTIVE DISCONTINUED OPERATIONS:

During 2003, the Company spent $1.8 million on matters attributable to its
automotive discontinued operations. Tax obligations of $154.2 million are
expected to be resolved in 2004 or 2005. In addition, the Company projects
between $3.0 million and $4.0 million of annual spending related to its
remaining automotive obligations. All payments will be paid with future cash
from operations supplemented, as required, by commercial paper borrowings.

OFF-BALANCE SHEET ARRANGEMENTS

GUARANTEES & INDEMNITIES:

In September of 1998, the Company completed the sale of its automotive
electrical systems business to Valeo SA for approximately $1,700 million. As
part of the sale, the Company provided Valeo SA with representations and
warranties with respect to the operations of that 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 $680.0 million. However, because of the lapse of
time, or the fact that the parties have resolved certain issues, at December 31,
2003, the Company has an accrual of $7.8 million, 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 million. As part of the
sale, the Company provided Continental AG with representations and warranties
with respect to the operations of that 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 to
Continental AG on an undiscounted basis is $950.0 million. However, because of
the lapse of time, or the fact that the parties have resolved certain issues, at
December 31, 2003, the Company has an accrual of $14.3 million, 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 eight 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 equals $28.9 million. At
December 31, 2003, the Company does not believe that a loss contingency is
probable for these guarantees

35

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 million 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
million. At December 31, 2003, the Company has an accrual related to the
expansion of a bridge in the amount of $10.0 million.

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 $44.8 million, 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, 2003, the Company does not believe that a loss
contingency is probable, and, therefore does not have an accrual recorded in its
financial statements.

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, "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 $336.8 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, 2003 and 2002 was $81.6 million and $97.0 million,
including $4.0 million of accrued interest in each period.

At December 31, 2003 and 2002, the Company's short-term and long-term debt
obligations were $602.4 million and $791.8 million, respectively. In addition,
the Company's cash balances at December 31, 2003 and 2002 were $414.2 million
and $202.2 million, respectively. Based on these positions and the Company's
overall exposure to interest rates, changes of 13 and 15 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, 2003 and 2002, respectively) on the Company's cash and marketable
securities and on its floating rate debt obligations and related interest rate
derivatives would have a $0.1 million and $0.8 million effect on the Company's
pretax earnings for the years ended December 31, 2003 and 2002, respectively.
Increases of 74 and 78 basis points in long-term interest rates (equivalent to
10% of the Company's weighted average long-term interest rates at December 31,
2003 and 2002, respectively) would have a $0.6 million and $0.5 million
reduction in the fair value of the Company's fixed rate debt for the years ended
December 31, 2003 and 2002, 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 certain transactions in foreign countries. During 2003, the Company's
largest exposures to foreign exchange rates existed primarily with the Euro,
Swedish Krona, and British Pound against the U.S. Dollar. At December 31, 2003,
the Company had seven foreign currency derivative contracts outstanding for a
total notional amount of $81.1 million. A 10% depreciation of the Euro against
all other currencies related to the Company's foreign currency derivatives, held
as of December 31, 2003, would cause a net reduction of $2.5 million on the fair
value of such instruments. During 2002, the Company's largest exposures to
foreign exchange rates existed primarily with the Euro, Swedish Krona, and
British Pound against the

36

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%
depreciation of the Euro against all other currencies related to the Company's
foreign currency derivatives, held as of December 31, 2002, would cause a net
reduction of $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% depreciation of the Euro against
all other currencies related to the Company's foreign currency derivatives
contracts held as of December 31, 2001, would cause a net reduction of $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 utilize all credits generated through
December 31, 2003 for income taxes paid in foreign jurisdictions that currently
do not have a valuation allowance.

DEFERRED TAX ASSETS:

The Company had net deferred tax assets of $335.1 million and $532.9
million at December 31, 2003 and 2002, 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 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.

As of December 31, 2003, a valuation allowance of approximately $40.7
million exists for deferred income tax benefits related to certain U.S.
subsidiary loss carryforwards and certain foreign tax credits that may not be
realized.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States of America, 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, 2003, the Company's best
estimate is $108.0 million, which approximates the accrual related to the
remediation of ground water and soil. The low range estimate for environmental
liabilities is $80.0 million and the high range estimate is $171.0 million. On
an annual basis the Company spends between $8.0 million and $11.0 million on its
environmental remediation liabilities. These estimates, and related accruals,
are reviewed periodically and updated for progress of remediation efforts and
changes in facts and legal circumstances. Liabilities for environmental

37

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 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," within the Notes to Consolidated
Financial Statements.

Key Pension Assumptions:

The Company determines its expected return on plan assets assumption by
evaluating both historical returns and estimates of future returns.
Specifically, the Company analyzes the Plan's actual historical annual return on
assets over the past 10, 15, 20 and 25 years; makes estimates of future returns
using a Capital Asset Pricing Model; and evaluates historical broad market
returns over the past 75 years based on the Company's strategic asset
allocation, which is detailed in Note 19, "Employee Benefit Plans," in the Notes
to Consolidated Financial Statements.

Based on the approach described above, the Company estimates the long-term
annual rate of return on assets for domestic pension plans at 9.0%. For
reference, the Company's actual geometric average annual return on plan assets
for domestic pension plans stood at 10.1%, 11.2%, 11.8%, and 12.6%, 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, 2003, is 8.86%.

The Company utilizes the assistance of its plan actuaries in determining
the discount rate assumption. As a service to its clients, the plan actuaries
have developed and published an interest rate yield curve to enable companies to
make judgments pursuant to EITF Topic No. D-36, "Selection of Discount Rates
Used for Measuring Defined Benefit Pension Obligations and Obligations of Post
Retirement Benefit Plans Other Than Pensions." The yield curve is comprised of
AAA/AA bonds with maturities between zero and thirty years. The plan actuaries
then discount the annual benefit cash flows of the Company's pension plan using
this yield curve and develop a single-point discount rate matching the plan's
characteristics.

At December 31, 2003, the Company lowered the discount rate on all of its
domestic pension plans, which represent about 90% of the Company's total pension
obligations, from 6.50% to 6.25%. The Company's weighted average discount rate
for all pension plans, including foreign affiliate plans, at December 31, 2003,
is 6.18%.

At December 31, 2003, the Company also lowered its expected rate of future
compensation increases for its domestic plan participants to 4.5%, from 5.0%,
based on recent historical experience and expectations for future economic
conditions.

Management develops each assumption using relevant Company experience in
conjunction with market related data for each individual
38

country in which such plans exist. All assumptions are reviewed periodically
with third party actuarial consultants and adjusted as necessary.

Pension Plan Accounting and Information:

The Company's strategic asset allocation target for its U.S. domestic plans
apportions 70% of all assets to equity instruments and the remaining 30% to
fixed income instruments. At December 31, 2003, the Company's actual asset
allocation was 68.5% in equity instruments, 21.6% in fixed income instruments
and 9.7% in hedge funds, with the remainder in cash and other.

On an annual basis, the Company's long-term expected return on plan assets
will often differ from the actual return on plan assets. The chart below shows
actual returns versus the expected long-term returns for the Company's domestic
pension plans that are utilized in the calculation of the net periodic benefit
cost. Please see Note 19, "Employee Benefit Plans," in the Notes to Consolidated
Financial Statements for more information.

The Company's Defense Electronics & Services segment represents
approximately 50% of the active U.S. Salaried Plan participants. As a result,
the Company has sought and will continue to seek reimbursement from the
Department of Defense for a portion of its pension costs, in accordance with
government regulations. U.S. Government Cost Accounting Standards (CAS) govern
the extent to which pension costs are allocable to and recoverable under
contracts with the U.S. Government. Reimbursements of pension costs are made
over time through the pricing of the Company's products and services on U.S.
Government contracts.

Funding requirements under IRS rules are a major consideration in making
contributions to our pension plan. The Company contributed $206.3 million to the
U.S. Master Trust in 2003, and an additional $100.0 million in the first quarter
of 2004. As a result, the Company will not face material minimum required
contributions to its U.S. Salaried Plan in 2004 and 2005, under current IRS
contribution rules. Furthermore, we currently estimate that we will not make
significant additional contributions to the Company's U.S. Salaried Pension Plan
during the remainder of 2004.

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 zero to $400 million in the 2005 to 2006
timeframe.

Funded Status:

Funded status is derived by subtracting the value of the projected benefit
obligations at December 31, 2003 from the end of year fair value of plan assets.
The Company's U.S. Salaried Pension Plan represents approximately 80% of the
Company's total pension obligation, and therefore the funded status of the U.S.
Salaried Pension Plan has a considerable impact on the overall funded status of
the Company's pension plans.

During 2003, the Company's U.S. Salaried Pension Plan assets grew by $647.0
million to $2,989.2 million at the end of 2003. This increase primarily
reflected return on assets of $659.0 million, and company contributions of
$200.0 million, offset by payments to plan beneficiaries of $206.8 million.

Also during 2003, the projected benefit obligation for the U.S. Salaried
Pension Plan increased by $152.0 million to $3,448.8 million. The increase
included the $104.3 million impact of a 25 basis point decline in the discount
rate at year-end, as well as the $(28.3) million impact of a 50 basis point
decrease in the expected rate of future compensation increases. As a result, the
funded status for the Company's U.S. Salaried Plan improved by $495.4 million to
$(459.6) million at the end of 2003. Funded status for the Company's total
pension obligations, including foreign and affiliate plans, improved by $452.6
million to $(871.3) million at the end of 2003.

Funded status at the end of 2004 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 80%
of the Company's pension obligations, by approximately $104 million. Similarly,
every five per-

39

centage point change in the actual 2004 rate of return on assets impacts the
same plan by approximately $150 million.

Minimum Pension Liability:

SFAS No. 87 "Employers' Accounting for Pensions," ("SFAS No. 87"), 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 the discount rate and a decline in
assets caused several of the Company's plans to be in a deficit position.
Accordingly, during 2002, the Company recorded a total after-tax reduction of
$765.5 million to its total shareholders' equity. As a result of the improved
financial markets in 2003, the Company recorded a total after-tax increase of
$182.5 to its shareholders' equity at year-end 2003. It is important to note
that these actions 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 uses the market-related value of assets method, as described in
paragraph 30 of SFAS No. 87, for the calculation of pension expense. This method
recognizes investment gains or losses over a five-year period from the year in
which they occur. In addition, in accordance with paragraph 32 of SFAS No. 87, a
portion of the Company's unrecognized net actuarial loss is amortized and this
cost is included in the net periodic benefit cost.

The Company recorded $33.0 million of net periodic pension cost ($35.4
million after considering the effects of curtailment losses) into its
Consolidated Income Statement in 2003, compared with pension income of $10.4
million in 2002. The 2003 net periodic pension cost reflected benefit service
cost of $73.3 million and interest cost on accrued benefits of $256.5 million,
offset by the expected return on plan assets of $327.0 million. In addition, the
2003 pension expense included $23.5 million of amortization of past losses, up
from $3.2 million in 2002. The primary drivers behind the increase in the net
periodic pension cost were the effect of the change in the discount rate, the
effect of the lowered assumption as to expected return on assets and the
increase in amortization of past losses in 2003.

In 2004, the Company expects to incur approximately $65.0 million of
pension expense that will be recorded into its Consolidated Income Statement.
The increase in pension expense is primarily due to the effect of the change in
discount rate and higher amortization of past losses.

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, 2003 and 2002 was
$34.5 million and $40.4 million, respectively. See Note 22, "Guarantees,
Indemnities and Warranties," in the

40

Notes to Consolidated Financial Statements for additional details.

ACCOUNTING PRONOUNCEMENTS

In December 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 132 (revised December 2003) "Employers' Disclosures About Pensions and
Other Post Retirement Benefits." This revised SFAS retains the disclosure
requirements of SFAS 132. Additionally, the pronouncement requires additional
disclosures regarding the types of plan assets, investment strategy, measurement
dates, plan obligations, cash flows and components of net periodic benefit cost
recognized during interim periods for defined benefit pension plans and other
defined benefit post retirement plans. The Company adopted this pronouncement
effective December 31, 2003. Adoption did not have a material impact on the
financial statements 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 material impact on the
Company's financial statements.

In June 2001, the 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. Both tests were conducted in the first quarter of 2002.

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 financial statements.

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 financial
statements.

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 adoption of this standard did not have a material effect
on the Company's financial statements.

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 April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and hedging activities under SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
149 clarifies the circumstances under which a contract with an initial net
investment meets the characteristics of a derivative as discussed in SFAS No
133. In addition, SFAS No. 149 clarifies
41

when a derivative contains a financing component that warrants special reporting
in the statement of cash flows. SFAS No. 149 is effective for contracts entered
into or modified after June 30, 2003, and for hedging relationships designated
after June 30, 2003. The adoption of this interpretation did not have a material
effect on the Company's financial statements.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 requires certain financial instruments that embody obligations of the
issuer and have characteristics of both liabilities and equity to be classified
as liabilities. The provisions of SFAS No. 150 were effective for financial
instruments entered into or modified after May 31, 2003 and to all other
instruments that exist as of the beginning of the first interim financial
reporting period beginning after June 15, 2003. The Company did not have any
financial instruments that met the provisions of SFAS No. 150; therefore, the
adoption of this standard did not have a material effect on the Company's
financial statements.

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
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. The adoption of this interpretation did not have a
material effect on the Company's financial statements.

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
to all variable interest entities created after January 31, 2003 and variable
interest entities in which an enterprise obtains an interest after that date.
For variable interest entities created before January 31, 2003, the provisions
were effective December 31, 2003. The Company did not create or obtain any
variable interest entities during 2003. The Company elected early adoption of
the provisions of FIN 46 related to variable interest entities created prior to
January 31, 2003 as of July 1, 2003. The adoption of this interpretation did not
have a material effect on the Company's financial statements. In December 2003,
the FASB issued a revision to Interpretation No. 46; however, it had no impact
on ITT's adoption.

In January 2004, FASB Staff Position ("FSP") No. 106-1, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003" ("FSP No. 106-1") was issued. FSP No. 106-1
permits the deferral of recognizing the effects of the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 (the Act) in the accounting for
postretirement health care plans under SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," and in providing disclosures
related to the plan required by SFAS No. 132. The deferral of the accounting for
the Act continues to apply until authoritative guidance is issued on the
accounting for the federal subsidiary provided by the Act or until certain other
events requiring plan remeasurement. The Company has elected the deferral
provided by this FSP and is evaluating the magnitude of the potential favorable
impact of this FSP on the financial statements. The authoritative guidance, when
issued, could require a change to previously reported information. See Note 19,
"Employee Benefits," in the Notes to Consolidated Financial Statements for
discussion of postretirement benefits.

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 Environ-

42

mental 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 accounting principles generally
accepted within the United States. 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.

EURO CONVERSION:

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

2004 OUTLOOK:

The Company expects 2004 revenues and earnings to exceed the financial
results reported in 2003. Overall, revenues are projected to grow between 9% and
13% from 2003. The anticipated financial performance of the Defense Electronics
& Services and Fluid Technology segments are the primary factors for this
increase. Growth in the Defense Electronics & Services segment is expected to be
20% to 24% over 2003, driven by higher service revenue, reflecting a broader
range of offerings/capabilities, and acquisition revenue related to a second
quarter 2004 acquisition. Expected revenue growth of 9% to 11% from 2003, in the
Fluid Technology segment is due to continued growth in the water/wastewater
business and acquisition revenue associated with a first quarter 2004
acquisition. Revenue, from the introduction of new products, is expected to
increase results in the Electronic Components segment. Platform losses in the
automotive tubing business will drive a revenue decline of 2% to 6% from 2003,
in the Motion & Flow Control Segment. Sales growth in the leisure marine
business, resulting from new products, will partially offset the decline.

Operating income is projected to increase between 15% and 24% in 2004 due
to the revenue growth discussed above. Segment operating margin is projected to
increase between approximately 50 and 100 basis points over 2003 due to the
benefits of 2003 restructuring actions and the Company's shift in its
manufacturing footprint. New products will also increase operating margins.

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 "Executive Summary,"
"Liquidity and Capital Resources," "Market Risk Exposures," "Critical Accounting
Policies," "Risks and Uncertainties" and "2004 Outlook"), 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;
43

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 segments 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.

44

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 18, "Financial Instruments", in
the 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 report by Andersen on the Company's consolidated financial statements
for 2001 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 2001 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 the Company's two most recent fiscal years, 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 2003 and 2002 and there were
no reportable events, as listed in Item 304(a)(1)(v) of Regulation S-K.

ITEM 9A. 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 Securities Exchange Act of
1934 (the "Exchange Act")) as of the end of the period covered by this Annual
Report. Based on such evaluation, such officers have concluded that the
Company's disclosure controls and procedures are effective as of the end of such
period 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 changes during the period covered by this Annual
Report in our internal controls over financial reporting that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.

45

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 portions of the definitive proxy
statement for the Company's 2004 annual meeting of shareholders to be filed
pursuant to Regulation 14A of the Exchange Act set forth under the captions
"Election of Directors", "Information About the Board of Directors" and "Report
of the Audit Committee".

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 corporate governance principles and charters for
each of its standing committees. The principles address director qualification
standards, responsibilities, access to management and independent advisors,
compensation, orientation and continuing education, management succession
principles and board and committee self-evaluation. The corporate governance
principles and charters are available on the company's website
http.//www.itt.com/profile/govandcharters.asp. A copy of the corporate
governance principles and charters are also available to any shareholder who
requests them from the Company's secretary.

ITT Industries has also adopted a written code of ethics, the "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 was filed as an exhibit to last year's
Form 10-K and has been posted on our website and a copy of the code is available
to any shareholder who requests it. ITT Industries intends to disclose any
changes in or waivers from its 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 portions of the definitive proxy statement referred to above in Item 10
set forth under the caption "Executive Compensation."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information called for by Item 12 is incorporated herein by reference
to the portions of the definitive proxy statement referred to above in Item 10
set forth 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. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information called for by Item 14 is incorporated herein by reference
to the portions of the definitive proxy statement referred to above in Item 10
set forth under the caption "Independent Auditor Fees".

46

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) Reports on Form 8-K filed by ITT Industries in the fourth quarter ended
December 31, 2003 and through the filing of this annual report.

Form 8-K dated November 12, 2003, reporting under Item 5, Other Events and
Item 7, Financial Statements and Exhibits, announcing a business combination
agreement to acquire WEDECO AG Water Technology pursuant to a tender offer.

Form 8-K dated February 4, 2004, reporting under Item 5, Other Events, our
February 3, 2004 press release announcing the decision of the Board of Directors
to implement a CEO succession plan, as the Company's CEO, Mr. Louis J. Giuliano,
announced his intention to retire.

Form 8-K dated February 11, 2004 reporting under Item 5, Other Events and
Item 7, Financial Statements and Exhibits, our February 9, 2004 press release
announcing that the Company had entered into a definitive agreement to acquire
Eastman Kodak's Remote Sensing Systems.

47

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.

In 2002, 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/ Edward W. Williams

Louis J. Giuliano Edward W. Williams

Chairman, President and Senior Vice President and

Chief Executive Officer Chief Financial Officer

F-2

INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying consolidated balance sheets of ITT
Industries, Inc. and subsidiaries ("the Company") as of December 31, 2003 and
2002, and the related consolidated statements of income, comprehensive income,
changes in shareholders' equity, and cash flows for the years 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 audits. The consolidated financial statements of the Company for the year
ended December 31, 2001 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 audits 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 audits provide a
reasonable basis for our opinion.

In our opinion, such 2003 and 2002 consolidated financial statements
present fairly, in all material respects, the financial position of the Company
as of December 31, 2003 and 2002, and the results of its operations and its cash
flows for the years 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 the Company
for the year ended December 31, 2001 were audited by other auditors who have
ceased operations. Notes 6, 13 and 17 of these financial statements include
additional disclosures related to 2001. 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 year ended December
31, 2001 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 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 in Note 6 are appropriate.

As discussed in Note 13 to the consolidated financial statements, the
consolidated financial statements for the year ended December 31, 2001 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 with respect to
2001 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 those periods related to goodwill and intangible assets that are no longer
being amortized, to the Company's underlying records obtained from management,
and (ii) testing the mathematical accuracy of the reconciliation of reported net
income to adjusted net income, and the related earnings per share amounts. In
our opinion, the disclosures for 2001 on the consolidated income statement are
appropriate.
F-3

Note 17 to the consolidated financial statements for the year ended
December 31, 2001 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 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 in Note 17 are
appropriate.

We were not engaged to audit, review, or apply any procedures to the 2001
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 consolidated financial statements taken
as a whole.

Our audits were conducted for the purpose of forming an opinion on the
basic 2003 and 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. The
2003 and 2002 schedules have been subjected to the auditing procedures applied
in our audits of the basic financial statements and, in our opinion, are fairly
stated in all material respects when considered in relation to the basic
financial statements taken as a whole. The 2001 schedule was subjected to
auditing procedures by other auditors who have ceased operations. Those auditors
expressed an unqualified opinion on that financial statement schedule in their
report dated January 23, 2002.

/s/ Deloitte & Touche LLP
Stamford, Connecticut
March 11, 2004

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
SUMMARY OF SIGNIFICANT 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 78.3%, 78.0% and
76.4% of total RD&E costs were expended pursuant to customer contracts for each
of the three years ended December 31, 2003, 2002 and 2001, 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 11.7% and 11.4% of total 2003 and 2002 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.
Certain losses recognized in 2003 and 2001 were recorded in restructuring and
asset impairments. See Note 4,

F-11

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

"Restructuring and 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, 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 $4.2, $0.3 and $2.9 in 2003, 2002, and 2001, 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 No. 133, "Accounting for Derivative
Instruments

F-12

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, 2003, the Company has one stock-based employee compensation
plan that is issuing new options and restricted shares. The Company also has two
stock-based employee compensation plans and two stock-based non-employee
director's compensation plans that have options and restricted shares
outstanding, but will not be issuing additional stock-based compensation. These
plans are described more fully in Note 20, "Shareholders' Equity." The Company
accounts for these plans under the 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 2003, 2002 and 2001: dividend yield of 1.57%, 1.65%
and 1.89%, respectively; expected
F-13

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

volatility of 28.72%, 28.30% and 27.61%, respectively; expected life of six
years; and risk-free interest rates of 3.37%, 4.78% and 4.91%, respectively.

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, 2003, 2002 and 2001 were $0.7, $0.6, and
$0.9, 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

In December 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 132 (revised December 2003) "Employers' Disclosures About Pensions and
Other Post Retirement Benefits" ("SFAS No. 132"). The revised standard retains
the disclosure requirements of SFAS 132. Additionally, the pronouncement
requires additional disclosures regarding the types of plan assets, investment
strategy, measurement dates, plan obligations, cash flows and components of net
periodic benefit cost recognized during interim periods for defined benefit
pension plans and other defined benefit post retirement plans. The Company
adopted this pronouncement effective December 31, 2003. Adoption did not have a
material impact on the financial statements 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 financial statements.

In June 2001, the 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 financial statements.

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

F-14

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 financial statements.

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 adoption of this standard did not have a material effect
on the Company's financial statements.

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."

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149
amends and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities under
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS No. 133"). SFAS No. 149 clarifies the circumstances under which a
contract with an initial net investment meets the characteristics of a
derivative as discussed in SFAS No. 133. In addition, SFAS No. 149 clarifies
when a derivative contains a financing component that warrants special reporting
in the statement of cash flows. SFAS No. 149 was effective for contracts entered
into or modified after June 30, 2003, and for hedging relationships designated
after June 30, 2003. The adoption of this interpretation did not have a material
effect on the Company's financial statements.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS No. 150"). SFAS No. 150 requires certain financial instruments that
embody obligations of the issuer and have characteristics of both liabilities
and equity to be classified as liabilities. The provisions of SFAS No. 150 were
effective for financial instruments entered into or modified after May 31, 2003
and to all other instruments that exist as of the beginning of the first interim
financial reporting period beginning after June 15, 2003. The Company did not
have any financial instruments that met the provisions of SFAS No. 150;
therefore, the adoption of this standard did not have a material effect on the
Company's financial statements.

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. This
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," for additional information. The adoption of this
interpretation did not have a material effect on the Company's financial
statements.

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

F-15

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 were applicable 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. For variable interest
entities created before January 31, 2003, the provisions were effective December
31, 2003. The Company did not create or obtain any variable interest entities
during 2003. The adoption of this interpretation did not have a material effect
on the Company's financial statements. In December 2003, the FASB issued a
revision to Interpretation No. 46; however, it had no impact on ITT's adoption.

In January 2004, FASB Staff Position ("FSP") No. 106-1, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003" ("FSP No. 106-1") was issued. FSP No. 106-1
permits the deferral of recognizing the effects of the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 (the Act) in the accounting for
postretirement health care plans under SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," and in providing disclosures
related to the plan required by SFAS No. 132. The deferral of the accounting for
the Act continues to apply until authoritative guidance is issued on the
accounting for the federal subsidy provided by the Act or until certain other
events requiring plan remeasurement. The Company has elected the deferral
provided by this FSP and is evaluating the magnitude of the potential favorable
impact of this FSP on the financial statements. The authoritative guidance, when
issued, could require a change to previously reported information. See Note 19,
"Employee Benefits," for discussion of postretirement benefits.

NOTE 3
ACQUISITIONS

During 2003, the Company spent $46.2 primarily for the acquisition of two
entities, one in the Electronic Components segment and one in the Fluid
Technology segment. The excess of the purchase price over the fair values of net
assets acquired of $30.5 was recorded as goodwill, of which $5.6 was tax
deductible. The Electronic Components segment was assigned $24.0 of the goodwill
balance and the Fluid Technology and Motion & Flow Control segments were
assigned $5.4 and $1.1, respectively. The purchase price allocations for the
2003 acquisitions were based on preliminary data and changes are expected as
evaluations are finalized and additional information becomes available. 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 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:

- - The VEAM/TEC Division of the Northrop Grumman Corporation, a designer and
manufacturer of cylindrical, filter and fiber optic connectors for the
military/aerospace, industrial, transit, entertainment and nuclear markets.

- - Uniservice Wellpoint Srl., a manufacturer of high quality diesel and electric
powered, vacuum primed centrifugal pumps, along with spear or well point
dewatering systems for the rental market and sale.

Additionally, the Company also finalized purchase price allocations related
to the 2002 acquisitions, which resulted in a decrease in goodwill of $5.1.

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,

F-16

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

NOTE 4
RESTRUCTURING AND ASSET IMPAIRMENT CHARGES

2003 RESTRUCTURING ACTIVITIES

The Company recorded restructuring charges related to 2003 actions in
accordance with SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities." Restructuring actions initiated prior to January 1, 2003
were recorded in accordance with the guidelines of Emerging Issues Task Force
Issue No. 94-3, "Liability Recognition for Certain Employee Benefits (including
Certain Costs Incurred in a Restructuring)."

During the fourth quarter of 2003 the Company announced actions to reduce
operating costs primarily through the reduction of headcount. The new $15.4
restructuring charge primarily reflects the severance of 301 employees. The
actions by segment are as follows:

- - The Electronic Components segment recorded $1.5 of the charge for the
termination of 132 employees, including 113 factory workers, 14 office
workers and five management employees.

- - The Fluid Technology segment recognized $12.4 of the charge for the severance
of 134 employees, including 39 factory workers, 90 office workers and five
management employees. Lease and other costs represent $0.3 of the charge. The
segment also recorded a $0.2 charge associated with the disposal of machinery
and equipment.

- - The Defense Electronics & Services segment recorded a $1.0 charge for the
severance of 35 employees, including seven factory workers, 19 office workers
and nine management employees.

In addition to the new restructuring actions announced during the fourth
quarter, the Motion & Flow Control segment recognized $0.5 of severance and
employee benefit costs related to actions announced during the first quarter and
the Electronic Components segment recognized $0.2 of outplacement related to
actions announced earlier in 2003.

During the third quarter of 2003 the Company announced actions to reduce
operating costs primarily through the reduction of headcount. The new $2.6
restructuring charge primarily reflects the planned severance of 72 employees.
The actions by segment are as follows:

- - The Electronic Components segment recorded $1.2 of the charge for the planned
termination of 40 employees, including 15 factory workers and 25 office
workers. The segment also recorded a $0.1 charge

F-17

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

associated with the disposal of machinery and equipment.

- - The Fluid Technology segment recognized a $0.5 charge for the planned
severance of 13 factory workers and 14 office workers. Lease and other costs
represent $0.4 of the charge.

- - The Motion & Flow Control segment recorded a $0.4 charge for the planned
severance of one management employee and four factory workers.

In addition to the new restructuring actions announced during the third
quarter, the Motion & Flow Control segment recognized $0.2 of severance and
employee benefit costs related to actions announced during the first quarter.

During the second quarter of 2003 the Company continued its program to
reduce structural costs and increase profitability. New restructuring actions
totaling $4.7 were announced during the period. The charge primarily reflected
the planned severance of 148 employees and the cancellation of an operating
lease. The actions by segment are as follows:

- - The Electronic Components segment comprises $2.7 of the charge and the
actions taken at this segment include the planned termination of six
management employees, 19 factory workers and 71 office workers.

- - The Motion & Flow Control segment recognized $1.0 for the planned severance
of 50 employees, including six management employees, 31 factory workers and
13 office workers. Lease termination fees of $0.7 and asset disposal costs of
$0.1 were also reflected in the charge.

- - At Corporate Headquarters, a charge of $0.2 was recorded for the planned
termination of one management employee and one office worker.

In addition to the new restructuring actions announced during the second
quarter, the Motion & Flow Control segment recognized $1.2 of severance and
employee benefit costs related to actions announced during the first quarter.

During the first quarter of 2003 the Company recorded a $9.0 restructuring
charge primarily for the planned severance of 465 persons. Severance of $8.3
represents the majority of the charge. The actions by segment are as follows:

- - The Electronic Components segment recorded $6.8 of the charge for the planned
termination of 226 persons, comprised of 101 office workers, 116 factory
workers and nine management employees. Idle facility costs of $0.3 and asset
disposal costs of $0.4 were also reflected in the charge. The actions were
prompted by management's projections of continued weakness in certain
businesses.

- - Corporate Headquarters recorded $1.1 of the charge for the consolidation of
administrative tasks, including the planned termination of two management
employees.

- - The Motion & Flow Control segment recorded $0.4 of the charge for the planned
termination of 237 employees, comprised of 21 office workers and 216 factory
workers. The charge relates to the closure of a manufacturing facility in
Arkansas. The actions will be completed during 2003 and 2004 and the total
estimated charge of approximately $2.6 will be recognized ratably over the
restructuring period as the terminations become effective. Management deemed
the restructuring actions necessary to address the anticipated loss of
certain platforms during the second half of 2003.

Also during 2003, the Company recorded a $1.4 asset impairment charge
primarily for a technology license that will not be utilized based on
management's projections of future market conditions. The applicable assets were
written down to their fair values based on management's comparison of projected
future discounted cash flows generated by each asset to the applicable asset's
carrying value. These impairments were unrelated to the Company's restructuring
activities.

F-18

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2002 RESTRUCTURING ACTIVITIES

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 planned
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 the Fluid Technology and the 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 platforms in the automotive fluid handling
systems 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.

2001 RESTRUCTURING ACTIVITIES

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
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

F-19

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

F-20

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 Components' 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 earlier restructuring plans
that management determined will not be incurred.

At December 31, 2002, the accrual balance for restructuring activities was
$16.3. Cash payments of $25.0 and additional cash charges of $33.0 were recorded
in 2003. Also, management reviewed the Company's remaining restructuring actions
and determined that certain 2003, 2002 and 2001 actions at the Electronic
Components segment totaling $4.4 would be completed for less than planned or
deemed no longer feasible. Additionally, actions at the Motion & Flow Control
segment were completed for $0.1 less than planned. Accordingly, restructuring
accruals totaling $4.5 were reversed into income during 2003. The accrual
balance increased by $0.3 due to the effect of foreign currency translation. The
accrual balance at December 31, 2003 is $20.1, which includes $17.7 for
severance and $2.4 for facility carrying costs and other. During 2003, $0.2 of
other non-cash charges were reversed.

As of December 31, 2002, remaining actions under restructuring activities
announced in 2001 and 2002 were to close three facilities and reduce headcount
by 256. During 2003, the Company closed three facilities and reduced headcount
by 919 persons related to actions taken on all plans. The Company also

F-21

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

experienced employee attrition, leaving a balance of 208 planned reductions
(including the 2003 plans). Additionally, one facility related to the first
quarter 2003 actions remains to be closed. Actions announced during 2003 will be
substantially completed by the end of the third quarter of 2004. The actions
contemplated under the 2001 plan are completed and actions contemplated under
the 2002 plan were substantially completed by the close of 2003. Closed facility
expenditures related to the 2001 plan will continue to be incurred in 2004.
There will also be severance run-off related to the 2001 plan during 2004.
Future restructuring expenditures will be funded with cash from operations,
supplemented, as required, with commercial paper borrowings.

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 businesses
requesting post-closing adjustments to the purchase prices under the provisions
of the sales agreements. In 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 Statement under income from discontinued
operations. The excess was primarily related to favorable foreign tax rulings.

At December 31, 2003, the Company had automotive discontinued operations
accruals of $186.1 that are primarily related to taxes ($154.2), product recalls
($7.8), environmental obligations ($14.3) and employee benefits ($9.9). In 2003,
the Company spent $1.8. 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 $792.2, $627.8 and
$540.5 of total service revenues for the years ended December 31, 2003, 2002 and
2001, respectively, and $525.0, $374.0 and $325.2 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.

F-22

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 and carryforwards.

Deferred tax assets (liabilities) include the following:

The Company's deferred taxes in the Consolidated Balance Sheets consist of
the following:

No provision was made for U.S. taxes payable on accumulated undistributed
foreign earnings of certain subsidiaries amounting to approximately $445.1,
because these amounts are permanently reinvested. While the amount of federal
income taxes, if such earnings are distributed in the future, cannot now be
determined, such taxes may be reduced by tax credits and other deductions.

As of December 31, 2003, the Company had approximately $46.2 of foreign tax
credit carryforwards. The credit carryforwards will expire as follows: $0.2 on
December 31, 2004, $33.9 on December 31, 2005 and $12.1 on December 31, 2006.
The Company had approximately $2.0 of general business credit carryforwards
which will expire on December 31, 2020. The Company had net operating losses

F-23

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

from some U.S. subsidiaries in the amount of $41.9, which will begin to expire
on December 31, 2019. The Company had net operating losses from some foreign
subsidiaries in the amount of $32.3, which have no expiration.

As of December 31, 2003, a valuation allowance of approximately $40.7
exists for deferred income tax benefits related to certain U.S. subsidiary loss
carryforwards and certain foreign tax credits that may not be realized. During
2003, the valuation allowance increased by $15.2.

Shareholders' equity at December 31, 2003 and 2002 reflects tax benefits
related to the stock options exercised in 2003 and 2002 of approximately $18.1
and $40.2, respectively.

The IRS is currently examining the federal consolidated tax returns of the
Company for the years ended December 31, 1998 through December 31, 2000. The IRS
has completed its examination of all years through 1997. As of December 31,
2003, 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 78,940 shares of common stock at an average price of
$65.37 per share were outstanding at December 31, 2003 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 and 2013.

(2) 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.

(3) 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.

NOTE 9
RECEIVABLES, NET

Receivables consist of the following:

NOTE 10
INVENTORIES, NET

Inventories consist of the following:

NOTE 11
OTHER CURRENT ASSETS

At December 31, 2003 and 2002, other current assets consist primarily of
advance

F-24

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 and initial goodwill impairment test at its 12 identified reporting
units and determined that no impairment exists. Both tests were conducted in the
first quarter of 2002. The Company also conducted its annual impairment test in
the first quarter of 2003 (as of the beginning of the year) 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.

Changes in the carrying amount of goodwill for the years ended December 31,
2003 and 2002 by operating segment are as follows:

F-25

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Information regarding the Company's other intangible assets follows:

Amortization expense related to intangible assets for the years ended
December 31, 2003 and 2002 was $2.7 and $0.9, respectively. Estimated
amortization expense for each of the five succeeding years is approximately $3
per year.

NOTE 14

OTHER ASSETS

At December 31, 2003 and 2002, 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 $29.4 and $44.6 at December 31, 2003 and 2002,
respectively.

Investments in unconsolidated companies consist of the following:

During 2003 the Company sold substantially all of its interest in
DigitalGlobe Inc., a developmental stage company that recently launched a
satellite capable of collecting high-resolution digital imagery, for $43.5. The
Company recorded sales to unconsolidated affiliates during 2003, 2002 and 2001
totaling $21.0, $24.2 and $22.6, respectively. In addition, the Company provided
services to unconsolidated affiliate companies in 2003, 2002 and 2001 and
received $0.5, $0.5 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
$133.

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 $66.7, $60.2 and $50.1 for 2003,
2002 and 2001, respectively. Future minimum operating lease payments under
long-term operating leases as of December 31, 2003 are shown below.

2004................................ $ 72.2
2005................................ 60.8
2006................................ 50.4
2007................................ 39.1
2008................................ 32.9
2009 and thereafter................. 179.2
------
Total minimum lease payments........ $434.6
======

F-26

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 16

DEBT

Debt consists of the following:

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

(1) The interest rate for the note/debenture was 1.02% and 1.28% at December 31,
2003 and 2002, respectively.

(2) The weighted average interest rate was 5.12% and 5.24% at December 31, 2003
and 2002, respectively.

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

The weighted average interest rate for short-term borrowings was 1.53% and
1.73% at December 31, 2003 and 2002, 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, 2003, the fair value of
long-term debt was $484.0, compared to the fair value of $517.9 at December 31,
2002. The year-over-year decrease in fair value primarily reflects the impact of
the decrease in long-term debt levels and an upward shift in the yield curve
experienced during 2003.

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, 2003, 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 $36.1 as of December 31,
2003.

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, 2003, 2002 and 2001 consist of the following:

F-27

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, 2003 and 2002, the Company had interest rate swaps
outstanding with notional values totaling $336.8 and $349.4, respectively. The
carrying value of the swaps at December 31, 2003 and 2002 were $81.6 and $97.0,
respectively, including $4.0 of accrued interest in each period. 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 1.22% and 7.40% at December 31, 2003. 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 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, 2003 and 2002. There were no changes in the forecasted transactions during
2003 or 2002 regarding their probability of occurring, which would require
amounts to be reclassified to earnings.

There were no ineffective portions of changes in fair values of cash flow
hedge positions reported in earnings for the twelve month periods ended December
31, 2003, 2002 and 2001 and no amounts were excluded from the measure of
effectiveness reported in earnings during these periods.

At December 31, 2003 and 2002, the Company had foreign currency forward
contracts with notional amounts of $81.1 and $109.1, respectively, to hedge the
value of recognized assets, liabilities and firm commitments. The fair values of
the contracts were $0.2 and $0.6 at December 31, 2003 and 2002, respectively.
The ineffective portion of changes in fair values of such hedge positions
reported in operating income during 2003, 2002 and 2001 amounted to $(0.3),
$(0.1) and $0.6, respectively. There were no amounts excluded from the measure
of effectiveness.

F-28

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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. 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 $0.7, $0.4 and $0.4 for the years ended 2003, 2002 and 2001, 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.

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 $27.2, $25.3 and
$23.9 for the years ended 2003, 2002 and 2001, respectively.

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 2003, 2002 and 2001 were as follows:

F-29

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Amounts recognized in the Consolidated Balance Sheets consist of:

In 2003, the Company recorded a total after tax increase of $182.5 to its
shareholders' equity which reflects a decrease in the minimum pension liability.

Information for pension plans with an accumulated benefit obligation in excess
of plan assets:

The accumulated benefit obligation for all defined benefit pension plans
was $4,104.3 and $3,814.6 at December 31, 2003, and 2002, respectively.
ACCUMULATED BENEFIT OBLIGATION:

The accumulated benefit obligation for all defined benefit plans was
$4,104.3 and $3,814.6 at December 31, 2003 and 2002, respectively.

TABLE OF ASSUMPTIONS:
Weighted-average assumptions used to determine benefit obligations at
December 31:

Weighted-average assumptions used to determine net periodic benefit cost
for the years ended December 31:

PLAN ASSETS:

The pension and welfare benefit plans' assets are comprised of a broad
range of domestic and foreign securities, fixed income investments, hedge funds
and investments in cash and cash equivalent investments. The assets of the
domestic pension Master Trust which covers all of the domestic pension plans and
the various welfare benefit plan trusts had

F-30

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the following asset allocations as of December 31:

The strategic asset allocation target for the Company's domestic pension
funds apportions 70% to equity investments and 30% to fixed income instruments.
The investment in the Company's stock within the Master Trust approximates 1% in
2003 and 2002.

CONTRIBUTIONS:

The Company currently anticipates making contributions to its pension plans
in a range of $100.0 to $125.0, during 2004 of which $100.0 was made in the
first quarter of 2004 to the U.S. Salaried Pension Plan.

CASH FLOWS:

ESTIMATED FUTURE BENEFIT PAYMENTS

The following benefit payments covering domestic pension and other benefit
plans have been projected based on benefits earned to date and the expectation
that certain future service will be earned by currently active employees:

The assumed rate of future increases in the per capita cost of health care
(the health care trend rate) was 9.0% for 2003. The rate was assumed to be 8.0%
for 2004, 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 $38.3 and the aggregate service and interest cost
components by $2.8. A decrease of one percent in the trend rate would reduce the
benefit obligation by $33.5 and the aggregate service and interest cost
components by $2.4. 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.

On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) was signed into law. The Act introduces a
prescription drug benefit under Medicare (Medicare Part D) that provides several
options for Medicare eligible participants and employers, including a federal
subsidy to companies that elect to provide a retiree prescription drug benefit
which is at least actuarially equivalent to Medicare Part D. The Act provides
for a two year transitional period to allow for, among other items, the
possibility that companies may amend existing plans. There are significant
uncertainties regarding the eventual regulations required to implement the Act
as well as the Act's overall effect on plan participant's coverage choices and
the related impact on their health care costs. As such, the effects of the Act
are not reflected in the accumulated postretirement benefit obligation as of
December 31, 2003, or in the 2003 net periodic postretirement benefit cost. ITT
is currently evaluating the provisions of the Act and its potential impact to
our postretirement medical plans which we believe will ultimately reduce our
accumulated postretirement benefit obligation and other postretirement benefit
costs.

F-31

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 shares have been designated as "Common
Stock" having a par value of $1 per share and 50,000,000 shares 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, 2003 and 2002, 52,876,689 and 53,323,493 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-32

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, 2003, 2002 and 2001, 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, 2003 (shares in thousands):

The 2003 Equity Incentive Plan was established in May of 2003. This plan
provides for the grant of stock options, stock appreciation rights, restricted
stock and restricted stock units. The number of shares initially available for
awards under this plan was 6,100,000. As of December 31, 2003, 6,055,811 shares
were available for future grants. During 2003, the Company awarded 9,489
restricted shares with five-year restriction periods in payment of the annual
retainer for non-employee directors.

The 2003 Equity Incentive Plan replaces the 2002 ITT Industries Stock
Option Plan for Non-Employee Directors, the ITT Industries 1996 Restricted Stock
Plan for Non-Employee Directors and the 1994 ITT Industries Incentive Stock Plan
on a prospective basis. All awards granted under these prior plans will continue
to vest and be exercisable in accordance with their original terms; however, no
future grants will be made from these prior plans.

The 1994 incentive stock plan provides for awarding restricted stock
subject to a restriction period in which the stock cannot be sold, exchanged or
pledged. There were no restricted shares awarded in 2003, 10,000 restricted
shares awarded in 2002 and no restricted shares awarded in 2001 under this plan.

During 2003, 2002 and 2001, pursuant to the ITT Industries 1996 Restricted
Stock Plan for Non-Employee Directors, the Company awarded zero, 6,098 and 7,469
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.

F-33

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, 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. 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 cash flows.

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, 2003, 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, 2003, the Company calculated a best
estimate of $108.0, which approximates its accrual, related to the cleanup of
soil and ground water. The low range estimate for its environmental liabilities
is $80.0 and the high range estimate for those liabilities is $171.0. On an
annual basis the Company spends between $8.0 and $11.0 on its environmental
remediation liabilities. These estimates, and related accruals, 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 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 operation of the water

F-34

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

treatment system is expected to continue until 2013. ITT and the other PRPs
continue to pay their respective allocated costs of the operation of the water
treatment system and the Company does not anticipate a default by any of the
PRPs which would increase its allocated share of the liability. As of December
31, 2003, the Company's accrual for this liability was $10.9 representing its
best estimate; its low estimate for the liability is $7.4 and its high estimate
is $16.4.

ITT Corporation 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 completed the investigation of the site in coordination with
state and federal environmental authorities and is in the process of evaluating
various remedies. A remedy for the site has not yet been selected. Currently,
the estimated range for the remediation is between $5.9 and $20.0 with a best
estimate of $10.5. The Company has accrued $10.5 for this matter, which
approximates its best estimate.

The Company is involved with a number of PRPs regarding property in the
City of Bronson, Michigan operated by a former subsidiary of ITT Corporation,
Higbie Manufacturing, prior to the time ITT acquired Higbie. The Company 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 $3.9 and $13.2. It has an accrual for this matter of $9.8 which
represents its best estimate of its current liabilities. The Company 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 2004. 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:

The Company 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.
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 former 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
2003, ITT and Goulds resolved approximately 2,000 claims through settlement or
dismissal. The average amount of settlement per plaintiff has been nominal and
substantially all defense and settlement costs have been covered by insurance.
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 &

F-35

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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. 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 since 1991. Both actions have
been stayed to allow the parties to negotiate an acceptable allocation
arrangement. In addition, Utica National, Goulds' historic insurer, has
requested that the Company negotiate a coverage in place agreement to allocate
the Goulds asbestos liabilities between insurance policies issued by Utica and
those issued by others. The parties are currently negotiating the terms of such
an agreement. The Company is continuing to receive the benefit of insurance
payments during the pendency of these proceedings. The Company believes that
these actions will not materially affect the availability of its insurance
coverage and will not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.

The Company is one of several defendants in a suit filed in El Paso, Texas
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 aviation insurers are contributing to
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 is on notice 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 demands from U.S. Silica for partial indemnity
regarding personal injury actions alleging injury due to silica. In 1985, the
Company sold the stock of its subsidiary Pennsylvania Glass Sand to U.S. Silica.
As part of that transaction, the Company provided an indemnity to U.S. Silica
for silica personal injury suits. That indemnity expires in September 2005.
Costs incurred in these matters related to the defense, settlements or judicial
awards are allocated between U.S. Silica and the Company. The Company's
allocated portion is paid in part by its historic product liability carriers and
then shared pursuant to the Distribution Agreement. See "Company History and
Certain Relationships" within Part 1, Item 1 of this Annual Report for a
description of the Distribution Agreement. 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.

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 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
seeking a resolution of this matter through arbitration. The Company believes
the claim is grossly overstated and will not have a material adverse effect on
the Company's consolidated financial position, results of operations or cash
flows.
F-36

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, 2003 the Company
has an accrual of $7.8 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 that 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 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, 2003 the Company has an accrual of $14.3 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 eight 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, 2003, 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, 2003, the Company has an accrual related
to the expansion of a bridge in the amount of $10.0.

F-37

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 $44.8, 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, 2003, 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, 2003, the
Company has a product warranty accrual in the amount of $34.5.

PRODUCT WARRANTY LIABILITIES

F-38

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 23

BUSINESS SEGMENT INFORMATION

F-39

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

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

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 $1,454.7, $1,105.3 and $1,104.9 for 2003, 2002 and 2001,
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 as well as systems for municipal, industrial, residential,
agricultural and commercial applications with brand names such as McDonnell &
Miller(R) and ITT Standard(R) in addition to those mentioned above. This segment
comprises approximately 40% of the Company's sales and revenues and
approximately 45% of its segment operating income for 2003.

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 44% 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 81%, 73% and 85%
of 2003, 2002 and 2001 Defense Electronics & Services sales and revenues,
respectively, were to the U.S. government. The Defense Electronics & Services
segment comprises about 32% of the Company's sales and revenues and 31% of its
segment operating income in 2003.

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 17% of the Company's sales and revenues and

F-40

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

approximately 22% of its segment operating income for 2003.

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 11% of the Company's sales and
revenues and 2% of its segment operating income for 2003.

CORPORATE AND OTHER:

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

F-41

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 24

QUARTERLY RESULTS FOR 2003 AND 2002

- ------------
(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 2003 and 2002. 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, 2004 through February 29, 2004, the high
and low reported market prices of the Company's common stock were $78.52 and
$71.26, respectively. The Company declared dividends of $0.17 per common share
in the first quarter of 2004. There were 30,553 holders of record of the
Company's common stock on February 29, 2004.

F-42

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 25

SUBSEQUENT EVENTS

On January 19, 2004, the Company announced it had acquired approximately
81.4% of the shares of WEDECO AG Water Technology ("Wedeco") for approximately
$232.5. Wedeco is the world's largest manufacturer of UV disinfection and ozone
oxidation systems, which are alternatives to chlorine treatment. The acquisition
expands the Company's technological and geographic reach of its water business.

Additionally, on February 9, 2004, the Company signed a definitive
agreement to purchase the Remote Sensing Systems ("RSS") business from Eastman
Kodak Company for $725. RSS is the world's leading supplier of high-resolution
satellite imaging systems and image information processing services. The
acquisition significantly broadens the Company's space payload and service
product offering for U.S. military as well as other science, government and
commercial customers.

F-43

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/ MARK E. LANG

-----------------------------------
MARK E. LANG
VICE PRESIDENT AND CORPORATE
CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)

March 11, 2004

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

EXHIBIT INDEX

II-2

II-3

II-4

II-5