Business Overview

ITT Corporation and its subsidiaries ("ITT", "we", "us", "our" and "the Company") 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:

• "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.

• "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 measure of financial performance under accounting principles generally accepted in the United States of America ("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

ITT reported sales and revenues of $2.6 billion during the first quarter of 2009, a decrease of 8.9% from the $2.8 billion reported during the first quarter of 2008, reflecting challenging market conditions for our commercial businesses. Over the same period, income from continuing operations increased 9.1% to $186.5, or $1.02 per diluted share. This increase reflects a reduction in tax expense, as well as lower selling, general and administrative ("SG&A") and interest expense partially offset by the impact of lower sales volumes, higher restructuring costs, and higher employee benefit plan costs.

Financial highlights for the quarter ended March 31, 2009 include:

• Sales and revenues for the Defense Electronics & Services business segment of $1.5 billion, which were relatively flat compared to the same prior year period. Operating income for the segment was $164.3, a 7.5% increase year-over-year.

• Sales and revenue declines of 15.6% and 27.3% from our Fluid Technology and Motion & Flow Control business segments, respectively, compared to the prior year period resulting from the negative impact of

global economic conditions. Operating income declined 32.5% and 59.0%, respectively, for these business segments as compared to the same prior year period.

• A year-over-year reduction of $36.6 in SG&A expenses in response to current and anticipated market conditions. As a result, SG&A as a percent of sales was flat year-over-year. In addition, we initiated $10.7 in restructuring actions.

• A 35.0% decrease in interest expense, primarily due to lower year-over-year levels of commercial paper debt.

• A reduction of $68.0 in income tax expense from the prior year, primarily attributable to the reversal of a $57.7 deferred tax liability no longer required as a result of the restructuring of certain international legal entities.

• Generation of $165.4 of free cash flow.

Other significant highlights for the quarter ended March 31, 2009 include:

• Year-over-year order growth of 14.8% from the Defense Electronics & Services business segment, including a $317.0 order to produce additional CREW 2.1 Counter-IED Jammers.

• A net debt to net capital ratio of 25.3%, a 260 basis point reduction from December 31, 2008. In addition, outstanding commercial paper debt balance was $1,492.7 at March 31, 2009, a reduction of $126.0 from our 2008 year-end level.

• Continued improvement in our strategic alignment with end-markets and leveraging of our production capabilities and cost structures within the Motion & Flow Control business segment through the combination of the Energy Absorption and Control Technologies businesses. The combined business will retain the "Control Technologies" name.

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

2009 Outlook

Changes in the global economic environment resulted in difficult market conditions during the first quarter of 2009. We are planning restructuring actions of approximately $65.0 to $70.0 in 2009 (including those taken during the first quarter) and are developing contingency plans that are reactive to any volume declines beyond our expectations for 2009. 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.

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, and benefits from productivity and cost containment initiatives. We also anticipate that foreign currency fluctuations will continue to 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.

• Organic revenues declined 4.5% during the first quarter of 2009 compared to the same prior year period. Additionally, organic orders declined 6.9% and 25.5% at our Fluid Technology and Motion & Flow Control business segments, respectively, as compared to the same prior year period. This reflects, in part, the impact of the global 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.

• The real estate market deteriorated during 2008, particularly within the United States and Europe. Continued decline in demand during the first quarter of 2009 negatively impacted those portions of our Fluid Technology business segment which sell products with residential and commercial market applications.

• Declining economic conditions could cause certain municipalities to cancel projects or delay their related funding. While we experienced stable municipal market conditions during the first quarter of 2009, our Fluid Technology business could be adversely affected in future periods.

• A portion of our Fluid Technology business segment provides products to end-markets such as oil and gas, power, chemical and mining. Economic conditions negatively impacted this portion of our business during the first quarter of 2009. We expect that as a result of current economic conditions and the impact on these markets we may see some level of order delays and/or cancellations during 2009.

• The International Air Transport Association recently reported expected 2009 cargo traffic and passenger traffic declines of approximately 13% and 6%, respectively. Commercial airline carriers are addressing the decline, and have announced capacity cuts. These activities are expected to negatively impact both commercial transport build rates and the commercial aerospace aftermarket industry. Declines in the aerospace industry have already negatively impacted a portion of our Motion & Flow Control business segment, particularly within the commercial aerospace original equipment manufacturer ("OEM") market.

• A recent Bishop Report, a publication for the connector industry, forecasts a 2009 decline in sales of connectors of approximately 15%. A portion of our Motion & Flow Control business segment is sensitive to trends within the connector industry. Our results through March 31, 2009 reflect continued decline within the defense, aerospace, industrial and transportation connector end-markets. We expect year-over-year declines to extend throughout 2009.

• The global automotive and marine markets declined significantly in 2008, with significant contraction in OEM production over the same period. Portions of our Motion & Flow Control business segment were negatively impacted by the continued decline in these markets during the first quarter of 2009. We expect that our business will be negatively impacted during 2009, if economic and market conditions continue to decline or do not return to prior year levels.

• While the U.S. Defense Budget proposal issued by Secretary of Defense Robert M. Gates is generally in line with the programs supported by the Defense Electronics & Services business segment, the final impact on U.S. Defense programs will be determined by ongoing evaluations 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.

• 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.

• Recent distress in the financial markets has had an adverse impact on the availability of credit and liquidity resources. 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 our 2008 Annual Report on Form 10-K and our disclosure under the caption "Forward-Looking Statements and Cautionary 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 Defense 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 &         Data analysis and research on homeland defense,
Services                       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     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

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. This 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; KONI® 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, and general aviation
                               markets; regulators, switches and diaphragm seals
                               for natural gas vehicles, 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;

                               With the combination of Motion & Flow Control's
                               Energy Absorption business, this business now also
                               includes a wide range of standard and custom
                               energy absorption and vibration isolation
                               solutions including shock absorbers, buffers, 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


                                                               Three Months Ended March 31
                                                                                   (Decrease) Increase
                                                      2009           2008            %/Point Change

Sales and revenues                                 $  2,557.1      $ 2,806.4                       (8.9 )%
Gross profit                                            669.1          760.9                      (12.1 )%
Selling, general and administrative expenses            384.0          420.6                       (8.7 )%
Research and development expenses                        52.9           52.6                        0.6 %
Restructuring and asset impairment charges, net          10.7            3.6                      197.2 %
Operating income                                        221.5          284.1                      (22.0 )%
Interest expense                                         26.4           40.6                      (35.0 )%
Interest income                                           4.3            8.4                      (48.8 )%
Income tax expense                                       10.0           78.0                      (87.2 )%
Income from continuing operations                       186.5          170.9                        9.1 %

Gross margin                                             26.2 %         27.1 %                     (0.9 )
Selling, general and administrative expenses as
a % of sales                                             15.0 %         15.0 %                        -
Research & development expenses as a % of sales           2.1 %          1.9 %                      0.2
Operating margin                                          8.7 %         10.1 %                     (1.4 )
Effective tax rate                                        5.1 %         31.3 %                    (26.2 )

Sales and Revenues

Sales and revenues for the quarter ended March 31, 2009 were $2,557.1, representing an 8.9% decrease as compared to the same prior year period. Volume declines, primarily driven by global economic conditions, and unfavorable foreign currency fluctuations continued to negatively impact our Fluid Technology and Motion & Flow Control business segments. Sales and revenues for the Defense Electronics & Services business segment were relatively flat compared to the same prior year period.

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

                                                     Three
                                                     Months
                                                   2009/2008
                                                    % Change

                   Organic growth                        (4.5 )%
                   Acquisitions and divestitures         (0.2 )%
                   Foreign currency translation          (4.2 )%

                   Sales and revenues                    (8.9 )%

During the first quarter of 2009, we received orders of $2,572.6, a decrease of $110.0 or 4.1% as compared to the same prior year period. On a constant currency basis, orders grew by 0.5% or $13.2. This increase was attributable to organic order growth within our Defense Electronics & Services business segment, mostly offset by organic order decreases at both the Fluid Technology and Motion & Flow Control business segments.

Gross Profit

Gross profit for the quarter ended March 31, 2009 was $669.1, a 12.1% decrease compared to the same prior year period. This decrease was attributable to the decline in sales and revenues previously mentioned, and unfavorable foreign currency fluctuations, partially offset by benefits from productivity and cost saving initiatives, including efforts to improve supply chain productivity and control material costs.

Gross margin decreased 90 basis points to 26.2% during the quarter due to the same factors mentioned above.

Selling, General and Administrative Expenses

SG&A expenses decreased 8.7% to $384.0 for the quarter ended March 31, 2009. The decrease was primarily attributable to cost saving initiatives in response to declining global economic conditions and a positive impact from foreign currency exchange translation, partially offset by higher pension and other postretirement plan costs. SG&A as a percentage of sales was 15.0% for both the first quarter 2009 and 2008.

Research and Development Expenses

Research and development expenses ("R&D") increased $0.3 to $52.9 for the quarter ended March 31, 2009. R&D as a percentage of sales increased 20 basis points to 2.1%, as we continued our efforts within each of our business segments to support product development.

Restructuring and Asset Impairment Charges, Net

During the first quarter of 2009, we recorded $10.7 of restructuring and asset impairment charges, a $7.1 increase from the same prior year period. These charges primarily relate to headcount reductions. See the section entitled "Restructuring and Asset Impairment Charges" and Note 3, "Restructuring and Asset Impairment Charges" in the Notes to Consolidated Condensed Financial Statements for additional information.

Operating Income

Operating income of $221.5 for the first quarter of 2009 reflects a 22.0% decrease as compared to the same prior year period, primarily due to the impact of lower sales volumes, higher employee benefit plan costs, unfavorable foreign currency fluctuations and increased restructuring costs, partially offset by benefits from productivity and cost saving initiatives. Segment operating income decreased 19.1%, driven by volume declines within our commercial businesses, partially offset by operating income growth from our Defense Electronics & Services business segment.

Operating margin decreased 140 basis points to 8.7% for the quarter ended March 31, 2009 from the same prior year period, primarily due to the items mentioned above.

Interest Expense and Interest Income

Interest expense during the first quarter of 2009 decreased 35.0% to $26.4 from the same prior year period. The decrease was attributable to lower year-over-year levels of commercial paper debt.

We recorded interest income of $4.3 and $8.4 for the quarters ended March 31, 2009 and 2008, respectively. The decrease was driven by a lower average cash and . . .