ITT INDUSTRIES INC - 10-K Annual Report

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FORM 10-K
ANNUAL REPORT

Pursuant to Section 13 of the Securities Exchange Act of 1934

For The Fiscal Year Ended December 31, 2004

2004

(ITT INDUSTRIES LOGO)

NOTICE

This document is a copy of the Annual Report filed by ITT Industries, Inc.
with the Securities and Exchange Commission and the New York Stock Exchange. It
has not been approved or disapproved by the Commission nor has the Commission
passed upon its accuracy or adequacy.

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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, 2004
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. 1-5672
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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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE.

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No
.... ....

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (sec.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]

Indicate by check mark whether the 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, 2004 was approximately $7.7
billion.

As of February 28, 2005, there were outstanding 92,281,113 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 10, 2005, 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 2004 sales of approximately $6.76 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,
respectively, Pumps & Complementary Products, Defense Products & Services,
Specialty Products and Connectors & Switches. Also prior to January 1, 2002,
Engineered Process Solutions Group (formerly named Engineered Valves) 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 44,000 employees based in 59 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.

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 $2.59
billion, $2.25 billion, and $1.96 billion for 2004, 2003 and 2002, 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, controls and treatment 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 1.2% of 2004 sales for Fluid Technology. Sales are made
directly or through independent distributors and representatives.

As one of 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 of 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 Water
Products, Marlow Pumps, Lowara, and Vogel.

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

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 (discussed below) 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 position 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 secondary
treatment 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. Aquious provides advanced membrane
filtration engineered systems, reverse osmosis systems and portable filtration
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 addition of Aquious in 2004, ITT Industries offers advanced membrane
filtration for both municipal and industrial applications. WEDECO is a leading
provider of ultraviolet disinfection and ozone oxidation systems.

2

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 a 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
designed 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 sump and slurry pumps and control systems.
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

We strive 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 downstream 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, treatment, filtration, oxidation and
disinfection processes.

In the industrial markets, our pump systems are now supplied with
intelligent control systems and predictive conditioning monitoring. Customers
engaging our "total systems approach" generally find dramatically lower energy
consumption, maintenance and overall life cycle costs.

3

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

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

Order backlog for Fluid Technology was $575.5 million in 2004, compared
with $374.6 million in 2003, and $339.8 million in 2002.

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

The level of activity in Fluid Technology is dependent upon economic
conditions in the markets served, weather conditions, and 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 12,000
employees and have 48 major facilities in 14 countries.

DEFENSE ELECTRONICS & SERVICES

Defense Electronics & Services, with sales and revenues of approximately
$2.41 billion, $1.79 billion, and $1.51 billion for 2004, 2003 and 2002,
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 and advanced engineering and sciences businesses. Defense
electronics consists of our aerospace and communications, night vision,
avionics, radar and space systems businesses.

Systems and Services

The Systems Division provides a broad range of systems integration,
communications, engineering and technical support solutions ranging from
strategic command and control and tactical warning and attack assessment, to
test, training and range evaluation. The Systems Division also provides total
systems support solutions for combat equipment, tactical information systems and
facilities management.

The Advanced Engineering & Sciences Division provides a wide range of
research, technologies and engineering support services to government,
industrial and commercial customers. In addition, the division provides products
and services for information collection, information processing and control,
information security and telecommunications.

Defense Electronics

The ITT Aerospace/Communications Division ("A/CD") develops wireless
networking systems for tactical communications. A/CD is the creator of the core
technology used in the world's two largest tactical digitization programs: the
U.S. Tactical Internet and the U.K. Bowman program. This technology has created
a family of interconnected products including the Single Channel Ground and
Airborne Radio System (SINCGARS). A/CD is at the leading edge of networking with
its routers and algorithms. These devices permit self-organizing and
self-healing connections all across the battlespace. A/CD is also developing the
newest ground to air radios for the Federal Aviation Administration.

The Night Vision Division supplies the most advanced night vision equipment
available to U.S. and allied military forces. The equipment includes night
vision goggles for fixed and rotary-wing aviators; night vision goggles,
monoculars and weapon sights for ground forces, and image intensifier tubes
required for all of these systems. The division is also supplying
high-performance night vision devices to federal, state and local law
enforcement officers in support of homeland security.

4

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 Operations 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 Avionics
Division 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 military and civilian air traffic
control systems and air defense radars. Gilfillan's latest generation of air
traffic control radar systems includes fixed and mobile terminal airport
surveillance radars and precision approach radars for landing assistance in
extreme physical environments. Gilfillan also produces and installs air
surveillance and weapons control for both ship and land-based applications.

The Space Systems Division ("SSD") provides innovative solutions to
customers in the Department of Defense, intelligence, space science, and
commercial aerospace communities to help them visualize and understand critical
events anywhere on earth, in the air, or in space. The Space Systems Division's
offering includes intelligence, surveillance and reconnaissance systems, image
information solutions, sophisticated meteorological imagers and sounders, GPS
navigation payload systems and components, commercial remote sensing and space
science systems.

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 99% of 2004 sales and revenues of Defense Electronics & Services
were to governmental and international entities, of which approximately 87% were
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 12% and 1%, respectively, of 2004 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 1% in 2004, 5% in
2003 and 3% in 2002. 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 $3.46 billion
in 2004 compared with $3.19 billion in 2003 and $2.85 billion in 2002.

5

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
14,400 employees and are present in 157 facilities in 24 countries.

MOTION & FLOW CONTROL

Motion & Flow Control, with sales and revenues of approximately $1,070.5
million, $992.3 million and $935.5 million for 2004, 2003 and 2002,
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
for use in applications such as braking systems, fuel supply, and other fluid
transfer applications in transportation or industrial uses. Fluid Handling
Systems' principal 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:

ITT Industries Friction Products designs and manufactures friction pads and
backplates for braking applications on vehicles. From three facilities in Italy,
Friction Products services most European "OEM" (Original Equipment
Manufacturers) auto makers and also operates a substantial facility for research
and testing of new materials. Approximately 54% of Friction Products' 2004
business is in aftermarket activity.

Koni designs and markets adjustable shock absorbers under the brand name
KONI(R) for high performance vehicles, trucks, buses, railway equipment and
specialty applications such as bridges. 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 markets. Products sold worldwide under the brand
names Jabsco(R), Rule(R), Flojet(R), and Danforth(R) also serve the recreational
vehicle market. 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 Industries' quick connects are produced by Fluid Handling Systems and
replace threaded or clamped fittings with simple push together assembly for use
in the transportation market as well as the industrial market, including
plumbing applications and computer cooling.

ITT Aerospace Controls is a worldwide supplier of valves, actuators and
switches for the commercial, military, regional, business and general aviation
markets. Products are principally sold to OEM's and the aftermarket in North and
South America, Europe and Asia. Aerospace Controls also sells switches and
regulators into the oil and gas, fluid power, power generation, and chemical
markets.

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

6

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.

ELECTRONIC COMPONENTS

Electronic Components, with sales and revenues of approximately $696.9
million, $585.7 million, and $563.2 million for 2004, 2003 and 2002,
respectively, designs and manufactures connectors, interconnects, cable
assemblies, switches, keypads, multi-function grips, panel switch assemblies,
dome arrays, input/output (I/O) card kits and smart card systems.

Electronic Components provides products and services for the areas of
communications, industrial, 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, and smart card systems. 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, instrumentation, 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, rack and panel, 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 and audio circular connectors.

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

7

expertise, and customer service. See "-- COMPETITION."

Electronic Components companies have an aggregate of approximately 12,200
employees and have 26 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 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. As a result of
subsequent purchases in 2004, we currently own over 96% of the outstanding
shares of WEDECO.

On August 6, 2004, we acquired Allen Osborne Associates, Inc. a
manufacturer of high precision GPS systems receivers for our Defense Electronics
& Services business segment.

On August 13, 2004, we acquired 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 & Services business segment.

On December 20, 2004, we acquired Cleghorn Waring & Co. (Pumps) Limited, a
supplier of marine and industrial pumps in the United Kingdom for our Motion and
Flow Control segment.

On December 21, 2004 we disposed of our equity interest in Mesh Networks,
Inc. to Motorola, Inc.

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 complementary metal-oxide semiconductor (CMOS)
cameras on December 12, 2002, and during 2002 we sold a defense related joint
venture.

8

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

See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- RISKS AND UNCERTAINTIES -- STATUS OF AUTOMOTIVE
DISCONTINUED OPERATIONS" 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 2004,
approximately 49% of the sales and revenues of Fluid Technology was derived from
North America, approximately 35% was derived from Europe, and the Asia/Pacific
region accounted for approximately 9%. 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 both submersible
pumps for the sewage handling and mining markets and vertical turbine pumps
including 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 88% of 2004
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 2004, approximately 48% of sales and revenues of
Motion & Flow Control were to customers in North America, and approximately 48%
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
39% of 2004 sales and revenues, North America accounted for 36% of 2004 sales
and revenues, and the Asia/Pacific region accounted for 24% of 2004 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, 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.

9

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

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

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

EXPOSURE TO CURRENCY FLUCTUATIONS

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

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

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.

A portion of our business is classified by the government and cannot be
specifically described. The operating results of these classified programs are
included in our consolidated financial statements. The business risks associated
with classified programs, as a general matter, do not differ materially from
those of our other government programs and products.

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

10

material adverse effect on our financial position, results of operations or cash
flows. In addition, we have purchased insurance protection against certain
unknown risks.

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

RAW MATERIALS

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

RESEARCH, DEVELOPMENT, AND ENGINEERING

Our businesses require substantial commitment of resources for research,
development, and engineering activities to maintain significant positions in the
markets we serve. Such activities are conducted in laboratory and engineering
facilities at several of our major manufacturing locations. Although most of our
funds dedicated to research, development, and engineering activities are applied
to areas of high technology, such as aerospace and applications involving
electronic components, these activities are important in all of our business
segments. Expenditures by ITT Industries for research, development, and
engineering relating to our on-going lines of business totaled $634.0 million in
2004, $558.3 million in 2003 and $518.0 million in 2002. Of those amounts 75.4%
in 2004, 78.5% in 2003, and 78.2% in 2002 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, 2004, ITT Industries and its subsidiaries employed an
aggregate of approximately 44,000 people. Of this number, approximately 20,000
are employees in the United States, of whom approximately 20% 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.

11

In connection with the Distribution, ITT Destinations changed its name to ITT
Corporation. On February 23, 1998, ITT Corporation was acquired by Starwood
Hotels & Resorts Worldwide, Inc.

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

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

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

INTERNET ADDRESS AND INTERNET ACCESS TO CURRENT AND PERIODIC REPORTS

ITT Industries' website address is www.itt.com/ir. ITT Industries makes
available free of charge on or through www.itt.com/ir 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"). Information contained on the Company's website
is not incorporated by reference unless specifically stated herein.
------------------------

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

The Company is responsible, in whole or in part, or is alleged to be
responsible for environmental investigation and remediation at approximately 80
sites in various countries. Of those sites, it has received notice that it is
considered a Potentially Responsible Party ("PRP") at a

12

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, 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, 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 treatment
system is expected to continue until 2013.

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 2005. 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.

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 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
2004, ITT and Goulds resolved in excess of 4,200 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 & Casualty Company ("ACE") 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

13

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. The New
York action has been stayed in favor of the California suit. ITT and ACE have
successfully resolved the matter and the Company is working with other parties
in the suit to resolve the matter as to those insurers. 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 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. Numerous motions are currently pending before the
Court. A hearing on class certification is expected in late 2005. On October 5,
2004, the Company filed an action, ITT Industries, Inc. et al. v. Fireman's Fund
Insurance Company et al., Superior Court, County of Los Angeles, C.A. No. B.C.
322546, against various insurers who issued historic aircraft products coverage
to the Company seeking a declaration that each is liable for the costs of
defense of the El Paso matter. The parties have an agreement in principle to
resolve this matter whereby the Company will continue to receive the cost of
defense of this matter from the insurers. Management believes that the El Paso
suit 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.

The Company is involved in an arbitration with Rayonier, Inc., a former
subsidiary of the Company's predecessor, ITT Corporation. The arbitration
involves a claim by Rayonier stemming from the 1994 Distribution Agreement for
the spinoff of Rayonier by ITT Corporation. Rayonier seeks a portion of the
proceeds from certain settlements in connection with the Company's environmental
insurance recovery litigation. The parties completed the arbitration hearings in
late 2004. A decision is expected in the spring of 2005. 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.

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.

14

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 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. Hill, prior to his
election as Vice President, ITT Industries (2004) and President, Motion & Flow
Control (2004) was President, ITT Jabsco Worldwide (2003) and Vice President and
General Manager, ITT Industries Cannon (1999); (vi) Mr. Loranger, prior to his
election as Chairman, President, Chief Executive Officer and Director (2004),
was Executive Vice President and Chief Operating Officer of Textron, Inc. (2002)
and held executive positions at Honeywell International, Inc. and its
predecessor from 1981 to 2002; (vii) Mr. Pagano, prior to his election as Vice
President and Corporate Controller (2004) was President, ITT Industries' Fluid
Technology Industrial Products Group (2002) and Vice President -- Finance and
Controller, ITT Fluid Technology (1998); (viii) Ms. Reichelderfer, prior to her
election as Senior Vice President (2002) and President, Electronic Components
(2003), was President, Motion & Flow Control (2002). Prior to that she was Vice
President, Flow Control and held other executive positions with ITT Industries;
and (ix) 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.

15

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES

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, 2005 through February
28, 2005, the high and low reported market prices of our common stock were
$89.95 and $80.48, respectively.

We declared dividends of $0.16 per share of common stock in each of the
four quarters of 2003. We declared dividends of $0.17 per share of common stock
in each of the four quarters of 2004. In the first quarter of 2005, we declared
a dividend of $0.18 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 25,511 holders of record of our common stock on February 28,
2005.

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

ISSUER PURCHASES OF EQUITY SECURITIES

- ------------
(1) All share repurchases were made in open-market transactions. None of these
transactions were made pursuant to a publicly announced repurchase plan.

(2) Average price paid per share is calculated on a settlement basis and
excludes commission.

No share purchases were made pursuant to a publicly announced plan or
program. The Company's strategy for cash flow utilization is to pay dividends
first and then repurchase Company common stock to cover option exercises made
pursuant to the Company's stock option programs. The remaining cash is then
available for strategic acquisitions and discretionary repurchases of the
Company's common stock.

16

ITEM 6. SELECTED FINANCIAL DATA

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

(a) Operating income and income from continuing operations in 2004, 2003, 2002
and 2001 includes (expense) income of $(37.7), $(30.1), $3.5 and $(97.3)
pretax, respectively, or $(26.0), $(20.8), $2.4 and $(63.2), 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 and 2000 includes goodwill amortization expense.

17

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

RESULTS OF OPERATIONS

EXECUTIVE SUMMARY

Consolidated Results

The Company's revenues grew almost 21% from prior year results. The
contribution from acquisitions accounted for growth of approximately 6%, while
the effects of foreign currency translation contributed growth of approximately
3%. The remaining increase of approximately 12% 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 $634.9
million. This amount increased $101.7 million from prior year due to higher
volume. All four segments contributed to this performance which reflects
operating income growth of approximately 19.1%.

In 2004, the Company reported diluted earnings per share of $4.58, which
increased $0.29, or 6.8%, from the prior year. It is important to note that both
periods contained special items that management considers separately from core
operations. These items include: restructuring, tax settlements and related
interest, sale of investments, other items and results from discontinued
operations. The impact of special items represents a $0.02 and $0.40 increase to
diluted earnings per share in 2004 and 2003, respectively.

BUSINESS SEGMENT HIGHLIGHTS

FLUID TECHNOLOGY

The Fluid Technology segment had revenues of $2.59 billion, an increase of
15.3% from 2003. Revenues from acquisitions contributed growth of 6.2% and
foreign currency translation provided growth of 4.7%. The remaining revenue
growth of 4.4% represented organic contributions from existing businesses, of
which the water/wastewater business was the largest contributor. The reported
results reflect the Company's focus, which is to grow existing businesses
through new product introductions and 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. Forecasted 2005
segment revenues are between $2.65 billion and $2.75 billion.

Operating income increased 5.3% during 2004 to $285.9 million reflecting
increased volume, which was partially offset by the impact

19

of acquisition costs. Operating income is forecasted to be between $328 million
and $352 million in 2005.

DEFENSE ELECTRONICS & SERVICES

The Defense Electronics & Services segment increased revenues 34.8% in 2004
to $2.41 billion. This increase reflects increased revenues in all businesses,
particularly in the service sectors, as well as the contributions from the
acquisition of the Remote Sensing Systems business ("RSS") in the third quarter.
The segment's backlog, which management regards as an important indicator of
future performance, increased from $3.19 billion at December 31, 2003 to $3.46
billion at December 31, 2004. Revenue is projected to grow 14.0% to 18.0% in
2005 resulting in revenue between $2.75 billion and $2.85 billion.

Operating income was $254.1 million in 2004, or 35.8% higher than 2003.
This increase reflects increased volume as well as the contributions of RSS.
Operating income is projected to be between $275 million and $291 million in
2005.

MOTION & FLOW CONTROL

Motion & Flow Control revenues were $1.07 billion or 7.9% greater than
2003. The improvement was mainly due to increased revenues in the friction
products, aerospace controls, and spa/whirlpool 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. Continued share gains and expansion
into the U.S. market by friction products and new products in leisure marine is
expected to offset the impact of continued platform losses in auto tubing.
Revenue is expected to be between $1.05 billion and $1.1 billion in 2005.

Operating income increased 9.7% to $147.8 million. The performance reflects
increased volume and favorable product mix. Operating income is projected to be
between $155 million and $168 million in 2005.

ELECTRONIC COMPONENTS

The Electronic Components segment's revenue increased 19.0% to $696.9
million primarily due to higher volume in all businesses, particularly the
transportation, industrial and military/ aerospace businesses, and the impact of
foreign currency translation. Revenues for 2005 are projected to be between $700
million and $725 million.

Operating income was $29.5 million in 2004, an increase of $14.8 million,
and operating margin was 4.2%. The increase from 2003 is due to the inventory
pricing environment, and the pruning of low margin products in 2004. Operating
margin for 2005 is forecast to increase approximately 330 basis points due to
the benefit of 2004 restructuring initiatives, process improvement initiatives
and the continued pruning of low margin products. Operating income is projected
to be between $49 million and $58 million in 2005.

YEAR ENDED DECEMBER 31, 2004 COMPARED TO THE YEAR ENDED DECEMBER 31, 2003:

Sales and revenues for the year ended December 31, 2004 were $6.76 billion,
an increase of $1.15 billion, or 20.6%, from 2003. Costs of sales and revenues
of $4.47 billion for 2004 increased $794.4 million, or 21.6%, from the
comparable 2003 period. The increases in sales and revenues and costs of sales
and revenues are primarily attributable to higher volume in all segments,
contributions from acquisitions made by the Fluid Technology and Defense
Electronics & Services segments and the impact of foreign currency translation.
Additionally, costs of sales and revenues increased due to a change in product
mix.

Selling, general and administrative ("SG&A") expenses during 2004 were
$991.1 million, an increase of $173.9 million, or 21.3%, from 2003. The increase
in SG&A expenses was primarily due to the impact of foreign currency
translation, increased marketing expense in all segments, including expenses
from five acquisitions, and higher general and administrative expenses. Higher
general and administrative costs reflect additional employee benefit costs, the
cost of process improvement initiatives, administrative expenses related to the
four acquisitions and increased other administrative expenses.

Research, development and engineering ("RD&E") expenses for 2004 of $634.0
million, increased $75.7 million, or 13.6%, compared to 2003. The increase is
attributable to increased spending in all segments.

During 2004, the Company recorded a $38.8 million restructuring charge to
streamline its operating structure. The charge primarily reflected the planned
reduction of 1,319 per-

20

sons, the closure of two facilities and lease cancellation costs. Additionally,
$1.1 million of restructuring accruals related to prior periods were reversed
into income, as management determined that certain cash expenditures would not
be incurred. During 2003, the Company recorded a $33.3 million restructuring
charge to reduce operating costs and streamline its operating structure. The
charge primarily reflected the planned reduction of 971 persons. Additionally,
in 2003, the Company 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. Also, during 2003, the
Company reversed $4.6 million of restructuring accruals into income as it was
determined that certain 2003 and 2001 actions would be completed for less than
planned. 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 2004 was $634.9 million, an increase of $101.7
million, or 19.1%, compared to $533.2 million for 2003. The increase is
primarily due to improved sales and revenues at each of the segments offset by
increased SG&A and RD&E expenses. Segment operating margin for 2004 was 10.6%,
which was relatively flat with the segment operating margin for the comparable
2003 period.

Interest expense was $50.4 million compared to $43.2 million in 2003.
Interest income was $22.5 million for 2004 compared to $53.3 million in the
comparable prior year period. The variance in interest expense is primarily
attributable to higher average debt balances, reflecting the impact of 2004
acquisitions. The reduction in interest income in 2004, compared to 2003, is
primarily due to interest income of $32.3 million, related to two 2003 tax
settlements.

The gain on sale of assets primarily reflects the Company's sale of its
interest in Mesh Networks, a technology company in the wireless
telecommunications market, for $31.2 million.

Miscellaneous expense was $17.8 million in 2004 compared to $7.9 million in
2003. The $9.9 million increase is primarily due to higher employee benefit
costs for disposed companies.

Income tax expense was $172.5 million in 2004, an increase of $31.1 million
from the comparable prior year period. The increase is primarily attributable to
higher pretax income and an increase in the Company's effective tax rate. The
increase in the effective tax rate from 26.4% in 2003 to 28.3% in 2004 is
predominantly due to the occurrence and magnitude of one-time items in each of
those years. In 2003, these one-time items included tax benefits realized from
the filing of amended returns, foreign sales corporation redeterminations, the
effects of the closing of the 1996 and 1997 IRS audit cycle and the settlement
of IRS refund claims for the years 1986-1995. The one-time items occurring in
2004 included the filing of foreign sales corporation redeterminations,
favorable foreign tax credit utilizations and the settlement of a claim. The tax
benefits produced by the one-time items realized in 2003 exceeded those
generated in 2004.

Income from continuing operations was $437.5 million, or $4.63 per diluted
share in 2004, compared to $394.0 million or $4.18 per diluted share for 2003.
The increase reflects the results discussed above.

During 2004, the Company recognized a $5.2 million loss from discontinued
operations. The 2004 loss primarily relates to the discontinued operations of
the Company's Network Systems & Services business. During 2003, the Company
recognized $9.9 million of income from discontinued operations. The 2003 income
related 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 income of $8.0 million.

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

Sales and revenues for the year ended December 31, 2003 were $5.61 billion,
an increase of $648.1 million, or 13.1%, from 2002. Costs of sales and revenues
of $3.67 billion for 2003 increased $476.2 million, or 14.9%, 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

21

contributed to the increase in costs of sales and revenues.

SG&A expenses during 2003 were $817.2 million, an increase of $104.5
million, or 14.7%, 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.

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 $33.3 million restructuring charge to
reduce operating costs and streamline its structure. The charge primarily
reflects the planned reduction of 971 persons. Additionally, management reviewed
the Company's remaining restructuring actions and determined that certain 2003
and 2001 actions would be completed for $4.6 million less than planned at the
Electronic Components segment. Accordingly, restructuring accruals totaling $4.6
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 $533.2 million compared to $539.7 million for
2002. The decrease is primarily due to increased SG&A and RD&E expenses and
increased net restructuring and asset impairment charges of $33.6 million,
partially offset by increased sales and revenues at each of the segments.
Segment operating margin for 2003 was 10.8%, 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 $53.3 million and interest expense was $43.2 million
for 2003. The Company recognized $56.5 million of interest expense and $24.1
million of interest income during 2002. The variance in interest income between
years is primarily due to income related to two 2003 tax settlements. Lower
average debt levels and lower interest rates contributed to the variance in
interest expense between 2003 and 2002.

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 $141.4 million in 2003, an increase of $11.8 million
from 2002. The increase is primarily due to $10.1 million of net interest income
during 2003 (versus $32.4 million of net 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 26.4% compared to 25.4% 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 $394.0 million, or $4.18 per
diluted share, compared to $381.3 million or $4.07 per diluted share for 2002.
The increase reflects the results discussed above.

The Company recognized $9.9 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. A loss from
the Company's Network Systems and Services business partially offset this
income.

22

BUSINESS SEGMENT INFORMATION

YEAR ENDED DECEMBER 31, 2004 COMPARED TO THE YEAR ENDED DECEMBER 31, 2003:

Fluid Technology's sales and revenues and costs of sales and revenues
increased $344.2 million, or 15.3%, and $221.3 million, or 14.8%, respectively,
in 2004 compared to 2003. Higher sales in the water/wastewater markets,
industrial products and fluid handling businesses, acquisition revenue from the
water treatment business and the impact of foreign currency translation were the
primary factors for the increases. These items were partially offset by lower
volume in the engineered process solutions business. SG&A expenses for 2004
increased $96.1 million, or 22.6%, compared to 2003, mainly due to the impact of
foreign currency translation, increased advertising costs, sales commissions,
employee benefits, and administrative costs in most businesses, and costs
attributable to 2004 acquisitions. During 2004, the segment recorded a $19.7
million restructuring charge mainly related to a planned reduction in headcount
and the closure of two facilities. During 2003, the Company recorded a $13.8
million restructuring charge primarily for the planned 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. Operating income
for 2004 increased $14.5 million, or 5.3%, compared to 2003, due to the
activities discussed above.

Defense Electronics & Services' sales and revenues and costs of sales and
revenues for 2004 increased $623.1 million, or 34.8%, and $446.3 million, or
42.7%, respectively, from the comparable prior year period. The increases are
primarily due to higher volume in all businesses and acquisition revenue from
RSS. Additionally, a change in product mix contributed to the increase in costs
of sales and revenues. SG&A expenses increased $52.5 million, or 46.6%, from the
comparable prior year period, primarily due to increased employee benefit and
administrative costs, higher marketing costs and costs attributable to the
acquisition of RSS. RD&E expenses increased $58.3 million, or 13.1%, from the
comparable prior year period, due to increased spending in most businesses and
the impact of RSS. Operating income for 2004 was $254.1 million, an increase of
$67.0 million, or 35.8%, compared to the same period in 2003. The increase
reflects the results discussed above.

Motion & Flow Control recorded sales and revenues and costs of sales and
revenues of $1.07 billion and $776.8 million, respectively, during 2004,
reflecting increases of $78.2 million, or 7.9%, and $55.2 million, or 7.6%, from
2003. The increases were mainly due to higher volume in the friction products,
aerospace controls and spa/whirlpool businesses and the impact of foreign
currency translation, partially offset by scheduled platform rolloffs in the
auto tubing business. SG&A expenses increased $1.8 million, or 1.9%, from the
comparable prior year period, reflecting the impact of foreign currency
translation and higher marketing costs. During 2004 and 2003, the segment
recorded $6.3 million and $4.5 million of restructuring charges, respectively,
mainly related to planned reductions 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. Operating income of $147.8 million was $13.1 million, or
9.7%, higher in 2004, compared to 2003, primarily due to the items mentioned
above.

Electronic Components' sales and revenues of $696.9 million and costs of
sales and revenues of $493.2 million in 2004, increased $111.2 million, or
19.0%, and $73.6 million, or 17.5%, respectively, from the comparable prior year
period. The increases reflect higher volume in all businesses and the impact of
foreign currency translation. Product pruning and process improvements partially
offset the increase in costs of sales and revenues. SG&A expenses increased
$17.6 million, or 15.9%, from the comparable prior year period, due to the
impact of foreign currency translation and increased marketing, employee benefit
and administrative expenses. During 2004, the segment recorded an $11.0 million
restructuring charge primarily relating to planned headcount reductions and
lease cancellation costs. During 2003, the segment recorded a $12.7 million
restructuring charge primarily relating to planned headcount reductions and
reversed $4.5 million of restructuring accruals into income as management deemed
certain 2003 and 2001 actions would be completed for less than originally
planned. Additionally, the segment recorded a $1.4 million asset impairment
charge mainly to write-off a license agreement for technology, which will
23

not be utilized in the foreseeable future due to projected market conditions.
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 2004 increased $14.8 million from 2003. The increase was due to the factors
discussed above.

Corporate expenses increased $7.7 million, or 10.3%, in 2004, primarily due
to costs associated with process improvements and an increase in other
administrative costs. Additionally, during 2004 and 2003, $1.8 million and $1.3
million of restructuring costs, respectively, were recognized primarily for
headcount reductions. 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.

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 products businesses and the impact of foreign currency translation,
partially offset by volume declines in the auto tubing 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%,

24

higher in 2003 compared to 2002, primarily due to the items mentioned above.

Electronic Components sales and revenues of $585.7 million and costs of
sales and revenues of $419.6 million in 2003, increased $22.5 million, or 4.0%,
and $39.5 million, or 10.4%, 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 $18.6 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 $12.7 million restructuring charge primarily relating to
planned headcount reductions and reversed $4.5 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. Additionally, the segment reversed
$8.7 million of restructuring accruals in 2002, related to 2001 plan
restructuring actions (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 $57.6 million, or 79.7%, from 2002. The
decline was due to the factors discussed above.

Corporate expenses increased $14.2 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.

STATUS OF RESTRUCTURING AND
ASSET IMPAIRMENTS

2004 RESTRUCTURING ACTIVITIES

During the fourth quarter of 2004, the Company recognized a $12.4 million
charge, primarily for the planned severance of 727 employees. The actions by
segment are as follows:

- - The Fluid Technology segment recorded $9.3 million for the planned termination
of 80 employees, including 20 factory workers and 60 office workers. Other
costs totaling $0.3 million were also recognized during the quarter.

- - The Motion & Flow Control segment recognized $1.8 million for the planned
termination of 43 employees, including 14 factory workers, 25 office workers
and four management employees. The segment also recorded $0.1 million for
outplacement.

- - The Electronic Components segment recorded $0.9 million for the planned
termination of 604 employees. The terminations include 17 office workers and
587 factory workers.

As of December 31, 2004, the Company had made $2.5 million of payments
attributable to the 2004 fourth 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 fourth quarter of 2004 are approximately $12 million during 2005 and
approximately $57 million between 2006 and 2009. The savings primarily represent
lower salary and wage expenditures and will be reflected in "Costs of Sales and
Revenues" and "Selling, General and Administrative Expenses."

In addition to the 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
of 2003 and $0.1 million of outplacement related to actions announced in 2002.
Electronic Components recognized an additional $0.5 million of severance related
to actions announced during the first quarter of 2004 and an additional $0.1
million of moving costs related to actions announced in the third quarter of
2004.

25

During the third quarter of 2004, the Company recognized a $5.5 million
charge, primarily for the planned severance of 71 employees and movement of
production. The actions by segment are as follows:

- - The Fluid Technology segment recorded $3.3 million for the planned termination
of 36 employees, including nine factory workers, 23 office workers and four
management employees. Other costs totaling $0.2 million were also recognized
during the quarter.

- - The Motion & Flow Control segment recognized $0.5 million for the planned
termination of 30 employees, including 23 factory workers and seven office
workers. The segment also recorded $0.6 million for relocation and moving
costs.

- - The Electronic Components segment recorded $0.2 million for the planned
termination of five employees. The terminations include four office workers
and one management employee. The segment also recorded a $0.7 million charge
primarily for costs associated with moving two product lines from Weinstadt,
Germany to Shenzhen, China and one product line from Santa Ana, CA to Nogales,
Mexico.

As of December 31, 2004, the Company had made $4.5 million of payments
attributable to the 2004 third 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 third quarter of 2004 are approximately $5 million during 2005 and
approximately $22 million between 2006 and 2009. The savings primarily represent
lower salary and wage expenditures and will be reflected in "Costs of Sales and
Revenues" and "Selling, General and Administrative Expenses."

In addition to the restructuring actions announced during the third
quarter, the Motion & Flow Control segment recognized $0.1 million of severance
and employee benefit costs related to actions announced during the first quarter
of 2003.

During the second quarter of 2004, the Company recognized a $13.6 million
charge, primarily for the planned severance of 418 employees and the recognition
of lease cancellation costs. The actions by segment are as follows:

- - The Electronic Components segment recorded $4.5 million of the charge for the
recognition of lease cancellation costs. Severance of $0.9 million was
recorded for the reduction of 328 employees. The terminations include 273
factory workers, 52 office workers and three management employees. The segment
also recorded a $1.1 million charge for the disposal of machinery and
equipment.

- - The Fluid Technology segment recorded $2.4 million for the termination of 45
employees, including eight factory workers and 37 office workers. Lease
commitments totaling $0.7 million were recognized related to the closure of
two facilities (one in Sweden and one in Florida). Asset write-offs and other
costs totaling $0.2 million and $0.1 million, respectively, were also
recognized during the quarter.

- - The Motion & Flow Control segment recognized $2.1 million for the termination
of 44 employees, including seven factory workers, 32 office workers and five
management employees.

- - Corporate headquarters recorded $1.6 million for the severance of one
management employee.

As of December 31, 2004, the Company had made $4.5 million of payments
attributable to the 2004 second quarter restructuring actions. Future
restructuring expenditures will be funded with cash from operations,
supplemented, as required, with commercial paper borrowings.

The projected future savings from the restructuring actions announced
during the second quarter of 2004 are approximately $8 million during 2005,
including $0.3 million of non-cash savings, and approximately $29 million
between 2006 and 2009, including $0.6 million of non-cash savings. The savings
primarily represent lower salary and wage expenditures and will be reflected in
"Costs of Sales and Revenues" and "Selling, General and Administrative
Expenses."

In addition to the restructuring actions announced during the second
quarter, the Motion & Flow Control segment recognized $0.3 million of severance
and employee benefit costs related to actions announced during the first quarter
of 2003 and the Electronic Compo-

26

nents segment recognized $0.3 million of severance and employee benefit costs
related to actions announced during the first quarter of 2004 and $0.1 million
of outplacement related to actions announced in 2003.
During the first quarter of 2004, the Company recognized a $5.3 million
charge, primarily for the planned severance of 103 employees. The actions by
segment are as follows:

- - The Fluid Technology segment recorded $2.7 million for the planned termination
of 50 employees, including 15 factory workers and 35 office workers. Asset
write-offs and other costs totaling $0.4 million and $0.1 million,
respectively, were also recognized during the quarter.

- - The Electronic Components segment recorded $1.7 million of the charge
primarily for the planned reduction of 35 employees, including 23 factory
workers, 11 office workers and one management employee.

- - The Motion & Flow Control segment recognized $0.2 million for the planned
termination of 16 employees, including three factory workers and 13 office
workers.

- - Corporate headquarters recorded $0.2 million for the planned severance of one
office worker and one management employee.

As of December 31, 2004, the Company had made $5.5 million of payments
attributable to the 2004 first quarter restructuring actions (including costs
recognized in subsequent quarters related to first quarter 2004 actions). Future
restructuring expenditures will be funded with cash from operations,
supplemented, as required, with commercial paper borrowings.

The projected future savings from the restructuring actions announced
during the first quarter of 2004 are approximately $6 million during 2005,
including $0.1 million in non-cash savings, and $21 million between 2006 and
2009, including $0.4 million in non-cash savings. The savings primarily
represent 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 2004 restructuring programs (in millions):

During the third and fourth quarters of 2004, a total of $0.2 million of
restructuring accruals related to 2004 restructuring actions were reversed into
income as a result of quarterly reviews of the Company's remaining restructuring
actions.

During 2004, two facilities were closed, headcount was reduced by 632
persons and the Company experienced employee attrition, leaving a balance of 684
planned headcount reductions related to the 2004 restructuring plans.

2003 RESTRUCTURING ACTIVITIES

During the fourth quarter of 2003 the Company announced actions to reduce
operating costs primarily through the reduction of headcount. The $15.3 million
restructuring charge primarily reflects the planned severance of 296 employees.
The actions by segment are as follows:

- - The Electronic Components segment recorded $1.4 million of the charge for the
planned termination of 127 employees, including 113 factory workers, ten
office workers and four management employees.

- - The Fluid Technology segment recognized $12.4 million of the charge for the
planned 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 planned severance of 35 employees, including seven factory workers, 19
office workers and nine management employees.

27

The projected future cash savings from the restructuring actions announced
during the fourth quarter of 2003 are approximately $13 million during 2005 and
$39 million between 2006 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".

During 2004, the Company had made $9.9 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 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 $2.6
million restructuring charge primarily reflects the planned severance of 71
employees. The actions by segment are as follows:

- - The Electronic Components segment recorded $1.2 million of the charge for the
planned termination of 39 employees, including 15 factory workers and 24
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 office workers.

The projected future cash savings from the restructuring actions announced
during the third quarter of 2003 are approximately $4 million during 2005 and
$11 million between 2006 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."

During 2004, the Company had made $0.6 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 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. Restructuring actions
totaling $4.4 million were announced during the period. The charge primarily
reflected the planned severance of 143 employees and the cancellation of an
operating lease. The actions by segment are as follows:

- - The Electronic Components segment comprises $2.4 million of the charge and the
actions taken at this segment include the planned termination of five
management employees, 19 factory workers and 67 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 $7 million during 2005 and
$22 million between 2006 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."

During 2004, the Company had made $0.6 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.

28

In addition to the 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 an $8.9 million
restructuring charge primarily for the planned severance of 461 persons.
Severance of $8.2 million represents the majority of the charge. The actions by
segment are as follows:

- - The Electronic Components segment recorded $6.7 million of the charge for the
planned termination of 222 persons, comprised of 98 office workers, 116
factory workers and eight 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 were completed during 2003 and 2004 and the total
estimated charge of approximately $2.6 million was recognized ratably over the
restructuring period as the terminations became effective. Management deemed
the restructuring actions necessary to address the anticipated loss of certain
platforms during the second half of 2003.

During 2004, the Company had made $2.9 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 $9 million during 2005 and
$28 million between 2006 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 2004, $0.3 million of restructuring accruals related to 2003
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 due to favorable employee
attrition at the Electronic Components segment.

During the second half of 2003, $3.4 million of restructuring accruals
related to 2003 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.

29

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 2004, headcount was reduced by 189 persons and the Company
experienced employee attrition, completing the planned reductions related to the
2003 restructuring plans. In addition, the final facility related to 2003
restructuring plans was closed during 2004.

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.

30

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

During 2004, the Company reduced headcount by 12 and experienced employee
attrition, leaving a balance of one planned headcount reduction. Some severance
run-off payments will occur in 2005. 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 2005 and approximately $23 million for
2006 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 2004, 2003 and 2002.

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 $82.9 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 3,386 persons and other asset impairments.
The cash portion of the charge of $60.6 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. All of the actions contemplated under the 2001 plan were
substantially completed in 2003.

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

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

31

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. In 2001 and early in 2002, both claims were favorably
resolved.

The following tables display a rollforward of the automotive discontinued
operations accruals from January 1, 2002 to December 31, 2004 (in thousands):

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, 2004, the Company has automotive discontinued operations
accruals of $188.7 million that primarily relate to the following: taxes $154.1
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
$14.2 million -- for the remediation and investigation of groundwater and soil
contamination at thirteen sites which are recorded in Other Liabilities;
employee benefits $12.6 million -- for workers compensation issues which are
recorded in Accrued Expenses. In 2004, the Company made immaterial payments for
matters attributable to the automotive discontinued operations. The Company
expects that it will settle $154.1 million of tax obligations in late 2005. The
Company projects that it will spend between $1.0 million and $4.0 million in
2005 related to its other remaining automotive obligations.

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOW OVERVIEW:

The Company generated $528.6 million of cash from operating activities
during 2004. Net income generated from continuing operations plus depreciation
and amortization contributed approximately $636.1 million of cash flow. The
deferral of tax payments of $102.4 million and increases in accounts payable and
accrued expenses of $16.9 million, were also positive contributors of cash.
Increases in accounts receivable and inventory of $21.8 million and $80.3
million, respectively, reflecting increased sales volume, partially offset the
cash generated from operations. Cash from operating activities during 2004 also
reflects a $100.0 million pre-funding of pension obligations.

The Company used cash generated from operating activities, additional debt
financing of $674.5 million, cash received from exercised stock options of $76.8
million and cash on hand
32

to fund $1,010.0 million of strategic acquisitions, $165.1 million of capital
expenditures, and the reduction of debt of $68.7 million. Additionally, $159.6
million was used to repurchase the Company's common stock and $61.8 million was
used for dividend payments.

The Company projects cash from operating activities to be between $575.0
million and $625.0 million for 2005.

CASH FLOWS: COMPARISON OF 2004 TO 2003

Cash provided by operating activities during 2004 was $528.6 million, or a
$51.1 million decrease from 2003. The decrease is primarily attributable to tax
payments of $70.1 million in 2004 (versus $26.6 million of tax receipts in 2003)
and increased inventory levels. A $100.0 million prepaid pension contribution in
2004 compared to a $200.0 million prepaid pension contribution in 2003 and
reduced cash outflows from accounts receivable, partially offset these declines
in cash provided from operations.

CONTRACTUAL OBLIGATIONS:
The Company's commitment to make future payments under long-term
contractual obligations was as follows, as of December 31, 2004 (in millions):

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

(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 approximately 80 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, 2004, the Company has calculated a best estimate to remediate
ground water and soil of $98.0 million and has recorded an accrual that
approximates the estimate.

STATUS OF RESTRUCTURING ACTIVITIES:

Restructuring payments during 2004 totaled $33.6 million and were comprised
of $17.0 million of expenditures for the 2004 plans and $16.6 million of
expenditures for the 2003, 2002 and 2001 restructuring plans. All future
payments are projected to be paid with future cash from operating activities
supplemented, as required, by commercial paper borrowings.

33

ADDITIONS TO PLANT, PROPERTY AND EQUIPMENT:

Capital expenditures during 2004 were $165.1 million, an increase of $11.8
million from 2003. The increase primarily reflects increased investments by the
Defense Electronic & Services and Motion & Flow Control segments.

ACQUISITIONS:

2004 ACQUISITIONS

On August 13, 2004, the Company purchased all of the Remote Sensing Systems
business ("RSS") for $736.9 million in cash. The RSS business is a leading
supplier of high resolution satellite imaging systems and information services.
Management believes that the acquisition of RSS will enhance the Company's
competitive position in the space payload and service product offering industry
and create a full spectrum provider with the latest visible and infrared
satellite imaging technology in the remote sensing market.

The excess of the purchase price of RSS over the fair value of net assets
acquired of $597.6 million was recorded as goodwill and is deductible for tax
purposes. The entire goodwill balance is reflected in the Defense Electronics &
Services segment.

The Company has preliminarily assigned values to the assets and liabilities
of RSS; however, the allocation is subject to further refinement.

The following table summarizes the fair value of assets acquired and
liabilities assumed at the date of acquisition. The purchase price allocations
were based on preliminary data and changes are expected as evaluations of items,
such as employee benefit obligations, are finalized and additional data becomes
available.

The $124.9 million of intangible assets is comprised of $120.0 million of
customer relationships (amortized over 16 years), $3.4 million of maintenance
contracts (amortized over 15 years) and $1.5 million of product software
(amortized over 12 years).

The Company also spent $273.1 million on additional 2004 acquisitions that
it does not believe are material individually or in the aggregate to its results
of operations or financial condition. These acquisitions include:

- - WEDECO AG Water Technology ("WEDECO"), the world's largest manufacturer of UV
disinfection and ozone oxidation systems, which are alternatives to chlorine
treatment.

- - Allen Osborne Associates, Inc. ("AOA"), a leader in the development of global
positioning system receivers for both portable and fixed sites.

- - Shanghai Hengtong Purified Water Development Co. Ltd. and Shanghai Hengtong
Water Treatment Engineering Co. Ltd. ("Hengtong"), a Shanghai-based producer
of reverse-osmosis, membrane and other water treatment systems for the power,
pharmaceutical, chemical and manufacturing markets in China.

- - Cleghorn Waring and Co. ("(Pumps) Limited"), a distributor of pumps and marine
products.

The excess of the purchase price over the fair value of net assets acquired
in these transactions of $247.0 million was recorded as goodwill, of which
$240.1 million, $3.5 million and $3.4 million are reflected in the Fluid
Technology, Defense Electronics & Services and Motion & Flow Control segments,
respectively. Additionally, the purchase price allocations for the 2004
acquisitions were based on preliminary data and changes are expected as
evaluations are finalized and additional information becomes available.

Intangibles assets relating to the acquisitions of WEDECO and AOA, totaled
$56.2 million. This amount includes $25.4 million of proprietary technology and
other (amortized over 15 years), $18.8 million of customer relationships
(amortized over 10 years), and $12 million of tradenames.

34

The Company also finalized purchase price allocations related to its 2003
acquisitions, which resulted in an increase in goodwill of $1.5 million.

PRO FORMA RESULTS

The following unaudited pro forma financial information presents the
combined results of operations of the Company and RSS as if RSS was acquired on
January 1, 2004 and 2003. The pro forma results presented below for 2004 combine
the results of the Company for 2004 and the historical results of RSS from
January 1, 2004 to August 12, 2004. The pro forma results presented for 2003
combine the results of the Company for 2003 and the historical results of RSS
for the comparable period. The unaudited pro forma financial information is not
intended to represent or be indicative of the Company's consolidated results of
operations that would have been reported had RSS been acquired as of the
beginning of the periods presented and should not be taken as indicative of the
Company's future consolidated results of operations. Pro forma adjustments are
tax effected at the Company's effective tax rate.

2003 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, of which $5.6 million
was tax deductible. The Electronic Components segment was assigned $24.0 million
of the goodwill balance and the Fluid Technology and Motion & Flow Control
segments were assigned $5.4 million and $1.1 million, respectively. 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, in 2003, the Company finalized purchase price allocations
related to its 2002 acquisitions, which resulted in a decrease in goodwill of
$5.1 million.

2002 ACQUISITIONS

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

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

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

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

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

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

35

SALE OF INVESTMENTS:

In December 2004, the Company sold its interest in Mesh Networks, Inc., a
technology company in the wireless telecommunications market for $31.2 million,
of which $24.9 million was received in cash and $6.3 million was placed in
escrow.

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

DIVESTITURES:

During 2004, the Company generated $7.4 million from the sale of plant,
property and equipment primarily by the Electronic Components and Fluid
Technology segments.

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.

SHARE REPURCHASE:

In 2004, 2003, and 2002, 2.0 million, 1.0 million and 0.7 million shares,
respectively, were repurchased to offset the dilutive effect of exercised stock
options.

DEBT AND CREDIT FACILITIES:

Debt at December 31, 2004 was $1.3 billion, compared with $602.4 million at
December 31, 2003. The change in debt levels primarily reflects the Company's
utilization of debt to partially fund 2004 acquisitions. Cash and cash
equivalents were $262.9 million at December 31, 2004, compared to $414.2 million
at December 31, 2003.

In December 2004, the Company recorded a $120.0 million obligation
associated with a ten year agreement with a major financial institution-
involving the sale and the subsequent leasing back of certain properties. Under
the terms of the agreement, the Company is required to make annual payments of
principal and interest. At the end of the agreement, the Company has the option
to repurchase the applicable properties for a nominal fee. This transaction is
reflected as debt.

In March 2004, the Company entered into a revolving credit agreement, which
expires in March 2005, with five domestic and foreign banks providing aggregate
commitments of $400 million. The Company also 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, 2004, the Company's
coverage ratio was well in excess of the minimum requirements. The commitment
fee on the revolving credit agreements is .125% of the total commitment. The
revolving credit agreements serve as backup for the commercial paper program.
Borrowing through commercial paper and under the revolving credit agreements may
not exceed $1.4 billion in the aggregate outstanding at any time. At December
31, 2004 commercial paper borrowings were $696.3 million.

STATUS OF AUTOMOTIVE DISCONTINUED OPERATIONS:

In 2004, the Company made immaterial payments for matters attributable to
its automotive discontinued operations. Tax obligations of $154.1 million are
expected to be resolved in 2005. In addition, the Company projects between $1.0
million and $4.0 million of annual spending related to its remaining automotive
obligations. All payments are forecast to be paid with future cash from
operations, supplemented as required, with 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

36

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,
2004, 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, 2004, the Company has an accrual of $14.2 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 nine 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 has been released from its
obligation to perform under both of these guarantees in the third quarter of
2004. The third guarantee 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, 2004, 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, 2004, the Company does not believe that a loss
contingency is probable, and, therefore does not have an accrual recorded in its
financial statements.

The Company has a number of individually immaterial guarantees outstanding
at December 31, 2004, that may be affected by various conditions and external
forces, some of which could require that payments be made under such guarantees.
The Company does not believe these payments 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.

37

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 $335.8 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, 2004 and 2003 was $84.9 million and $81.6 million,
respectively, including $3.3 million and $4.0 million of accrued interest,
respectively.

At December 31, 2004 and 2003, the Company's short-term and long-term debt
obligations totaled $1,272.0 million and $602.4 million, respectively. In
addition, the Company's cash balances at December 31, 2004 and 2003 were $262.9
million and $414.2 million, respectively. Based on these positions, and the
Company's overall exposure to interest rates, changes of 24 and 13 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, 2004 and 2003, respectively) on the Company's cash and marketable
securities and on its floating rate debt obligations and related interest rate
derivatives would have a $1.9 million and $0.1 million effect on the Company's
pretax earnings for the years ended December 31, 2004 and 2003, respectively.
Increases of 48 and 74 basis points in long-term interest rates (equivalent to
10% of the Company's weighted average long-term interest rates at December 31,
2004 and 2003, respectively) would have a $3.4 million and $0.6 million
reduction in the fair value of the Company's fixed rate debt as of December 31,
2004 and 2003, 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 2004, 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, 2004,
the Company had eight foreign currency derivative contracts outstanding for a
total notional amount of $93.3 million. A 10% depreciation of the Euro against
all other currencies related to the Company's foreign currency derivatives, held
as of December 31, 2004, would cause a net reduction of $0.5 million of the fair
value of such instruments. 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 of 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, 2004 for income taxes paid in foreign jurisdictions that currently
do not have a valuation allowance.
38

DEFERRED TAX ASSETS:

The Company had net deferred tax assets of $216.0 million and $334.9
million at December 31, 2004 and 2003, 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 deductible temporary
differences for which a valuation allowance has not been established.

As of December 31, 2004, a valuation allowance of approximately $43.9
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.

The Company expects to settle $154.1 million in tax obligations that relate
to the reorganization and disposition of its automotive businesses in 1998, as
part of the current IRS examination of the Company's federal consolidated tax
returns for the years ended December 31, 1998 through December 31, 2000. As of
December 31, 2004, the Company believes the accrual for income taxes payable is
sufficient to cover potential liabilities arising from these examinations.

In addition, the Company has contingent tax obligations in other
jurisdictions related to the 1998 dispositions and reorganizations of
approximately $85.0 million. The Company has determined that payment of this
amount is unlikely.

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, 2004, the Company's best
estimate is $98.0 million, which approximates the accrual related to the
remediation of ground water and soil. The low range estimate for environmental
liabilities is $72.9 million and the high range estimate is $160.8 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
expenditures are recorded on an undiscounted basis.

The Company is currently involved in the environmental investigation and
remediation of approximately 80 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

39

Statements for additional details on environmental matters.

EMPLOYEE BENEFIT PLANS:

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

Key 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 12.1%,11.2%, 12.6% and 12.7%, 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, 2004, is 8.89%.

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, 2004, the Company lowered the discount rate on most of its
domestic pension plans, which represent about 90% of the Company's total pension
obligations, from 6.25% to 6.00%. The Company's weighted average discount rate
for all pension plans, including foreign affiliate plans, at December 31, 2004,
is 5.94%. Also, at December 31, 2004, the Company lowered the discount rate on
its postretirement welfare plans from 6.25% to 5.75% and increased the medical
trend rate for 2005 to 10% decreasing ratably to 5% in 2010.

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 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:

With respect to its qualified U.S. defined benefit pension plans and one of
its retiree medical plans, the Company has set up a U.S. Master Trust to pay
future benefits to eligible retirees and dependents.

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, 2004, the Company's actual asset
allocation was 66.2% in equity instruments, 16.4% in fixed income instruments
and
40

9.9% 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 60% 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, and therefore, are recognized in the Defense Electronics &
Services segment's net sales.

Funding requirements under IRS rules are a major consideration in making
contributions to our pension plan. With respect to its qualified pension plans,
the Company intends to contribute annually not less than the minimum required by
applicable law and regulations. The Company contributed $120.1 million to the
U.S. Master Trust in 2004, and an additional $102.4 million in the first quarter
of 2005. As a result, the Company will not face material minimum required
contributions to its U.S. Salaried Plan in 2005 and 2006, 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 2005.

Assuming that current IRS contribution rules continue to apply in the
future, and barring major disruptions in the equity and bond markets, the
Company estimates that it will not be required to make mandatory contributions
in the 2006 to 2007 timeframe.

Funded Status:

Funded status is derived by subtracting the value of the projected benefit
obligations at December 31, 2004 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 2004, the Company's U.S. Salaried Pension Plan assets grew by $575.4
million to $3,564.6 million at the end of 2004. This increase primarily
reflected return on assets of $474.3 million, Company contributions of $100.0
million and the addition of $235.0 million in assets as a result of the
acquisition of RSS, offset by payments to plan beneficiaries of $233.6 million.

Also during 2004, the projected benefit obligation for the U.S. Salaried
Pension Plan increased by $458.2 million to $3,907.6 million. The increase
included the $126.4 million impact of a 25 basis point decline in the discount
rate at year-end and the assumption of $260.0 million in liabilities as part of
the acquisition of RSS. As a result, the funded status for the Company's U.S.
Salaried Plan improved by $116.6 million to $(343.0) million at the end of 2004.
Funded status for the Company's total pension obligations, including foreign and
affiliate plans, improved by $105.5 million to $(754.9) million at the end of
2004.

Funded status at the end of 2005 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 point 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 $126 million. Similarly,
every five percentage point change in the actual 2005 rate of return on assets
impacts the same plan by approximately $178 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.

41

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 shareholders' equity. As a result of the improved
financial markets in 2003 and 2004, the Company recorded total after-tax
increases to its shareholders' equity of $182.5 and $81.8 million at year-end
2003, and 2004, respectively. It is important to note that these actions did not
cause a default in any of the Company's debt covenants.

Future recognition or reversal 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 $62.1 million of net periodic pension cost ($65.4
million after considering the effects of curtailment losses and settlements)
into its Consolidated Income Statement in 2004, compared with pension cost of
$33.0 million ($35.4 million including curtailments) in 2003. The 2004 net
periodic pension cost reflected benefit service cost of $87.9 million and
interest cost on accrued benefits of $267.9 million, offset by the expected
return on plan assets of $344.2 million. In addition, the 2004 pension expense
included $43.3 million of amortization of past losses, up from $23.5 million in
2003. The primary drivers behind the increase in the net periodic pension cost
were the effect of the change in the discount rate, the increase in amortization
of past losses in 2004 and the inclusion of RSS in the cost from the date of
acquisition.

In 2005, the Company expects to incur approximately $93.0 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, higher amortization of past losses and the full year impact of
the RSS acquisition.

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, 2004 and 2003 was
$40.3 million and $34.3 million, respectively. See Note 22, "Guarantees,
Indemnities and Warranties," in the Notes to Consolidated Financial Statements
for additional details.

ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004)
"Share-Based Payment (SFAS 123R)" which is a

42

revision of SFAS No. 123, "Accounting for Stock-Based Compensation." This
statement eliminates the option of using the intrinsic value method of
accounting for employee stock options (historically utilized by the Company),
which generally resulted in the recognition of no compensation cost. The
provisions of SFAS No. 123R require the recognition of employee services
received in exchange for awards of equity instruments based on the grant-date
fair value of the awards as determined by option pricing models. The calculated
compensation cost is recognized over the period that the employee is required to
provide services per the conditions of the award. SFAS No. 123R is effective for
the Company July 1, 2005. The adoption of this statement will not have a
material impact on the Company's financial statements.

In December 2003, the FASB issued SFAS No. 132 (revised December 2003)
"Employers' Disclosures About Pensions and Other Post Retirement Benefits"
("SFAS No. 132"). This revised pronouncement retains the disclosure requirements
of SFAS No. 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.

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.

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 Issued 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 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 statement 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
43

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 statement did not have a material effect on the Company's
financial statements.

In November 2004, the FASB issued SFAS No. 151, "Inventory Costs -- an
amendment of ARB No. 43, Chapter 4" ("SFAS No. 151"). This statement clarifies
the criteria of "abnormal amounts" of freight, handling costs, and spoilage that
are required to be expensed as current period charges rather than deferred in
inventory. In addition, this statement requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. SFAS No. 151 is effective for the Company July 1,
2005. The Company is currently in the process of determining the impact of this
statement 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," 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 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 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 FIN 46; however, it
had no impact on the Company'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. Subsequently, FSP
No. 106-2 was issued, which amends FSP No. 106-1 and discusses the recognition
of the effects for the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 (the "Medicare Modernization 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 Company adopted this
pronouncement effective July 1, 2004, but was unable to conclude whether
benefits of its plans are actuarially equivalent based on the proposed
regulations released in August 2004. Currently, the Company is analyzing the
effect of the Medicare Modernization Act on the Company's plans based on the
final regulations issued at the end of January 2005 and has not taken any action
at this time to reflect the Medicare changes. In addition, it was assumed that
the adoption of this pronouncement did not affect demographic factors used to
determine plan assets and obligations at December 31, 2004, the Company's
measurement date. See Note 19, "Employee Benefit Plans," in the Notes to
Consolidated Financial Statements, for discussion of postretirement benefits.

In December 2004, the FASB issued FSP 109-1, "Application of FASB Statement
No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified
Production Activities Provided by the American Jobs Creation Act of 2004 ("FSP
109-1")." The American Jobs Creation Act of 2004 (the "AJCA") provides for a tax
relief for U.S. domestic manufacturers. FSP 109-1 states that tax benefit should
be recorded in the year in which it can be taken in the Company's tax return
rather than reflecting
44

a deferred tax asset in the period the AJCA was enacted. FSP 109-1 was effective
upon issuance. Adoption of FSP will not have a material effect on the Company's
financial statements.

In December 2004, the FASB issued FSP 109-2, "Accounting Disclosures
Guidance for the Foreign Earnings Repatriation Provision Within the American
Jobs Creation Act of 2004 ("FSP 109-2")." The Foreign Earnings Repatriation
Provision Within the Act (the "Provision") provides a special limited-time
dividends received deduction on the repatriation of certain foreign earnings to
a U.S. taxpayer. FSP 109-2 states that a company should recognize the income tax
effect related to the Provision when it decides on a plan for reinvestment or
repatriation of foreign earnings. At this time, the Company does not expect to
elect to apply this provision of the AJCA.

RISKS AND UNCERTAINTIES

ENVIRONMENTAL MATTERS:

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

In estimating the costs of environmental investigation and remediation, the
Company considers, among other things, regulatory standards, its prior
experience in remediating contaminated sites, and the professional judgment of
environmental experts. It is difficult to estimate the total costs of
investigation and remediation due to various factors, including incomplete
information regarding particular sites and other potentially responsible
parties, uncertainty regarding the extent of contamination and the Company's
share, if any, of liability for such problems, the selection of alternative
remedies, and changes in cleanup standards. When it is possible to create
reasonable estimates of liability with respect to environmental matters, the
Company establishes accruals in accordance with 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.

2005 OUTLOOK:

Revenue growth in the Defense Electronics & Services segment is expected to
improve 14% to 18% over 2004 revenues, driven by higher service revenue,
reflecting a broader range of offerings/capabilities, and the acquisition of
RSS. The Fluid Technology segment expects revenue growth of 2% to 6% above 2004
revenue levels due to continued growth in the water/wastewater business and
contributions from WEDECO. Revenue from the introduction of new products is
expected to increase results in the Electronic Components segment. Revenue
growth in Motion & Flow Control's leisure marine business, resulting from new
products, and expansion into the U.S. by friction products, are expected to
partially offset platform losses in the automotive tubing business.

Operating income is projected to increase between 12% and 22% in 2005 due
to the revenue growth discussed above. Segment operating margin is projected to
increase between approximately 70 and 110 basis points over 2004 due to the
benefits of 2004 process improvement initiatives and pruning of lower margin
products.

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 "2005 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-
45

looking statements involve known and unknown risks, uncertainties and other
factors that may cause the actual results or performance of the Company and its
businesses to be materially different from that expressed or implied by such
forward-looking statements. Such factors may be described or referred to from
time to time in filings made by the Company with the Securities and Exchange
Commission. Included in those factors are the following: general economic and
business conditions; foreign currency exchange rates; political, social and
economic conditions and local regulations in the countries in which the Company
conducts its businesses; government regulations and compliance therewith;
demographic changes; sales and revenues mix; pricing levels; changes in sales
and revenues to, or the identity of, significant customers; changes in
technology; industry capacity and production rates; ability of outside third
parties to comply with their commitments; competition; capacity constraints;
availability of raw materials and adequate labor; availability of appropriate
professional expertise; availability of liquidity sufficient to meet the
Company's needs; the ability to adapt to changes resulting from acquisitions and
divestitures and to effect cost reduction programs; and various other factors
referenced in this Management's Discussion and Analysis. In some areas the
availability of energy sources may affect our production processes or customer
demand for our products or services. In addition to these factors, our business
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.

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

None.

ITEM 9A. CONTROLS AND PROCEDURES

Attached as exhibits to the Form 10-K are certifications of the Company's
Chief Executive Officer (CEO) and Chief Financial Officer (CFO) which are
required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934
("Act"), as amended. This section includes information concerning controls and
controls evaluation referred to in the certifications. Part IV of this Form 10-K
contains the report of Deloitte & Touche LLP ("Deloitte & Touche"), our
independent registered public accounting firm, regarding the audit of the
Company's internal control over financial reporting and of management's
assessment of internal control over financial reporting set forth below. This
section should be read in conjunction with the certifications and the Deloitte &
Touche report.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

The Company, with the participation of various levels of management,
including the CEO and CFO, conducted an evaluation of

46

effectiveness of the design and operation of our disclosure controls and
procedures as of December 31, 2004. On the basis of this review, management,
including the CEO and the CFO, concluded that our disclosure controls and
procedures are designed, and are effective, to give reasonable assurance that
the information required to be disclosed in our reports filed under the Act is
assembled, recorded, processed, summarized and reported within the time periods
specified in the SEC's forms and reports, and to ensure that information
required to be disclosed in the reports submitted under the Act is accumulated
and communicated to our management, including our CEO and CFO, in a manner that
allows timely decisions regarding required disclosure.

In 2002, the Company 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 CFO and assists the CEO and
the CFO in designing, establishing, reviewing and evaluating the Company's
disclosure controls and procedures.

MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rules 13a-15(f)
and 15d-15(f) under the Act. The Company's internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with accounting principles generally
accepted in the United States of America. Internal control over financial
reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, completely, accurately and
fairly reflect the transactions and dispositions of the Company's assets; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of the financial statements in accordance with accounting
principles generally accepted in the United States of America; (iii) provide
reasonable assurance that Company receipts and expenditures are made only in
accordance with the authorization of management and the directors of the
Company, (iv) and provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of assets that could
have a material effect on the consolidated financial statements.

Internal control over financial reporting includes the controls themselves,
monitoring and internal auditing practices and actions taken to correct
deficiencies as identified.

Management assessed the effectiveness of the Company's internal control
over financial reporting as of December 31, 2004. Management based this
assessment on criteria for effective internal control over financial reporting
described in "Internal Control -- Integrated Framework" issued by the Committee
of Sponsoring Organizations (COSO) of the Treadway Commission. Management's
assessment included an evaluation of the design of the Company's internal
control over financial reporting and testing of the operational effectiveness of
its internal control over financial reporting. Management reviewed the results
of its assessment with the Audit Committee of our Board of Directors.

Based on this assessment, management determined that, as of December 31,
2004, the Company maintained effective internal control over financial
reporting.

Management's assessment of the effectiveness of the Company's internal
control over financial reporting as of December 31, 2004, has been audited by
Deloitte & Touche, our independent registered public accounting firm, as stated
in their report which is included herein.

The Company completed two material transactions in 2004 that were excluded
from management's report on internal controls over financial reporting. Remote
Sensing System (RSS) was acquired on August 13, 2004 and WEDECO AG Water
Technology (WEDECO) was acquired on January 19, 2004. The combined financial
statements of RSS and WEDECO reflect total assets and revenues which constitute
17.7% and 4.8%, respectively, of the related consolidated financial statement
accounts as of and for the year ended December 31, 2004.

INHERENT LIMITATIONS ON EFFECTIVENESS OF CONTROLS

The Company's management, including the CEO and the CFO, does not expect
that our disclosure controls and procedures, because of

47

inherent limitations, will prevent or detect all error and all fraud. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may be inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There have been no changes in our internal control over financial reporting
during our fourth fiscal quarter that have materially affected, or are
reasonably likely to materially affect our internal control over financial
reporting.

ITEM 9B. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited management's assessment, included in the accompanying
Management Report on Internal Control Over Financial Reporting, that ITT
Industries, Inc. and subsidiaries (the "Company") maintained effective internal
control over financial reporting as of December 31, 2004, based on the criteria
established in Internal Control -- Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. As described in the
Management Report on Internal Control Over Financial Reporting, management
excluded from their assessment the internal control over financial reporting at
WEDECO AG Water Technology ("WEDECO") and Remote Sensing Systems ("RSS"), which
were acquired on January 19, 2004 and August 13, 2004 respectively, and whose
combined financial statements reflect total assets and revenues constituting
17.7 percent and 4.8 percent, respectively, of the related consolidated
financial statement amounts as of and for the year ended December 31, 2004.
Accordingly, our audit did not include the internal control over financial
reporting at WEDECO and RSS. The Company's management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.

We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.

A company's internal control over financial reporting is a process designed
by, or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in
48

conditions, or that the degree of compliance with the policies or procedures may
deteriorate.

In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on the criteria established in
Internal Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2004, based on the criteria established in Internal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet of the Company as of December 31, 2004, and the related consolidated
statements of income, comprehensive income, cash flows, and changes in
shareholders' equity for the year then ended and the financial statement
schedule listed on page S-1, and our report dated March 11, 2005 expressed an
unqualified opinion on those financial statements and financial statement
schedule.

Stamford, Connecticut
March 11, 2005

ITEM 9C. OTHER INFORMATION

Our Defense & Electronics Services sales to non-U.S. customers also makes
us subject to the export control regulations of the U.S. Department of State and
the Department of Commerce. If these regulations are violated, it could result
in monetary penalties and denial of export privileges. We are currently unaware
of any violations of export control regulations which are reasonably likely to
have a material adverse effect on our business or our results of operations,
cash flows or financial position.

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 2005 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 at
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 SEC's rules and regulations, a copy of the
code was filed as an exhibit to the 2002 Form 10-K and has been posted on our
website and a copy of the code is also 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.

Pursuant to New York Stock Exchange ("NYSE") Listing Company Manual Section
303A.12(a), the Company submitted a Section 12(a) CEO Certification to the NYSE
in 2004. The Company also filed with the SEC, as exhibits to the Company's
current Form 10-K, the certifications required under Section 302 of the
Sarbanes-Oxley Act for its Chief Executive Officer and Chief Financial Officer.
49

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".

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

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

1. See Index to Consolidated Financial Statements appearing on page
F-1 for a list of the financial statements 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.

50

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The 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, 2004 and
2003, and the related consolidated statements of income, comprehensive income,
cash flows and changes in shareholders' equity for each of the three years in
the period ended December 31, 2004. Our audits also included the financial
statement schedule listed on page S-1. These financial statements and the
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statements and the
financial statement schedule based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
2004 and 2003, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2004, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
Company's internal control over financial reporting as of December 31, 2004,
based on the criteria established in Internal Control -- Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 11, 2005 expressed an unqualified opinion on
management's assessment of the effectiveness of the Company's internal control
over financial reporting and an unqualified opinion on the effectiveness of the
Company's internal control over financial reporting.

Stamford, Connecticut
March 11, 2005

F-2

ITT INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENTS

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

F-3

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-4

ITT INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

F-5

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-6

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-7

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 75.4%, 78.5% and
78.2% of total RD&E costs were expended pursuant to customer contracts for each
of the three years ended December 31, 2004, 2003 and 2002, 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 10.7% and 11.7% of total 2004 and 2003 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 were recorded in restructuring and asset
impairments. See Note 4, "Restructuring and

F-8

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

PLANT, PROPERTY AND EQUIPMENT:

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

GOODWILL AND OTHER INTANGIBLE ASSETS:

In accordance with Statement of Financial Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), goodwill, the
excess of cost over the fair value of net assets acquired, and indefinite-lived
intangible assets are tested for impairment on an annual basis, or more
frequently if circumstances warrant.

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 (losses)/gains from foreign currency
transactions are reported currently in selling, general and administrative
expenses and were $(0.9), $4.1 and $0.2 in 2004, 2003, and 2002, 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 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

F-9

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, 2004, the Company has one stock-based employee compensation
plan that is issuing new options and restricted shares. The Company also has one
stock-based employee compensation plan and two stock-based non-employee
director's compensation plans that have options and restricted shares
outstanding; however no new awards will be granted under these plans. 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 2004, 2003 and 2002: dividend yield of 1.39%, 1.57%
and 1.65%, respectively; expected volatility of 25.77%, 28.72% and 28.30%,
respectively; expected life of six years; and risk-free interest rates of 3.71%,
3.37% and 4.78%, 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, 2004, 2003 and 2002 were $1.6, $0.7, and
$0.6, respectively.

F-10

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123 (revised 2004) "Share-Based Payment" ("SFAS 123R") which is a
revision of SFAS No. 123, "Accounting for Stock-Based Compensation." This
statement eliminates the option of using the intrinsic value method of
accounting for employee stock options (historically utilized by the Company),
which generally resulted in the recognition of no compensation cost. The
provisions of the SFAS No. 123R require the recognition of employee services
received in exchange for awards of equity instruments based on the grant-date
fair value of the awards as determined by option pricing models. The calculated
compensation cost is recognized over the period that the employee is required to
provide services per the conditions of the award. SFAS No. 123R is effective for
the Company July 1, 2005. The adoption of this statement will not have a
material impact on the Company's financial statements.

In December 2003, the FASB issued SFAS No. 132 (revised December 2003)
"Employers' Disclosures About Pensions and Other Post Retirement Benefits"
("SFAS No. 132"). This revised pronouncement retains the disclosure requirements
of SFAS No. 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.

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.

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 state-

F-11

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ments 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 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 statement 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 statement did not have a material effect on the
Company's financial statements.

In November 2004, the FASB issued SFAS No. 151, "Inventory Costs -- an
amendment of ARB No. 43,Chapter 4"("SFAS No. 151") This statement clarifies the
criteria of "abnormal amounts" of freight, handling costs, and spoilage that are
required to be expensed as current period charges rather than deferred in
inventory. In addition, this statement requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. SFAS No. 151 is effective for the Company July 1,
2005. The Company is currently in the process of determining the impact of this
statement 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 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.

F-12

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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
FIN 46; however, it had no impact on the Company'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. Subsequently, FSP
No. 106-2 was issued, which amends FSP No. 106-1 and discusses the recognition
of the effects for the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 (the "Medicare Modernization 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 Company adopted this
pronouncement effective July 1, 2004, but was unable to conclude whether
benefits of its plans are actuarially equivalent based on the proposed
regulations released in August 2004. Currently, the Company is analyzing the
effect of the Medicare Modernization Act on the Company's plans based on the
final regulations issued at the end of January 2005 and has not taken any action
at this time to reflect the Medicare changes. In addition, it was assumed that
the adoption of this pronouncement did not affect demographic factors used to
determine plan assets and obligations at December 31, 2004, the Company's
measurement date. See Note 19, "Employee Benefit Plans," for discussion of
postretirement benefits.

In December 2004, the FASB issued FSP 109-1, "Application of FASB Statement
No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified
Production Activities Provided by the American Jobs Creation Act of 2004 ("FSP
109-1")." The American Jobs Creation Act of 2004 (the "AJCA") provides for a tax
relief for U.S. domestic manufacturers. FSP 109-1 states that tax benefit should
be recorded in the year in which it can be taken in the Company's tax return
rather than reflecting a deferred tax asset in the period the AJCA was enacted.
FSP 109-1 was effective upon issuance. Adoption of FSP 109-1 did not have a
material effect on the Company's financial statements.

In December 2004, the FASB issued FSP 109-2, "Accounting Disclosures
Guidance for the Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004 ("FSP 109-2"). The Foreign Earnings Repatriation
Provision Within the Act (the "Provision") provides a special limited-time
dividends received deduction on the repatriation of certain foreign earnings to
a U.S. taxpayer. FSP 109-2 states that a company should recognize the income tax
effect related to the Provision when it decides on a plan for reinvestment or
repatriation of foreign earnings. At this time, the Company does not expect to
elect to apply this provision of the AJCA.

NOTE 3

ACQUISITIONS

2004 ACQUISITIONS

On August 13, 2004, the Company purchased all of the Remote Sensing Systems
business ("RSS") for $736.9 in cash. The RSS business is a leading supplier of
high resolution satellite imaging systems and information services. Management
believes that the acquisition of RSS will enhance the Company's competitive
position in the space payload and service product offering industry and create a
full spectrum provider with the latest visible and infrared satellite imaging
technology in the remote sensing market.

The excess of the purchase price of RSS over the fair value of net assets
acquired of $597.6 was recorded as goodwill and is deductible for tax purposes.
The entire goodwill balance is reflected in the Defense Electronics & Services
segment.

The Company has preliminarily assigned values to the assets and liabilities
of RSS; however, the allocation is subject to further refinement.

The following table summarizes the fair value of assets acquired and
liabilities assumed at the date of acquisition. The purchase price
F-13

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

allocations were based on preliminary data and changes are expected as
evaluations of items, such as employee benefit obligations, are finalized and
additional data becomes available.

The $124.9 of intangible assets is comprised of $120.0 of customer
relationships (amortized over 16 years), $3.4 of maintenance contracts
(amortized over 15 years) and $1.5 of product software (amortized over 12
years).

The Company also spent $273.1 on additional 2004 acquisitions that it does
not believe are material individually or in the aggregrate to its results of
operations or financial condition. These acquisitions include:

- - WEDECO AG Water Technology ("WEDECO"), the world's largest manufacturer of UV
disinfection and ozone oxidation systems, which are alternatives to chlorine
treatment.

- - Allen Osborne Associates, Inc. ("AOA"), a leader in the development of global
positioning system receivers for both portable and fixed sites.

- - Shanghai Hengtong Purified Water Development Co. Ltd. and Shanghai Hengtong
Water Treatment Engineering Co. Ltd. ("Hengtong"), a Shanghai-based producer
of reverse-osmosis, membrane and other water treatment systems for the power,
pharmaceutical, chemical and manufacturing markets in China.
- - Cleghorn Waring and Co. (Pumps) Limited, a distributor of pumps and marine
products.
The excess of the purchase price over the fair value of net assets acquired
in these transactions of $247.0 was recorded as goodwill, of which $240.1, $3.5
and $3.4 are reflected in the Fluid Technology, Defense Electronics & Services
and Motion & Flow Control segments, respectively. Additionally, the purchase
price allocations for the 2004 acquisitions were based on preliminary data and
changes are expected as evaluations are finalized and additional information
becomes available.

Intangibles assets relating to the acquisitions of WEDECO and AOA, totaled
$56.2. This amount includes $25.4 of proprietary technology and other (amortized
over 15 years), $18.8 of customer relationships (amortized over 10 years), and
$12.0 of indefinite-lived tradenames.

The Company also finalized purchase price allocations related to the 2003
acquisitions, which resulted in an increase in goodwill of $1.5.

PRO FORMA RESULTS

The following unaudited pro forma financial information presents the
combined results of operations of the Company and RSS as if RSS was acquired on
January 1, 2004 and 2003. The pro forma results presented below for 2004 combine
the results of the Company for 2004 and the historical results of RSS from
January 1, 2004 to August 12, 2004, respectively. The pro forma results
presented for the 2003 combine the results of the Company for 2003 and the
historical results of RSS for the comparable period. The unaudited pro forma
financial information is not intended to represent or be indicative of the
Company's consolidated results of operations that would have been reported had
RSS been acquired as of the beginning of the periods presented and should not be
taken as indicative of the Company's future consolidated results of operations.
Pro forma adjustments are tax effected at the Company's effective tax rate in
each of the periods presented.

F-14

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2003 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. 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, in 2003, the Company finalized purchase price allocations
related to the 2002 acquisitions, which resulted in a decrease in goodwill of
$5.1.

2002 ACQUISITIONS

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

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

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

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

The Company recognized $117.2 of goodwill from these acquisitions, of which
approximately $69.0 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.

NOTE 4

RESTRUCTURING AND ASSET IMPAIRMENT CHARGES

2004 RESTRUCTURING ACTIVITIES

During the fourth quarter of 2004, the Company recognized a $12.4 charge,
primarily for the planned severance of 727 employees. The actions by segment are
as follows:

- - The Fluid Technology segment recorded $9.3 for the planned termination of 80
employees, including 20 factory workers and 60 office workers. Other costs
totaling $0.3 were also recognized during the quarter.

- - The Motion & Flow Control segment recognized $1.8 for the planned termination
of 43 employees, including 14 factory workers, 25 office workers and four
management employees. The segment also recorded $0.1 for outplacement.

- - The Electronic Components segment recorded $0.9 for the planned termination of
604 employees. The terminations include 17 office workers and 587 factory
workers.

In addition to the 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 of
2003 and $0.1 of outplacement related to actions announced in 2002. Electronic
Compo-

F-15

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

nents recognized an additional $0.5 of severance related to actions announced
during the first quarter of 2004 and an additional $0.1 of moving costs related
to actions announced in the third quarter of 2004.

During the third quarter of 2004, the Company recognized a $5.5 charge,
primarily for the planned severance of 71 employees and movement of production.
The actions by segment are as follows:

- - The Fluid Technology segment recorded $3.3 for the planned termination of 36
employees, including nine factory workers, 23 office workers and four
management employees. Other costs totaling $0.2 were also recognized during
the quarter.

- - The Motion & Flow Control segment recognized $0.5 for the planned termination
of 30 employees, including 23 factory workers and seven office workers. The
segment also recorded $0.6 for relocation and moving costs.

- - The Electronic Components segment recorded $0.2 for the planned termination of
five employees. The terminations include four office workers and one
management employee. The segment also recorded a $0.7 charge primarily for
costs associated with moving two product lines from Weinstadt, Germany to
Shenzhen, China and one product line from Santa Ana, CA to Nogales, Mexico.

In addition to the restructuring actions announced during the third
quarter, the Motion & Flow Control segment recognized $0.1 of severance and
employee benefit costs related to actions announced during the first quarter of
2003.

During the second quarter of 2004, the Company recognized a $13.6 charge,
primarily for the planned severance of 418 employees and the recognition of
lease cancellation fees. The actions by segment are as follows:

- - The Electronic Components segment recorded $4.5 of the charge for the
recognition of lease cancellation costs. Severance of $0.9 was recorded for
the planned reduction of 328 employees. The terminations include 273 factory
workers, 52 office workers and three management employees. The segment also
recorded a $1.1 charge for the disposal of machinery and equipment.

- - The Fluid Technology segment recorded $2.4 for the planned termination of 45
employees, including eight factory workers and 37 office workers. Lease
commitments totaling $0.7 were recognized related to the closure of two
facilities (one in Sweden and one in Florida). Asset write-offs and other
costs totaling $0.2 and $0.1, respectively, were also recognized during the
quarter.

- - The Motion & Flow Control segment recognized $2.1 for the planned termination
of 44 employees, including seven factory workers, 32 office workers and five
management employees.

- - Corporate headquarters recorded $1.6 for the severance of one management
employee.

In addition to the restructuring actions announced during the second
quarter, the Motion & Flow Control segment recognized $0.3 of severance and
employee benefit costs related to actions announced during the first quarter of
2003 and the Electronic Components segment recognized $0.3 of severance and
employee benefit costs related to actions announced during the first quarter of
2004 and $0.1 of outplacement related to actions announced in 2003.

During the first quarter of 2004, the Company recognized a $5.3 charge,
primarily for the planned severance of 103 employees. The actions by segment are
as follows:

- - The Fluid Technology segment recorded $2.7 for the planned termination of 50
employees, including 15 factory workers and 35 office workers. Asset
write-offs and other costs totaling $0.4 and $0.1, respectively, were also
recognized during the quarter.

- - The Electronic Components segment recorded $1.7 of the charge primarily for
the planned reduction of 35 employees, including 23 factory workers, 11 office
workers and one management employee.

- - The Motion & Flow Control segment recognized $0.2 for the planned termination
of 16 employees, including three factory workers and 13 office workers.

F-16

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

- - Corporate headquarters recorded $0.2 for the planned severance of one office
worker and one management employee.

2003 RESTRUCTURING ACTIVITIES

During the fourth quarter of 2003 the Company announced actions to reduce
operating costs primarily through the reduction of headcount. The new $15.3
restructuring charge primarily reflects the planned severance of 296 employees.
The actions by segment are as follows:

- - The Electronic Components segment recorded $1.4 of the charge for the planned
termination of 127 employees, including 113 factory workers, ten office
workers and four management employees.

- - The Fluid Technology segment recognized $12.4 of the charge for the planned
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
planned 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 $2.6
restructuring charge primarily reflects the planned severance of 71 employees.
The actions by segment are as follows:

- - The Electronic Components segment recorded $1.2 of the charge for the planned
termination of 39 employees, including 15 factory workers and 24 office
workers. The segment also recorded a $0.1 charge 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 office workers.

In addition to the 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. Restructuring actions
totaling $4.4 were announced during the period. The charge primarily reflected
the planned severance of 143 employees and the cancellation of an operating
lease. The actions by segment are as follows:

- - The Electronic Components segment comprises $2.4 of the charge and the actions
taken at this segment include the planned termination of five management
employees, 19 factory workers and 67 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 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 an $8.9 restructuring
charge primarily for the planned severance of 461 persons. Severance of $8.2
represents the majority

F-17

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of the charge. The actions by segment are as follows:

- - The Electronic Components segment recorded $6.7 of the charge for the planned
termination of 222 persons, comprised of 98 office workers, 116 factory
workers and eight 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.

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

On December 14, 2001, the Company announced a restructuring program to
reduce structural costs and improve profitability

F-18

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

whereby the Company recorded a charge of $82.9 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 3,386 persons and other asset
impairments. The cash portion of the charge of $60.6 primarily relates to
severance and lease termination costs. The non-cash portion of the charge of
$22.3 primarily relates to machinery and equipment that became impaired as a
result of the announced plans.

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

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

During the third and fourth quarters of 2004, a total of $0.2 of
restructuring accruals related to 2004 restructuring actions were reversed into
income.

During the second quarter of 2004, $0.1 and $0.2 of restructuring accruals
related to 2003 and 2002 restructuring actions, respectively, were reversed into
income. The reversals related to the 2003 actions primarily reflect lower than
anticipated severance costs on completed actions at the Electronic Components
segment. The reversals related to the 2002 actions represent lower than
anticipated severance costs on completed actions at the Fluid Technology
segment.

F-19

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

During the first quarter of 2004, $0.2 and $0.4 of restructuring accruals
related to 2003 and 2001 restructuring actions, respectively, were reversed into
income. The reversals related to the 2003 actions primarily reflect lower than
anticipated severance costs on completed actions due to favorable employee
attrition at the Electronic Components segment. The reversals associated with
the 2001 actions represent lower than anticipated closed facility costs.

During 2003, $3.4, $0.1 and $0.9 of restructuring accruals related to 2003,
2002 and 2001 programs, respectively, were reversed into income as a result of
quarterly reviews of the Company's remaining restructuring actions. The
reversals primarily reflected 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.

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, 2003, the accrual balance for restructuring activities was
$20.1. Cash payments of $33.6 and additional cash charges of $37.1 were recorded
in 2004. Also, management reviewed the Company's remaining restructuring actions
and determined that certain 2004, 2003, 2002 and 2001 actions totaling $1.1
would be completed for less than planned. Accordingly, restructuring accruals
totaling $1.1 were reversed into income during 2004. The accrual balance
increased by $0.2 due to the effect of foreign currency translation. The accrual
balance at December 31, 2004 is $22.7, which includes $16.6 for severance and
$6.1 for facility carrying costs and other.

As of December 31, 2003, remaining actions under restructuring activities
announced in 2003, 2002 and 2001 were to close one facility and reduce headcount
by 208. During 2004, the Company closed three facilities, reduced headcount by
833 persons related to all plans and experienced employee attrition, leaving a
balance of 685 planned reductions. Actions announced during the fourth quarter
of 2004 will be substantially completed by the second quarter of 2005. Actions
announced during the second quarter of 2004 will be substantially completed by
the end of the first quarter of 2005. Actions announced during the first and
third quarters of 2004 are substantially completed. Actions announced during
2003 were substantially completed in 2004. All of the actions contemplated under
the 2002 and 2001 plans were substantially completed in 2003.

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.

At December 31, 2004, the Company had automotive discontinued operations
accruals of $188.7 that are primarily related to taxes ($154.1), product recalls
($7.8), environmental obligations ($14.2) and employee benefits
F-20

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

($12.6). In 2004, the Company made immaterial payments of its automotive
discontinued operations liabilities. The Company expects that it will settle
$154.1 of tax obligations in 2005.

NS&S -- DISCONTINUED OPERATIONS
In the 4th quarter of 2004, the Company decided to sell its Network Systems
& Services (NS&S) business. NS&S produces robust structured cabling and
intelligent high-speed network solutions. After a comprehensive review of the
Company's expected future profitability, and market participation the Company
believed that NS&S would provide greater value for an organization whose primary
focus is the networking market.

Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Longed-Lived Assets," ("SFAS 144") requires the
Company to classify the assets and liabilities of the disposal group as held for
sale and the results of operations of the component classified as discontinued
operations.

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 $1,103.9, $792.2 and
$627.8 of total service revenues for the years ended December 31, 2004, 2003 and
2002, respectively, and $760.1, $525.0 and $374.0 of total costs of service
revenues, respectively, during the same period. The Fluid Technology segment
comprises the majority of the remaining balances of service revenues and costs
of service revenues.

NOTE 7
INCOME TAXES

Income tax data from continuing operations is as follows:

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

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

F-21

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 $669.6,
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, 2004, the Company had approximately $52.1 of foreign tax
credit carryforwards. The credit carryforwards will expire as follows: $33.9 on
December 31, 2010, $12.1 on December 31, 2011 and $6.1 on December 31, 2013. The
Company had approximately $2.0 of general business credit carryforwards which
will expire on December 31, 2020 and $2.9 which will expire on December 31,
2021. The Company had net operating losses from some U.S. subsidiaries in the
amount of $66.8, which will begin to expire on December 31, 2019. The Company
had net operating losses from some foreign subsidiaries in the amount of $38.2,
which have no expiration.

As of December 31, 2004, a valuation allowance of approximately $43.9
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
2004, the valuation allowance increased by $3.2.

Shareholders' equity at December 31, 2004 and 2003 reflects tax benefits
related to the stock options exercised in 2004 and 2003 of approximately $26.4
and $18.1, respectively.

The Company expects to settle $154.1 in tax obligations that relate to the
reorganization and disposition of its automotive businesses in 1998, as part of
the current IRS examination of the Company's federal consolidated tax returns
for the years ended December 31, 1998 through December 31, 2000. As of December
31, 2004, the Company believes the accrual for income taxes payable is
sufficient to cover potential liabilities arising from these examinations.

In addition, the Company has contingent tax obligations in other
jurisdictions related to the 1998 dispositions and reorganizations of
approximately $85.0. The Company has determined that payment of this amount is
unlikely.

On October 22, 2004, the AJCA was signed into law and includes a deduction
of 85% of certain foreign earnings that are repatriated, as defined in the AJCA.
Under the AJCA, the Company may elect to apply this provision to qualifying
earnings repatriations occurring in its 2004 or 2005 taxable year. At this time,
the Company has made a determination that it does not expect to elect to apply
the provision to any distributions occurring in either of these taxable years.

NOTE 8
EARNINGS PER SHARE

A reconciliation of the data used in the calculation of basic and diluted
earnings per

F-22

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

share computations for income from continuing operations is as follows:

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

(1) Options to purchase 127,500 shares of common stock at an average price of
$83.02 per share were outstanding at December 31, 2004 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 2014.

(2) 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.
(3) 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.

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, 2004 and 2003, other current assets consist primarily of
advance payments on contracts, prepaid expenses and capitalized tooling costs.

NOTE 12
PLANT, PROPERTY AND EQUIPMENT, NET

Plant, property and equipment consist of the following:

NOTE 13
GOODWILL AND OTHER INTANGIBLE ASSETS

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. 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 Com-

F-23

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

pany 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 tests in the first quarters of 2004 and 2003 (as of the
beginning of the year) and determined that no impairment exists.

Changes in the carrying amount of goodwill for the years ended December 31,
2004 and 2003 by operating segment are as follows:

Information regarding the Company's other intangible assets follows:

During the first quarter of 2004, the Company completed the acquisition of
WEDECO. The acquisition of WEDECO resulted in the recognition of $238.3 of
goodwill, $12.0 of intangibles for tradenames, $21.4 of proprietary technology,
$18.8 of customer relationships and $2.7 of patents and other. During the third
quarter of 2004, the Company completed the acquisition of RSS. This acquisition
preliminarily resulted in the recognition of $597.6 of goodwill, $120.0 of
intangible assets related to customer relationships and $4.9 of other intangible
assets.

Amortization expense related to intangible assets for the years ended
December 31, 2004, 2003 and 2002 was $10.4, $2.7 and $0.9, respectively.

Estimated amortization expense for each of the five succeeding years is as
follows:

Customer relationships, proprietary technology and patents and other are
amortized over weighted average lives of 15 years, 15 years and 25 years,
respectively.

NOTE 14
OTHER ASSETS

At December 31, 2004 and 2003, 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 $17.1 and $29.4 at December 31, 2004 and 2003,
respectively.

F-24

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Investments in unconsolidated companies consist of the following:

In December 2004, the Company sold its interest in Mesh Networks, a
technology company in the wireless telecommunications market for $31.2,
including $24.9 received in cash and $6.3 placed in escrow.
During 2003 the Company sold substantially all of its interest in
DigitalGlobe Inc., a developmental stage company that launched a satellite
capable of collecting high-resolution digital imagery, for $43.5.

The Company recorded sales to unconsolidated affiliates during 2004, 2003
and 2002 totaling $24.1, $21.0 and $24.2, respectively. In addition, the Company
provided services to unconsolidated affiliate companies in 2004, 2003 and 2002
and received $0.6, $0.5 and $0.5, 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
$152.

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 $82.7, $66.6 and $60.1 for 2004,
2003 and 2002, respectively. Future minimum operating lease payments under
long-term operating leases as of December 31, 2004 are shown below.

2005.......................................... $ 88.7
2006.......................................... 72.6
2007.......................................... 62.0
2008.......................................... 47.5
2009.......................................... 40.3
2010 and thereafter........................... 194.0
------
Total minimum lease payments.................. $505.1
======

NOTE 16
DEBT

Debt consists of the following:

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

(1) The interest rate for the note/debenture was 2.27% and 1.02% at December 31,
2004 and 2003, respectively.

F-25

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(2) The weighted average interest rate was 4.72% and 5.12% at December 31, 2004
and 2003, respectively.

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

The weighted average interest rate for short-term borrowings was 2.31% and
1.53% at December 31, 2004 and 2003, 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, 2004, the fair value of
long-term debt was $555.7, compared to the fair value of $484.0 at December 31,
2003. The year-over-year increase in fair value primarily reflects the impact of
the increase in long-term debt levels related to 2004 acquisitions.

In March 2004, the Company entered into a revolving credit agreement which
expires in March 2005, with five domestic and foreign banks providing aggregate
commitments of $400.0. 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 for total aggregate
commitments of $1.4 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, 2004, the Company's coverage ratio was
well in excess of the minimum requirement. Additionally, borrowing through
commercial paper under the revolving credit agreement may not exceed $1.4
billion in the aggregate outstanding at any time. The commitment fee on the
revolving credit agreements is .125% of the total commitment, based on the
Company's current debt ratings. The revolving credit agreements serve as backup
for the commercial paper program and are not otherwise restricted.

In December 2004, the Company recorded a $120.0 obligation associated with
a ten year agreement involving the sale and the subsequent leasing back of
certain properties. Under the terms of the agreement, the Company is required to
make annual payments of principal and interest. At the end of the agreement, the
Company has the option to repurchase the applicable properties for a nominal
fee. This transaction is reflected as debt.

The book value of assets pledged as collateral amounted to $67.6 as of
December 31, 2004.

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, 2004, 2003 and 2002 consist of the following:

NOTE 18

FINANCIAL INSTRUMENTS

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

The Company's credit risk associated with these derivative contracts is
generally limited to the unrealized gain on those contracts with a positive fair
market value, reduced by the effects of master netting agreements, should any
counterparty fail to perform as contracted. The counterparties to the Company's
derivative contracts consist of a number of major, interna-

F-26

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

tional 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, 2004 and 2003, the Company had interest rate swaps
outstanding with notional values totaling $335.8 in both periods. The carrying
value of the swaps at December 31, 2004 and 2003 were $84.9 and $81.6,
respectively, including $3.3 and $4.0 of accrued interest, respectively. The
swaps were designed to manage the interest rate exposure associated with certain
long-term debt. The swaps mature at various dates through 2025 and effectively
convert much of the long-term debt, mentioned in Note 16 "Debt" 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 2.64% and 7.40% at December 31, 2004.
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.

At December 31, 2004 the Company had one foreign currency cash flow hedge
outstanding that had no change in value during 2004. At December 31, 2003 the
Company had no foreign currency cash flow hedges outstanding. There were no
changes in the forecasted transactions during 2004 regarding their probability
of occurring that would require amounts to be reclassified to earnings.

The notional amount of the foreign currency forward contract utilized to
hedge cash flow exposures was $0.1 at December 31, 2004. The applicable fair
value of this contract at December 31, 2004 was approximately zero. There were
no ineffective portions of changes in fair values of cash flow hedge positions
reported in earnings for the twelve months ended December 31, 2004, 2003 and
2002, and no amounts were excluded from the measure of effectiveness reported in
earnings during these periods.

At December 31, 2004 and 2003, the Company had foreign currency forward
contracts with notional amounts of $93.3 and $81.1, respectively, to hedge the
value of recognized assets, liabilities and firm commitments. The fair values of
the contracts were $(0.4) and $0.2 at December 31, 2004 and 2003, respectively.
The ineffective portion of changes in fair values of such hedge positions
reported in operating income during 2004, 2003 and 2002 amounted to $(0.4),
$(0.3) and $(0.1), respectively. There were no amounts excluded from the measure
of effectiveness.

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

NOTE 19
EMPLOYEE BENEFIT PLANS

PENSION PLANS:

The Company sponsors numerous defined benefit pension plans. The Company
funds employee pension benefits, except in some countries outside the U.S. where
funding is not required. In addition to Company sponsored

F-27

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 $1.2, $0.7 and $0.4 for the years ended 2004, 2003 and
2002, 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 $31.2, $27.2 and
$25.3 for the years ended 2004, 2003 and 2002, 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 2004 and 2003 were as follows:

F-28

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Amounts recognized in the Consolidated Balance Sheets consist of:

In 2004, the Company recorded a total after tax increase of $81.8 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:

ACCUMULATED BENEFIT OBLIGATION:

The accumulated benefit obligation for all defined benefit plans was
$4,586.3 and $4,104.3 at December 31, 2004 and 2003, 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:

F-29

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 in cash and cash equivalents. The assets of the domestic pension U.S. Master
Trust which covers all of the domestic pension plans and the various welfare
benefit plan trusts had 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 U.S. Master Trust approximates
1% in 2004 and 2003.

CONTRIBUTIONS:

The Company currently anticipates making contributions to its pension plans
in a range of $120.0 to $140.0, during 2005, of which $102.4 was made in the
first quarter of 2005, to the U.S. Master Trust.

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 8.0% for 2004. The assumed rate is 10.0% for
2005, decreasing ratably to 5.0% in 2010. Increasing the health care trend rates
by one percent per year would have the effect of increasing the benefit
obligation by $39.9 and the aggregate service and interest cost components by
$3.1. A decrease of one percent in the health care trend rate would reduce the
benefit obligation by $40.4 and the aggregate service and interest cost
components by $2.6. 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 accounting pronouncements, the review of various indexes, discussion
with our 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 Modernization Act was signed into law.
The Medicare Modernization 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 Medicare Modernization 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 Medicare
Modernization Act as well as the Medicare

F-30

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Modernization 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
Medicare Modernization Act are not reflected in the accumulated postretirement
benefit obligation as of December 31, 2004, or in the 2004 net periodic
postretirement benefit cost. The Company is currently evaluating the provisions
of the Medicare Modernization 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.

OTHER MATTERS:

As a result of the acquisition of RSS in August, 2004, the Company assumed
$260.0 in liabilities related to the pension benefits accrued by the acquired
employees under the Kodak Retirement Income Plan. These benefits were merged
into and became part of the ITT Industries domestic salaried pension plan. Under
the terms of the purchase and sale agreement, the Kodak plan made a preliminary
transfer of assets to the U.S. Master Trust, effective as of the closing date,
in the amount of $279.5 subject to adjustment in order to comply with IRS
regulations relative to the transfer of assets from one pension plan to another.
The Company and its actuaries believe that the ultimate transfer amount allowed
under such regulations will be approximately $235.0. Accordingly, the Company
has reflected a payable of $44.5 in the accounts of the pension plan and the
amounts shown in the table of assets above have been presented net of the amount
that is expected to be refunded to the Kodak trust fund.

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, 2004 and 2003, 52,853,895 and 52,876,689 shares of
Common Stock were held in treasury, respectively.

The Company included $35.6, $93.1 and $100.0 of Capital Surplus in Retained
Earnings at December 31, 2004, 2003 and 2002, 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
F-31

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

A summary of the status of the Company's stock option incentive plans as of
December 31, 2004, 2003 and 2002, 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, 2004 (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, 2004, 4,105,057 net
shares were available for future grants. During 2004 and 2003, the Company
awarded 6,194 and 9,489 restricted shares with five-year restriction periods
respectively in payment of the annual retainer for non-employee directors.
During 2004, the Company awarded 13,100 restricted shares to employees with a
weighted average restriction period of 2.4 years.

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

F-32

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 2004 or 2003, and 10,000
restricted shares were awarded in 2002, under this plan.

Pursuant to the ITT Industries 1996 Restricted Stock Plan for Non-Employee
Directors, the Company did not grant awards in 2004 and 2003. In 2002, 6,098
restricted shares with five-year restriction periods were awarded in payment of
the annual retainer for such directors. Restrictions may lapse earlier depending
on certain circumstances.

NOTE 21
COMMITMENTS AND CONTINGENCIES

The Company and its subsidiaries are from time to time involved in legal
proceedings that are incidental to the operation of their businesses. Some of
these proceedings allege damages against the Company relating to environmental
liabilities, 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, 2004, the Company is responsible, or is alleged
to be responsible, for approximately 80 environmental investigation and
remediation sites in various countries. In many of these proceedings, the
Company's liability is considered de minimis. At December 31, 2004, the Company
calculated a best estimate of $98.0, which approximates its accrual, related to
the cleanup of soil and ground water. The low range estimate for its
environmental liabilities is $72.9 and the high range estimate for those
liabilities is $160.8. 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.

F-33

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 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, 2004, the
Company's accrual for this liability was $10.4 representing its best estimate;
its low estimate for the liability is $7.0 and its high estimate is $15.9.

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 $5.5 and $19.3. The Company
has accrued $8.1 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 $5.7 and $13.5. It has an accrual for this matter of $9.2 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 2005. 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.

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 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
2004, ITT and Goulds resolved in excess of 4,200 claims through settlement or
dismissal. The average amount of settlement per plaintiff has been nominal and
substantially
F-34

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 & Casualty Company ("ACE") 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. The New York action has been stayed in favor of the California suit.
ITT and ACE have successfully resolved the matter and the Company is working
with other parties in the suit to resolve the matter as to those insurers. 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 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. Numerous motions are currently pending before the
Court. A hearing on class certification is expected in late 2005. On October 5,
2004, the Company filed an action, ITT Industries, Inc. et al. v. Fireman's Fund
Insurance Company et al., Superior Court, County of Los Angeles, C.A. No. B.C.
322546, against various insurers who issued historic aircraft products coverage
to the Company seeking a declaration that each is liable for the costs of
defense of the El Paso matter. The parties have an agreement in principle to
resolve this matter whereby the Company will continue to receive the cost of
defense of this matter from the insurers. Management believes that the El Paso
suit 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 is involved in an arbitration with Rayonier, Inc., a former
subsidiary of the Company's predecessor ITT Corporation. The arbitration
involves a claim by Rayonier stemming from the 1994 Distribution Agreement for
the spinoff of Rayonier by ITT Corporation. Rayonier seeks a portion of the
proceeds from certain settlements in connection with the Company's environmental
insurance recovery litiga-
F-35

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

tion. The parties completed the arbitration hearings in late 2004. A decision is
expected in the spring of 2005. 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.

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, 2004 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, 2004 the Company has an accrual of $14.2 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 nine 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 has been released from its
obligation to perform under both of these guarantees in the third quarter of
2004. The third guarantee 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, 2004, the Company has an accrual related to the expansion of a
bridge in the amount of $10.0.

F-36

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, 2004, the Company does not believe that a loss contingency is
probable and therefore does not have an accrual recorded in its financial
statements.

The Company has a number of individually immaterial guarantees outstanding
at December 31, 2004, that may be affected by various conditions and external
forces, some of which could require that payments be made under such guarantees.
The Company does not believe these payments 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.
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, 2004,
the Company has a product warranty accrual in the amount of $40.3.

PRODUCT WARRANTY LIABILITIES

F-37

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 23

BUSINESS SEGMENT INFORMATION

F-38

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 $2,098.2, $1,454.7 and $1,105.3 for 2004, 2003 and 2002,
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 and pumping system businesses,
including brands such as Flygt(R), Goulds(R), Bell & Gossett(R), A-C Pump(R),
Marlow(R), Flowtronex(R), Lowara(R), Vogel(R), and Richter(R) 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), Hoffman
Specialty(TM) and ITT Standard(R) in addition to those mentioned above.
Additionally, the Fluid Technology segment produces wastewater aeration and
diffuser systems under the brands Sanitaire(R) and ABJ(R), ultraviolet and ozone
water disinfection systems under the WEDECO(R) brand and membrane filtration and
bioreactor systems under the Aquious(TM) brand for the water and wastewater
treatment markets. This segment comprises approximately 38% of the Company's
sales and revenues and approximately 40% of its segment operating income for
2004.

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 46% 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 87%, 81% and 73%
of 2004, 2003 and 2002 Defense Electronics & Services sales and revenues,
respectively, were to the U.S. government. The Defense Electronics & Services
segment comprises about 36% of the Company's sales and revenues and 35% of its
segment operating income in 2004.

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), system
components for the whirlpool baths, hot

F-39

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

tub and spa markets under the HydroAir(R) brand, fluid handling materials such
as HydroLogic(TM) brand tubing systems and Posi-Lock(R) and HydroLock(R) brand
connectors for various automotive and industrial markets, specialty shock
absorbers under the brand KONI(R) and brake components for the transportation
industry. The Motion & Flow Control segment comprises approximately 16% of the
Company's sales and revenues and approximately 20% of its segment operating
income for 2004.

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. This segment
comprises about 10% of the Company's sales and revenues and 4% of its segment
operating income for 2004.

CORPORATE AND OTHER:

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

F-40

ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 24
QUARTERLY RESULTS FOR 2004 AND 2003 (UNAUDITED)

- ---------------
(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 2004 and 2003. 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, 2005 through February 28, 2005, the high
and low reported market prices of the Company's common stock were $89.95 and
$80.48, respectively. The Company declared dividends of $0.18 per common share
in the first quarter of 2005. There were 25,511 holders of record of the
Company's common stock on February 28, 2005.

F-41

INDEX TO SCHEDULE

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/ ROBERT J. PAGANO, JR.

-----------------------------------
ROBERT J. PAGANO, JR.
VICE PRESIDENT AND CORPORATE
CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)

March 11, 2005

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

- ---------------
*Management compensatory plan

II-6