Good morning, ladies and gentlemen. My name is Natasha. Iwould like to welcome everyone to the ITT Industry Third Quarter 2007 EarningsConference Call. All lines have been placed on mute to prevent backgroundnoise. After the speakers' remarks there will be a question-and-answer period(Operator Instructions). We do ask that you limit yourselves to one question and onefollow-up. Thank you. It is now my pleasure to turn the floor over toyour host, Peter Milligan, Director of Investor Relations.

Thanks, Natasha. Good morning everybody and thanks forjoining us to discuss our third quarter 2007 results. With me this morning areour Chairman and CEO Steve Loranger, and our CFO Denise Ramos. Steve will provide some highlights for the quarter, Denisewill take us through a detail financial review including a review of eachsegment. So then talk about our updated guidance and Steve will sum up beforewe move to the Q&A. And the highlight of this morning's presentation, pressrelease and all non-GAAP financial measures provided during the call can befound on our website at itt.com/IR. In addition, let remind you that ourdiscussion will contain forward-looking statements, which involve risks anduncertainties and actual results could differ materially from projections. Please refer to our annual report on Form 10-K for a fulldiscussion of these risks. This conference call is being webcast and a replaywill be available later today on our website. With that, I will turn things over to Steve.

Good morning, thanks for joining us. We're pleased to reportthis morning that we have executed another extraordinarily productive quarterfor ITT. On top of continued strong organic growth and operationalproductivity, we made very important changes to our portfolio, including theclosing of the IMC transaction, the definitive agreement to purchase ITOCorporation, and the sale of our switches business. We also continued to run the existing business with a highlevel of operating performance, which resulted in 19% earnings growth. Ourthird quarter EPS of $0.92 was led by a well-balanced revenue growth of 9% andoutstanding profitability expansion. Our geographic and end market diversification both among andwithin our segments, continues to enhance our ability to deliver consistentfinancial performance because of the good balance of economic and seculardrivers. This diversification enables solid top-line expansion asstrong growth across most of our end markets more than offsets softness in theU.S. residential and marine markets. In Fluid Technology, our businessdelivered solid top-line growth in strong operating margin expansion despitethe drag of foreign exchange. Revenue increased 6% organically, driven by growth in allFluid Technology value centers, reflecting solid global end market demand andshare gains. Over half of our fluid sales were from outside North America, andnotably, in Asia, where organic sales increased 20%. This was also the first full quarter where our advancedwater treatment business was aligned with our flight business. We are quicklyimplementing a seamless transition to a market facing water/waste waterplatform. Our legacy treatment business is still facing difficultoperating challenges. However, we are confident that we will be effective inturning around this important piece of our water business. As you've come to know about the ITT management team, whenwe have issues in our businesses, you can count on to us step subpoena anddrive our IMS and our operating excellence processes to fix them. Finally, Gretchen McClain and her…

Thank you, Denise. Let me close by saying that we're pleasedwith the performance of that our organization has achieved year-to-date. We aredelivering on what we've set out to do, which is to generate strong organicrevenue growth, increase productivity, and effectively reinvest our capital ina balanced way. In short, our overall corporate strategy is working. Thiswas an extremely busy and productive quarter, and we're now working hard todetail our 2008 operating plans, which we're going to share with you at ourupcoming analyst meeting in a few weeks. And at that time, we'll have the opportunity for ITT'ssenior leadership team to share the strategies behind their business successand discuss what they see in terms of future opportunities. So, let me turn things back over to Peter, and we'll beginthe Q&A session.

Thanks, Steve. Natasha. IF you could introduce theinstructions for placing a question.

(Operator Instructions) Your first question comes from DeaneDray of Goldman Sachs.

Good morning, Dean. Dean, you are maybe on mute?

Yeah.

All right.

Sorry. Can you hear me now?

Yes.

Sorry.

All right.

Steve, could we go to your prepared remarks we talk aboutthe operating challenges in the legacy water and wastewater businesses? So, itsounds like we're not going to get a chance to talk about the AWT going forwardas it's combined with flight, so while it goes into the segment or into thebusiness, on a consolidated basis 2% organic revenue growth is very healthy,but there's still some legacy issues in it. If you could just step through those, how much of that is aportfolio change that you might do, as a productivity initiative that you mightaddress, and are there any specific end-market topics, you think will be a headwind?

Okay, Dean, we're going to still, despite the fact that weare integrating this into three market-facing platforms, we'll still break outtreatment as to be able to discuss those technology platforms. So walking through it, keep in mind that treatment is, forthe most part, a series of technologies. In the biological segment, we'reoperating very well. We're well positioned in continuing to invest there. We do need to invest more to upgrade our technology inultraviolet and ozone. And in the fresh water filtration segment, notablyLeopold, we're extremely well positioned in North America and we're going tocontinue to invest in those technologies for global expansion. And then finally, we participate in the small-scale reverseosmosis filtration and desalination markets, and that's an area also where wewill continue to invest in our systems and explore further desalination intocommercial and industrial markets. So underneath this, what I'm saying is we have a number oftechnology investments to ensure that the technologies in the treatment areacan be flowed into the municipal, industrial, and commercial market segment. Inaddition, we also have some product line activity in place, where we'll bemigrating some production from various locations to others to ensure that we'releveraging our scale. And that's all part of the www or water/wastewaterintegration plan.

Great. That’s very helpful. And just a follow-up Denise thatI hear correctly when you walked through the integrated water business theresidential piece in the U.S. was up 4%?

No, did you not hear that Deane. The residential portion inthe United States is obviously off. Off in the business, but when you walkthrough the math, since we all know that U.S. housing is down, that iseffectively; that's effectively impacting us in the order of $10, $15 million. So it's of top line in residential. Because the -- becauseeven though we participate in that business, it's only about 5% of FluidTechnology and two-thirds of that 5% is roughly aftermarket. And so it is downa couple of percent on a year-over-year basis, but we're absorbing it. On the flip side, our commercial businesses in NorthAmerica, in terms of buildings, are up about in the 10 to 15% range. Yeah,Deane, just it’s a so you know, it's down 4% in the U.S. and the residential isdown 1% globally.

Got it. Thank you.

Thank you. Your next question comes from Jeff Sprague ofCitigroup.

Thank you. Good morning. I guess, two sets of questions.First, defense margins obviously, very impressive again. Just wonder if youcould give us a little more color on kind of the mix underscoring thatobviously looking at the very strong systems and services growth that wouldkind of technically blend you lower. You talked about good fixed price contract performance, butif could you give us a little more color on that, and if there's some positivecontract developments or something else in the quarter that underscored thoseresults?

Let me comment on that. There was nothing unusual in thequarter that would have produced a higher number than we would have expected.It really does have to go -- is focused on all of the strong productivityinitiatives that we've had on the product side of our business. So we're very, very happy with what we saw in the third quarteron the margin. As you've indicated, though, as the portfolio begins to shiftmore to the services side we do expect to see the margins come down from thesevery high levels and we have articulated a long-term margin rate of about 10.5to 11.5%. While we don't see that immediately, we will trend to that,and we do expect that the defense margins in Q4 will come down from the levelthat we're seeing in Q3.

Should we putting the mix issue aside, if we look at systemsand services themselves, is there any change in the underlying margin in thosebusinesses around the type of contracts you're doing or where you're doing itor anything like that?

No, nothing of significance. Every now and then we'll see ashift in terms of what makes up that service business, but in general it'sabout 7 to 8% and we really don't see any change in that.

And just to go back to AWT, I know this is kind of the tailthat always seems to wag the dog on the call here, but, Steve, your answersounded maybe a little bit different than what I heard before, in that I think,previously it seemed like the issue was just the sales force wasn't orientedand maybe you had kind of these group of businesses that weren't actingco-recently in the marketplace. Now, what kind of sounds like maybe they don't have kind ofthe products and technologies that you think they need to really succeed. Is itboth of those issues now, or is it really just more of a product issue at thispoint?

Jeff, it's safe to say that it is in the aggregate both ofthose issues, but keep in mind that as we think about how to drive businessesfor operating performance, we're always addressing all of those issues. When you think about the fact that Gretchen and her teamhave been organizing into three market-facing segments that, in and of itself,is very responsive to the sales force issue that we were facing the sales forceas well as customer access issue that we were facing in treatment. We had 140 sales people in treatment that we integrated withover 1,000 sales people inflect as well as our residential and industrial salesforces, and that's giving us a good participation. So we're still working that side of it. We're looking atmaking the business the back-end business processes leveragable with some ofthe base capabilities inflict and now we are turning our attention to insuringthat our engineering investments continue to make the products viable in themarketplace. And I would say that's a very selective statement,principally around our ultraviolet and ozone technology. In the balance of thetechnologies we're pretty well positioned, but as we think about the future, wewant to make sure that we've got the best products for the marketplace.

Great. And maybe just update on the process with Ito, ifthere's anything you could add, obviously, the stock is trading above youroffer. I don't know if there's anything you clearly say that, but…

No, Jeff, we obviously very much like the acquisition. It isvery complimentary to our existing defense businesses, and we think thecombination with the ITT and Ito properties is going to be excellent. Things are progressing on schedule. We filed the proxy, asyou may know, on Wednesday, and the Hart-Scott-Rodino filings were made by bothcompanies in early October. What's to happen next is once the proxy is finalized, whichshould happen in the next week or so, the vote, the shareholder vote, will bescheduled, and we sort of -- we would just maintain what we said before as wecan't obviously predict the exact timing, but we're pretty confident thetransaction will close in early 2008. So, all-in-all things are on track, and we feel good aboutthe -- feel good about this acquisition.

Thanks a lot.

Thank you. Your next question comes from Shannon O'Callaghanof Lehman Brothers.

Good morning, guys.

Hello, Shannon.

Can you give a little more detail, in this quarter we hadsome of the pieces of defense move around with the space down big, you mentionedthe comp issue. I mean, just as you think about fourth quarter next year, canyou give little over view in terms of the relative pieces -- you're expectingto be down big or up big?

No, no…

Let me just answer.

Go ahead.

Let me just answer, something and Steve, you can jump in.We're going to be talking more in a couple of weeks about next year, so a lotof that commentary you will hear at that point in time. From a sales perspective, we've always talked about an 8% to10% growth in our sales rate. And we have no reason to change that at thispoint in time. And what we've also said is that as a product-side of ourbusiness ramps down we're ramping up the services side. And you saw that in Q3 with some of the very strong resultsthat we had in the services side of our business. So, from that perspectivethere's -- we still expect the 8% to 10% range. Steve, do you want to addanything?

No, Shannon. No major shifts. Denise and I just reviewedwith Steve Gaffney and the team the 2008 revenue and backlog plans, and as istypical this year we sit in pretty good situation in terms of booked,authorized, and probability to be authorized that gives us confidence in the 8to 10 zone next year, and no major mix shifts are anticipated.

Okay, great, thanks. And then on -- I guess just on the ACDbusiness, I mean, the production has find matters, is there any pressure, thatyou're seeing to take that higher and just also maybe a comment on side.

No, right now we're lockstep with our customer, and we thinkwe're going to maintain that production rate for a while. And actually, I thinkwith respect to side yet, no orders parse, but we believe that this overallsituation is constructively unfolding about the way that we've beencommunicating for the past several years. And that is that our customer, the U.S. military iscontinues to contemplate the best path to achieve the advanced intraoperabilityand the overall communication integration of the jitters framework. They continue to explore innovative ideas from a lot ofindustry participants, obviously, including ITT. And as you know, then, thatwith respect to our advanced technology, such as the Side Hat and the SoldierRadio Wave Form, we already offer much of the desired interoperability andcapability in our segment of the Jitters piece. So as this evaluation is ultimately unfolded, we'reconfident that we're going to participate meaningfully in the future designs.And I think that that strategy has been validated by continued high productionrates of singers the last several years and the fact that we've got goodbacklog in place for next year validates that strategy.

Okay. Thanks. Just one more from me. On fluid tech youmentioned material costs there. Can you give us a sense, are you getting pricenow? Is there more you can get? What kind of contribution are you looking forthere in terms of offsets?

Let me comment. In terms of material costs we are seeingfluid getting hit harder than our other segments with fluid costs because ofthe specialty metals that go into this even product. So they've been impactedpretty hard, especially on some of the commodities with nickel and chrome andcopper. We've been able to offset some of that through the globalsourcing initiative we've had underway for a couple of years, so that hashelped. We have also seen some price increases that we've been able to flowinto that marketplace to help offset some of that also. So on balance we're seeing some hit associated with that,but we've taken advantage of supply chain and some pricing.

Okay. Is there more to come, you think, or is this it fornow?

In terms of what?

In terms of pricing.

In terms of pricing or it's something that we always lookat, whether or not we're going to take any, I'm not certain at this point intime.

Okay. Thanks very much.

Thanks Shannon.

Thank you. Your next question comes from Michael Schneiderof Robert W. Baird.

Good morning.

Good morning.

Hello, Michael.

Wonder if we could start with the orders in fluid tech. Iguess the surprising element is that you did 9% organic growth against thecomparison of last year, which I think is the toughest. Did you 5% a year ago.Can you walk through what changed? Because it seems to be substantially stronger than the 6%revenue growth you reported for the quarter. Did something accelerate duringthe quarter? Were there any enormous project booked at IPG? Just some color.

The one thing I would point to is just what you said. A lotof it is on IT side. We've been seeing a lot of strength there in the largeproject sales, and that really has to do because of the strength that we'reseeing on commodity front in mining and the oil and gas market. So that is really strong with us, and on a year-over-yearbasis we're seeing very strong order growth for that. On the other thing, justthe legacy www, the flight business, that continues to be strong with us for usorganically also.

Okay. And did AWT make some progress during the quarter juston orders?

No, you know, AWT continues to struggle. They're strong inEurope. It's weak in the U.S. And so, you know, we're still having somechallenges from an order perspective there.

Okay. And then just industrial process and Asiaspecifically, it seems like that's hit an inflection point and that market hasbeen strong for sometime. Is there some new strategy or some new presence thatyou've got in Asia to explain the acceleration there?

Well, we've been, Michael, we've been doing a lot of work inAsia. We have been hiring a number of new sales people, and we've continued totransition some of our products, so I would say that particularly in thepremium segment of the business, we've been succeeding pretty well. In Asia, weare seeing very strong markets in the chemical, oil, and gas components. So wefeel good about our industrial position there.

Okay. Then final question. When I was in Stockholm meetingwith the flight management, it seemed clear that there is, now that they'reresponsible for this AWT division, a renewed emphasis on R&D spending andmaybe closing some of the technology gaps that you've at least alluded toearlier. Does that spending cycle impact your margin goals in fluidtech to improve the margin? I believe it's 80 to 100 basis points a year?

Michael, first of all, we are going to invest to ensure thatwe sustain high levels of organic growth. But I think you can always expectfrom me that we hold our businesses accountable for an equal component ofproductivity. And so as we've been detailing these operating plans, wehave been asking for our Fluid Technology business units to increaseengineering investment, as well as increasing some selective selling andmarketing investments where we want to put capability in emerging markets. But at the same time, we hold -- we're doing a lot ofrepositioning, global sourcing, a lot of lean activity, and all in all we'regoing to continue an appropriate level of margins and earnings growth in theprocess.

And just to add into that, in terms of a margin impact foradditional R&D spending, we're not looking at anything that would be really-- that would be really significant.

Okay. Thanks and great quarter.

Thank you.

Thank you. Your next question comes from, John Inch ofMerrill Lynch.

Thank you good morning.

Good morning.

Hi Denise why again do defense margins come down in thefourth quarter? Can you just sort of a remind us was there any thing I know you– I know -- I heard your comments, but was there anything that was pulled fromfourth into third?

No, John, there was nothing that was pulled from fourth intothird to produce the high margins into Q3. It really is a mix shift where we'regoing to see more of the services business as being part of the revenue therethan we saw on the -- in Q3.

And is that specific to 2007, or do you traditionally seethis mix shift occurring in the fourth quarter?

No, you know, I would say in general we've been talkingabout this shift that's going to occur in the defense business as we win moreon the services side. So, it's nothing that happens from an -- on an annualbasis. It's just a shift that we've been talking about that we're going to beseeing.

If I read between the lines, I mean it sounds like the sidehat could be in 2008 event. Is that reasonable, and, you know, presumably it'sgoing to be prospectively very accretive to your defense margins is that alsothe way we should be thinking about this? I know that's not what your guidance is going to be, but ifwe're looking for some up side next year from obviously the defense margin thatare very high could that be one of those catalogs?

John, we are -- I can't speculate on that because I thinkwhat I was saying earlier was that the timing of the side hat orders is quitefrankly involved with the overall U.S. Government's evaluation of variousinteroperability options in the overall jitters framework. Clearly if it happens, the side hat would be an upside, butwe can't speculate on the timing because at the evaluation in terms of the bestpath towards the ultimate goal of jitters is quite frankly fairly complicated,a lot of government constituents and technologies are involved. So we can'treally speculate on the timing.

But, are there -- Steve are there milestones? It just seemsto me that this whole jitters versus side hat debate has actually gone on forquite a long time. Is why just part of the bureaucratic process, or are therethings that to have get worked through that, perhaps, as external parties wecould benchmark or think about?

Well would look at it this way. Not part of bureaucraticprocess, but obviously in its ultimate and clean sheet of paper form, thejitters as it was envisioned several years ago is a massive expensiveundertaking. And what used evident to the user community is that a numberof adaptive hybrid technologies from not only ITT but other industryparticipants are indeed available that could ultimately be better value, lowercost type options. And so the U.S. government in my view is being veryresponsible in terms of trying to evaluate what the best path is through thisto see how they can ultimately achieve the goals of a fully networkedintegrated communication system and use some of the existing technology. So, I'm just saying it is a big undertaking, and it'scomplicated, involves a lot of different components besides just the radio.Remember, there's vehicle’s communication center there’s airborne issuesthere’s data processing issues. A lot more to jitters than just the radiocomponent.

Yes hey, last for me, Steve, with Ito, your mix of defenseis going to be well over the 50% mark. Or you guys after lot of great marketpositions and technologies there's still going to be this view I suppose, byseveral people that, feeder operations in the Middle East are going to bewinding down. I mean does this put strategic pressure on you, perhaps, orITT to redress that balance and look to some industrial M&A activities toperhaps put ITT back on more of an industrial.

Let me answer in this way. We recognized the increase in thedefense component, but in that and of itself is going to continue to be a very,very strong value creator, particularly with the combined acquisition,independent of the current activity that we have. The reason is that the world has changed, and that when wethink about how contemporary defense and intelligence networks are being operated,those technologies that are around sensing, surveillance, communications,information technology are going to continue to be more vital. So we feel goodabout that platform. On the flip side, we are through this process, intending tomaintain, a strong balance sheet and economic currency to be able to continueto grow our industrial and commercial markets, particularly globally. We'll doso on a strategic and value based analysis, but nonetheless, I think would youexpect that's where our -- that's where our next activity would be.

Understood. Thank you.

Thanks, John.

Thank you. Your next question comes from John Balotti of FTNMidwest.

Good morning, Steve.

Hello, John.

How are you?

Great, thank you.

I got a couple just a quick questions. Denise, I believe youmentioned when you went over the updated segment revenue and profitability thatyou mentioned that the increase in fluid was currency related. Is that correct?

Yes, that had to do with the guidance that we gave for thefull year.

Right.

We increased our revenue, and most of that was FX related.

Right and since, we know there's a natural hedge betweenrevenue and margins at Fluid Technology, the fact that the margins stay thesame with higher revenue with FX, and also you mentioned the headwinds withmaterial costs, can you just characterize the underlying profitability in termsof how you see it now versus how you see lets say it in the beginning of the year?

You mean in terms of their margin…

In terms of, if you have higher revenue with currency andthere's an offset on the margin, does it imply that the underlying businessyou're seeing, because of actions you've taken before, that you're seeingimproved margin underlying the currency and underlying the material costs?

Well, we are see going productivity improvements there,which is why when you look at the margin improvement that we saw in thisquarter what we indicated is that we were hit by about 20 basis pointsassociated with that. So, everything else being the same, if the foreign exchangewas the same as what it was a year ago we would have seen 20 basis points inaddition to the 40 basis points that we saw. It is true that when you look atit on a net income basis, it's basically a wash, just because of theirfootprint and how the sales and production flows from how they're structured. So, yes we see something on the top line. It does it impactour margins but from a net income perspective it's basically flat.

Okay. And then return on invested capital, I assume that itwas basically flat because of the timing of the closure of IMC.

We were about 17% ROIC on how we look at it. IMC does impactROIC to some degree, roughly 40 to 50 basis points.

Okay. And then, finally, on the share repurchase, I think,if my numbers are right that there's about roughly $700 million or so left tinauthorization, and I would imagine the third quarter was quiet because of Itoand IMC. Is that fair?

Yeah, that's fair. In fact we -- we have the billion dollarprogram. Under that billion-dollar program, we've repurchased about $350million to-date.

Okay.

All right. So, we have about 650 left to go. And, yes, Q3was -- we only repurchased $5 million in Q3, and that was because of the ITOacquisition and the transaction we were working on.

Okay. Great. Thanks, very much.

Thanks. Natasha, we have time for one more question.

Thank you. Your final question comes from Steve Tussa ofJPMorgan.

Hi, good morning. Just two quick questions. The first one,I'm still not quite clear, been a lot of good questions asked on defense butthe margin there longer-term, it's continued to surprise to the upside is andyou guys have a good backlog there and you talk about how visible it is. What are you missing might be at the beginning of the yearwhen you forecast this thing, and then obviously coming out on the good side ofit, so we're not going to ding you for that. Then what is really the risk hereas you go forward, you're flattish now object the Syncar stuff and there aresome very interesting and attractive opportunities coming up. Is there any potential for your customer to come back andsay, you guys are making great money on this stuff, give us a little back onthat, so we'll be a little more favorable to you going forward on some of thesecontracts? I'm not sure how that stuff works, but I'm just curious asto, I guess, just to longer-term sustainability of this defense margin. I'm notquite clear why it continues to surprise to the upside.

Steve, I think the answer is really simple. We have anexcellent operating team in defense, and we push the defense team forproductivity like we do in every one of our segments. And this year,particularly in our product segment businesses, we did have above planproductivity. As an example, Mike and the team down in Night-vision hadsome breakthroughs in lean manufacturing with respect to tube yields, which isa fundamental issue in terms of cost on our fixed price Night-vision contract. And we had many successes. So, quite frankly, we're proud ofit. That said, you did mention the fact that the government contracting, it istrue that as you renegotiate contracts, whether it's fixed price or cost plus,there always is a great daily of cost negotiation, cost visibility, andovertime, you do tend to give that back in either your rates or your costassumptions in the contract. That's why defense margins in our business don't continue toexpand and why we always come back and say, on a periodic basis, you know,we're pleased with the results, but think about 11%, 11.5% as sort of along-term sustainable, given margin, given the mix of our service, our product,our cost-plus and fixed price mix.

So you're sticking to that target net, and I'm not at themoment with you, so I'm not sure if you're saying it with a straight face ornot but you've really blown that target away for the last couple of year.You're sticking with the 11 to 11.5 for the longer term?

Yes, we are. And that does recognize, Steve, the fact that,we do see a slight increase with respect to the service component as well asthe cost plus component. And both of those are negative to margin expansion.

Okay. One last quick one detailed one. I'm just not quitegetting to your guidance for the fourth quarter. If I take the high end of yoursales range and the high end of your margin range, maybe this is just rounding,I’m getting to something like a 13.5% operating margin, if I back into what theOP number is for fourth quarter. Is there something below the line, its going to be maybe alittle bit more of a drag that gets you to the $0.93? I'm having a hard timegetting down to that 39 using your annual assumptions and back end of thefourth quarter?

Yeah. You'll probably find there's a little bit more on theinterest side associated with IMC.

Okay.

So, we can work through that in detail with you after thecall.

Okay. Appreciated. Good quarter. Thanks.

Thanks.

That's it. And so we'll wrap up now. Paul and I will be hereall day to answer any follow-on questions and we'll look forward to seeingeverybody up a couple weeks in New York City.

Thanks a lot. Thank you. This concludes today's ITTindustries third quarter 2007 earnings conference call. You may now disconnect.