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ITT is a company committed to the advancement of human progress. When you see our people and products in action, it is obvious that our commitment is a central theme in all that we do.

Right now, in Fort Wayne, Indiana, there are ITT scientists in a lab designing space-based sounders and imagers that will enable more accurate weather forecasts. In Bangkok, Thailand, construction workers are installing ITT fire pumps to help protect a subway system that will transport 10 million riders a year. In Europe, an ITT product engineer is meeting with municipal water treatment operators to discuss how our treatment systems can help make wastewater safe for reuse by industry or consumers.

The 41,000 employees of ITT provide solutions to problems that matter to all of us. As we say, ITT is Engineered for life, and our focus on human progress has always been a hallmark of this company.

It is particularly rewarding to celebrate our 10th anniversary as an independent company with our best operating year ever. We saw double-digit growth in organic revenue, double-digit growth in adjusted earnings from operations, and strong cash flows*.

Just as important, we focused on accelerating change, making progress on our four strategies: growth, operating excellence, resource optimization and leadership. We translated these strategies into discrete, crisp execution plans with an improved strategic and operating planning process, managing our portfolio to maximize market leadership, profitability and cash flow, with particular emphasis on our key platforms of water and defense.

We trained our top 1,000 leaders around the world in Value-Based Goal Deployment, and we now perform monthly reviews at every value center. The Value-Based Goal Deployment process provides a way for our business and project leaders to establish and prioritize key breakthrough objectives, allocate resources to the highest priorities and set metrics to track progress. In short, Value-Based Goal Deployment enables us to translate our strategic and operating plans into consistent business results.

We completed an extensive analysis of the entire ITT business portfolio — using our Value-Based Management process as a guide — to help us deploy our resources and attention to create the most value. The process helped us identify our key growth platforms of the future: Water, Wastewater, Advanced Water Treatment, Defense Communications & Electronics, Advanced Engineering & Services, Space & Intelligence Systems and Leisure Marine. The portfolio analysis also allowed us to earmark those businesses which do not augment our long-term strategy. As a result, we sold our automotive tubing business for approximately $205 million, and began the process of preparing our electronic switches business for sale.

We realigned the senior leadership team to advance our future strategy, further strengthening our talent pipeline in several key positions and creating new capabilities by adding new leaders to the organization. In addition, we rolled out a comprehensive Value-Based Leadership Development (VBLD) program focused on leadership assessment and accelerated talent development.

We conducted a lean fulfillment program in many of our business units and established a global sourcing group, bringing on world-class supply chain experts from other premier organizations to develop a team of people that know how to execute global sourcing.

We simplified our corporate structure, reducing the number of value centers from 26 to 15 to align customer focus around growth platforms and maximize efficiency.

We emphasized a single ITT organizational identity to better leverage the strength and breadth of our global reach and accelerate our business performance. Building on our Engineered for life philosophy and showcasing our distinct product brands, a unified ITT identity will help differentiate us from competitors, allow us to compete more effectively as a solutions provider in the global marketplace and assist us in recruiting and retaining top talent.

In addition, we have improved our management fundamentals through broader use of our ITT Management System. This "flight manual" provides all of our businesses with a common set of world-class practices and value-based processes. As a whole, the ITT Management System provides us with the underlying fuel to achieve sustained and consistent results, and propels us forward on our path to premier.

The impact of these improvements was evident in the strong financial results we recorded in 2005. Annual revenues in 2005 increased by 17 percent to $7.43 billion, driven by substantial new contracts in our Defense business and continued organic growth in our Fluid Technology group. We have now reported 15 consecutive quarters of revenue growth and two years of double-digit organic growth. Additionally, we are seeing success in generating cash through good attention to working capital.

Reported net income for 2005 was $360 million and full year EPS was $1.91, including the impact of special items primarily related to an impairment charge in our Electronic Components segment and restructuring charges. Excluding special items, income from continuing operations as adjusted was $494 million or $2.62 per share, up 20 percent over 2004. We are on a clear path to meet our long-term earnings commitments. Investor confidence in our performance is reflected in the improvement of our price-to-earnings (PE) ratio, making us one of the top-performing multi-industry companies. The PE improvement also paved the way for the ITT Board of Directors to approve the company's first 2-for-1 stock split since becoming an independent company, and to increase our annual dividend by 22 percent.

One component of our success has been a strong, diversified portfolio of businesses with solid positions in growing, attractive markets.

Our Fluid Technology segment has a long track record of growth and market fundamentals that point to sustained future progress. The Earth's population will expand by more than 2.5 billion people in the next 40 years, and nearly all of these people will live in areas that are already scarce in water.

As a company, we offer both large- and small-scale products and technologies, and our systems solutions approach in the water, wastewater, water treatment and industrial markets enabled our Fluid Technology segment to generate $2.8 billion in revenues in 2005, up 9 percent over the prior year.

Our Defense segment is similarly well positioned. ITT provides products and services for high-priority areas of national security — including surveillance and intelligence, battlefield management, night vision, data processing, electronic warfare technology, and advanced engineering solutions for security and communications.

In 2005, we won several substantial programs, including a sole-source contract for night vision goggles worth a potential $560 million and a five-year contract to operate and maintain communications and information systems for the U.S. Army in southwest Asia and Africa. As a result, revenues for our Defense segment rose 34 percent to $3.2 billion, of which 21 percent was organic, all while maintaining a backlog near its historic peak.

Our Motion & Flow Control segment continues to generate growth through the pursuit of innovative products and operational excellence. We introduced a new line of submersible refueling pumps, and our friction materials business is an industry leader in the area of continuous improvement. Our ongoing businesses within the Motion & Flow Control segment grew full year revenues by 6 percent to $670 million.

Full-year revenues in our Electronic Components segment grew 2 percent to $709 million. However, operating performance was short of what we had planned for and attributable to ongoing challenges in our switches business. We believe our decision to dispose of the switches business will allow us to focus on the remaining connectors businesses that are more closely aligned with our other strategies.

ITT is a global company, and we now have a team in place to take advantage of the significant opportunities that present themselves through global sourcing. Today, less than 10 percent of our sourcing is from low-cost regions, and we have established a program to help us increase that percentage considerably in the future.

ITT has enjoyed strong sales growth in the Asia-Pacific region, and it is clear that this region presents an attractive opportunity for significant sales growth in the future. We are developing broader sales capabilities, integrating value centers and leveraging infrastructure throughout the Asia-Pacific region.

We intend to accelerate the company's capabilities to execute lean manufacturing. There are some good examples of lean techniques throughout the company, and we are doing more every day to reap additional benefits from lean process focus.

Leadership development is one of our strategic priorities. Through our Value-Based Leadership Development and Accelerated Talent Development initiatives, we will continue to build a deep pool of strong leaders with broad exposure to new experiences and challenging opportunities.

There is a strong sense of optimism about ITT — reflected in our recent stock split and dividend increase — and much of it is due to our current cadre of sharp and talented leaders.

In 2005, George Minnich was named Chief Financial Officer, joining us from United Technologies, where he held a series of senior financial positions. George replaced Edward Williams, who retired in 2005 following a productive and distinguished 18-year career with ITT.

Another newcomer to ITT was John Williamson, who was driving efforts in global supply chain and lean management for Danaher and is now enabling ITT to take advantage of the significant opportunities that present themselves through strategic global sourcing.

We also saw a number of our strongest leaders accept new challenges within the organization. Hank Driesse, who directed the dramatic growth of our Defense business, was named to lead our Fluid Technology business, and Steve Gaffney, who had led our dynamic Defense Systems business, was promoted to head the Defense group. Nick Hill, head of our Motion & Flow Control group, was given the additional responsibility of leading our Electronic Components businesses when Brenda Reichelderfer was named Chief Technology Officer, responsible for advancing our forward momentum in the areas of engineering excellence, new product innovation and engineering career development.

Finally, Usha Wright, who was instrumental in bringing world-class processes to ITT's Environment, Safety and Health program over the last 10 years, was tapped to produce the same results for our diversity and inclusion efforts as Director of Global Workforce Strategy.

Our leaders help chart the course for future success, but it's our people who make it happen and define the culture of excellence that is part of working at ITT. I have been privileged to witness some extraordinary acts of selflessness, caring, innovative thinking and integrity during my tenure at the company. One was a group of concerned employees doing whatever it took to donate and install surface- and seawater-purifying equipment in Sri Lanka, bringing fresh water to thousands of tsunami survivors within weeks of the disaster. Another team successfully tripled our production rate of much needed battlefield radios without missing a step. These efforts and many more like them helped land ITT again on lists like Forbes "Best Managed Companies" and Governance Metrics International and Institutional Shareholder Services´ best performers in the area of corporate governance.

ITT people the world over have given the very best of themselves — on the job and off — to help serve humanity in countless ways. They hold themselves accountable for serving the customers, creating value and, as our strong Code of Conduct emphasizes, for "doing the right thing — always." The future of ITT is much brighter thanks to the diligence and focus of all of our employees who bring Engineered for life to life.

By staying the course, building on our strong portfolio, adhering to the ITT Management System and the Code of Conduct, I'm confident that ITT will continue to be a company that can attract the best employees and customers, and reward its investors. One strategic step at a time, we will become a better, smarter, more disciplined version of the company we are today.



Steven R. Loranger
Chairman, President and
Chief Executive Officer


* Download the 2005 At A Glance or see "Highlights" in the "ITT At a Glance" section for reported and adjusted summary financial information and refer to itt.com/ir for detailed reconciliations of reported and adjusted segment results.