This Report contains information that may constitute "forward-looking statements." Forward-looking statements by their nature address matters that are, to different degrees, uncertain. Generally, the words "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," "target" and similar expressions identify forward-looking statements, which generally are not historical in nature. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking.

These forward-looking statements include, but are not limited to, statements about the separation of Xylem Inc. (the "Company") from ITT Corporation, the terms and the effect of the separation, the nature and impact of the separation, capitalization of the Company, future strategic plans and other statements that describe the Company's business strategy, outlook, objectives, plans, intentions or goals, and any discussion of future operating or financial performance. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future - including statements relating to orders, sales, operating margins and earnings per share growth, and statements expressing general views about future operating results - are forward-looking statements.

Caution should be taken not to place undue reliance on any such forward-looking statements because they involve risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied in, or reasonably inferred from, such statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from the Company's historical experience and our present expectations or projections. For a more detailed discussion of these factors, see the information under the heading "Risk Factors" in our 2011 Annual Report and with other filings we make with the SEC.

The following discussion should be read in conjunction with the condensed consolidated and combined financial statements, including the notes thereto, included elsewhere in this Report. Except as otherwise indicated or unless the context otherwise requires, "Xylem," "we," "us," "our" and "the Company" refer to Xylem Inc. and its subsidiaries. References in the condensed consolidated and combined financial statements to "ITT" or "parent" refer to ITT Corporation and its consolidated subsidiaries (other than Xylem Inc.).

On October 31, 2011, ITT Corporation ("ITT") completed the Spin-off of Xylem, formerly ITT's water equipment and services businesses (the "Spin-off"). Effective as of 12:01 a.m., Eastern time on October 31, 2011 (the "Distribution Date"), the common stock of Xylem was distributed, on a pro rata basis, to ITT's shareholders of record as of the close of business on October 17, 2011 (the "Record Date"). On and prior to October 31, 2011, our financial position, results of operations and cash flows consisted of the water equipment and services businesses of ITT Corporation ("WaterCo") and have been derived from ITT's historical accounting records and are presented on a carve-out basis through the Distribution Date, while our financial results for Xylem following the Spin-off are prepared on a stand-alone basis. As such, our Condensed Consolidated and Combined Statements of Income and Cash Flows for the three months ended March 31, 2012 consist of the consolidated results of Xylem on a stand-alone basis and for the three months ended March 31, 2011 consist entirely of the combined results of WaterCo on a carve-out basis.

Overview

Xylem Inc. ("Xylem" or the "Company") is a leading equipment and service provider for water and wastewater applications with a broad portfolio of products and services addressing the full cycle of water, from collection, distribution and use to the return of water to the environment. Xylem operates in two segments, Water Infrastructure and Applied Water. The Water Infrastructure segment focuses on the transportation, treatment and testing of water, offering a range of products including water and wastewater pumps, treatment and testing equipment, and controls and systems. The Applied Water segment encompasses all the uses of water and focuses on the residential, commercial, industrial and agricultural markets. The segment's major products include pumps, valves, heat exchangers, controls and dispensing equipment. Xylem Inc. (f/k/a ITT WCO, Inc.) was incorporated in Indiana on May 4, 2011. The name of the Company was changed from ITT WCO, Inc. to Xylem Inc. on July 14, 2011.

Our business focuses on providing technology-intensive equipment and services within the water industry supply chain. We sell our equipment and services via direct and indirect channels that serve the needs of each customer type. On the utility side, we provide over 70% direct sales with strong application expertise, with the remaining amount going through distribution partners. To end users of water, we provide over 85% of our sales through long-standing relationships with the world's leading distributors, with the remainder going direct to customers. The total market opportunity for this equipment and services portion of the water industry supply chain is estimated at $280 billion.

Our product and service offerings are organized into two segments: Water Infrastructure and Applied Water. Our segments are aligned with each of the sectors in the cycle of water, supply infrastructure and usage applications.

• Water Infrastructure serves the supply infrastructure sector with pump systems that transport water from aquifers, lakes, rivers and seas; with filtration, ultraviolet and ozone systems that provide treatment, making the water fit to use; and providing pump lift stations that move the wastewater to treatment facilities where our mixers, biological treatment, monitoring, and control systems provide the primary functions in the treatment process.

• Applied Water serves the usage applications sector with boosting systems for farming irrigation, pumps for dairy operations, and rainwater reuse systems for small scale crop and turf irrigation. We also provide water boosting systems for drinking; heating, ventilation and air conditioning and for fire protection systems to the residential and commercial building services markets. In addition, our pumps, heat exchangers, valves and controls provide cooling to power plants and manufacturing facilities, as well as circulation for food and beverage processing.

Executive Summary

Xylem reported revenue for the first quarter 2012 of $925 million, an increase of 3.9% compared to $890 million during the comparable quarter in 2011, primarily due to recently acquired YSI business combined with strong industrial and commercial performance partially offset by residential market weakness. Operating income for the first quarter of 2012, excluding separation costs of $5 million incurred, was $104 million reflecting an increase of $1 million or 1.0% compared to $103 million, excluding separation costs of $3 million, incurred in the first quarter of 2011.

Additional financial highlights for the three months ended March 31, 2012 include the following:

• Revenue growth of 3.9%, or 5.5% excluding negative currency translation impact

• Net income of $63 million, or $0.34 per diluted share

• Free cash flow generation of $41 million, down $13 million from 2011

Key Performance Indicators and Non-GAAP Measures

Management reviews key performance indicators including revenue, gross margin, segment operating income and margins, earnings per share, orders growth, working capital, free cash flow, and backlog, among others. In addition, we consider certain measures to be useful to management and investors evaluating our operating performance for the periods presented, and provide a tool for evaluating our ongoing operations, liquidity and management of assets. This information can assist investors in assessing our financial performance and measures our ability to generate capital for deployment among competing strategic alternatives and initiatives, including, but not limited to, dividends and acquisitions, share repurchases and debt repayment. These metrics, however, are not measures of financial performance under accounting principles generally accepted in the United States of America ("GAAP") and should not be considered a substitute for revenue, operating income, net income, earnings per share (basic and diluted) or net cash from operations as determined in accordance with GAAP. We consider the following non-GAAP measures, which may not be comparable to similarly titled measures reported by other companies, to be key performance indicators:

• "organic revenue" and "organic orders" defined as revenue and orders, respectively, excluding the impact of foreign currency fluctuations, intercompany transactions and contributions from acquisitions and divestitures. Divestitures include sales of insignificant portions of our business that did not meet the criteria for classification as a discontinued operation. The period-over-period change resulting from foreign currency fluctuations assumes no change in exchange rates from the prior period.

• "adjusted net income" and "adjusted earnings per share" defined as net income and earnings per share, respectively, adjusted to exclude non-recurring separation costs associated with the Spin-off and tax-related special items. A reconciliation of adjusted net income is provided below.

                                                        Three Months Ended
                                                             March 31,
        (in millions, except per share data)            2012          2011
        Net income                                    $      63     $      78
        Separation costs, net of tax                          4             2

        Adjusted net income                           $      67     $      80


        Weighted average number of shares - Diluted       185.9         184.6
        Adjusted earnings per diluted share (a)       $    0.36     $    0.43

(a) Subsequent to the Spin-off on October 31, 2011, we had 184.6 million shares of common stock outstanding and this share amount is being utilized to calculate diluted earnings per share for all periods prior to October 31, 2011 presented.

• "operating expenses excluding separation costs" defined as operating expenses, adjusted to exclude non-recurring costs incurred in connection with the separation.

• "free cash flow" defined as net cash provided by operating activities less capital expenditures as well as adjustments for other significant items that impact current results which management believes are not related to our ongoing operations and performance. Our definition of free cash flow does not consider certain non-discretionary cash payments, such as debt. The following table provides a reconciliation of free cash flow.

                                                        Three Months Ended
                                                            March 31,
        (in millions)                                  2012            2011
        Net cash provided by operating activities   $       61      $       71
        Capital expenditures                               (31 )           (19 )
        Separation cash payments                            11               2

        Free cash flow                              $       41      $       54

Results of Operations:



(in millions)                                           Three Months Ended March 31,
                                                   2012             2011           % Change
Revenue                                         $      925       $      890              3.9 %
Gross profit                                           363              337              7.7 %
Gross margin                                          39.2 %           37.9 %            130 bp
Operating expenses excluding separation
costs                                                  259              234             10.7 %
Expense to revenue ratio                              28.0 %           26.3 %            170 bp
Separation costs                                         5                3
Total operating expenses                               264              237             11.4 %
Operating income                                        99              100             (1.0 )%
Operating margin                                      10.7 %           11.2 %            (50 )bp
Interest and other non-operating expense
(income), net                                           15               (1 )
Income tax expense                                      21               23             (8.7 )%
Tax rate                                              24.8 %           22.7 %            210 bp
Net income                                      $       63       $       78            (19.2 )%

Revenue

Revenue generated during the three months ended March 31, 2012 was $925 million,
reflecting an increase of $35 million or 3.9% as compared to the same prior year
period. The following table illustrates the impact from organic growth, recent
acquisitions, and fluctuations in foreign currency, in relation to revenue
during the comparable 2011 period.



           (in millions)                       $ Change        % Change
           2011 Revenue                       $       890
           Organic Growth                              15            1.7 %
           Acquisitions/(Divestitures), net            34            3.8 %
           Foreign currency translation               (14 )         (1.6 )%

           Total change in revenue                     35            3.9 %

           2012 Revenue                       $       925

The following table summarizes revenue by segment:

                                          Three Months Ended March 31,
             (in millions)             2012             2011        % Change
             Water Infrastructure   $      584       $      551           6.0 %
             Applied Water                 355              355             -
             Eliminations                  (14 )            (16 )

             Total                  $      925       $      890           3.9 %

Water Infrastructure

Water Infrastructure's revenue increased $33 million, or 6.0% for the first quarter of 2012, including an unfavorable foreign currency translation of $10 million and incremental revenue of $34 million from the acquisition of YSI which closed in September 2011.

Organic revenue growth of $10 million or 1.8% during the quarter was primarily attributable to industrial performance, particularly dewatering applications serving the gas and mining markets. Treatment applications declined on slower public utility funding in developed markets offset, in part, by strong sales in emerging markets.

Applied Water

Applied Water's first quarter 2012 revenue was flat as compared to the first quarter of 2011 at $355 million. Organic revenue growth of $5 million or 1.4% reflects strength in general industry and beverage applications and commercial market share gains. This increase was offset by residential weakness driven by unfavorable weather conditions for the heating season in North America and the unfavorable impacts from continued economic uncertainty in Europe and political instability in the Middle East. Foreign currency translation was unfavorable by $5 million for the three months ended March 31, 2012 as compared to 2011.

Orders / Backlog

Orders received during the first quarter of 2012 increased by $26 million, or 2.7% over the first quarter of the prior year to $1,004 million, including a benefit of $37 million from acquisitions and an unfavorable impact of $18 million from foreign currency translation adjustments. Organic order growth was 0.7% for the quarter.

The Water Infrastructure segment generated order growth of $26 million, or 4.2% to $638 million, including $37 million from acquisitions and $13 million of unfavorable foreign currency impact. Additionally, increased order volumes in transport applications primarily due to industrial dewatering in North America, continued flood mitigation efforts in Australia and strength in test markets were largely offset by a decline in treatment application orders primarily due to timing and lapping a very strong first quarter 2011.

Applied Water generated order growth of $1 million or 0.3% over the same period in the prior year to $382 million primarily due to increased activity in Europe, the Middle East and Asia, offset by $5 million from unfavorable foreign currency translation.

Delivery schedules vary from customer to customer based upon their requirements. Typically, large projects require longer lead production cycles and delays can occur from time to time. Total backlog

was $739 million at March 31, 2012 an increase of $88 million or 13.5% as compared to $651 million at December 31, 2011 and an increase of $17 million or 2.4% as compared to $722 million at March 31, 2011. We anticipate that in excess of 85% of the backlog at March 31, 2012 will be recognized as revenue in the remainder of 2012.

Gross Margin

Gross margin as a percentage of revenue, increased to 39.2% for the quarter ended March 31, 2012 compared to 37.9% for the comparable period of 2011. The increase is attributable to benefits from incremental revenue from the acquisition of YSI, factory productivity and price realization initiatives offset, in part, by rising commodity and labor costs.

Operating Expenses excluding Separation Costs

                                                             Three Months Ended March 31,
(in millions)                                       2012                2011               % Change
Selling, General and Administrative (SG&A)        $    231            $    210                  10.0 %
SG&A as a % of revenue                                25.0 %              23.6 %                 140 bp
Research and Development (R&D)                          28                  24                  16.7 %
R&D as a % of revenue                                  3.0 %               2.7 %                  30 bp
Operating expenses excluding separation costs     $    259            $    234                  10.7 %
Expense to revenue                                    28.0 %              26.3 %                 170 bp

Selling, General and Administrative Expenses

SG&A increased by $21 million to $231 million or 25.0% of revenue in the first quarter of 2012, as compared to $210 million or 23.6% of revenue in first quarter of 2011. The increase in SG&A expenses as a percentage of revenue is primarily due to additional expenses incurred as a standalone company related to investments in information technology and the establishment of appropriate regulatory compliance and corporate governance functions.

Research and Development Expenses

R&D spending increased $4 million to $28 million or 3.0% of revenue in the first quarter of 2012 as compared to $24 million or 2.7% of revenue in the comparable period of 2011 reflecting $3 million of incremental expense from our YSI acquisition.

Separation Costs

We had non-recurring pre-tax separation costs of $5 million, or $4 million after
tax, during the three months ended March 31, 2012 and $3 million, or $2 million
after tax, during the three months ended March 31, 2011. The components of
separation costs incurred are presented below.



                                                        Three Months Ended
                                                             March 31,
         (in millions)                                  2012           2011
         Rebranding and marketing costs               $       2       $     -
         Employee retention and hiring costs                  -             1
         Advisory fees and other                              3             2

         Total separation costs in operating income           5             3
         Income tax benefit                                  (1 )          (1 )

         Total separation costs, net of tax           $       4       $     2

Our current estimate of the pre-tax cash impact of the remaining activities associated with the Spin-off ranges from approximately $10 million to $15 million.

Operating Income

We generated operating income of $99 million during the first quarter of 2012, a
1.0% decrease from the prior year, primarily due to additional standalone
company costs and non-recurring separation costs. The following table
illustrates operating income results by business segments.



                                           Three Months Ended March 31,
          (in millions)                 2012           2011         % Change
          Water Infrastructure       $       75      $      64           17.2 %
          Applied Water                      40             46          (13.0 )%

          Segment operating income          115            110            4.5 %
          Corporate and other               (16 )          (10 )

          Total operating income     $       99      $     100           (1.0 )%

          Operating margin                 10.7 %         11.2 %          (50 )bp

The table below provides a reconciliation from segment operating income to adjusted operating income, and a calculation of the corresponding adjusted operating margin.

                                           Three Months Ended March 31,
         (in millions)                  2012           2011         % Change
         Water Infrastructure
         Operating income            $        75     $      64           17.2 %
         Separation costs                      2             -

         Adjusted operating income   $        77     $      64           20.3 %
         Adjusted operating margin          13.2 %        11.6 %          160 bp
         Applied Water
         Operating income            $        40     $      46          (13.0 )%
         Separation costs                      1             -

         Adjusted operating income   $        41     $      46          (10.9 )%
         Adjusted operating margin          11.5 %        13.0 %         (150 )bp
         Total Xylem
         Operating income            $        99     $     100           (1.0 )%
         Separation costs(a)                   5             3

         Adjusted operating income   $       104     $     103            1.0 %
         Adjusted operating margin          11.2 %        11.6 %          (40 )bp

(a) Comprised of non-recurring separation costs of $3 million in our business segments and $2 million within Corporate for 2012 and $3 million within Corporate in 2011.

Water Infrastructure

Operating income for our Water Infrastructure segment increased $11 million or 17.2% ($13 million or 20.3% excluding separation costs) compared with the prior year as incremental operating income

of $8 million from acquisitions over the same period and price realization was partially offset by increased spend on research and development and the unfavorable impacts of inflation on labor and material. Operating margin expanded by 120 bps (160 bps excluding separation costs) on strong operating leverage, price realization and contributions from the YSI acquisition.

Applied Water

Operating income for our Applied Water segment decreased $6 million or 13.0% ($5 million or 10.9% excluding separation costs) compared to the prior year as strong price performance was offset by warm winter related volume declines, product mix and net cost inflation. Operating margin declined by 170 bps (150 bps excluding separation costs) driven by net cost inflation and increased standard costs partially offset by price realization.

Interest Expense

Interest expense was $14 million in the first quarter of 2012, primarily reflecting interest related to the issuance of $1.2 billion aggregate principal amount of senior notes issued in September 2011. Refer to Note 11, "Credit Facilities and Long-Term Debt," for further details.

Income Tax Expense

The income tax provision for the three months ended March 31, 2012 was $21 million at an effective tax rate of 24.8% compared to $23 million at an effective tax rate of 22.7% for the same period in 2011. The increase in the effective tax rate for the first quarter 2012 as compared to the same period in 2011 was primarily due to our geographic mix of earnings and a change in the U.S. earnings in states with higher income tax rates.

Liquidity and Capital Resources

The following table summarizes our sources and uses of cash.



                                          Three Months Ended March 31,
           (in millions)             2012           2011            Change
           Operating activities   $       61     $       71     $          (10 )
           Investing activities          (29 )          (18 )              (11 )
           Financing activities          (10 )          (33 )               23
           Foreign exchange                7              3                  4
           Total                  $       29     $       23     $            6


Sources and Uses of Liquidity

Operating Activities

During the first three months of 2012, net cash provided by operating activities decreased by $10 million as compared to the first three months of 2011. The year-over-year decrease is primarily driven by the payment of interest on debt . . .