BUSINESS OVERVIEW
ITT is a global multi-industry leader in high-technology engineering and manufacturing engaged directly and through its subsidiaries. We generate revenue and cash through the design, manufacture, and sale of a wide range of engineered products and the provision of related services. For financial reporting purposes our businesses are aggregated and organized into three principal business segments, Defense Electronics & Services, Fluid Technology, and Motion & Flow Control.
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.

Key Performance Indicators and Non-GAAP Measures Management reviews key performance metrics including sales and revenues, segment operating income and margins, earnings per share, orders growth, and backlog, among others.
In addition, we consider the following non-GAAP measures to be key performance indicators:

n "organic sales and revenues", "organic orders", and "organic operating income" defined as sales and revenues, orders, and operating income, respectively, excluding the impact of foreign currency fluctuations and contributions from acquisitions and divestitures.

n "free cash flow" defined as cash flow from operations less capital expenditures.

Management believes that these metrics are useful to investors evaluating our operating performance for the periods presented, and provide a tool for evaluating our ongoing operations and our management of assets held from period to period. These metrics, however, are not a measures of financial performance under accounting principles generally accepted in the United States ("GAAP") and should not be considered a substitute for sales and revenue growth (decline), or cash flows from operating, investing and financing activities as determined in accordance with GAAP and may not be comparable to similarly titled measures reported by other companies.

EXECUTIVE SUMMARY
Despite challenging market conditions during the fourth quarter, we achieved record revenue and earnings during 2008. Sales and revenues for the full year ended December 31, 2008 were $11.7 billion, an increase of 29.9% over 2007. Income from continuing operations increased 22.5% in 2008 over 2007 to $4.23 per diluted share, reflecting net cost productivity, contributions from acquisitions such as EDO and IMC, organic revenue growth and lower pension expense, which more than offset additional restructuring and realignment costs and strategic growth investments.
Financial highlights for the year ended December 31, 2008 include:

n Sales and revenues for the Defense Electronics & Services business segment of $6.3 billion, an increase of 50.4% over 2007, attributable to organic revenue growth and the successful integration of the EDO acquisition. Operating income for the segment was $727.0, a 44.6% increase year-over-year.

n Sales and revenue growth for the Fluid Technology business segment of 9.4% year-over-year to $3.8 billion, primarily driven by organic revenue growth. Operating income of $468.7 increased 8.3% year-over-year.

n Sales and revenues for the Motion & Flow Control business segment of $1.6 billion, up 18.8% over 2007, primarily attributable to the IMC acquisition. For the year, operating income grew 2.3% on a comparable basis to $191.7.

n Generation of $870.9 of free cash flow, a 112.3% conversion of income from continuing operations.

Other significant highlights for the year ended December 31, 2008 include:

n Successful integration of our EDO and IMC acquisitions, which contributed more than $2 billion of sales and revenues in 2008.

n Investments in attractive markets served by both our Motion & Flow Control and Fluid Technology business segments through the opening of new plants, including plants in China, India and the Czech Republic.

n Participation in the development of the next generation Joint Tactical Radio System by our Defense Electronics & Services business segment, which also became the sole provider of enhanced night vision goggles to the U.S. Army, and commenced delivery of the FAA's next generation air traffic control program.

n An investment of approximately $94.0 in restructuring, asset impairment and realignment actions, including facility consolidations and headcount reductions, during the fourth quarter of 2008 to better position certain businesses for 2009.

n The combination of certain Motion & Flow Control businesses to improve our strategic alignment with end-markets and to better leverage our production capabilities and cost structures.

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

2009 OUTLOOK
Recent changes in the global economic environment, including disruptions in global financial markets and global currency fluctuations, will create difficult 2009 market conditions. In this environment, our strategy is to focus on the current needs of our customers, deploy our capital in a disciplined manner, focus on cost controls, and execute on our operational initiatives.
We are going to focus on our customers by aligning our activities, including our vital service and maintenance offerings, with their needs. We plan to improve product life cycle costs by making our products more energy efficient and by reducing the total cost of ownership.
We are focused on protecting our financial position through continued high free cash flow generation coupled with a balanced capital deployment approach, including the preservation of liquidity, a dividend increase and the elimination of the expiration date of our share repurchase program.
We are proactively reducing costs and leveraging our business and functional strength to achieve competitive advantages. We will continue strategic initiatives within the framework of the ITT Management System aimed at enhancing our operational performance. We are now planning approximately $50 of new restructuring actions in 2009 and are developing contingency plans that are reactive to any volume declines beyond our expectations for 2009. Other cost and productivity actions include discretionary cost controls, and driving incremental supply chain savings through our integrated global strategic sourcing group.
We continue to plan for the long-term by supporting strategic growth investments, including research and development activities, significant capital investments to support our strategic initiatives, including our position on the FAA next generation air traffic control program, emerging market expansion, and investing in new information technology systems.
Current global economic conditions could have a negative impact on our 2009 performance, particularly within our Fluid Technology and Motion & Flow Control business segments. However, we expect that our Defense Electronics & Services business segment will provide a stable base for 2009 due in part to a strong funded backlog position and a winning program track record.
Factors impacting our 2009 performance, compared to 2008, include revenue declines in our Fluid Technology and Motion & Flow Control business segments, higher pension and other employee benefit-related costs, lower restructuring actions, and benefits from productivity and cost containment initiatives. We also anticipate that foreign currency fluctuations will have a negative impact on our 2009 results of operations.

KNOWN TRENDS AND UNCERTAINTIES
The following list represents a summary of trends and uncertainties, which could have a significant impact on our results of operations, financial position and/or cash flows from operating, investing and financing activities.

n Organic revenues grew 4.9% during the fourth quarter of 2008 compared to the prior year, lower than our full year 2008 growth rate of 7.2%. Additionally, organic orders declined 22.0% and 5.2% during the fourth quarter of 2008 at our Motion & Flow Control and Fluid Technology business segments, respectively. This reflects, in part, the impact of the recent economic downturn. It is difficult to determine the breadth and duration of the recent economic and financial market decline and the many ways in which it may affect our suppliers, customers and our business in general. Continuation or further worsening of these difficult financial and macroeconomic conditions could have a significant adverse effect on our sales, profitability and results of operations.

n The real estate market has suffered greatly over the last year, particularly within the United States and Europe. Continued decline in demand would result in further negative impacts to those portions of our Fluid Technology business segment which sell products with residential and commercial market applications.

n Recent declines in economic conditions could cause certain municipalities to cancel certain projects or delay their related funding, which could have an adverse effect on the results of our Fluid Technology business segment. A portion of our Fluid Technology business segment provides products to end markets such as oil and gas, power, chemical and mining. We expect to see some level of order delays and/or cancellations during 2009 as a result of declining economic conditions and the impact on these end markets.

n The International Air Transport Association recently reported cargo traffic and passenger traffic declines of approximately 23% and 5%, respectively. Continued declines could negatively impact a portion of our Motion & Flow Control businesses segment.

n A portion of our Motion & Flow Control business segment is sensitive to trends within the connector industry. A recent Bishop Report, a publication for the connector industry, forecasts a 2009 decline in sales of approximately 15%.

n The global automotive and marine markets have declined significantly over the last year. OEM production has contracted over the same period. These markets are expected to be challenged during 2009, and as a result, portions of our Motion & Flow Control business segment could be adversely impacted.

n U.S. Defense programs could be impacted as a result of program evaluations to be conducted during 2009. Changes in the portion of the U.S. Defense budget devoted to these programs could adversely impact our business. In addition, we have anticipated that our overall performance will benefit from certain international markets. Variability of timing and size of key orders could negatively impact our future results.

n We expect to incur approximately $40.6 of net periodic pension cost in 2009.
Changes to our overall pension and other employee-related benefit plans, including material declines in the fair value of our pension plan assets among others, could adversely affect our results of operations beyond 2009, as well as require us to make significant funding contributions.

n Recent distress in the financial markets has had an adverse impact on the availability of credit and liquidity resources. Short-term and long-term interest rates increased significantly during the fourth quarter of 2008, including rates on our commercial paper. Volatility in these markets and their impact on interest rates have been somewhat less predictable than in years past. Higher rates would negatively impact our results of operations.

The information provided above does not represent a complete list of trends and uncertainties that could impact our business in either the near or long-term. It should, however, be considered along with the risk factors identified in Item 1A of this Annual Report on Form 10-K and our disclosure under the caption "Forward-Looking Statements" at the end of this section.

BUSINESS SEGMENT OVERVIEW
Summarized below is information on each of our three business segments, including markets served, goods and services provided, relevant factors that could impact results, business challenges, and areas of focus.

Defense Electronics & Services
Our Defence Electronics & Services business segment is designed to serve future needs around safety, security, intelligence and communication. 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.
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 & Services
Data analysis and research on homeland defense, telecommunications systems and 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, aircraft armament suspension-and-release systems and advanced composite structures

Intelligence & Information Warfare
Intelligence systems and analysis, information 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

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 and successful program execution.

Fluid Technology
Our Fluid Technology business segment provides critical products and services in markets that are driven by population growth, increasing environmental regulation, global security and global infrastructure trends. Fluid Technology products include water and wastewater treatment systems, pumps and related technologies, and other water and fluid control products with residential, commercial, and industrial 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 pumps, residential, commercial, light industrial, and agriculture and turf irrigation applications

Industrial Process
Pumps and valves for industrial, mining, pulp and paper, chemical and petroleum processing, and high-purity systems for biopharmaceutical applications Factors that could impact Fluid Technology's financial results include broad economic conditions in markets served, 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.

Motion & Flow Control
Our Motion & Flow Control business segment provides highly engineered critical components that serve the high-end of our markets. It's group of businesses provide products and services for the areas of defense, aerospace, industrial, transportation, computer, telecom and RV/marine. Revenue opportunities are balanced between OEM and after-market 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 provides a summary of the Motion & Flow Control businesses and the goods and services each provides to its respective end-markets.

Motion Technologies
Friction pads and back plates serving global automotive and railway customers; KoniŽ shocks, premier adjustable shocks with car, bus, truck, trailer, and rail applications

Interconnect Solutions
Connectors, interconnects, cable assemblies, multi-function grips, input/output card kits and smart card systems serving the defense, aerospace, industrial, transportation, computer, and telecom markets

Flow Control
Pumps and related products for the marine and leisure market; pumps and components for beverage applications; pumps for other specialty industrial fluid dispensing applications; valve actuation control systems for harsh environments, including oil and gas pipelines, as well as solenoid valves

Control Technologies
Valves, actuators, pumps, switches for the commercial, military, regional, business and general aviation markets; switches and regulators into the oil and gas, fluid power, power generation, and chemical markets; electro-mechanical actuators, servo motors, Computer Numerical Control systems, motion controller and other components with medical imaging, semi-conductor, machine tool, industrial automation, metal fabrication and aircraft seating applications; pressure regulators and diaphragm seals for industrial applications and natural gas vehicles

Energy Absorption
Wide range of standard and custom energy absorption and vibration isolation solutions including shock absorbers, buffers, tow bar snubbers, rate controls, dampers, vibration isolators and other related products serving the industrial, oil and gas, rail, aviation and defense 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, 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, manufacturing footprint optimization, global sourcing of direct material purchases and lean fulfillment.

CONSOLIDATED FINANCIAL RESULTS


                                                                                          2008/2007               2007/2006
                                                                                           INCREASE                INCREASE
                                            YEAR ENDED DECEMBER 31                       (DECREASE)              (DECREASE)
                                        2008            2007            2006         %/POINT CHANGE          %/POINT CHANGE
Sales and revenues                $ 11,694.8       $ 9,003.3       $ 7,807.9                   29.9 %                  15.3 %
Costs of sales and revenues          8,439.4         6,435.0         5,618.4                   31.1 %                  14.5 %
Gross profit                         3,255.4         2,568.3         2,189.5                   26.8 %                  17.3 %
Selling, general and
administrative expenses              1,723.5         1,342.7         1,175.9                   28.4 %                  14.2 %
Research and development
expenses                               244.3           182.3           160.9                   34.0 %                  13.3 %
Restructuring and asset
impairment charges, net                 77.5            66.1            51.7                   17.2 %                  27.9 %
Operating income                     1,210.1           977.2           801.0                   23.8 %                  22.0 %
Interest expense                       140.8           114.9            86.2                   22.5 %                  33.3 %
Interest income                         31.3            49.6            25.4                  (36.9 )%                 95.3 %
Income tax expense                     312.3           265.5           227.6                   17.6 %                  16.7 %
Income from continuing
operations                             775.2           633.0           499.7                   22.5 %                  26.7 %
Income from discontinued
operations, net of tax                  19.5           109.1            81.4                  (82.1 )%                 34.0 %

Gross margin                            27.8 %          28.5 %          28.0 %                 (0.7 )                   0.5
Selling, general and
administrative expenses as a
% of sales                              14.7 %          14.9 %          15.1 %                 (0.2 )                  (0.2 )
Research and development
expenses as a % of sales                 2.1 %           2.0 %           2.1 %                  0.1                    (0.1 )
Operating margin                        10.3 %          10.9 %          10.3 %                 (0.6 )                   0.6
Effective tax rate                      28.7 %          29.5 %          31.3 %                 (0.8 )                  (1.8 )

SALES AND REVENUES
Sales and revenues for the year ended December 31, 2008 were $11,694.8, representing a 29.9% increase over 2007. This increase reflects contributions from acquisitions of $1,948.7, including EDO and IMC, and a benefit of $98.5 from foreign currency exchange fluctuations. Despite a global economic environment that deteriorated as the year progressed, organic revenues grew 7.2% over the prior year primarily driven by higher volumes, price increases and contributions from new products and programs. During the fourth quarter of 2008, organic revenues grew 4.9%, as portions of our business were impacted by the recent economic downturn.
Sales and revenues for the year ended December 31, 2007 were $9,003.3, representing a 15.3% increase over 2006. Organic revenue growth of 10.9% over the same period was primarily driven by higher volumes and price increases. The following table illustrates the impact of organic growth, acquisitions completed during the period, and foreign currency translation fluctuations on sales and revenues during these periods.

                                                2008/2007         2007/2006
                                                 % CHANGE          % CHANGE
             Organic growth                           7.2 %            10.9 %
             Acquisitions                            21.6 %             1.9 %
             Foreign currency translation             1.1 %             2.5 %

             Sales and revenues                      29.9 %            15.3 %

Orders received during 2008 totaled $11,726.1, an increase of $2,628.3 over the prior year, including orders attributable to acquisitions and a favorable benefit from foreign currency exchange translation. Organic orders increased 8.5% overall, including growth of 14.8% and 5.6% at our Defense Electronics & Services and Fluid Technology business segments, respectively. Our Motion & Flow Control business segment reported a full year organic orders decline of 3.0%. Organic orders declined at each of our business segments during the fourth quarter of

2008 compared to the same prior year period, including 22.0% and 5.2% decreases at our Motion & Flow Control and Fluid Technology business segments, respectively. We believe that these order declines, taken into consideration with the current level of backlog attributable at our commercial businesses, indicate that our 2009 sales and revenues could be substantially lower than those reported in 2008.
During 2007, we received orders of $9,097.8, an increase of $706.1 or 8.4%, over the prior year period. Order growth in 2007 was attributable to our Fluid Technology and Motion & Flow Control business segments, including contributions from both existing businesses and acquisitions.

COSTS OF SALES AND REVENUES AND GROSS PROFIT
Costs of sales and revenues were $8,439.4 and $6,435.0 for the years ended December 31, 2008 and 2007, respectively. These results represent increases of 31.1% and 14.5% over each respective prior year, primarily reflecting the impact of acquisitions, including EDO and IMC during 2008, higher organic sales volume over both periods, and the negative impact of foreign currency exchange translation.
Gross profit for the year ended December 31, 2008 was $3,255.4, a 26.8% increase over 2007. Gross margin of 27.8% decreased 70 basis points for 2008, due to higher production costs, impact from the EDO acquisition, partially offset by price increases, and benefits from productivity and strategic initiatives, including efforts to improve supply chain productivity and control material costs.
Gross profit for the year ended December 31, 2007 was $2,568.3, a 17.3% increase over 2006. Gross margin improved 50 basis points to 28.5% for 2007. This increase was driven by our productivity and cost savings initiatives, including continued efforts to improve supply chain productivity and control material costs, partially offset by unfavorable mix and foreign currency transaction costs.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") increased 28.4% to $1,723.5 for the year ended December 31, 2008. The year-over-year increase was primarily attributable to the acquisitions of EDO and IMC, and a negative impact from foreign currency exchange translation. In addition, we recognized certain loss reserves as a result of realignment actions taken during the fourth quarter of 2008 in our Fluid Technology and Motion & Flow Control business segments. SG&A increased $166.8, or 14.2% in 2007. The year-over-year increase was primarily attributable to higher levels of marketing expense at each of our business segments in support of product campaigns and new sales proposals. In addition, general and administrative expense increased due to higher compensation-related costs, investments in growth and process improvement initiatives, and the impact of foreign currency translation.
SG&A as a percentage of sales were 14.7%, 14.9%, and 15.1% for the three years ended December 31, 2008, 2007 and 2006, respectively.

RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses ("R&D") increased $62.0 and $21.4 during 2008 and 2007, respectively, over each prior year period. The 2008 increase reflects the impact of our recent acquisitions, including EDO and IMC. R&D as a percentage of sales were relatively consistent at 2.1%, 2.0%, and 2.1% for the . . .