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SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities

Filed by the Registrant x

Filed by a Party other than the Registrant o

Check the appropriate box:

ITT INDUSTRIES, INC.

Payment of Filing Fee (Check the appropriate box):

o  Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

Louis J. Giuliano

March 27, 2002

Dear Fellow Shareholders:

Enclosed are the Notice of Annual Meeting and Proxy Statement for ITT Industries’ 2002 Annual Meeting of Shareholders. As has been the case with our previous Annual Meetings, this year’s meeting is intended to address only the business included on the agenda. Details of the business to be conducted at the Annual Meeting are given in the accompanying Notice of Annual Meeting and Proxy Statement, which provides information as required by applicable laws and regulations.

If you are the registered owner of ITT Industries’ stock, you may vote your shares by making a toll-free telephone call or using the Internet. You also may vote your shares by returning your proxy form by mail. Details of these voting options are explained in the Proxy Statement. You also can find useful instructions on the enclosed proxy form.

If you are a beneficial owner and someone else, such as your bank or broker, is the owner of record, the owner of record will communicate with you about how to vote your shares.

We urge you to complete and return the enclosed proxy as promptly as possible. Your vote is important.

March 27, 2002

Notice of 2002 Annual Meeting

The 2002 Annual Meeting of ITT Industries, Inc. will be held on Tuesday, May 7, 2002 at 10:30 a.m. at Tappan Hill, 81 Highland Avenue, Tarrytown, New York. Directions to Tappan Hill are provided inside the back cover of the Proxy Statement.

The purpose of the 2002 Annual Meeting is to elect nine Directors, ratify the Board of Directors’ appointment of Deloitte & Touche LLP as ITT Industries’ independent auditors for 2002, and take action on three specific proposals:

Each proposal is described in more detail in this proxy statement.

The record date for the meeting is March 15, 2002. If you were a shareholder at the close of business on the record date, you are entitled to vote.

Table of Contents

Proxy Statement

Beginning March 27, 2002, this proxy statement is being sent to shareholders who were shareholders of record as of March 15, 2002, as part of the Board of Directors’ solicitation of proxies for ITT Industries’ 2002 Annual Meeting.

Information about Voting

Why the Board solicits proxies from shareholders. In order to vote your shares, you must appoint a proxy to vote on your behalf, or attend the annual meeting and vote in person. Because it would be impossible for all shareholders to attend the meeting in person, the Board of Directors recommends that you appoint the three people named on the accompanying proxy form to act as your proxies at the 2002 Annual Meeting.

If you appoint the proxies, they will vote your shares in accordance with your voting instructions. If you appoint the proxies but do not provide voting instructions, they will vote as recommended by the Board of Directors. The proposals to be voted on and the Board’s voting recommendations are described on the following pages 5 through 21. If any other matters not described in this proxy statement are properly brought before the meeting for a vote, the proxies will use their discretion in deciding how to vote on those matters.

This proxy statement and ITT Industries’ 2001 Annual Report to Shareholders contain information that the Board of Directors believes offers an informed view of the Company and meets the regulations of the Securities and Exchange Commission for proxy solicitations.

Proxy voting procedures. You may vote in any one of the following ways:

Counsel has advised the Company that the Internet and telephone voting procedures meet legal requirements.

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Discretionary voting by proxies. There are five formal items scheduled to be voted upon at the annual meeting: election of Directors, ratification of the appointment of the independent auditors, reapproval of the ITT Industries 1997 Annual Incentive Plan for Executive Officers and the ITT Industries 1997 Long-Term Incentive Plan and approval of the 2002 ITT Industries Stock Option Plan for Non-Employee Directors. The Board of Directors did not receive any notice during the advance notice period that ended November 27, 2001 that any other matter might be presented for a vote at the 2002 Annual Meeting. However, if another matter were to be properly presented, the proxies would use their discretion in deciding whether to vote for or against it.

Revoking your proxy. You may revoke your proxy at any time before it is voted by granting a new proxy or by voting in person at the 2002 Annual Meeting.

Shares outstanding. As of the March 15, 2002 record date for the 2002 Annual Meeting, 90,245,452 shares of the Company’s common stock were outstanding. Each of those outstanding shares is entitled to one vote on each matter to be voted on at the 2002 Annual Meeting.

Quorum. In order for business to be conducted at the 2002 Annual Meeting, there must be a quorum. If the holders of a majority of ITT Industries’ outstanding shares, as of the record date, are present in person or represented by proxies at the meeting, there will be a quorum.

Votes required to elect Directors or approve a proposal. Indiana law, the law of the state in which ITT Industries is incorporated, provides that directors are elected by a plurality of the votes cast. This means that the nine nominees who receive the highest number of votes will be elected the Directors of ITT Industries. Each of the other matters to be voted on at the 2002 Annual Meeting, including the ratification of the appointment of auditors, will be approved if the number of shares voted in favor of it is larger than the number of shares voted against it. Approval of the plans requires, for purposes of the New York Stock Exchange (the “NYSE”) and the Internal Revenue Code, as applicable, the affirmative vote of a majority of the votes cast, provided that the total votes cast represent over 50 percent in interest of all securities entitled to vote on the plans.

Abstentions and broker non-votes. Indiana law provides that abstentions and broker non-votes will be counted in order to determine whether there is a quorum; however, they will not be counted as votes for or against any matter. For NYSE purposes, abstentions will have the effect of a vote against the plans, and broker non-votes will have no effect. For the purpose of determining whether the number of votes cast represents more than 50 percent of the shares of common stock entitled to vote, abstentions will count as votes cast and broker non-votes will not count as votes cast.

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Voting by employee participants in ITT Industries’ savings plans. If you participate in any of ITT Industries’ savings plans for salaried or hourly employees, your plan trustee will vote the ITT Industries shares credited to your savings plan account in accordance with your voting instructions. The trustee votes the shares on your behalf because you are the beneficial owner, not the record owner, of the shares credited to your account. The trustees will vote the savings plan shares for which they do not receive voting instructions in the same proportion as the shares for which they received voting instructions.

If you are a participant in the ITT Industries Investment and Savings Plan for Salaried Employees and also are a record owner of ITT Industries’ common stock, you will receive one proxy form that reflects your savings plan shares and the other shares you own, including any shares held in the Direct Purchase, Sale & Dividend Reinvestment Plan for ITT Industries, Inc. The number of savings plan and other shares that you own will be set out separately on the proxy form.

Number of ITT Industries shares held by participants in the Company’s employee savings plans. As of March 15, 2002, Bankers Trust Company held 9,894,934 shares of ITT Industries’ common stock (approximately 11% of the outstanding shares) as trustee of the salaried employees savings plan, and Northern Trust Company, Inc. held 491,514 shares (approximately .5% of the outstanding shares) as trustee for the hourly employees savings plans.

Inspectors of Election and confidential voting. Representatives of IVS Associates, Inc. will act as the Inspectors of Election for the 2002 Annual Meeting. They will monitor the voting and certify whether the votes of shareholders are being kept in confidence in compliance with ITT Industries’ confidential voting policy.

Cost of the solicitation. ITT Industries has appointed Georgeson & Company Inc. to assist with the solicitation of proxies from its registered owners for a fee of $12,500 plus expenses. ITT Industries also will reimburse brokers, nominees, custodians and fiduciaries for their costs of sending the proxy materials to the beneficial owners. Directors, officers or other regular employees of ITT Industries also may solicit proxies from shareholders in person, or by telephone, facsimile transmission or other electronic means of communication.

Shareholder proposals for the 2003 Annual Meeting. Rule 14a-8 of the Securities and Exchange Commission establishes the eligibility requirements and the procedures that must be followed for a shareholder’s proposal to be included in a public company’s proxy materials. Under the rule, if a shareholder wishes to include a proposal in ITT Industries’ proxy materials for its next annual meeting, those eligibility requirements and procedures must be complied with and the proposal must be received by ITT Industries at its principal executive offices on or before November 27, 2002. An ITT Industries shareholder who wishes to present a matter for action at ITT Industries’ next annual meeting, but chooses not to do so under SEC Rule 14a-8, must deliver

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Proposals to be voted on at the 2002 Annual Meeting

A. Election of Directors

The Board of Directors has nominated nine individuals for election as Directors at the 2002 Annual Meeting. Each of the nominees is currently serving as a Director of ITT Industries and has agreed to continue to serve if elected. If unforeseen circumstances arise before the annual meeting and a nominee becomes unable to serve, the Board of Directors could reduce the size of the Board or nominate someone else for election. If the Board nominates someone else, the proxies could use their discretion to vote for that other person. Each Director elected at the 2002 Annual Meeting will be elected to serve as a Director until ITT Industries’ next annual meeting.

The Board of Directors recommends that you vote FOR the election of each of the following nine nominees:

		Louis J. Giuliano Chairman, President and Chief Executive Officer of ITT Industries, Inc.

Mr. Giuliano, 55, has been chairman, president and chief executive officer of ITT Industries since March 1, 2001. From October 1998 to February 28, 2001 he was president and chief operating officer of the Company. Prior to that, he was president and chief executive of ITT Industries’ Defense & Electronics businesses and a senior vice president of the Company for eight years. Mr. Giuliano joined ITT in July 1988 as a vice president of the Company and vice president of Defense Operations at ITT Defense. Prior to joining ITT, Mr. Giuliano held various positions at Allied-Signal during a 19-year career there, including president of the Avionics Systems Group. Mr. Giuliano holds a BS degree in Chemistry and an MBA from Syracuse University.

Mr. Giuliano has been a Director of ITT Industries since February, 2001.

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		Rand V. Araskog Chairman and Chief Executive Officer of ITT Corporation (retired), a hotel, gaming, entertainment and information services company

Mr. Araskog, 70, was chairman and chief executive officer of ITT Corporation from December 1995 until March 1998. Previously, he had served as the chief executive of the corporate predecessor of ITT Industries from 1979 and as its chairman from 1980. He is a director of Dow Jones & Company, The Hartford Financial Services Group, Inc., Rayonier Inc., and ITT Educational Services, Inc. He is a graduate of the U.S. Military Academy at West Point and attended the Harvard Graduate School of Arts and Sciences.

Mr. Araskog has been a Director of ITT Industries or its predecessor since 1977.

		Curtis J. Crawford Chairman of the Board, ON Semiconductor, a global supplier of high performance broadband and power management integrated circuits

Dr. Crawford, 54, has served as chairman of the board of ON Semiconductor, a global supplier of high-performance broadband and power management integrated circuits since 1999. He was president and chief executive officer of ZiLOG, Inc. from 1998 to 2001 and its chairman from 1999 to 2001. From 1997 to 1998, Dr. Crawford was group president of the Microelectronics Group of Lucent Technologies and served as its president from 1995-1997. Prior to the formation of Lucent Technologies, he was president of AT&T Microelectronics, a business unit of AT&T, from 1993 to 1995, and its vice president and co-chief executive officer from 1991 to 1993. From 1988 to 1991, he was vice president of sales, service and support at AT&T Computer Systems. From 1973 to 1988, Dr. Crawford held various positions at International Business Machines Corporation. Dr. Crawford is a director of ON Semiconductor, E.I.Dupont de Nemours and Company, and CENiX Corporation and is a member of the Board of Trustees of DePaul University. He received a BA degree in business administration and computer science and an MA degree from Governors State University, an MBA from DePaul University and a Ph.D. from Capella University. Governors State University awarded him an honorary doctorate in 1996 and he received an honorary doctorate degree from DePaul University in 1999.

Dr. Crawford has been a Director of ITT Industries since 1996.

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		Christina A. Gold Chairman, President and Chief Executive Officer, Excel Communications, Inc., a provider of telecommunications services

Mrs. Gold, 54, was named chairman and president of Excel, a unit of BCE, Inc., in November 2000. She continues as its chief executive officer, a position to which she was named in October 1999. Previously, she was president and chief executive officer of The Beaconsfield Group. From February 1997 to March 1998, Mrs. Gold was executive vice president, global direct selling of Avon Products, Inc. She was executive vice president of Avon Products and president of Avon North America from 1993 to 1997, and from 1989 to 1993 Mrs. Gold was president of Avon Canada. She is a director of New York Life Insurance Company and The Torstar Corporation. Mrs. Gold also is a director of The Conference Board, Inc. of Canada and vice chairman and a trustee of The Conference Board, Inc. in New York. She is a member of the Advisory Council of Carleton University and a member of the board of the Direct Selling Association. Mrs. Gold is a graduate of Carleton University, Ottawa, Canada.

Mrs. Gold has been a Director of ITT Industries since 1997.

		John J. Hamre President and Chief Executive Officer, Center for Strategic & International Studies, a public policy research institution dedicated to strategic, bipartisan global analysis and policy impact

Dr. Hamre, 51, was elected president and chief executive officer of CSIS in April of 2000. Prior to joining CSIS, he served as U.S. Deputy Secretary of Defense from 1997 to 2000 and Under Secretary of Defense (Comptroller) from 1993 to 1997. Prior to serving in the Department of Defense, Dr. Hamre was a professional staff member of the Senate Armed Services Committee from 1984 to 1993 with responsibilities for oversight and evaluation of procurement, research and development programs and defense budget issues. From 1978 to 1984, Dr. Hamre served as Deputy Assistant Director, National Security and International Affairs, in the Congressional Budget Office. Dr. Hamre is a director of MITRE Corporation. He received a BA degree, with highest distinction from Augustana College in Sioux Falls, South Dakota, was a Rockefeller Fellow at Harvard Divinity School and was awarded a Ph.D., with distinction, from the School of Advanced International Studies, Johns Hopkins University in 1978.

Dr. Hamre has been a Director of ITT Industries since 2000.

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		Raymond W. LeBoeuf Chairman of the Board and Chief Executive Officer of PPG Industries, Inc., a global manufacturer of materials for manufacturing, construction, automotive, chemical processing and other industries

Mr. LeBoeuf, 55, has been chairman of PPG Industries since November 1997 and its chief executive officer since July 1997. In December 1995 he was elected president and chief operating officer of PPG. He was an executive vice president of PPG from 1994 until 1995. Mr. LeBoeuf joined PPG Industries in 1980 as its treasurer, and has held a number of executive positions since that time. Mr. LeBoeuf was elected a director of PPG in December 1995. He is also a director of Praxair, Inc. Mr. LeBoeuf is chairman of the Robert Morris College Board. He is also a board member of the Allegheny Conference on Community Development, Business Roundtable, Extra Mile Foundation and the Pittsburgh Cultural Trust. Mr. LeBoeuf is a graduate of Northwestern University and holds an MBA from the University of Illinois.

Mr. LeBoeuf has been a Director of ITT Industries since 2000.

		Frank T. MacInnis Chairman and Chief Executive Officer of EMCOR Group, Inc., an international electrical and mechanical construction and facility management company

Frank T. MacInnis, 55, has been chairman of the board and chief executive officer of EMCOR since April 1994. He was also president of EMCOR from April 1994 to April 1997. From April 1990 to April 1994, Mr. MacInnis served as president and chief executive officer and from August 1990 to April 1994 as chairman of the board, of Comstock Group Inc., a nationwide electrical contracting company. Mr. MacInnis is also a director of The Williams Companies, Inc., Geneva Steel Holdings Corp., The Greater New York Chapter of the March of Dimes and ComNet Communications Inc. Mr. MacInnis received an undergraduate degree from The University of Alberta and is a graduate of The University of Alberta Law School, Alberta, Canada.

Mr. MacInnis has been a Director of ITT Industries since October, 2001.

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		Linda S. Sanford Senior Vice President and Group Executive, Storage Systems Group International Business Machines Corporation, an information technology company

Ms. Sanford, 49, was named senior vice president and group executive, Storage Systems Group, IBM in September 2000. Previously she was general manager of IBM’s Storage Subsystems Division, which develops and markets IBM’s Enterprise Storage Server and other storage-related hardware and software. She has also held positions as general manager, Global Industries, which manages relationships with IBM’s largest customers worldwide, and general manager of IBM’s S/390 Division, which develops, manufactures and markets large-enterprise systems. Ms. Sanford joined IBM in 1975 as a mathematician. Since then she has held a number of executive positions at IBM. Ms. Sanford is a member of the Women in Technology International Hall of Fame and the National Association of Engineers. She is on the board of directors of St. John’s University and Rensselaer Polytechnic Institute. She is a graduate of St. John’s University and earned an MS degree in operations research from Rensselaer Polytechnic Institute.

Ms. Sanford has been a Director of ITT Industries since 1998.

		Markos I. Tambakeras President and Chief Executive Officer of Kennametal, Inc., a premier global tooling solutions supplier to the automotive, aerospace, energy, mining, construction and other industries

Markos I. Tambakeras, 51, has been president and chief executive officer and a director of Kennametal, Inc. since July 1999. From 1997 to June 1999, Mr. Tambakeras served as president, Industrial Controls Business of Honeywell Incorporated, having previously served as president, Industrial Automation and Control, Honeywell Incorporated from 1995 to 1996 and as president, Honeywell Asia Pacific in Hong Kong from 1992 to 1994. Mr. Tambakeras is Vice Chair, Manufacturers Alliance Board of Trustees and a member of the Board of Saint Vincent’s College, Latrobe, PA and the Allegheny Conference on Community Development. Mr. Tambakeras received a BSe degree from the University of Witwatersrand, Johannesburg South Africa and an MBA from Loyola Marymount University, Los Angeles, CA.

Mr. Tambakeras has been a Director of ITT Industries since July, 2001.

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B. Ratification of Appointment of the Independent Auditors

The Company’s By-Laws provide that the Board of Directors may at any time during the year appoint new independent auditors if the Board of Directors feels that such a change would be in the best interests of the Company and its shareholders.

The Board of Directors has appointed Deloitte & Touche LLP as ITT Industries’ independent auditors for 2002. Deloitte & Touche LLP was appointed on March 22, 2002 at the same meeting that the Board of Directors decided not to reappoint Arthur Andersen LLP (“Andersen”) for 2002 based upon the recommendation of the Audit Committee. The decision was made over a period of several months. The Company considered several large independent accounting firms and selected Deloitte & Touche.

In connection with the audits for the two most recent fiscal years and through March 22, 2002, there have been no disagreements with Andersen on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Andersen, would have caused Andersen to make reference thereto in its report on the financial statements of the Company for such time periods. Also, during those time periods, there have been no “reportable events,” as such term is used in Item 304(a)(1)(v) of Regulation S-K.

Andersen’s reports on the financial statements of the Company for the last two years neither contained an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles.

During the Company’s two most recent fiscal years ended December 31, 2001, and the subsequent interim period through March 22, 2002, the Company did not consult with Deloitte & Touche regarding any of the matters or events set forth in Item 304(a)(2)(i) and (ii) of Regulation S-K.

Representatives of Andersen attended all meetings of the Audit Committee during 2001 and through March 5, 2002. The Audit Committee reviewed the non-audit services provided by Andersen to ITT Industries in 2001. Based on that review, the Audit Committee determined that the provision of certain non-audit services was compatible with the provision of independent auditor services.

Audit Fees: The aggregate fees billed or expected to be billed for the audit of ITT Industries’ annual financial statements for 2001 and reviews of quarterly unaudited financial statements were approximately $2,800,800 which includes $1,363,100 related to statutory audits of subsidiaries.

Financial Information Systems Design and Implementation Fees: The aggregate fees billed or expected to be billed for 2001 for information technology services were approximately $160,000.

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All Other Fees: Additionally, the Company paid $5,677,600 for services related to tax compliance and consulting, and for other services provided by Andersen. Included in the total for All Other Fees is $3,314,500 which the Company paid for audit-related services including employee benefit plan audits, acquisitions and divestitures and accounting assistance on proposed transactions and standards.

Representatives of both Andersen and Deloitte & Touche will attend the annual meeting, and will be available to make a statement at the meeting if they wish. They also will be available to respond to appropriate questions from shareholders in accordance with the rules of the meeting.

The Board of Directors recommends that you vote FOR ratification of the appointment of Deloitte & Touche LLP as the independent auditors of ITT Industries for 2002.

Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), places a maximum limitation of $1,000,000 on the tax deductibility by the Company with respect to compensation paid to the most highly compensated executive officers of the Company unless such compensation is pursuant to certain performance-based plans which the Company’s shareholders approve every five years. If approval is obtained, the Company may deduct such performance-based compensation to such persons without regard to that limitation. The ITT Industries 1997 Annual Incentive Plan for Executive Officers (the “Annual Incentive Plan”), originally adopted by the Board of Directors (the “Board”) upon the recommendation of the Compensation and Personnel Committee of the Board (the “Committee”) in 1997 and approved by the shareholders at the annual meeting held May 15, 1997, is such a plan. Awards have been made under the Annual Incentive Plan each year commencing with payments in 1998 for performance year 1997. Pursuant to such Code requirements, the Company will present the Annual Incentive Plan to its shareholders at the annual meeting for such reapproval.

All amounts paid under the Annual Incentive Plan to the Chief Executive Officer and the four other highest compensated executives of ITT Industries are intended to qualify as “performance-based compensation” for purposes of Section 162(m) of the Code and are therefore intended to be deductible for income tax purposes by ITT Industries. Participants will recognize ordinary taxable income upon payment, to the extent of the value thereof, unless the participant elects to defer payments.

The Annual Incentive Plan is intended to provide incentive compensation in the form of a bonus to designated executive officers (the “Participating Executives”) of ITT Industries based upon performance measured against pre-established performance targets (the “Performance Targets”). Executive

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The Performance Period has been determined to be the calendar year, beginning on January 1 and ending on December 31, unless the Committee determines otherwise. Within the first ninety days of the applicable Performance Period the Committee must establish in writing the Performance Targets applicable to each Participating Executive with respect to that Performance Period. The Performance Targets are based upon one or more measures (the “Performance Measures”) and are expressed as an objective formula to be used in calculating the amount of bonus award the Participating Executive will be eligible to receive at various levels of achievement. Performance Measures will be based upon one or more of the following factors: revenue, net operating profit after tax, free cash flow, operating cash flow, economic value added, earnings per share, return on equity, return on total capital and, to the extent consistent with Section 162(m) of the Code, other objectives such as negotiating transactions or sales and developing long-term business goals. There may be different Performance Targets for different Participating Executives and for different Performance Periods.

Following each Performance Period the Committee must certify in writing the degree to which the Performance Targets for each Performance Period have been achieved and the applicable amount to which the Participating Executive might be entitled. In establishing Performance Targets and Performance Measures, and in calculating the degree of achievement thereof, the Committee may ignore extraordinary items, property transactions, changes in accounting standards and losses or gains arising from discontinued operations. In no event may a payment under the Annual Incentive Plan to a Participating Executive for any Performance Period exceed the lesser of 200% of the Participating Executive’s annual base salary in effect on the last day of the Performance Period or $4,000,000. Although the Committee may not increase the amount payable to a Participating Executive under the Plan, it may reduce or totally eliminate the amount if deemed appropriate to reflect the Participating

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Payments will be made in cash as soon as practicable after the end of each Performance Period. In the event of death, payment may be made to the Participating Executive’s estate. Amounts payable may be prorated or eliminated, at the discretion of the Committee, in the event that the Participating Executive is not an employee of ITT Industries or one of its subsidiaries on the last day of the Performance Period. The Plan provides that, upon the occurrence of an Acceleration Event, payments will be made in cash promptly at the target achievement level for the entire Performance Period.

The table presented below sets forth the payments made in 2002 for performance year 2001 to Messrs. Giuliano, Anderson, Ayers, Maffeo, Driesse, and Engen, and to each of the required groups set forth therein.

ITT Industries Annual Incentive Plan

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Since Performance Targets and Performance Measures under the Annual Incentive Plan are established each year with respect to new Performance Periods, it cannot be determined at this time what amounts, if any, will be paid in the future.

Amendments to the Annual Incentive Plan for future Performance Periods can be made that can increase the cost of the Annual Incentive Plan to ITT Industries and can alter the allocation of benefits to Participating Executives. However, no such amendment that is inconsistent with the purpose of the Annual Incentive Plan or with the compliance of the Annual Incentive Plan with applicable law and the requirements of the Code will be made without shareholder approval. There have not been any amendments to the Annual Incentive Plan since its approval and adoption in 1997.

The foregoing description of the Annual Incentive Plan is qualified in its entirety by the actual provisions of the Annual Incentive Plan which is attached to this Proxy Statement as Appendix I.

The Board of Directors recommends that you vote FOR the reapproval of the ITT Industries 1997 Annual Incentive Plan for Executive Officers.

D. Reapproval of the ITT Industries 1997 Long-Term Incentive Plan

Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), places a maximum limitation of $1,000,000 on the tax deductibility by the Company with respect to compensation paid to the most highly compensated executive officers of the Company unless such compensation is pursuant to certain performance-based plans which the Company’s shareholders approve every five years. If approval is obtained, the Company may deduct such performance-based compensation to such persons without regard to that limitation. The ITT Industries 1997 Long-Term Incentive Plan (the “Long-Term Incentive Plan”), originally adopted by the Board of Directors (the “Board”) upon the recommendation of the Compensation and Personnel Committee of the Board (the “Committee”) in 1997 and approved by the shareholders at the annual meeting held May 15, 1997, is such a plan. Awards have been made under the Long-Term Incentive Plan each year commencing in 1997. Pursuant to such Code requirements, the Company will present the Long-Term Incentive Plan to its shareholders at the annual meeting for such reapproval.

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All amounts paid under the Long-Term Incentive Plan to the Chief Executive Officer and the four other highest compensated executives of ITT Industries are intended to qualify as “performance-based compensation” for purposes of Section 162(m) of the Code and are therefore intended to be deductible for income tax purposes by ITT Industries. Participants will recognize ordinary taxable income upon payment, to the extent of the value thereof, unless the participant elects to defer payments.

The Long-Term Incentive Plan is intended (i) to promote the achievements of long-term objectives of ITT Industries by tying a participant’s long-term incentive compensation opportunities to pre-established goals; (ii) to attract and retain employees of outstanding competence and encourage teamwork among them; and (iii) to reward performance based on the achievement of pre-established objectives. Awards will be made, at the discretion of the Committee, to key employees (including directors who are also employees) whose responsibilities and decisions directly affect the performance of the Company or any participating company. The Committee, each member of which shall be a “Non-Employee Director” under the Securities Exchange Act of 1934 and an “Outside Director” under Section 162(m) of the Code, and no member of which may receive an Award, is charged with administering and interpreting the Long-Term Incentive Plan. To the extent permitted by law, the Committee may delegate its authority and responsibilities under the Long-Term Incentive Plan. During 2002, 52 executives received target awards under the Long-Term Incentive Plan.

The Committee determines each period of time over which achievement is measured (the “Performance Period”), which must be in excess of one year. The Committee also establishes the goal or goals to be achieved by each participant (the “Performance Goal(s)”), which must be established in writing within the first ninety days of the applicable Performance Period. The Performance Goal(s) may be based upon one or more standards against which achievement can be measured (the “Performance Measures”). The Performance Goal(s) are to be expressed as an objective formula to be used in calculating the amount of the Award the participant will be eligible to receive at various levels of achievement and may differ for different participants and different Performance Periods.

The Committee may establish as one or more Performance Measures financial or performance criteria with respect to ITT Industries and its subsidiaries, or with respect to a participating company, which will be based upon one or more of the following measurements: economic value added; after-tax profits; operational cash flow; debt levels; earnings per share; increases in measures such as reserves, net income or earnings before taxes; return on capital; return on shareholder equity; and total shareholder return. In addition, Performance Measures may be based upon target levels of, or percentage increases in, total shareholder return for ITT Industries (measured as changes in the market price

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The Committee establishes the value of an Award for each participant, the Performance Measures comprising the Performance Goals against which the degree of achievement may be determined, and the Performance Periods during which the Performance Goals must be achieved. The Committee may make such revisions and/or adjustments to the Award, Performance Measures and/or Performance Goal(s) to the extent necessary to preserve the intention of the Long-Term Incentive Plan, including adjustments resulting from changes in accounting standards. In no event may a payment to a participant for any Performance Period exceed the lesser of 200% of the participant’s annual base salary as in effect at the time of the Award or $4,000,000.

Following each Performance Period, the Committee must certify in writing the degree to which the Performance Goal(s) for the applicable Performance Period have been achieved and the applicable amount to which each participant might be entitled. Such amount will be paid as soon as practicable after the end of each Performance Period. Payments may be made, in whole or in part, in the form of cash and/or ITT Industries common stock as determined by the Committee in its sole discretion. Such payment determinations may differ for participants and for Performance Periods. Payments may be prorated in cases of death, disability or retirement, as determined by the Committee. Upon the occurrence of an Acceleration Event, payments will be made in cash at the maximum achievement level for the Performance Period. In no event will the aggregate number of shares of ITT Industries common stock issued to participants with respect to any Performance Period exceed one percent (1%) of the total of the issued and outstanding shares of such common stock, plus treasury stock as reported in the Annual Report on Form 10-K of ITT Industries for the fiscal year ending immediately prior to or simultaneously with such Performance Period.

The table presented below sets forth the Target Awards under the Long-Term Incentive Plan made in 2002 to Messrs. Giuliano, Anderson, Ayers, Maffeo, and Driesse, and to each of the required groups set forth therein. Award payouts under the Long-Term Incentive Plan are included in the Summary Compensation Table.

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ITT Industries 1997 Long-Term Incentive Plan

Since Performance Measures and Performance Goals under the Long-Term Incentive Plan are established each year with respect to new Performance Periods, it cannot be determined at this time what amounts, if any, will be awarded in the future, nor can it be determined what level of payout, if any, will be made.

Amendments to the Long-Term Incentive Plan for future Performance Periods can be made that can increase the cost of the Long-Term Incentive Plan to ITT Industries and can alter the allocation of benefits to participants. However, no such amendment that is inconsistent with the purpose of the Long-Term Incentive Plan or with the compliance of the Long-Term Incentive Plan with applicable law and the requirements of the Code will be made without shareholder approval. There have not been any amendments to the Long-Term Incentive Plan since its approval and adoption in 1997.

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The foregoing description of the Long-Term Incentive Plan is qualified in its entirety by the actual provisions of the Long-Term Incentive Plan which are attached to this Proxy Statement as Appendix II.

The Board of Directors recommends that you vote FOR the reapproval of the ITT Industries 1997 Long-Term Incentive Plan.

Based on the recommendation of the Board of Directors (the “Board”) on March 5, 2002, subject to the approval of the shareholders of the Company, the Board adopted the 2002 ITT Industries Stock Option Plan for Non-Employee Directors (the “Directors’ Option Plan”). The Board believes that the Directors’ Option Plan will enable the Company to attract, retain, motivate and reward Directors of superior ability and to directly link their incentives to the performance of ITT Industries common stock (“Stock”). The proposed Directors’ Option Plan will permit the Board to authorize Awards in the form of options (“Options”) to purchase shares of Stock. The effective date of the Directors’ Option Plan will be the date of its approval by the shareholders of the Company at the annual meeting.

Non-employee members of the Board presently receive annual retainers of $50,000 and attendance fees of $1,000 for each Board and committee meeting (of which they are a member) that they attend. The annual retainer is paid in shares of restricted stock pursuant to the ITT Industries 1996 Restricted Stock Plan for Non-Employee Directors. Attendance fees may be paid in cash or deferred. (See “Compensation of Directors” for further information regarding Directors’ compensation.)

A review of compensation practices of various companies of a size similar to ITT Industries has led to the conclusion that ITT Industries should increase the compensation paid to its non-employee Directors. Such review has also led to the conclusion that such increase should be in the form of Options to purchase Stock.

The proposed Directors’ Option Plan provides for the grant of non-qualified stock options. The proposed Directors’ Option Plan will expire on December 31, 2011.

The proposed Directors’ Option Plan contains a formula for establishing the maximum number of shares for which Options may be awarded in any given calendar year. The aggregate number of shares of Stock which may be subject to Options under the Plan during any Plan Year shall not exceed the greater of (i) that number of shares as shall be a multiple of (a) the number of Directors to receive Options as of the date of grant times (b) the amount of the annual retainer for such Plan Year, divided by the value of an Option to purchase one share of Stock, such value to be in accordance with the valuation methodology

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Subject to the above limitations, shares of Stock to be issued under the Directors’ Option Plan may be made available from the authorized but unissued Stock, from shares of Stock held in the treasury, or from shares purchased on the open market or otherwise. In the event of a reorganization, merger, recapitalization, consolidation, liquidation, stock dividend, stock split, reverse stock split, reclassification, combination of shares, rights offering, split-up, or extraordinary dividend (including a spin-off) or divestiture, or any other change in the corporate structure or shares, the number of shares subject to the Directors’ Option Plan, the number of shares then subject to Options, and the price per share payable on exercise of Options may be appropriately adjusted by the Compensation and Personnel Committee of the Board (the “Committee”). While the Directors’ Option Plan does not contain any provision prohibiting the cancellation and reissuance of Options at a lower Option price, ITT Industries has a long-standing agreement with the New York Stock Exchange that it will not take any such action without the approval of the ITT Industries’ shareholders.

For the purpose of computing the total number of shares of Stock available for Options under the Directors’ Option Plan, there shall be counted against the foregoing limitations the number of shares of Stock subject to issuance upon exercise or settlement of Options determined as of the dates on which such Options are granted. If any Options under the Directors’ Option Plan are forfeited, terminated, or expire unexercised, the shares of Stock which were theretofore subject to such Options shall again be available for Options under the Directors’ Option Plan to the extent of such forfeiture or expiration of such Options. Further, any shares that are exchanged (either actually or constructively) by optionees or withheld from the Option to be exercised as full or partial payment to the Company of the purchase price of shares being acquired through the exercise of an Option granted under the Directors’ Option Plan may be available for subsequent Options.

At December 31, 2001, 88,786,701 shares of Stock were issued and outstanding and 56,361,307 shares were held in treasury for a total of 145,148,008 issued shares. The limit amount of .15% thereof is 217,722 shares. No Options have been granted yet to non-employee Directors under the Directors’ Option Plan. In the event that the shareholders approve the Directors’ Option Plan at the annual meeting, it is contemplated that Options will be granted in accordance

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The closing price of a share of ITT Industries common stock on the New York Stock Exchange composite transactions on March 21, 2002, was $61.55.

If the Directors’ Option Plan is approved by the shareholders, the Board shall (i) authorize the granting of Options; (ii) determine the number of shares of Stock subject to each Option; (iii) determine the exercise price with respect to each Option (which may not be less than 100% of the fair market value of Stock on the date of grant); determine the time or times when and the manner in which each Option shall be exercisable and the duration of the exercise period; and (v) determine all other terms and conditions of each Option. Except as otherwise provided or required by law, the Committee has full power, discretion and authority to interpret, construe and administer the Directors’ Option Plan and may delegate such of its powers as it deems appropriate.

Options under the Directors’ Option Plan will expire not more than ten years and two days after grant. The exercise price for Options must be paid to the Company at the time of exercise and, in the discretion of the Committee, may be paid in the form of cash or already-owned shares of Stock or the withholding of shares from the Option being exercised or a combination thereof. During the lifetime of the Director, the Option must be exercised only by the Director or, in cases of Total Disability, by his or her Guardian, but no later than the earlier of one year after he or she ceases to be a Director or the original term of the Option. If the Director is terminated for cause, the Option is cancelled immediately.

The Directors’ Option Plan provides for the automatic protection of intended economic benefits in the event of a change in control of the Company (i.e., upon the occurrence of an Acceleration Event as defined in the Directors’ Option Plan). Such economic benefits would otherwise be jeopardized due to extended vesting requirements, volatility of the Stock price and uncertainty as to continuing service on the Board resulting from a change in control. Notwithstanding any other provisions of the Directors’ Option Plan, upon the occurrence of an Acceleration Event, all Options will generally become immediately exercisable for a period of 60 calendar days, but not beyond the expiration date of their original term.

The following is a brief summary of the current Federal income tax rules generally applicable to Options under the Directors’ Option Plan.

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Non-qualified Options

An optionee is not subject to Federal income tax upon grant of a non-qualified option. At the time of exercise, the optionee will realize compensation income to the extent that the then fair market value of the Stock exceeds the Option exercise price. The amount of such income will constitute an addition to the optionee’s tax basis in the optioned Stock. Sale of the shares will result in capital gain or loss (long-term or short-term depending on the optionee’s holding period). ITT Industries is entitled to a Federal tax deduction at the same time and to the same extent that the optionee realizes compensation income.

Excess Parachute Payments

Options which are granted, accelerated or enhanced upon the occurrence of a takeover (i.e., an Acceleration Event as defined in the Directors’ Option Plan) may give rise, in whole or in part, to “excess parachute payments” within the meaning of Section 280G of the Code and, to such extent, will be nondeductible by ITT Industries and subject to a 20% excise tax to the awardee.

Plan Amendments, Discontinuance

If the Directors’ Option Plan is approved by the shareholders, the Board may amend or terminate it at any time. However, shareholder approval is required for any amendment which may (i) alter the group of persons eligible for Options, (ii) increase the maximum number of shares available for Options (except as provided with respect to stock splits or other similar changes), or (iii) permit the granting of Options after December 31, 2011.

The foregoing description of the proposed Directors’ Option Plan is qualified in its entirety by the actual provisions of the Directors’ Option Plan which are attached to this Proxy Statement as Appendix III.

The Board of Directors recommends that you vote FOR approval of the proposed 2002 ITT Industries Stock Option Plan for Non-Employee Directors.

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Information about the Board of Directors

Responsibilities of the Board of Directors. The Board sets policy for ITT Industries and advises and counsels the chief executive officer and the executive officers who manage the Company’s business and affairs. The Board is responsible for assuring that:

Independent Directors. ITT Industries’ By-laws require that a majority of the Directors and a majority of the members of the Compensation and Personnel Committee at all times shall be independent directors. It has been the practice of ITT Industries that all members of the Compensation and Personnel Committee shall be independent directors. In addition, the By-laws also require all members of the Audit and Nominating and Governance Committees to be independent directors.

The By-laws say an independent director is someone who:

Committees of the Board of Directors. The five standing Committees of the Board that are described below perform essential corporate governance functions. The post of Committee Chair and the members of each Committee are rotated periodically to assure that fresh points of view are reflected.

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Audit Committee

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Capital Committee

Compensation and Personnel Committee

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Corporate Responsibility Committee

Nominating and Governance Committee

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During 2001, there were 6 regularly scheduled Board meetings, one special Board meeting and 25 Committee meetings. All Directors, other than Mr. MacInnis, attended at least 95% of the aggregate of all meetings of the Board and the Committees on which they served. Mr. MacInnis, who joined the Board in October, was unable to attend the December meetings due to the death of a business associate. For 2002, the Board has scheduled six regular meetings. In conjunction with the regular meetings, those Directors who are not employees of ITT Industries are scheduled to meet privately several times during the year.

Compensation of Directors. Non-employee Directors are paid annual retainers of $50,000 and attendance fees of $1,000 for each Board and Committee meeting (of which they are a member) that they attend. The annual retainer is paid in shares of restricted stock that are held in escrow until the restrictions lapse. The number of restricted shares is determined by dividing into $50,000 the average of the high and low sales prices per share of ITT Industries’ common stock on the date of the annual meeting. Any fractional share is paid in cash. Directors receive dividends on the restricted shares and may vote the shares during the restriction period. Directors may choose to extend the restriction period for up to two successive five year periods, or until six months and one day following the Director’s termination from the Board under certain permitted circumstances. Attendance fees are paid in cash. Directors can annually choose to defer receipt of attendance fees to a future date, up to the time the Director’s service on the Board ends. Such fees are treated as though invested in an interest bearing account. Mr. Giuliano, as an employee Director, does not receive compensation for his Board service. Each Director’s restricted shares are held in escrow and may not be transferred in any manner until one of the following events occurs:

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The ITT Industries Restricted Stock Plan for Non-Employee Directors provides that if a Director ceases serving on the Board under any other circumstances, shares with respect to which the Plan restrictions have not been lifted will be forfeited.

The Board of Directors has established Director share ownership guidelines. The guidelines currently provide for desired Director share ownership levels at four times the annual retainer amount, which level may be attained over a five year period. In addition to the above compensation, shareholders are being asked to vote at the annual meeting to approve the 2002 ITT Industries Stock Option Plan for Non-Employee Directors. See Item E herein for a summary of that plan and Appendix III for the terms and provisions of that plan. The plan would provide for an annual grant of stock options to non-employee Directors.

Directors are reimbursed for the expenses they incur to travel to Board and Committee meetings.

Director Nomination Policy. No one may be nominated for election as a Director after he or she has reached 72 years of age. The Committee will consider shareholder nominations for Directors that meet the requirements of ITT Industries’ By-laws. (A copy of the nomination requirements may be obtained from the Secretary of ITT Industries).

Indemnification and Insurance. As permitted by its By-laws, ITT Industries indemnifies the Directors to the full extent permitted by law and maintains insurance to protect the Directors from liabilities, including certain instances where it could not otherwise indemnify them. In 1998, ITT Industries prepaid a three-year premium of $1,896,000 for providing liability insurance for its Officers and Directors. An additional premium of $1,252,000 was prepaid in 2000 to extend the Officers and Directors liability insurance policy through 2002. ITT Industries also has entered into contracts with each of the non-employee Directors to protect them from liability including situations in which ITT Industries may not continue the liability insurance. All Directors are covered under a non-contributory group accidental death and dismemberment policy that provides each of them with $750,000 of coverage. They may elect to purchase additional coverage under that policy. Non-employee Directors also may elect to participate in an optional non-contributory group life insurance plan that would provide $100,000 of coverage.

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Report of the Audit Committee

The following Report of the Audit Committee does not constitute soliciting material and the Report should not be deemed filed or incorporated by reference into any other previous or future filings by the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the Company specifically incorporates this Report by reference therein.

• Role of the Audit Committee.

The Audit Committee of the Board of Directors provides oversight on matters relating to the Company’s financial reporting process and assures that the Company develops and maintains adequate financial controls and procedures, and monitors compliance with these processes. This includes review of financial reports and other financial information provided by the Company, its systems of internal accounting and financial controls, and the annual independent audit of the Company’s financial statements. The Company’s management has primary responsibility for the financial statements, including the Company’s system of internal controls. The Audit Committee may investigate any matter brought to its attention. In that regard, the Audit Committee has full access to all books, records, facilities and personnel of the Company.

• Audit Committee Charter.

The Board of Directors has adopted a written charter for the Audit Committee, which it annually reviews, updates and/or reaffirms. The Charter sets out the purpose, membership and organization, and key responsibilities of the Audit Committee.

• Composition of the Audit Committee.

The Audit Committee is comprised of four members of the Company’s Board. Each Audit Committee member meets the independence standards set out in the Company’s By-laws and the requirements of the New York Stock Exchange currently in effect. No member of the Audit Committee has any relationship with the Company that may interfere with the exercise of independence from management and the Company. All members of the Audit Committee, in the business judgment of the full Board of Directors, are financially literate and have accounting or related financial management expertise.

• Regular Review of Financial Statements.

During 2001, the Audit Committee regularly reviewed and discussed the Company’s audited financial statements with management. The Audit Committee, management and the Company’s independent auditors reviewed and discussed the Company’s unaudited financial statements before the release of each quarters’ earnings report and filing on Form 10-Q, and the Company’s

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• Communications with Independent Auditors.

The Audit Committee has discussed with Arthur Andersen LLP, the independent auditors, the matters required by Statement on Auditing Standards No. 61, Communication with Audit Committees (“SAS 61”), as modified or supplemented by the Auditing Standards Boards of the American Institute of Certified Public Accountants. These discussions included all matters required by SAS 61, including independent auditors’ responsibilities under generally accepted auditing standards in the United States, significant accounting policies and management judgments, the quality of the Company’s accounting principles and accounting estimates. The Audit Committee met privately with the independent auditors twice during 2001.

• Independence of Independent Auditors.

The Company’s independent auditors are accountable, ultimately, to the Board and the Audit Committee. The Audit Committee has received from the independent auditors required written disclosures, including a formal written statement, setting out all the relationships between the Company and its independent auditors, as required by Independence Standard No. 1, Independence Discussions with Audit Committees, as amended by the Independence Standards Board. The Audit Committee has discussed the independent auditors’ independence, any disclosed relationships and the impact of those relationships on the independent auditors’ independence.

• Recommendation Regarding Annual Report on Form 10-K.

In performing its oversight function during 2001 with regard to financial statements for 2001 the Audit Committee relied on financial statements and information prepared by the Company’s management. It also relied on information provided by the internal audit staff as well as the independent auditors. The Audit Committee reviewed and discussed with management the Company’s audited financial statements as of and for the year ended December 31, 2001. Based on these discussions, and the information received and reviewed, the Audit Committee recommended to the Company’s Board that the Financial Statements be included in the Annual Report on Form 10-K for that year (or the Annual Report to Shareholders if distributed prior to the filing of Form 10-K).

This report is furnished by the members of the Audit Committee.

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Executive Compensation

Report of the Compensation and Personnel Committee

The Compensation and Personnel Committee of the Board of Directors establishes executive compensation policies. This report discusses the application of these policies to ITT Industries’ executive officers in general, and the rationale for the decisions affecting the compensation as reported for 2001 of Louis J. Giuliano who was unanimously elected as chairman, president and chief executive officer effective upon the resignation and retirement of Travis Engen on March 1, 2001. Additionally, this report discusses the elements of compensation for Messrs. Giuliano and Engen and each of the four other named executive officers in the Summary Compensation Table.

ITT Industries is a global, multi-industry engineering and manufacturing company with leading positions in the markets that it serves. ITT Industries has approximately 38,000 employees located in 48 countries with 2001 sales of approximately $4.7 billion and assets of approximately $4.5 billion. In establishing compensation policies and programs for 2001, the Committee considered compensation provided to executives of corporations similar to ITT Industries in terms of assets, sales and revenues, and earnings. These corporations consisted of leading manufacturing companies in the S&P Industrials Index.

ITT Industries’ executive compensation program historically has been designed to attract, reward, and retain capable and motivated executives and to provide incentives that vary depending upon the attainment of short-term performance objectives and strategic long-term performance goals. The major objective of the long-term incentive program has been to provide ITT Industries’ executives with incentives directly linked to shareholder value. In reviewing ITT’s compensation programs, the Committee has agreed with management’s desire to provide a closer link between compensation and performance. The Company believes that the measures of performance in its compensation programs must be aligned with the measures that are key to the success of its businesses. The stronger link between compensation and performance is intended to provide incentives for achieving financial and business objectives, increasing the value of the Company’s stock and increasing value to our shareholders.

The Compensation Program. The executive compensation program of ITT Industries is based on current competitive compensation practices as well as on performance measures and policies that focus on the continued growth of shareholder value. The compensation for ITT Industries’ executives consists of base salary, annual incentives, stock-based programs, long-term incentives, and employee benefits. The Summary Compensation Table reflects payments and awards during the three years ended 2001.

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• Base Salary.

Salaries are set and administered to reflect the value of the job in the marketplace and individual contribution and performance. Based on a recent ITT Industries’ compensation survey, ITT Industries’ senior executive salaries are at competitive levels. Salaries provide a necessary element of stability in the total pay program. Salary increases are based primarily on merit, and during 2001 the normal interval between salary reviews for all executives was twelve months.

The Committee reviewed the performance of the named executive officers of ITT Industries during 2001. The Committee will continue to review and assess the performance of the chief executive officer and all senior executives and will authorize salary actions as are appropriate, commensurate with relevant competitive data and the approved ITT Industries’ salary administration program. Effective March 1, 2002, Mr. Giuliano’s annual base salary was increased to $927,000 to reflect his new duties as chairman, president and chief executive officer. As of March 1, 2002, the annual salaries of the other named executive officers of ITT Industries were as follows: Mr. Anderson, $515,000; Mr. Ayers, $434,500; Mr. Maffeo, $382,100; and Mr. Driesse, $335,000.

• Annual Incentive Plan.

For 2001, the named executive officers participated in the ITT Industries 1997 Annual Incentive Plan for Executive Officers approved by ITT Industries’ shareholders in 1997. Bonus amounts paid under the plan were based on the economic value added performance of ITT Industries during 2001 as compared with the annual performance goals established and approved by the Committee at the beginning of the 2001 performance year. The amounts paid with respect to performance year 2001 reflect ITT Industries’ strong operational and financial performance during the year. The bonus awards for 2001 shown in the Summary Compensation Table following this report, include payments in accordance with the annual incentive plan, as well as supplemental payments outside the plan to Messrs. Giuliano, Anderson, Ayers, and Driesse in recognition of performance factors. Mr. Engen did not receive a bonus for performance year 2001.

Pursuant to the requirements of Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), regarding performance-based compensation plans, the ITT Industries 1997 Annual Incentive Plan for Executive Officers, which was originally approved by the shareholders of ITT Industries at the annual meeting held in 1997, is being presented to the shareholders at the annual meeting for re-approval. See Item C herein for summary information regarding this plan and Appendix I hereto for the provisions of the plan itself.

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• Long-Term Incentive Award Program.

ITT Industries’ long-term incentive award program is based on the competitive market and designed to link incentive awards to shareholder value. The target value of each award is determined as a percent of base salary and program parameters are approved each year by the Compensation and Personnel Committee. All executives are eligible to participate in the program through non-qualified stock options. For senior executives, the total award value is split equally between non-qualified stock options and target cash awards.

• Stock-Based Awards.

Stock options are the incentive component utilized for all executive participants in the company’s Long-Term Incentive Award Program described above. Stock options provide long-term incentives that are directly related to the performance of ITT Industries’ common stock. Non-qualified stock options have terms of ten years and two days, and closely align executives’ interests with those of other shareholders. The stock option tables on pages 39 and 40 provide information relating to stock options held by the individuals named in the Summary Compensation Table.

Approximately 2,028,500 shares of non-qualified stock options were granted effective January 2, 2002 to approximately 469 executives under the 1994 ITT Industries Incentive Stock Plan (the “1994 Plan”). Grants to the named executive officers were as follows: Mr. Giuliano, 100,000 shares; Mr. Anderson, 40,000 shares; Mr. Ayers, 25,000 shares; Mr. Maffeo, 25,000 shares; and Mr. Driesse, 25,000 shares. For Messrs. Giuliano, and the other named executive officers, such options were granted at an option exercise price of $50.65 per share and will become exercisable upon the earlier of an appreciation in ITT Industries’ common stock price of 25% above the grant price for ten consecutive trading days, or nine years from the date of grant.

• Long-Term Incentive Plan.

The ITT Industries 1997 Long-Term Incentive Plan approved by shareholders in 1997 authorizes performance awards to be made to key employees of ITT Industries at the discretion of the Committee. It has been Company practice that only senior executives participate in this plan. Awards made under this plan are expressed as target cash awards and comprise one-half of the total long-term incentive value for senior executives. The nonqualified stock options described above comprise the other half.

The Long-Term Incentive Plan provides that the Committee shall determine the size and frequency of awards, performance measures, performance goals and performance periods. The size of the awards is determined by the Committee in order to meet competitive practice. Payment, if any, of awards generally will be made at the end of the applicable performance period and will be based on ITT Industries’ performance as compared with the performance measures approved by the Committee.

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Payment, if any, of awards may be made in whole or in part, at the discretion of the Committee, in the form of cash and/or common stock of ITT Industries.

The long-term incentive plan enables the Committee to make adjustments to awards and increase or decrease payment values based upon events or circumstances, including but not limited to acquisitions or divestitures, having a material impact on the overall performance of ITT Industries.

On January 2, 2002 the Committee granted target awards under the long-term incentive plan to 52 key employees, including Messrs. Giuliano, Anderson, Ayers, Maffeo, and Driesse. The performance period with respect to the 2002 awards is three years beginning January 1, 2002. The 2002 target awards made to each of the individuals named in the Summary Compensation Table are as follows: Mr. Giuliano, $1,412,000; Mr. Anderson, $564,800; Mr. Ayers, $353,000; Mr. Maffeo, $353,000; and Mr. Driesse, $353,000. The ultimate value, if any, of each of these awards will be determined in accordance with the established performance measurement formula for the target awards granted in 2002. The award amounts set forth above would be the amounts payable if the formula results in payment at the 100% level. Payment, if any, with respect to the 2002 target awards will be based on the Company’s total shareholder return performance compared with the other S&P® Industrial companies.

Messrs. Giuliano, Ayers, Maffeo, Driesse and Engen received grants of awards in 1999 under the ITT Industries 1997 Long-Term Incentive Plan. These awards were subject to a three-year performance period ending December 31, 2001 and were subject to achievement of pre-established goals, as approved by the Committee in 1999, measuring ITT Industries’ performance with respect to total shareholder return against the performance of the other S&P® Industrial companies. Long-Term Incentive Plan payments were made in strict accordance with the plan as measured for the period of December 31, 1999 through December 31, 2001 and are shown in the Summary Compensation Table on page 37. Based on the Company’s performance at the 69.4 percent rank of the S&P® Industrial companies, payout was at 164.815% of target, which was in accordance with the approved formula. The Committee determined that payment be made in a combination of cash and shares of ITT Industries’ stock to encourage increased share ownership among the company’s senior executives. The shares were valued at $50.50 per share, the market value as of the close of the measurement period.

Pursuant to the requirements of Section 162(m) of the Code regarding performance-based compensation plans, the ITT Industries 1997 Long-Term Incentive Plan, which was originally approved by the shareholders of ITT Industries at the annual meeting held in 1997, is being presented to the shareholders at the annual meeting for re-approval. See Item D herein for summary information regarding this plan and Appendix II hereto for the provisions of the plan itself.

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• Share Ownership Guidelines

At their meeting on March 5, 2001, the Committee endorsed Share Ownership Guidelines for corporate officers of ITT Industries, and such guidelines were approved by the ITT Industries Board of Directors on March 6, 2001. These guidelines specify the desired levels of company stock that each officer should own and encourage a set of behaviors to enable each officer to reach the guideline levels of ownership.

The approved guidelines require share ownership expressed as a multiple of base salary for all corporate officers. Specifically the guidelines apply as follows: chief executive officer at four times base salary; chief financial officer at three times base salary; senior vice presidents and management company presidents at two times base salary; and all other corporate vice presidents at one times base salary.

In achieving these ownership levels, shares owned outright, Company restricted stock, shares held in the Company’s dividend reinvestment plan, shares owned in the Company’s investment and savings plan, and “phantom” shares held in the deferred compensation plan are considered. To attain the ownership levels set forth in the guidelines it is expected that any restricted shares that become unrestricted will be held, that all shares earned through any payout of the Company’s long-term incentive plan will be held, and that all shares acquired through exercise of stock options will be held, except in all cases to the extent that tax obligations need to be met. The Committee will monitor compliance with the guidelines periodically.

• Employee Benefits.

Executives also participate in ITT Industries’ broad-based employee benefits program that includes a pension program, an investment and savings plan, group medical and dental coverage, group life insurance, and other benefit plans. The named executive officers also participate in certain other benefit programs that are described on pages 41 through 46.

Under the deferred compensation plan, executives with an annual base salary of $200,000 or more may elect to defer receipt of all or a portion of their annual incentive. The amount of deferred compensation ultimately received is based on the performance of benchmark investment funds made available under the plan as selected by the executive. Participants in the plan may elect a fund that tracks the performance of ITT Industries common stock.

Although the Committee believes that ITT Industries should strive to structure its compensation program for senior executives in a manner that would permit deductibility under the Internal Revenue Code, it realizes that the overall performance of the senior executives cannot be reduced in all cases to a fixed formula. There may be situations in which the prudent use of discretion in determining pay levels is in the best interest of ITT Industries and its

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This report is furnished by the members of the Compensation and Personnel Committee.

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Performance Graph

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Compensation of Executive Officers

The following table shows the annual and long-term compensation paid or awarded during the three-year period ended December 31, 2001 to each of the persons who held the position of chief executive officer and the four other most highly paid executive officers of ITT Industries during 2001.

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Option Grants During 2001

The following table provides information about options granted on January 2, 2001 to the named executive officers of ITT Industries and an additional grant to Mr. Giuliano on March 7, 2001 in recognition of his election as Chairman, President and Chief Executive Officer. The options awarded

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The options granted to Messrs. Ayers and Driesse will become exercisable upon the earlier of

The options granted on January 2, 2001 became exercisable on May 31, 2001 because the target increase in share price had been achieved.

Option/SAR Grants in Last Fiscal Year

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Aggregated Option Exercises During 2001 and Year-End Option Values

The table below provides information about

Aggregated Option/SAR Exercises in Last Fiscal Year

Long-Term Incentive Plan — 2001 Awards

The following table provides information about target awards made to each of the named executive officers during 2001. The final payment value, if any, of the target awards will be determined based on ITT Industries’ total shareholder return performance measured against the other S&P® Industrial companies. Payment, if any, would be made following the completion of the three-year performance period.

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Long-Term Incentive Plans — Awards in Last Fiscal Year

Senior Executive Severance Pay Arrangements

Senior executives who are U.S. citizens or who are employed in the United States are covered by the ITT Industries, Inc. Senior Executive Severance Pay Plan. If a covered executive is terminated by ITT Industries, that executive would be eligible to receive severance pay unless the executive is terminated for cause, terminated after the executive’s normal retirement date, or in certain divestiture instances where the executive accepts employment or refuses comparable employment. There is no severance in cases where the executive voluntarily leaves the company. The amount of severance pay depends upon the executive’s base pay and years of service. The amount will not exceed 24 months of base pay, or be greater than two times the executive’s total annual compensation during the year immediately preceding termination. ITT Industries’ obligation to continue severance payments stops if the executive does not comply with non-competition provisions of the plan or with ITT Industries’ Code of Corporate Conduct.

If a covered executive receives or is entitled to receive other compensation from ITT Industries, the amount of that compensation could be used to offset amounts otherwise payable under the plan. During the period in which the executive continues to receive severance payments, the executive will have a limited right to continue to be eligible for participation in certain benefit plans.

Messrs. Giuliano, Anderson, Ayers, Maffeo, and Driesse participate in the plan. As a part of Mr. Anderson’s employment arrangement, he is entitled to a severance benefit equal to two years of base salary and two years of target bonus should he be terminated from ITT Industries other than for cause during the first three years of his employment. Thereafter, his benefit would be determined in accordance with the plan.

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Special Senior Executive Severance Pay Plan

The ITT Industries, Inc. Special Senior Executive Severance Pay Plan provides severance benefits for covered executives whose employment is terminated other than for cause or where the covered executive terminates his or her employment for good reason within two years after the occurrence of an acceleration event as defined in the Change of Control Arrangements described below. The plan provides two levels of benefits for covered executives, based on their position within the Company. If an executive were terminated within two years of an acceleration event, he or she would be entitled to

Messrs. Giuliano, Anderson, Ayers, Maffeo, and Driesse are covered at the highest level of benefits.

Change of Control Arrangements

The payment or vesting of awards or benefits under the benefit plans listed below would be accelerated upon the occurrence of a change of control of ITT Industries. There would be a change of control if one of the following acceleration events occurred:

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(a) any consolidation or merger of ITT Industries in which it would not be the continuing or surviving corporation or the common stock of ITT Industries would be converted into cash, securities or other property, unless the transaction was a merger in which the shareholders of ITT Industries immediately prior to the merger would have the same proportionate ownership of common stock of the surviving corporation that they held in ITT Industries immediately prior to the merger; or

(b) any sale, lease, exchange or other transfer of all or substantially all of the assets of ITT Industries; or

The following ITT Industries benefit plans have change of control provisions:

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In addition, if approved by the shareholders at the annual meeting, the 2002 ITT Industries Stock Option Plan for Non-Employee Directors would have change of control provisions.

Salaried Retirement Plan

Most of ITT Industries’ salaried employees who work in the United States participate in the Salaried Retirement Plan. Under the plan, participants have the option, on an annual basis, to elect to be covered under either the Traditional Pension Plan (TPP) or a Pension Equity Plan (PEP) formula for future pension accruals. While the TPP formula pays benefits on a monthly basis after retirement, the PEP formula enables participants to elect to have benefits paid as a single sum payment upon employment termination, regardless of the participant’s age. Under the TPP, a participant first employed prior to January 1, 2000, would receive an annual pension that would be the total of

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The following table illustrates estimated annual benefits (not including Social Security reductions) that would be payable under the TPP formula to a participant who retired at age 65:

Pension Plan Table

Participants who retire at or after they reach 60 years of age and have completed at least 15 years of eligibility service would receive undiscounted early retirement pensions.

At the present time, none of the individuals named in the Summary Compensation Table have elected to accrue benefits under the PEP formula.

Employees first hired on or after January 1, 2000 are eligible to make an annual election to be covered under either the PEP formula referred to above or a TPP formula (post-2000 TPP) which provides for a lower accrual rate than the TPP formula described above which is available to employees hired before January 1, 2000.

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Regardless of the formula elected, participants become vested in their accrued pension benefits after they complete five years of eligibility service.

Federal law limits the amount of benefits that could be paid and the amount of compensation that could be recognized under tax-qualified retirement plans. As a consequence, ITT Industries has established and maintains non-qualified, unfunded Excess Pension Plans to pay retirement benefits that could not be paid from the Salaried Retirement Plan. Benefits under the Excess Pension Plans are generally paid directly by ITT Industries. There also is an excess plan trust under which excess benefits accrued by certain of the officers are funded. Generally, participating officers may elect, upon retirement, to receive their excess benefit in a single discounted lump sum payment, if approved by the Compensation and Personnel Committee of the Board.

In the event of a change of control, any excess benefit would be immediately payable and would be paid in a single discounted lump sum.

Beneficial Ownership of ITT Industries’ Common Stock

Set forth below is information reported to the Securities and Exchange Commission on the most recently filed Schedule 13G by the following persons who owned more than 5% of ITT Industries’ outstanding common stock. This information does not include holdings by the Trustee with respect to individual participants in the ITT Industries Investment and Savings Plan for Salaried Employees.

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Stock Ownership of Directors and Executive Officers

The following table shows, as of January 31, 2002, the beneficial ownership of ITT Industries’ common stock and options exercisable within 60 days by each Director, by each of the executive officers named in the Summary Compensation Table, and by all Directors and executive officers as a group.