Business Overview

ITT Corporation and its subsidiaries ("ITT", "we", "us", "our" and "the Company") is a global multi-industry company with worldwide operations engaged directly and through its subsidiaries in the design and manufacture of a wide range of engineered products and the provision of related services.

We have a diverse business portfolio, which we believe is designed to respond to the following macro-economic growth drivers: global security and infrastructure demands, population growth, and environment trends. Although our business is affected by global, regional and industry-specific economic factors, our geographic and industry diversity, as well as the diversity of our product sales and services, has helped limit the impact of any one industry, or the economy of any single country, on the consolidated operating results. While we do have some businesses that are linked to long- and short-cycle economies such as construction, defense, mining and minerals, transportation, automotive, and aerospace as industries, a disproportionate amount of our portfolio is responsive to large-scale drivers that are less sensitive to economic cycles. Furthermore, we drive our business to have the right mix of products and services by seeking a good combination of original equipment manufacturer ("OEM") and after-market participation, a balance between products and services, and a proper global distribution.

Our growth strategy is centered on both organic and acquisition growth. Our ability to grow organically stems from our value-based product development process, new and existing technologies, distribution capabilities, customer relationships and strong market positions. In addition to our growth initiatives, we have a number of strategic initiatives within the framework of the ITT Management System aimed at enhancing our operational performance. These include global sourcing, footprint rationalization and realignment, Six Sigma and lean fulfillment.

Our three principal business segments are Fluid Technology, Defense Electronics & Services, and Motion & Flow Control.

2008 Outlook

We believe that some markets we serve are slowing as a result of the unprecedented credit crisis and projected softening of the global economic environment. In response to anticipated market conditions, we expect to accelerate restructuring activities across our businesses during the fourth quarter. These actions will reduce capacity and costs, optimize our manufacturing footprint and simplify our infrastructure.

Despite these actions, we will remain focused on our strategic long-term growth initiatives, and deployment of operational processes, which contribute to our continuous improvement.

Overall, we expect 2008 revenues to increase to between $11.5 billion and $11.6 billion. Revenues in the Defense Electronics & Services business segment are expected to grow between $6.1 billion and $6.2 billion led by continued growth in the Advanced Engineering & Sciences and Systems divisions and the integration of the newly acquired EDO Corporation ("EDO"). The Fluid Technology business segment expects to grow revenues between $3.7 billion and $3.8 billion due to growth in the Water & Wastewater and Industrial Process businesses. In the Motion & Flow Control business segment, revenues of approximately $1.6 billion are expected, with growth largely attributable to the integration of International Motion Control, Inc. ("IMC") into the segment.

Summarized below is information on each of the three business segments, including markets served, goods and services provided, relevant factors that could impact results, business challenges, areas of focus and selected financial data.

Fluid Technology

Fluid Technology is a leading global provider of fluid systems and solutions, including the design, development, production, sale and after-sale support of a broad range of pumps, mixers, controls and treatment systems

for residential, municipal, commercial, industrial, and agricultural and turf applications. The following provides a summary of the Fluid Technology businesses and the goods and services each provides to its respective end-markets:

Water & Wastewater               Submersible pump systems for water and wastewater
                                 control, and biological filtration and
                                 disinfection treatment systems for municipal,
                                 industrial and commercial applications

Residential & Commercial Water   Pumps, systems and accessories for water wells,
                                 pressure boosters, agricultural and irrigation
                                 applications, heating, ventilation and air
                                 conditioning systems, boiler controls, flood
                                 control and fire protection

Industrial Process               Pumps and valves for industrial, mining, pulp and
                                 paper, chemical and petroleum processing, and
                                 high-purity systems for biopharmaceutical
                                 applications

Competitive advantages of the Fluid Technology business segment include selling premier brands, strong distribution capabilities, and benefiting from an installed base of more than 14 million pumps worldwide, which provides a strong foundation for repair, replacement and retrofit aftermarket sales. The demand drivers of the business include population growth, urbanization, migration to coastal areas, social awareness, increased regulation, aging infrastructure, and demand from developing markets.

Factors that could impact Fluid Technology's financial results include: broad economic conditions in markets served, weather conditions, the ability of municipalities to fund projects, raw material prices and continued demand for replacement parts and servicing. Primary areas of business focus include: new product development, geographic expansion into new markets, facility rationalization and global sourcing of direct material purchases.

Defense Electronics & Services

Defense Electronics & Services develops, manufactures, and supports high-technology electronic systems and components for worldwide defense and commercial markets, as well as provides communications systems, engineering and applied research. Defense Electronics & Services consists of two major areas:
Systems and Services and Defense Electronics. With the acquisition of EDO completed at the end of 2007, components of EDO have been integrated into various businesses of the Defense Electronics & Services business segment. In addition, we have identified two new businesses, "Integrated Structures" and "Intelligence & Information Warfare," as a result of the acquisition.

The following provides a summary of the Defense Electronics & Services businesses and the goods and services each provides to its respective end-markets:

Advanced Engineering &         Homeland defense, telecommunications systems and
Services                       information technology

Communications Systems         Voice and data systems, and battlefield
                               communication technology

Electronic Systems             Force protection, integrated electronic warfare
                               systems, reconnaissance and surveillance, radar
                               and undersea systems

Integrated Structures          Aircraft armament suspension-and-release systems
                               and advanced composite structures

Intelligence & Information     Intelligence systems and analysis, information
Warfare                        warfare solutions and data acquisition and storage

Night Vision                   Image intensifier technology, military and
                               commercial night vision equipment

Space Systems                  Satellite imaging systems, meteorological and
                               navigation payloads, related information solutions
                               and systems

Systems Division Systems integration, communications engineering and technical support solutions

Management believes that the Defense Electronics & Services business segment is well positioned with products and services that support our customers' needs. In addition, we expect new product development to continue to contribute to future growth.

Factors that could impact Defense Electronics & Services' financial results include: the level of defense funding by domestic and foreign governments, our ability to receive contract awards, the ability to develop and market products and services for customers outside of traditional markets and our ability to obtain appropriate export licenses for international sales and business. Primary areas of business focus include: new or improved product offerings, new contract wins, integration of acquisitions and successful program execution.

Motion & Flow Control

The businesses of the Motion & Flow Control business segment primarily serve the high end of their markets, with highly engineered products, high brand recognition, and a focus on new product development and operational excellence. Revenue opportunities are balanced between OEM and aftermarket customers. In addition to its traditional markets of the U.S. and Western Europe, opportunities in emerging markets such as Asia are increasing.

The following list provides a summary of the Motion & Flow Control businesses and the goods and services each provides to its respective end-markets.

Aerospace Controls             Aircraft fuel systems and actuators

Controls                       Motion controls, servo-motors and
                               electro-mechanical actuators for industrial,
                               medical and aircraft applications

Energy Absorption              Shock absorbers, suspension systems and pneumatic
                               automation components for transportation,
                               aerospace, industrial and electronics applications

Flow Control                   Pump systems, valve actuation controls and
                               accessories for leisure marine craft, whirlpool
                               baths, beverage systems and oil and gas pipelines

Friction Technologies          Brake pads and friction materials for
                               transportation markets

Interconnect Solutions         Connectors and interconnects for the military,
                               industrial, medical and transportation markets

The Motion & Flow Control businesses' financial results are driven by economic conditions in its major markets, the cyclical nature of the transportation industry, production levels of major auto producers, demand for marine and leisure products, weather conditions, raw material prices, the success of new product development, platform life and changes in technology. Primary areas of business focus include: expansion into adjacent markets, new product development, integration of acquisitions, manufacturing footprint optimization, global sourcing of direct material purchases and lean fulfillment.

Results of Operations

For the quarter ended September 30, 2008, ITT reported sales and revenues of $2,879.3 and net income of $216.3, or $1.18 per diluted share, compared with sales and revenues of $2,181.2 and net income of $230.1 or $1.25 per diluted share for the quarter ended September 30, 2007. Net income for the quarter ended September 30, 2008 includes income from discontinued operations of $11.8 or $0.07 per diluted share compared to $61.5 or $0.33 per diluted share for the same comparable prior year period.

For the nine months ended September 30, 2008, ITT reported sales and revenues of $8,749.8 and net income of $609.2, or $3.31 per diluted share, compared with sales and revenues of $6,474.6 and net income of $583.8 or $3.17 per diluted share for the nine months ended September 30, 2007. These results include income of $9.5 or $0.05 per diluted share from discontinued operations compared to income from discontinued operations of $79.2 or $0.43 per diluted share, during 2008 and 2007, respectively.

Further details related to these results are contained in the following Consolidated Financial Results and Segment Review sections.

Consolidated Financial Results


                                               Three Months Ended September 30                                    Nine Months Ended September 30
                                                                      Increase (Decrease)                                                 Increase (Decrease)
                                       2008             2007            %/Point Change                   2008              2007             %/Point Change

Sales and revenues                 $    2,879.3       $ 2,181.2                       32.0 %         $    8,749.8        $ 6,474.6                        35.1 %
Costs of sales and revenues             2,068.6         1,540.1                       34.3 %              6,311.1          4,606.9                        37.0 %
Gross profit                              810.7           641.1                       26.5 %              2,438.7          1,867.7                        30.6 %
Selling, general and
administrative expenses                   417.0           327.6                       27.3 %              1,283.4            978.5                        31.2 %
Research & development expenses            60.7            46.8                       29.7 %                172.5            129.9                        32.8 %
Restructuring and asset
impairment charges, net                     5.0             7.2                      (30.6 )%                15.9             31.1                       (48.9 )%
Operating income                          328.0           259.5                       26.4 %                966.9            728.2                        32.8 %
Interest expense                           29.3            25.8                       13.6 %                101.3             68.7                        47.5 %
Interest income                             8.3            12.6                      (34.1 )%                24.6             31.0                       (20.6 )%
Income tax expense                         98.6            73.1                       34.9 %                279.9            175.3                        59.7 %
Income from continuing
operations                                204.5           168.6                       21.3 %                599.7            504.6                        18.8 %
Income from discontinued
operations, net of tax                     11.8            61.5                      (80.8 )%                 9.5             79.2                       (88.0 )%

Gross margin                               28.2 %          29.4 %                     (120 ) bps             27.9 %           28.8 %                       (90 ) bps
Selling, general and
administrative expenses as a %
of sales                                   14.5 %          15.0 %                      (50 ) bps             14.7 %           15.1 %                       (40 ) bps
Research & development expenses
as a % of sales                             2.1 %           2.1 %                        -                    2.0 %            2.0 %                         -
Operating margin                           11.4 %          11.9 %                      (50 ) bps             11.1 %           11.2 %                       (10 ) bps
Effective tax rate                         32.5 %          30.2 %                      230 bps               31.8 %           25.8 %                       600 bps

Sales and Revenues

Sales and revenues increased $698.1 or 32.0% to $2,879.3 for the third quarter of 2008, over the same prior year period. Excluding the impact of foreign currency translation ("constant currency basis"), sales and revenues for the third quarter increased $660.0. Sales and revenues from acquired companies, including EDO (acquired during the fourth quarter of 2007) and IMC (acquired during the third quarter of 2007), contributed $491.0 during the third quarter of 2008. Organic sales and revenues (defined as sales and revenues from existing businesses on a constant currency basis) contributed $169.0 to our overall revenue growth, primarily due to higher volume and price, including the impact of new products and programs.

Sales and revenues for the nine months ended September 30, 2008 increased $2,275.2 to $8,749.8, representing a 35.1% increase over the same prior year period. On a constant currency basis, sales and revenues increased $2,083.3, including contributions from acquisitions of $1,563.6. Organic sales and revenues grew $519.7 over 2007, primarily attributable to higher volume and price, and the impact of new products and programs.

The following table further illustrates the impact of organic growth, acquisitions, and foreign currency translation fluctuations on sales and revenues during these periods.

                                                Three           Nine
                                                Months         Months
                                              2008/2007      2008/2007
                                               % Change       % Change

               Organic growth                        7.7 %          8.0 %
               Acquisitions                         22.6 %         24.1 %
               Foreign currency translation          1.7 %          3.0 %

               Sales and revenues                   32.0 %         35.1 %

During the third quarter of 2008, we received orders of $3,339.6, an increase of $961.2 or 40.4% over the same prior year period. On a constant currency basis, orders grew $918.8 or 38.6%. This increase was attributable to organic growth of $305.9 or 12.9%, including contributions from each of our business segments, and orders from acquisitions of $612.9 or 25.7%, including the addition of EDO and
IMC. Orders received during the first nine months of 2008 increased $2,443.2 or 38.2% over the prior year, including $1,319.9 or 20.6% from acquisitions, and organic growth of $920.2 or 14.4%. Foreign currency translation had a positive impact of 1.8% and 3.2% for the third quarter and nine month period ended September 30, 2008, respectively.

Costs of Sales and Revenues and Gross Profit

Costs of sales and revenues were $2,068.6 and $6,311.1 for the third quarter and nine month period ended September 30, 2008, respectively. This represents increases of $528.5 or 34.3% and $1,704.2 or 37.0% over the same prior year periods. These increases were primarily attributable to the acquisitions of EDO and IMC, higher sales volume and an unfavorable impact from foreign exchange translation.

Gross profit for the third quarter of 2008 was $810.7, a 26.5% increase compared to $641.1 during the same prior year period. Gross profit for the first nine months of 2008 was $2,438.7, a 30.6% increase compared to $1,867.7 during the same prior year period. Gross margin was 28.2% and 27.9% for the third quarter and nine month period ended September 30, 2008, respectively, compared to 29.4% and 28.8% over the same prior year periods. The year-over-year decreases were driven by higher production costs and unfavorable sales mix, but were partially offset by our productivity and strategic initiatives, including our efforts to improve supply chain productivity and control material costs.

Selling, General and Administrative Expenses

Selling, general and administrative expenses ("SG&A") were $417.0 and $1,283.4 for the third quarter and nine month period ended September 30, 2008, respectively, an increase of $89.4 and $304.9 over the same prior year period. The year-over-year increases were primarily attributable to the acquisitions of EDO and IMC, and a negative impact from changes in foreign currency exchange rates. SG&A as a percent of sales was 14.5% and 14.7% for the third quarter and first nine months of 2008, compared to 15.0% and 15.1% during the same prior year periods.

Research & Development Expenses

Research and development expenses ("R&D") were $60.7 and $172.5 for the third quarter and nine month period ended September 30, 2008, respectively, compared to $46.8 and $129.9 during the same prior year periods. The year-over-year increases were primarily attributable to the acquisitions of EDO and IMC. R&D expense as a percentage of sales was consistent over the same periods as we continued our efforts to support product development.

Operating Income

Operating income increased $68.5 or 26.4% and $238.7 or 32.8% during the third quarter and first nine months of 2008 over the same prior year periods. These increases were largely due to the impact from the EDO and IMC acquisitions. In addition, organic contributions were realized at each business segment. These contributions were primarily attributable to higher sales volumes and price, benefits from operating efficiencies, and cost savings initiatives, partially offset by unfavorable sales mix, and increased SG&A expenses.

Operating margin decreased 50 basis points to 11.4% and 10 basis points to 11.1% for the third quarter and nine month period ended September 30, 2008, respectively, over the same prior year periods. These results primarily reflect the benefits from operating efficiencies and cost savings initiatives, partially offset by unfavorable sales mix, and the impact of acquisitions (higher amortization of intangible assets).

Interest Expense and Interest Income

Interest expense during the third quarter and first nine months of 2008 increased $3.5 and $32.6, respectively, compared to the same prior year periods. These increases were primarily attributable to higher levels of debt, reflecting our funding for acquisitions and capital expenditures during the periods, and tax related charges partially offset by lower interest rates during the current year. In addition, partially offsetting the nine month year-over-year variance is a decrease in accrued interest of $7.0 as a result of the settlement of a tax examination during the second quarter of 2007.

We recorded interest income of $8.3 and $24.6 for the third quarter and nine month period ended September 30, 2008, respectively. This represents year-over-year decreases of $4.3 and $6.4, respectively, which were primarily attributable to a lower average balance of cash and cash equivalents during the second and third quarters of 2008.

Income Tax Expense

Income tax expense for the quarter and nine month period ended September 30, 2008 was $98.6 and $279.9, respectively, an increase of $25.5 and $104.6 over the same prior year periods. The effective tax rate for the quarter and nine month period ended September 30, 2008 was 32.5% and 31.8%, respectively, compared to 30.2% and 25.8% during the prior year.

The year-over-year tax expense increases primarily reflect the impact of a tax benefit of $44.3 resulting from the settlement of a tax examination during the second quarter of 2007, and higher earnings during the 2008 periods, partially offset by the impact of other tax-related items.

The year-over-year effective tax rate increases primarily reflect the impact of the previously discussed 2007 tax benefit, partially offset by a change in earnings mix and the impact of other tax-related items.

Segment Review


                                                Sales & Revenues             Operating Income            Operating Margin
Three Months Ended September 30               2008           2007           2008          2007          2008           2007

Fluid Technology                            $   949.3      $   858.4      $   132.2      $ 110.7           13.9 %       12.9 %
Defense Electronics & Services                1,539.5        1,011.5          187.8        137.1           12.2 %       13.6 %
Motion & Flow Control                           393.8          314.6           55.9         44.4           14.2 %       14.1 %
Eliminations/Corporate and Other                 (3.3 )         (3.3 )        (47.9 )      (32.7 )            -            -

                                            $ 2,879.3      $ 2,181.2      $   328.0      $ 259.5           11.4 %       11.9 %

                                                Sales & Revenues             Operating Income            Operating Margin
Nine Months Ended September 30                2008           2007           2008          2007          2008           2007

Fluid Technology                            $ 2,856.3      $ 2,523.9      $  373.0      $  307.3           13.1 %       12.2 %
Defense Electronics & Services                4,646.3        2,998.3         539.5         377.3           11.6 %       12.6 %
Motion & Flow Control                         1,256.8          962.3         195.3         149.4           15.5 %       15.5 %
Eliminations/Corporate and Other                 (9.6 )         (9.9 )      (140.9 )      (105.8 )            -            -

                                            $ 8,749.8      $ 6,474.6      $  966.9      $  728.2           11.1 %       11.2 %

Fluid Technology

For the quarter and nine months ended September 30, 2008, sales and revenues
from the Fluid Technology business segment increased $90.9 or 10.6% and $332.4
or 13.2%, respectively, over the same prior year periods. The following table
illustrates the impact of organic growth, acquisitions, and foreign currency
translation fluctuations on sales and revenues during these periods.


                                                Three           Nine
                                                Months         Months
                                              2008/2007      2008/2007
                                               % Change       % Change

               Organic growth                        7.5 %          8.0 %
               Acquisitions                          0.2 %          0.3 %
               Foreign currency translation          2.9 %          4.9 %

               Sales and revenues                   10.6 %         13.2 %

During the third quarter and first nine months of 2008, the Fluid Technology business segment recognized sales and revenues on a constant currency basis of $924.7 and $2,731.6, respectively, an increase of $66.3 or 7.7% and $207.7 or 8.3% over the same 2007 periods. Organic sales grew by $64.0 or 7.5% and $201.3 . . .