ILLINOIS TOOL WORKS INC (Form: 10-K, Received: 03/04/2005 14:46:25)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K


[X]		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the fiscal year ended December 31, 2004
		or
[ ]		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to

Commission file number 1-4797

ILLINOIS TOOL WORKS INC.

(Exact Name of Registrant as Specified in its Charter)


Delaware (State or Other Jurisdiction of Incorporation or Organization)		36-1258310 (I.R.S. Employer Identification No.)

3600 W. Lake Avenue, Glenview, Illinois (Address of Principal Executive Offices)		60026-1215 (Zip Code)

Registrant’s telephone number, including area code: (847) 724-7500

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class		Name of Each Exchange on Which Registered

Common Stock		New York Stock Exchange Chicago Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes X No

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2004, was approximately $23,800,000,000, based on the New York Stock Exchange closing sales price as of June 30, 2004.

Shares of Common Stock outstanding at January 31, 2005 — 292,257,801.

Documents Incorporated by Reference


2004 Annual Report to Stockholders		Parts I, II, IV
2005 Proxy Statement for Annual Meeting of Stockholders to be held on May 6, 2005		Part III

PART I


ITEM 1.	*Business*

General

Illinois Tool Works Inc. (the “Company” or “ITW”) was founded in 1912 and incorporated in 1915. The Company is a worldwide manufacturer of highly engineered products and specialty systems. The Company has approximately 650 operations in 45 countries that are aggregated and organized for internal reporting purposes into the following five segments:

Engineered Products — North America: Businesses in this segment are located in North America and manufacture a variety of short lead-time plastic and metal components and fasteners, as well as specialty products for a diverse customer base. These commercially oriented, value-added products become part of the customers’ products and typically are manufactured and delivered in a time period less than 30 days.

In the plastic and metal components and fasteners category, products include:


	•	metal fasteners, fastening tools, and metal plate connecting components for the commercial and residential construction industries;

	•	laminate products for the commercial and residential construction industries and furniture markets;

	•	metal fasteners for automotive, appliance and general industrial applications;

	•	metal components for automotive, appliance and general industrial applications;

	•	plastic components for automotive, appliance, furniture and electronics applications; and

	•	plastic fasteners for automotive, appliance and electronics applications.

In the specialty products category, products include:


	•	reclosable packaging for consumer food applications;

	•	swabs, wipes and mats for clean room usage in the electronics and pharmaceutical industries;

	•	hand wipes for industrial purposes;

	•	chemical fluids which clean or add lubrication to machines;

	•	adhesives for industrial, construction and consumer purposes;

	•	epoxy and resin-based coating products for industrial applications;

	•	components for industrial machines; and

	•	manual and power operated chucking equipment for industrial applications.

Engineered Products — International: Businesses in this segment are located outside North America and manufacture a variety of short lead-time plastic and metal components and fasteners, as well as specialty products for a diverse customer base. These commercially oriented, value-added products become part of the customers’ products and typically are manufactured and delivered in a time period less than 30 days.

In the plastic and metal components and fastener category, products include:


	•	metal fasteners, fastening tools, and metal plate connecting components tools for the commercial and residential construction industries;

	•	laminate products for the commercial and residential construction industries and furniture markets;

	•	metal fasteners for automotive, appliance and general industrial applications;

	•	metal components for automotive, appliance and general industrial applications;


	•	plastic components for automotive, appliance and electronics applications; and

	•	plastic fasteners for automotive, appliance and electronics applications.

In the specialty products category, products include:


	•	electronic component packaging trays used for the storage, shipment and manufacturing insertion of electronic components and microchips;

	•	swabs, wipes and mats for clean room usage in the electronics and pharmaceutical industries;

	•	adhesives for industrial, construction and consumer purposes;

	•	chemical fluids which clean or add lubrication to machines;

	•	epoxy and resin-based coating products for industrial applications; and

	•	manual and power operated chucking equipment for industrial applications.

Specialty Systems — North America: Businesses in this segment are located in North America and design and manufacture longer lead-time machinery and related consumables, as well as specialty equipment for a diverse customer base. These commercially oriented value-added products become part of the customers’ processes and typically are manufactured and delivered in a time period more than 30 days.

In the machinery and related consumables category, products include:


	•	industrial packaging equipment and plastic and steel strapping for the bundling and shipment of a variety of products for customers in numerous end markets;

	•	welding equipment and metal consumables for a variety of end market users;

	•	equipment and plastic consumables that multi-pack cans and bottles for the food and beverage industry;

	•	plastic stretch film and related packaging equipment for various industrial purposes;

	•	paper and plastic products used to protect shipments of goods in transit;

	•	marking tools and inks for various end users; and

	•	foil and film and related equipment used to decorate a variety of consumer products.

In the specialty equipment category, products include:


	•	commercial food equipment such as dishwashers, refrigerators, mixers, ovens, food slicers and specialty scales for use by restaurants, institutions and supermarkets;

	•	paint spray equipment for a variety of general industrial applications;

	•	static control equipment for electronics and industrial applications;

	•	wheel balancing and tire uniformity equipment used in the automotive industry; and

	•	airport ground power generators for commercial and military applications.

Specialty Systems — International: Businesses in this segment are located outside North America and design and manufacture longer lead-time machinery and related consumables, as well as specialty equipment for a diverse customer base. These commercially oriented, value-added products become part of the customers’ processes and typically are manufactured and delivered in a time period more than 30 days.

In the machinery and related consumables category, products include:


	•	industrial packaging equipment and plastic and steel strapping for the bundling and shipment of a variety of products for customers in numerous end markets;

	•	welding equipment and metal consumables for a variety of end market users;


	•	equipment and plastic consumables that multi-pack cans and bottles for the food and beverage industry;

	•	plastic bottle sleeves and related equipment for the food and beverage industry;

	•	plastic stretch film and related packaging equipment for various industrial purposes;

	•	paper and plastic products used to protect shipments of goods in transit; and

	•	foil and film and related equipment used to decorate a variety of consumer products.

In the specialty equipment category, products include:


	•	commercial food equipment such as dishwashers, refrigerators, mixers, ovens, food slicers and specialty scales for use by restaurants, institutions and supermarkets;

	•	paint spray equipment for a variety of general industrial applications;

	•	static control equipment for electronics and industrial applications; and

	•	airport ground power generators for commercial applications.

Leasing and Investments: Businesses in this segment make investments in mortgage entities, leases of telecommunications, aircraft, air traffic control and other equipment, properties, affordable housing and a venture capital fund. As a result of the Company’s strong cash flow, the Company has historically had excess funds to make opportunistic investments that meet the Company’s desired returns. The Company may be contractually required to make future cash payments related to affordable housing capital contributions, venture fund capital contributions or the dividends or redemption of preferred stock of subsidiaries. See page 47 in the Company’s 2004 Annual Report to Stockholders for further information regarding these cash contractual obligations as of December 31, 2004. The Company’s significant investments are described below:


	1)	Mortgage investments — In 1995, 1996 and 1997, the Company invested a total of $300 million in three separate mortgage entities. In these essentially similar transactions, the mortgage entities entered into various agreements with a AAA-rated third party related to commercial mortgage loans and real estate whereby the Company paid cash of $240 million ($80 million for each transaction), issued preferred stock of subsidiaries of $60 million ($20 million for each transaction) and the mortgage entities issued nonrecourse notes payable of $740 million. These agreements, each covering a ten-year period, are summarized as follows:


	•	The third party transferred to the mortgage entities legal title in pools of sub-performing commercial mortgage loans and real estate (collectively, the “mortgage assets”). To balance the economics of the transactions, a Treasury security was added to the pool of mortgage-related assets in the second transaction and an annuity contract was added to the pool of mortgage assets in the third transaction.

	•	The mortgage entities entered into swap agreements with the third party whereby:


	•	The third party (the “swap counter party”) makes the contractual principal and interest payments on the mortgage entities’ nonrecourse notes payable.

	•	The swap counter party receives all of the annual operating cash flows from the pools of mortgage assets except for $26 million per year ($9 million for the first two transactions and $8 million for the third transaction), which is paid to the Company.

	•	By the tenth year of each transaction, the swap counter party (who is also the asset servicer) is required to sell all of the mortgage assets. The Company receives the first $127.2 million of the disposition proceeds, which is equal to the redemption value (liquidation value plus accrued dividends) of the $60 million preferred stock of subsidiaries. The swap counter party receives the next $317.6 million of the disposition proceeds, which will be used to pay the principal and interest on the nonrecourse notes payable due in year 10.


	•	The mortgage entities entered into Servicing, Administration and Management agreements (the “servicing agreements”) with the swap counter party whereby the swap counter party will perform all aspects of the servicing, management and marketing of the pools of mortgage assets. In addition, under the terms of the servicing agreements, the swap counter party will collect all cash flows from the assets and make the required swap payments to the mortgage entities, the Company and the holder of the nonrecourse notes payable. In exchange for these services, the swap counter party is paid an annual servicing fee equal to a percentage of the mortgage assets managed and a disposition fee equal to a portion of the disposition proceeds from the sale of the mortgage assets at the end of ten years.

	•	To significantly reduce the risk that the Company will not receive its annual cash flow of $26 million per year, the swap counter party transferred to the Company legal title to certain membership interests in three limited liability corporations, which own separate pools of performing mortgage loans and real estate. In the event that the mortgage entities’ pools of mortgage assets do not generate cash flows of at least $26 million per year, the mortgage entities have a right to receive the shortfall from the cash flow generated by the pools of assets owned by the limited liability corporations. This collateral right is the Company’s only interest in the limited liability corporations.

	•	In 2000, the servicing agreements were amended such that the disposition proceeds from the sales of the original mortgage assets were allowed to be reinvested in replacement mortgage assets. As part of the amendment, the swap counter party guaranteed that the disposition proceeds of the replacement mortgage assets would be no less than the disposition proceeds from the sales of the original mortgage assets.


	See the Leasing and Investments section of the Management’s Discussion and Analysis in the Company’s 2004 Annual Report to Stockholders for further discussion of the estimated future cash flows and risks related to these mortgage investments.

	On July 1, 2003, the Company adopted FASB Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”) relative to its investments in the mortgage entities. FIN 46 requires consolidation of variable interest entities in which a company has a controlling financial interest, even if it does not have a majority voting interest. A company is deemed to have a controlling financial interest in a variable interest entity if it has either the majority of the risk of loss or the majority of the residual returns. Upon its adoption of FIN 46 for the mortgage investments as of July 1, 2003, the Company deconsolidated its investments in the mortgage entities as the Company neither bears the majority of the risk of loss nor enjoys the majority of any residual returns.

	Starting in the third quarter of 2003 and for subsequent periods, the Company accounts for its net investments in the mortgage entities using the equity method of accounting as provided in Statement of Position 78-9, Accounting for Investments in Real Estate Ventures. Under this method, the net mortgage investments are adjusted through income for changes in the Company’s share of the net assets of the mortgage entities. The excess of the liquidation value of the investments in the mortgage entities over their net book value as of July 1, 2003 of $178.3 million is being recognized as income over the remaining term of each of the investments.

	Prior to the adoption of FIN 46 for the mortgage investments as of July 1, 2003, each asset and liability of the mortgage entities was recorded based on the appropriate accounting method for each component. See the Investments note in the Company’s 2004 Annual Report to Stockholders for a detailed explanation of the accounting methods used prior to the adoption of FIN 46 for the various assets in these transactions.


	2)	Leases of equipment — The Company has entered into numerous leases of equipment used in the telecommunications and transportation industries. These leases are accounted for as leveraged, operating or sales-type leases. See the Investments note in the Company’s 2004 Annual Report to Stockholders for further discussion of these leases.


	3)	Affordable housing limited partnerships — The Company has entered into several affordable housing limited partnerships primarily to receive tax benefits in the form of tax credits and tax deductions from operating losses. See the Investments note in the Company’s 2004 Annual Report to Stockholders for further discussion of these investments.

80/20 Business Process

A key element of the Company’s business strategy is its continuous 80/20 business process. The basic concept of this 80/20 business process is to focus on what is most important (the 20% of the items which account for 80% of the value) and to spend less time and resources on the less important (the 80% of the items which account for 20% of the value). The Company’s operations use this 80/20 business process to simplify and focus on the key parts of their business, and as a result, reduce complexity that often disguises what is truly important. Each of the Company’s 650 operations utilizes the 80/20 process in all aspects of its business. Common applications of the 80/20 business process include:


	•	Simplifying manufactured product lines by reducing the number of products offered by combining the features of similar products, outsourcing products or, as a last resort, eliminating products.

	•	Simplifying the customer base by focusing on the 80/20 customers and finding different ways to serve the 20/80 customers.

	•	Simplifying the supplier base by partnering with key 80/20 suppliers and reducing the number of 20/80 suppliers.

	•	Designing business processes and systems around the key 80/20 activities.

The result of the application of this 80/20 business process is that the Company improves its operating and financial performance. These 80/20 efforts often result in restructuring projects that reduce costs and improve margins. Corporate management works closely with those business units that have operating results below expectations to help the unit apply this 80/20 business process and improve their results.

Premark Merger

In 1999, a wholly owned subsidiary of ITW merged with Premark International, Inc. (“Premark”), a manufacturer of commercial food equipment and laminate products. Shareholders of Premark received .8081 shares of ITW common stock in exchange for each share of Premark common stock outstanding. A total of 49,781,665 of ITW common stock shares were issued to the former Premark shareholders in connection with the merger. The merger was accounted for under the pooling-of-interests accounting method. Accordingly, ITW’s historical financial statements for periods prior to the merger have been restated to include the results of operations, financial position and cash flows of Premark as though the companies had been combined during such periods.

Discontinued Operations

In 2001, the Company’s Board of Directors authorized the divestiture of the Consumer Products segment. These businesses were acquired by ITW in 1999 as part of the Company’s merger with Premark. Subsequent to the Premark merger, the Company determined that the consumer characteristics of the businesses in the Consumer Products segment were not a good long-term fit with the Company’s other industrially focused businesses. Businesses in this segment were located primarily in North America and manufactured household products that are used by consumers, including Precor specialty exercise equipment, West Bend small appliances and premium cookware and Florida Tile ceramic tile. On October 31, 2002, the sales of Precor and West Bend were completed, resulting in cash proceeds of $211.2 million. On November 7,

2003, the sale of Florida Tile was completed, resulting in cash proceeds of $11.5 million. The Company’s net loss on disposal of the segment was as follows:


	Pretax			Tax			After-Tax
In thousands	Gain (Loss)			Provision (Benefit)			Gain (Loss)

Realized gains on 2002 sales of Precor and West Bend	$	146,240		$	51,604		$	94,636
Estimated loss on 2003 sale of Florida Tile recorded in 2002		(123,874	)		(31,636	)		(92,238	)

Estimated net gain on disposal of the segment deferred at December 31, 2002		22,366			19,968			2,398
Gain adjustments related to 2002 sales of Precor and West Bend recorded in 2003		(752	)		(256	)		(496	)
Additional loss on sale of Florida Tile recorded in 2003		(28,784	)		(10,348	)		(18,436	)

Net loss on disposal of segment as of December 31, 2003		(7,170	)		9,364			(16,534	)
Adjustments to Florida Tile loss on sale recorded in 2004		263			1,174			(911	)

Net loss on disposal of segment as of December 31, 2004	$	(6,907	)	$	10,538		$	(17,445	)

During the five-year period ending December 31, 2003, the Company acquired and disposed of numerous other operations which did not materially impact consolidated results.

Current Year Developments

Refer to pages 31 through 49, Management’s Discussion and Analysis, in the Company’s 2004 Annual Report to Stockholders.

Financial Information about Segments and Markets

Segment and geographic data and operating results of the segments are included on pages 32 through 42 and 74 through 76 of the Company’s 2004 Annual Report to Stockholders.

The principal end markets served by the Company’s four continuing manufacturing segments are as follows:


	% of 2004 Operating Revenues by
	Manufacturing Segment

	Engineered						Specialty
	Products-			Engineered			Systems-			Specialty
	North			Products-			North			Systems-
End Markets Served	America			International			America			International

Construction		47	%		37	%		13	%		6	%
Automotive		29			30			4			3
General Industrial		9			15			23			29
Food Retail and Service		—			—			25			21
Consumer Durables		4			7			3			2
Electronics		2			4			1			2
Food and Beverage		3			1			8			13
Industrial Capital Goods		2			1			4			6
Paper Products		—			—			3			4
Other		4			5			16			14

		100	%		100	%		100	%		100	%

The Company’s manufacturing businesses primarily distribute their products directly to industrial manufacturers and through independent distributors.

Backlog

Backlog generally is not considered a significant factor in the Company’s businesses as relatively short delivery periods and rapid inventory turnover are characteristic of most of its products. Backlog by manufacturing segment as of December 31, 2004 and 2003 is summarized as follows:


	Backlog in Thousands of Dollars

	Engineered				Specialty
	Products-		Engineered		Systems-		Specialty
	North		Products-		North		Systems-
	America		International		America		International		Total

2004	$	258,000	$	249,000	$	245,000	$	172,000	$	924,000
2003	$	236,000	$	199,000	$	205,000	$	143,000	$	783,000

Backlog orders scheduled for shipment beyond calendar year 2005 were not material in any manufacturing segment as of December 31, 2004.

The information set forth below is applicable to all industry segments of the Company unless otherwise noted:

Competition

The Company’s global competitive environment is complex because of the wide diversity of products the Company manufactures and the many markets it serves. Depending on the product or market, the Company may compete with a few other companies or with many others. The Company is a leading producer of plastic and metal components and fasteners; laminate products; polymers and fluid products; welding products; packaging machinery and related consumables; food service equipment; and industrial finishing equipment.

Raw Materials

The Company uses raw materials of various types, primarily metals, plastics and paper that are available from numerous commercial sources. The availability of materials and energy has not resulted in any significant business interruptions or other major problems, nor are any such problems anticipated.

Research and Development

The Company’s growth has resulted from developing new and improved products, broadening the application of established products, continuing efforts to improve and develop new methods, processes and equipment, and from acquisitions. Many new products are designed to reduce customers’ costs by eliminating steps in their manufacturing processes, reducing the number of parts in an assembly, or by improving the quality of customers’ assembled products. Typically, the development of such products is accomplished by working closely with customers on specific applications. Identifiable research and development costs are set forth on page 55 of the Company’s 2004 Annual Report to Stockholders.

The Company owns approximately 2,900 unexpired United States patents covering articles, methods and machines. Many counterparts of these patents have also been obtained in various foreign countries. In addition, the Company has approximately 1,100 applications for patents pending in the United States Patent Office, but there is no assurance that any patent will be issued. The Company maintains an active patent department for the administration of patents and processing of patent applications.

The Company believes that many of its patents are valuable and important. Nevertheless, the Company credits its leadership in the markets it serves to engineering capability; manufacturing techniques, skills and efficiency; marketing and sales promotion; and service and delivery of quality products to its customers. The expiration of any one of the Company’s patents would not have a material effect on the Company’s results of operations or financial position.

Trademarks

Many of the Company’s products are sold under various owned or licensed trademarks, which are important to the Company. Among the most significant are: ITW, Acme, Angleboard, Apex, Bernard, Binks, Buildex, Chemtronics, Corex, Deltar, Devcon, DeVilbiss, Dymon, Dynatec, Elga, Evercoat, Fastex, Foster, Gema, Hi-Cone, Hobart, Intellibuild, Keps, Krafft, LPS, Magna, Magnaflux, Miller, Mima, Minigrip, Nexus, Orgapack, Paktron, Paslode, Permatex, Pryda, Ramset, Ransburg, Red Head, Resopal, Rocol, Shakeproof, Signode, Simco, Spit, Stero, Strapex, Teks, Tempil, Tenax, Texwipe, Traulsen, Truswal Systems, Tri-Mark, Unipac, Valeron, Vulcan, Wilsonart, Wynn and Zip-Pak.

Environmental

The Company believes that its plants and equipment are in substantial compliance with applicable environmental regulations. Additional measures to maintain compliance are not expected to materially affect the Company’s capital expenditures, competitive position, financial position or results of operations.

Various legislative and administrative regulations concerning environmental issues have become effective or are under consideration in many parts of the world relating to manufacturing processes and the sale or use of certain products. To date, such developments have not had a substantial adverse impact on the Company’s sales or earnings. The Company has made considerable efforts to develop and sell environmentally compatible products resulting in new and expanding marketing opportunities.

Employees

The Company employed approximately 49,000 persons as of December 31, 2004 and considers its employee relations to be excellent.

International

The Company’s international operations include subsidiaries, joint ventures and licensees in 44 countries on six continents. These operations serve such end markets as construction, automotive, food retail and service, general industrial, food and beverage, and others on a worldwide basis. The Company’s international operations contributed approximately 44% of operating revenues in 2004 and 41% in 2003.

Refer to pages 31 through 49 and 74 through 76 in the Company’s 2004 Annual Report to Stockholders for additional information on international activities. International operations are subject to certain risks inherent in conducting business in foreign countries, including price controls, exchange controls, limitations on participation in local enterprises, nationalization, expropriation and other governmental action, and changes in currency exchange rates.

Forward-looking Statements

This annual report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, without limitation, statements regarding availability of raw materials and energy, the cost of compliance with environmental regulations, the Company’s 2005 forecasts and assumptions, the adequacy of internally generated funds, the recoverability of the Company’s investment in mortgage entities, future cash flows and income from the Company’s mortgage investments, recoverability of the Company’s investment in equipment leases, the meeting of dividend payout objectives, the impact of the adoption of SFAS 123R on stock-based compensation, the impact of the repeal of the ETI benefit on the Company’s future U.S. tax payments, the amount of U.S. pre-tax manufacturing income that would qualify as eligible income, payments under guarantees, the Company’s portion of future benefit payments related to pension and other postretirement benefits and the availability of additional financing. These statements are subject to certain risks, uncertainties, and other factors, which could cause actual results to differ materially from those anticipated. Important risks that may influence future results include (1) a downturn in the construction, automotive, general industrial, food retail and service, or real estate markets, (2) deterioration in global and domestic business and economic conditions, particularly in North America, the European Community and Australia, (3) the unfavorable impact of foreign currency fluctuations and costs of raw materials, (4) an interruption in, or reduction in, introducing new products into the Company’s product lines, (5) an unfavorable environment for making acquisitions, domestic and international, including adverse accounting or regulatory requirements and market values of candidates, and (6) unfavorable tax law changes and tax authority rulings. The risks covered here are not all inclusive and given these and other possible risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

ITW practices fair disclosure for all interested parties. Investors should be aware that while ITW regularly communicates with securities analysts and other investment professionals, it is against ITW’s policy to disclose to them any material non-public information or other confidential commercial information. Shareholders should not assume that ITW agrees with any statement or report issued by any analyst irrespective of the content of the statement or report.

Executive Officers

Executive Officers of the Company as of February 28, 2005:


Name	Office	Age

Robert T. Callahan	Senior Vice President, Human Resources		63
Jack R. Campbell	Executive Vice President		52
W. James Farrell	Chairman and Chief Executive Officer		62
Russell M. Flaum	Executive Vice President		54
David T. Flood	Executive Vice President		53
Philip M. Gresh, Jr	Executive Vice President		56
Thomas J. Hansen	Executive Vice President		56
Craig A. Hindman	Executive Vice President		50
Stewart S. Hudnut	Senior Vice President, General Counsel and Secretary		65
Jon C. Kinney	Senior Vice President and Chief Financial Officer		62
Frank S. Ptak	Vice Chairman		61
E. Scott Santi	Executive Vice President		43
David B. Speer	President		53
Allan C. Sutherland	Senior Vice President, Leasing and Investments		41
Hugh J. Zentmyer	Executive Vice President		58

The executive officers of the Company serve at the pleasure of the Board of Directors. Except for Messrs. Callahan, Campbell, Flood, Gresh, Hindman, and Santi, each of the foregoing officers has been employed by the Company in various elected executive capacities for more than five years. Mr. Callahan was elected Senior Vice President in 2002. He joined the Company in 1976 and has served the Company in various human resource capacities over the last 28 years. Mr. Campbell was elected Executive Vice President in 2004. He joined the Company in 1981 and served as president of various packaging and printing businesses since 1986. Mr. Flood was elected Executive Vice President in 2000. He joined the Company in 1993 and has held various management positions within the polymers, fluids and machined components businesses and previously worked for the Company from 1976 to 1991. Mr. Gresh was elected Executive Vice President in 2000. He joined the Company in 1989 and has held various sales, marketing and general management positions with the consumer packaging businesses. Mr. Hindman was elected Executive Vice President in 2004. He joined the Company in 1976 and has held various sales, marketing and general management positions with the construction products businesses. Mr. Santi was elected Executive Vice President in 2004. He joined the Company in 1983 and has held various sales, marketing and general management positions with the construction products, machined components, and welding businesses during his 22 years with the Company.

Internet Information

Copies of the following information are available free of charge through the Company’s website (www.itw.com) as soon as reasonably practicable after the Company electronically files the material with, or furnishes it to, the Securities and Exchange Commission and are available in print to any shareholder who requests it:


	•	The Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K;

	•	Statement of Principles of Conduct;

	•	Code of Ethics for CEO and key financial and accounting personnel;

	•	Charters of the Audit, Corporate Governance and Nominating and Compensation Committees of the Board of Directors;


	•	Corporate Governance Guidelines; and

	•	Board amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934.

ITEM 2. Properties

As of December 31, 2004, the Company operated the following plants and office facilities, excluding regional sales offices and warehouse facilities:


	Number		Floor Space
	of
	Properties		Owned		Leased		Total

			(In millions of square feet)
Engineered Products — North America		141		8.5		2.9		11.4
Engineered Products — International		123		5.4		2.2		7.6
Specialty Systems — North America		141		8.7		3.0		11.7
Specialty Systems — International		116		6.7		1.9		8.6
Leasing and Investments		20		0.6		0.4		1.0
Corporate		12		1.5		—		1.5

		553		31.4		10.4		41.8

The principal plants outside of the U.S. are in Australia, Austria, Belgium, Canada, China, Czech Republic, Denmark, France, Germany, Ireland, Italy, the Netherlands, Spain, Switzerland and the United Kingdom.

The Company’s properties are primarily of steel, brick or concrete construction and are maintained in good operating condition. Productive capacity, in general, currently exceeds operating levels. Capacity levels are somewhat flexible based on the number of shifts operated and on the number of overtime hours worked. The Company adds productive capacity from time to time as required by increased demand. Additions to capacity can be made within a reasonable period of time due to the nature of the businesses.


ITEM 3.	*Legal Proceedings*

In 2003, the Company received notification from Region V of the United States Environmental Protection Agency of a number of alleged violations of the Resource Conservation and Recovery Act at one of its manufacturing facilities in Michigan. The alleged violations were based on an inspection that took place in 2002. The notification indicated an intention to seek civil penalties of $326,000 through an administrative proceeding. The Company believed that penalties in that amount were unjustified. Through negotiation with USEPA, the Company recently concluded a settlement of this matter for $52,726 without admitting to any of the alleged violations.

Wilsonart International, Inc. (“Wilsonart”), a wholly owned subsidiary of ITW, is a defendant in a consolidated class action lawsuit filed in June 2000 in federal district court in White Plains, New York on behalf of purchasers of high-pressure laminate. The complaint alleges that Wilsonart participated in a conspiracy with competitors to fix, raise, maintain or stabilize prices for high-pressure laminate between 1994 and 2000 and seeks injunctive relief and treble damages. Indirect purchasers of high-pressure laminate filed similar purported class action cases under various state antitrust and consumer protection statutes in 13 states and the District of Columbia, all of which cases have been stayed pending the outcome of the consolidated class action. These lawsuits were brought following the commencement of a federal grand jury investigation into price-fixing in the high-pressure laminate industry, which investigation was subsequently closed by the Department of Justice with no further proceedings and with all documents being returned to the parties. Plaintiffs are seeking damages in the range of $439,000,000 to $475,000,000 before trebling. Without admitting liability, two of Wilsonart’s co-defendants, International Paper Company and Panolam International, Inc., have settled the federal consolidated class action case for $31,000,000 and $9,500,000,

respectively. The plaintiffs’ claims against Formica Corporation, the remaining co-defendant in the case, were dismissed with prejudice as a result of its bankruptcy proceedings on September 27, 2004. As a result, Wilsonart is the sole remaining defendant in the consolidated class action lawsuit. While no assurances can be given regarding the ultimate outcome or the timing of the resolution of these claims, the Company believes that the plaintiffs’ claims are without merit and intends to continue to defend itself vigorously in this action and all related actions that are now pending or that may be brought in the future.


ITEM 4.	*Submission of Matters to a Vote of Security Holders*

Not applicable.

PART II


ITEM 5.	*Market for Registrant’s Common Equity and Related Stockholder Matters*

Market information, holders of record and dividend data is incorporated by reference to page 77 of the Company’s 2004 Annual Report to Stockholders.

On April 19, 2004, the Company’s Board of Directors authorized a stock repurchase program, which provides for the buy back of up to 31,000,000 shares of common stock.

Share repurchase activity for the fourth quarter was as follows:


					Total Number of
					Shares Purchased as		Maximum Number that
	Total Number of		Average Price Paid		part of Publicly		may yet be Purchased
Period	Shares Purchased		Per Share		Announced Program		Under Program

October 2004		2,151,200	$	91.89		2,151,200		15,582,227
November 2004		2,351,600		94.08		2,351,600		13,230,627
December 2004		1,146,100		94.90		1,146,100		12,084,527

Total		5,648,900		93.41		5,648,900


ITEM 6.	*Selected Financial Data*


In thousands (except per share
amounts)		2004		2003		2002		2001		2000

Operating revenues		$	11,731,425		10,035,623		9,467,740		9,292,791		9,511,647
Income from continuing operations		$	1,339,605		1,040,214		931,810		802,449		969,451
Income from continuing operations per common share:
	Basic	$	4.43		3.39		3.04		2.64		3.21
	Diluted	$	4.39		3.37		3.02		2.62		3.18
Total assets at year-end		$	11,351,934		11,193,321		10,623,101		9,822,349		9,514,847
Long-term debt at year-end		$	921,098		920,360		1,460,381		1,267,141		1,549,038
Cash dividends declared per common share		$	1.04		.94		.90		.84		.76

On July 1, 2003, the Company adopted FASB Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”) relative to its investments in the mortgage entities. Refer to pages 61 and 62 of the Company’s 2004 Annual Report Stockholders for discussion of the adoption of FIN 46. Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. Refer to pages 64 and 65 of the Company’s 2004 Annual Report to Stockholders for discussion of the effect of the change in accounting principle.


ITEM 7.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*

This information is incorporated by reference to pages 31 through 49 of the Company’s 2004 Annual Report to Stockholders.


ITEM 7A.	*Quantitative and Qualitative Disclosures About Market Risk*

This information is incorporated by reference to page 48 of the Company’s 2004 Annual Report to Stockholders.


ITEM 8.	*Financial Statements and Supplementary Data*

The financial statements and report thereon of Deloitte & Touche LLP, Independent Registered Public Accounting Firm, dated March 1, 2005, as found on pages 51 through 76 and the supplementary data as found on page 77 of the Company’s 2004 Annual Report to Stockholders, are incorporated by reference.


ITEM 9.	*Changes in and Disagreements with Accountants on Accounting and Financial Disclosure*

Not applicable.


ITEM 9A.	*Controls and Procedures*

Controls and Procedures

The Company’s management, with the participation of the Company’s Chairman & Chief Executive Officer and Senior Vice President & Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of December 31, 2004. Based on such evaluation, the Company’s Chairman & Chief Executive Officer and Senior Vice President & Chief Financial Officer have concluded that, as of December 31, 2004, the Company’s disclosure controls and procedures were effective in timely alerting the Company’s management to all information required to be included in this Form 10-K and other Exchange Act filings.

Management’s Report on Internal Control over Financial Reporting

The Management Report on Internal Control Over Financial Reporting, as found on page 50 of the Company’s 2004 Annual Report to Stockholders, is incorporated by reference.

The Company’s Report of Independent Registered Public Accounting Firm, as found on page 51 of the Company’s 2004 Annual Report to Stockholders, is incorporated by reference.

In connection with the evaluation by management, including the Company’s Chairman & Chief Executive Officer and Senior Vice President & Chief Financial Officer, no changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the quarter ended December 31, 2004 were identified that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.


ITEM 9B.	*Other Information*

Not applicable.

PART III


ITEM 10.	*Directors and Executive Officers of the Registrant*

Information regarding the Directors of the Company is incorporated by reference to the information under the caption “Election of Directors” in the Company’s Proxy Statement for the 2005 Annual Meeting of Stockholders.

Information regarding the Audit Committee and its Financial Experts is incorporated by reference to the information under the captions “Board of Directors and Its Committees” and “Report of the Audit Committee” in the Company’s Proxy Statement for the 2005 Annual Meeting of Stockholders.

Information regarding the Executive Officers of the Company can be found in Part I of this Annual Report on Form 10-K on page 10.

Information regarding compliance with Section 16(a) of the Exchange Act is incorporated by reference to the information under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s Proxy Statement for the 2005 Annual Meeting of Stockholders.

Information regarding the Company’s code of ethics that applies to the Company’s Chairman & Chief Executive Officer, Senior Vice President & Chief Financial Officer, and key financial and accounting personnel is incorporated by reference to the information under the caption “Corporate Governance Policies and Practices” in the Company’s Proxy Statement for the 2005 Annual Meeting of Stockholders.


ITEM 11.	*Executive Compensation*

This information is incorporated by reference to the information under the captions “Executive Compensation” and “Director Compensation” in the Company’s Proxy Statement for the 2005 Annual Meeting of Stockholders.


ITEM 12.	*Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters*

This information is incorporated by reference to the information under the captions “Ownership of ITW Stock” and “Equity Compensation Plan Information” in the Company’s Proxy Statement for the 2005 Annual Meeting of Stockholders.


ITEM 13.	*Certain Relationships and Related Transactions*

This information is incorporated by reference to the information under the caption “Ownership of ITW Stock” in the Company’s Proxy Statement for the 2005 Annual Meeting of Stockholders.


ITEM 14.	*Principal Accountant Fees and Services*

This information is incorporated by reference to the information under the caption “Ratification of the Appointment of Independent Public Accountants” in the Company’s Proxy Statement for the 2005 Annual Meeting of Stockholders.

PART IV


ITEM 15.	*Exhibits and Financial Statement Schedules*

(a)(1) Financial Statements

The financial statements and report thereon of Deloitte & Touche LLP, Independent Registered Public Accounting Firm, dated March 1, 2005 as found on pages 51 through 76 and the supplementary data as found on page 77 of the Company’s 2004 Annual Report to Stockholders, are incorporated by reference.

(2) Financial Statement Schedules

Not applicable.

(3) Exhibits

(i) See the Exhibit Index on pages 17 and 18 of this Form 10-K.

(ii) Pursuant to Regulation S-K, Item 601(b)(4)(iii), the Company has not filed with Exhibit 4 any debt instruments for which the total amount of securities authorized thereunder are less than 10% of the total assets of the Company and its subsidiaries on a consolidated basis as of December 31, 2004, with the exception of the agreements related to the 5 ³ / 4 % and 6 ⁷ / 8 % Notes, which are filed with Exhibit 4. The Company agrees to furnish a copy of the agreements related to the debt instruments which have not been filed with Exhibit 4 to the Securities and Exchange Commission upon request.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 4th day of March 2005.


	ILLINOIS TOOL WORKS INC.


	By	/s/ W. JAMES FARRELL



	W. James Farrell
	Chairman and Chief
	Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on this 4th day of March 2005.


Signatures		Title


/s/ W. JAMES FARRELL W. James Farrell		Director, Chairman and Chief Executive Officer, (Principal Executive Officer)

/s/ JON C. KINNEY Jon C. Kinney		Senior Vice President and Chief Financial Officer, (Principal Accounting and Financial Officer)

WILLIAM F. ALDINGER		Director

MICHAEL J. BIRCK		Director

MARVIN D. BRAILSFORD		Director

SUSAN CROWN		Director

DON H. DAVIS, JR		Director

ROBERT C. MCCORMACK		Director

ROBERT S. MORRISON		Director

HAROLD B. SMITH		Director
		By /s/ W. JAMES FARRELL (W. James Farrell, as Attorney-in-Fact)

Original powers of attorney authorizing W. James Farrell to sign the Company’s Annual Report on Form 10-K and amendments thereto on behalf of the above-named directors of the registrant have been filed with the Securities and Exchange Commission as part of this Annual Report on Form 10-K (Exhibit 24).

EXHIBIT INDEX

ANNUAL REPORT on FORM 10-K

2004


Exhibit
Number				Description

	3	(a)	—	Restated Certificate of Incorporation of Illinois Tool Works Inc., as amended, filed as Exhibit 3(a) to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1997 (Commission File No. 1-4797) and incorporated herein by reference.
	3	(b)	—	By-laws of Illinois Tool Works Inc., as amended, filed as Exhibit 3(b) to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004 (Commission File No. 1-4797) and incorporated herein by reference.
	4	(a)	—	Indenture, dated as of November 1, 1986, between Illinois Tool Works Inc. and The First National Bank of Chicago, as Trustee, filed as Exhibit 4 to the Company’s Registration Statement on Form S-3 (Registration Statement No. 33-5780) filed with the Securities and Exchange Commission on May 14, 1986 and incorporated herein by reference.
	4	(b)	—	First Supplemental Indenture, dated as of May 1, 1990 between Illinois Tool Works Inc. and Harris Trust and Savings Bank, as Trustee, filed as Exhibit 4-3 to the Company’s Post-Effective Amendment No. 1 to Registration Statement on Form S-3 (Registration No. 33-5780) filed with the Securities and Exchange Commission on May 8, 1990 and incorporated herein by reference.
	4	(c)	—	Form of 5 ³ / 4 % Notes due March 1, 2009, filed as Exhibit 4 to the Company’s Current Report on Form 8-K dated February 24, 1999 and incorporated herein by reference.
	4	(d)	—	Form of Indenture (Revised) in connection with Premark International, Inc.’s Form S-3 Registration Statement No. 33-35137 and Form S-3 Registration Statement No. 333-62105 (Exhibit 4.2 to the Premark International, Inc.’s Annual Report on Form 10-K for the year ended December 28, 1996) and incorporated herein by reference.
	10	(a)*	—	Illinois Tool Works Inc. 1996 Stock Incentive Plan dated February 16, 1996, as amended on December 12, 1997, October 29, 1999, January 3, 2003, March 18, 2003, January 2, 2004, and December 10, 2004.
	10	(b)*	—	Illinois Tool Works Inc. 1982 Executive Contributory Retirement Income Plan adopted December 13, 1982, filed as Exhibit 10(c) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (Commission File No. 1-4797) and incorporated herein by reference.
	10	(c)*	—	Illinois Tool Works Inc. 1985 Executive Contributory Retirement Income Plan adopted December 1985, filed as Exhibit 10(d) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (Commission File No. 1-4797) and incorporated herein by reference.
	10	(d)*	—	Amendment to the Illinois Tool Works Inc. 1985 Executive Contributory Retirement Income Plan dated May 1, 1996, filed as Exhibit 10(c) to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1996 (Commission File No. 1-4797) and incorporated herein by reference.
	10	(e)*	—	Illinois Tool Works Inc. Executive Incentive Plan adopted February 16, 1996, filed as Exhibit 10(a) to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1996 (Commission File No. 1-4797) and incorporated herein by reference.
	10	(f)*	—	ITW Nonqualified Pension Benefits Plan, effective January 1, 2002, filed as Exhibit 10(a) to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2002 (Commission File No. 1-4797) and incorporated herein by reference.
	10	(g)	—	Illinois Tool Works Inc. Non-Employee Directors’ Restricted Stock Program, filed as Exhibit 10(a) to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004 (Commission File No. 1-4797) and incorporated herein by reference.


Exhibit
Number				Description

	10	(h)	—	Illinois Tool Works Inc. Outside Directors’ Deferred Fee Plan dated December 12, 1980, filed as Exhibit 10(h) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (Commission File No. 1-4797) and incorporated herein by reference.
	10	(i)	—	Illinois Tool Works Inc. Phantom Stock Plan for Non-Officer Directors, filed as Exhibit 10(e) to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1996 (Commission File No. 1-4797) and incorporated herein by reference.
	10	(j)*	—	Illinois Tool Works Inc. Executive Contributory Retirement Income Plan effective January 1, 1999, as amended effective July 1, 2000 and December 10, 2004.
	10	(k)	—	Underwriting Agreement dated February 19, 1999, related to the 5 ³ / 4 % Notes due March 1, 2009, filed as Exhibit 1 to the Company’s Current Report on Form 8-K dated February 24, 1999 and incorporated herein by reference.
	10	(l)	—	Illinois Tool Works Inc. Non-Officer Directors’ Fee Conversion Plan adopted February 19, 1999, as amended December 15, 2000, filed as Exhibit 10(l) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (Commission File No. 1-4797) and incorporated herein by reference.
	10	(m)	—	Executive Noncompetition Agreement dated November 11, 1999, by and between James M. Ringler and Illinois Tool Works Inc. filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K dated November 11, 1999 (Commission File No. 1-4797) and incorporated herein by reference.
	10	(n)*	—	Form of restricted stock agreement (unvested restricted stock forfeited at termination of employment) filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K dated December 10, 2004 and incorporated herein by reference.
	10	(o)*	—	Form of restricted stock agreement (unvested restricted stock fully vested at retirement, death or disability) filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K dated December 10, 2004 and incorporated herein by reference.
	10	(p)*	—	Stock option terms filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K dated December 10, 2004 and incorporated herein by reference.
	13		—	The Company’s 2004 Annual Report to Stockholders, pages 31-77.
	21		—	Subsidiaries and Affiliates of the Company.
	23		—	Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm.
	24		—	Powers of Attorney.
	31		—	Rule 13a-14(a) Certification.
	32		—	Section 1350 Certification.
	99	(a)	—	Description of the capital stock of Illinois Tool Works Inc., filed as Exhibit 99 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1997 (Commission File No. 1-4797) and incorporated herein by reference.


*	Management contract or compensatory plan or arrangement.

Exhibit 10(a)

Illinois Tool Works Inc.

1996 Stock Incentive Plan

Approved by the Board of Directors on February 16, 1996
and by the Stockholders on May 3, 1996

Amended by the Board of Directors on
December 12, 1997, October 29, 1999, January 3, 2003,
March 18, 2003, January 2, 2004 and December 10, 2004

TABLE OF CONTENTS


Section 1. Purpose.			1
Section 2. Definitions.			1
Section 3. Administration.			3
Section 4. Common Stock Subject to Plan.			3
Section 5. Options.			4
Section 6. Stock Awards.			4
Section 7. Performance Units.			5
Section 8. Stock Appreciation Rights.			5
Section 9. Termination of Employment.			6
Section 10. Adjustment Provisions.			7
Section 11. Term.			7
Section 12. Corporate Change.			7
Section 13. General Provisions.			7
Section 14. Amendment or Discontinuance of the Plan.			9
Section 15. Options Granted Under the Premark Plan.			9

-i-

Illinois Tool Works Inc.
1996 Stock Incentive Plan

Section 1. Purpose.

The purpose of the Plan is to encourage Key Employees to have a greater financial investment in the Company through ownership of its Common Stock. The Plan is an amendment and restatement of the 1979 Stock Incentive Plan (the “1979 Plan”). The terms of the Plan will apply to all outstanding Incentives granted under the 1979 Plan, including those pertaining to a Corporate Change and termination of employment as described below. No additional Incentives will be granted under the 1979 Plan.

Effective May 9, 2003, the Premark International, Inc. 1994 Incentive Plan (the “Premark Plan”) is merged into the 1996 Stock Incentive Plan. Section 15 of the 1996 Stock Incentive Plan sets forth the terms applicable to the merged Premark Plan and the Options granted thereunder.

Section 2. Definitions.

Board : The Board of Directors of the Company.

Code : The Internal Revenue Code of 1986, as amended.

Committee : The Compensation Committee of the Board or such other committee as shall be appointed by the Board to administer the Plan pursuant to Section 3.

Common Stock : The Common Stock, without par value, of the Company or such other class of shares or other securities as may be applicable pursuant to the provisions of Section 10.

Company : Illinois Tool Works Inc., a Delaware corporation, and any successor thereto.

Corporate Change : Any of the following: (i) the dissolution of the Company; (ii) the merger, consolidation, or reorganization of the Company with any other corporation after which the holders of Common Stock immediately prior to the effective date thereof hold less than 70% of the outstanding common stock of the surviving or resulting entity; (iii) the sale of all or substantially all of the assets of the Company to any person or entity other than a wholly owned subsidiary; (iv) any person or group of persons acting in concert, other than descendants of Byron L. Smith and trusts for the benefit of such descendants, or entity becomes the beneficial owner, directly or indirectly, of more than 30% of the outstanding Common Stock; or (v) the individuals who, as of the close of the most recent annual meeting of the Company’s stockholders, are members of the Board (the “Existing Directors”) cease for any reason to constitute more than 50% of the Board; provided, however, that if the election, or nomination for election, by the Company’s stockholders of any new director was approved by a vote of at least 50% of the Existing Directors, such new director shall be considered an Existing Director;

provided further, however, that no individual shall be considered an Existing Director if such individual initially assumed office as a result of either an actual or threatened “Election Contest” (as described in Rule 14a-11 under the Securities Exchange Act of 1934) or other actual or threatened solicitation of proxies by or on behalf of anyone other than the Board (a “Proxy Contest”), including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest.

Covered Employee : A Key Employee who is or is expected to be a “covered employee” within the meaning of Code Section 162(m) and the related regulations for the year in which an Incentive is taxable to such employee and for whom the Committee intends that such Incentive qualify as performance-based compensation under Code Section 162(m).

Disability : Eligible for Social Security disability benefits or disability benefits under the Company’s long-term disability plan, based upon a determination by the Committee that the condition arose prior to termination of employment.

Fair Market Value : The average of the highest and lowest price at which Common Stock was traded on the relevant date, as reported in the “NYSE-Composite Transactions” section of the Midwest Edition of The Wall Street Journal , or, if no sales of Common Stock were reported for that date, on the most recent preceding date on which Common Stock was traded.

Incentive Stock Option : As defined in Code Section 422.

Incentives : Options (including Incentive Stock Options), Stock Awards, Performance Units and Stock Appreciation Rights.

Key Employee : An employee of the Company approved by the Committee for participation in the Plan on the basis of his or her ability to contribute significantly to the growth and profitability of the Company.

Option : An option to purchase shares of Common Stock granted to a Key Employee pursuant to Section 5.

Performance Unit : A unit representing a cash sum or one or more shares of Common Stock that is granted to a Key Employee pursuant to Section 7.

Plan : The Illinois Tool Works Inc. 1996 Stock Incentive Plan, as amended from time to time.

Restricted Shares : Shares of Common Stock issued subject to restrictions pursuant to Section 6(b).

Retirement : Termination of employment while eligible for retirement as defined by the Company’s tax-qualified defined benefit retirement plan.

- 2 -

Stock Appreciation Right or Right : An award granted to a Key Employee pursuant to Section 8.

Stock Award : An award of Common Stock granted to a Key Employee pursuant to Section 6.

Stock Ownership Guidelines : The stock ownership guidelines adopted by the Board, as amended from time to time.

Section 3. Administration.

(a) Committee . The Plan shall be administered by the Committee. To the extent required to comply with Rule 16b-3 under the Securities Exchange Act of 1934, each member of the Committee shall qualify as a “non-employee director” as defined therein. To the extent required to comply with Code Section 162(m) and the related regulations, each member of the Committee shall qualify as an “outside director” as defined therein.

(b) Authority of the Committee . The Committee shall have the authority to approve Key Employees for participation; to construe and interpret the Plan; to establish, amend or waive rules and regulations for its administration; and to accelerate the exercisability of any Incentive or the termination of any restriction under any Incentive. Incentives may be subject to such provisions as the Committee shall deem advisable, and may be amended by the Committee from time to time; provided that no such amendment may adversely affect the rights of the holder of an Incentive without such holder’s consent, and no amendment, as it applies to any Covered Employee, shall be made that would cause an Incentive granted to such Covered Employee to fail to satisfy the performance-based compensation exemption under Code Section 162(m) and the related regulations.

Section 4. Common Stock Subject to Plan.

Subject to Section 10, the aggregate shares of Common Stock that may be issued under the Plan, including Common Stock authorized but not issued or reserved for issuance under the 1979 Plan, shall not exceed 10,000,000. In the event of a lapse, expiration, termination, forfeiture or cancellation of any Incentive granted under the Plan or the 1979 Plan without the issuance of shares or payment of cash, the Common Stock subject to or reserved for such Incentive may be used again for a new Incentive hereunder; provided that in no event may the number of shares of Common Stock issued hereunder exceed the total number of shares reserved for issuance. Any shares of Common Stock withheld or surrendered to pay withholding taxes pursuant to Section 13(e) or surrendered in full or partial payment of the exercise price of an Option pursuant to Section 5(e) shall be added to the aggregate of shares of Common Stock available for issuance.

The 10,000,000 shares of Common Stock authorized for issuance pursuant to the 1996 Stock Incentive Plan increased to 20,000,000 shares pursuant to the stock split in 1997. Effective May 9, 2003, the number of shares of Common Stock authorized for issuance shall be

- 3 -

30,930,193 shares, which number reflects the merger of the Premark Plan into the 1996 Stock Incentive Plan and an additional 3,000,000 shares.

Section 5. Options.

(a) Price . The exercise price per share of an Option shall be not less than the Fair Market Value on the grant date.

(b) Limitations . The exercise price of Incentive Stock Options exercisable for the first time by a Key Employee during any calendar year shall not exceed $100,000. Options for more than 500,000 shares of Common Stock may not be granted in any calendar year to any Key Employee. No Incentive Stock Options may be granted after April 30, 2006.

(c) Required Period of Employment . The Committee may condition the exercisability of any Option on the completion of a minimum period of employment.

(d) Duration . Each Option shall expire at such time as the Committee may determine at the time of grant, provided that Incentive Stock Options must expire not later than ten years from the grant date.

(e) Payment . The exercise price of an Option shall be paid in full at the time of exercise in cash, or by the surrender of Common Stock previously acquired from the Company that has been held by the Incentive holder for a period of at least six months and that has a value equal to the exercise price, or by a combination of the foregoing.

(f) Grant of Restorative Options . The Committee shall grant to any Key Employee a restorative Option to purchase additional shares of Common Stock equal to the number of shares delivered by the Key Employee in payment of the exercise price of an Option. The terms of a restorative Option shall be identical to the terms of the exercised Option, except that the exercise price shall be not less than the Fair Market Value on the grant date of the restorative Option.

Section 6. Stock Awards.

(a) Grant of Stock Awards . Stock Awards may be made on terms and conditions fixed by the Committee. Stock Awards may be in the form of Restricted Shares authorized pursuant to Section 6(b). Officers who are covered by the Stock Ownership Guidelines may elect to receive up to 50% of their Executive Incentive Plan awards in shares of Common Stock. The recipient of Common Stock pursuant to a Stock Award shall be a stockholder of the Company with respect thereto, fully entitled to receive dividends, vote and exercise all other rights of a stockholder except to the extent otherwise provided in the Stock Award. Stock Awards (including Restricted Share awards) for more than 500,000 shares of Common Stock may not be granted in any calendar year to any Key Employee.

(b) Restricted Shares . Restricted Shares may not be sold by the holder, or subject to execution, attachment or similar process, until the lapse of the applicable restriction period or

- 4 -

satisfaction of other conditions specified by the Committee. If the Committee intends the Restricted Shares granted to any Covered Employee to satisfy the performance-based compensation exemption under Code Section 162(m) (“Qualifying Restricted Shares”), the extent to which the Qualifying Restricted Shares will vest shall be based on the attainment of performance goals established in writing prior to commencement of the performance period by the Committee from the list in Section 7(a). The level of attainment of such performance goals and the corresponding number of vested Qualifying Restricted Shares shall be certified by the Committee in writing pursuant to Code Section 162(m) and the related regulations.

Section 7. Performance Units.

(a) Value of Performance Units . Prior to the commencement of the performance period, the Committee shall establish in writing an initial target value or number of shares of Common Stock for the Performance Units to be granted to a Key Employee, the duration of the performance period, and the specific performance goals to be attained, including performance levels at which various percentages of Performance Units will be earned and, for Covered Employees, the minimum level of attainment to be met to earn any portion of the Performance Units. If the Committee intends the Performance Units granted to any Covered Employee to satisfy the performance-based compensation exemption under Code Section 162(m) (“Qualifying Performance Units”), the performance goals shall be based on one or more of the following objective criteria: generation of free cash, earnings per share, revenues, market share, stock price, cash flow, retained earnings, results of customer satisfaction surveys, aggregate product price and other product price measures, safety record, acquisition activity, management succession planning, improved asset management, improved gross margins, increased inventory turns, product development and liability, research and development integration, proprietary protections, legal effectiveness, handling SEC or environmental issues, manufacturing efficiencies, system review and improvement, service reliability and cost management, operating expense ratios, total stockholder return, return on sales, return on equity, return on capital, return on assets, return on investment, net income, operating income, and the attainment of one or more performance goals relative to the performance of other corporations.

(b) Payment of Performance Units . After the end of a performance period, the Committee shall certify in writing the extent to which performance goals have been met and shall compute the payout to be received by each Key Employee. With respect to Qualifying Performance Units, for any calendar year, the maximum amount payable in cash to any Covered Employee shall be $5,000,000, and the aggregate shares of Common Stock that may be issued to any Covered Employee is 500,000. The Committee may not adjust upward the amount payable to any Covered Employee with respect to Qualifying Performance Units.

Section 8. Stock Appreciation Rights.

(a) Grant of Stock Appreciation Rights . Stock Appreciation Rights may be granted in connection with an Option (at the time of the grant or at any time thereafter) or may be granted independently. Stock Appreciation Rights for more than 500,000 shares of Common Stock may not be granted to any Key Employee in any calendar year.

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(b) Value of Stock Appreciation Rights . The holder of a Stock Appreciation Right granted in connection with an Option, upon surrender of that Option, will receive cash or shares of Common Stock equal in value to the lesser of (i) the excess of the Fair Market Value on the exercise date over the Option’s exercise price or (ii) the exercise price of the Option that is surrendered, multiplied by the number of shares covered by such Option. The holder of a Stock Appreciation Right granted independently of an Option, upon exercise of that Right, will receive cash or shares of Common Stock equal in value to the lesser of (i) the excess of the Fair Market Value on the exercise date over the Fair Market Value on the grant date or (ii) the Fair Market Value on the grant date, multiplied by the number of shares covered by such Right.

Section 9. Termination of Employment.

(a) Forfeiture of Incentives Upon Termination of Employment . Except as may be determined otherwise by the Committee, all unvested Options, Rights and Stock Awards and all unpaid Performance Units shall be forfeited upon termination of employment for reasons other than Retirement, Disability or death.

(b) Vesting Upon Retirement, Disability or Death . Subject to Section 13(g), upon termination of employment by reason of Retirement, Disability or death, all unvested Options, Rights and Stock Awards shall become fully vested and any Performance Units shall become payable to the extent provided in Section 9(c)(ii). Notwithstanding the foregoing, the Restricted Shares granted effective January 2, 2003 and January 2, 2004 shall not become fully vested upon termination of employment by reason of Retirement, Disability or death, unless the Compensation Committee determines otherwise.

(i) Options and Stock Appreciation Rights .

(A) Termination Due to Retirement, Disability or Death . Upon termination of employment by reason of Retirement or Disability, Options shall be exercisable not later than the earlier of five years after the termination date or the expiration of the term of the Options. Options held by a Key Employee who dies while employed by the Company or after terminating by reason of Retirement or Disability shall be exercisable by the Key Employee’s beneficiary not later than the earliest of two years after the date of death, five years after the date of termination due to Retirement or Disability, or the expiration of the term of the Options.

(B) Termination for Other Reasons . Upon termination of employment for any reason other than Retirement, Disability or death, all unvested Options shall be forfeited as provided in Section 9(a) and any Options vested prior to such termination may be exercised by a Key Employee during the three-month period commencing on the date of termination, but not later than the expiration of the

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term of the Options. If a Key Employee dies during such post-employment period, such Key Employee’s beneficiary may exercise the Options (to the extent such Options were vested and exercisable at the date of termination of employment), but not later than the earlier of two years after the date of death or the expiration of the term of the Options.

(ii) Performance Units . If a Key Employee terminates employment by reason of Retirement, Disability or death, the Key Employee or such Key Employee’s beneficiary in the event of death shall receive a prorated payment of the Key Employee’s Performance Units based on the number of full months of service completed by the Key Employee during the applicable performance period, adjusted based on the achievement of performance goals during the performance period. Payment shall be made at the time payments would have been made had the Key Employee not terminated by reason of Retirement, Disability or death.

Section 10. Adjustment Provisions.

In the event of a stock split, stock dividend, recapitalization, reclassification or combination of shares, merger, sale of assets or similar event, the Committee shall adjust equitably (a) the number and class of shares or other securities that are reserved for issuance under the Plan, (b) the number and class of shares or other securities that have not been issued under outstanding Incentives, and (c) the appropriate Fair Market Value and other price determinations applicable to Incentives.

Section 11. Term.

The Plan shall be deemed adopted and shall become effective on the date it is approved by the stockholders of the Company and shall continue until terminated by the Board or no Common Stock remains available for issuance under Section 4, whichever occurs first.

Section 12. Corporate Change.

In the event of a Corporate Change, all Incentives shall vest in each Key Employee, and the maximum value of each Key Employee’s Performance Units, prorated for the number of full months of service completed by the Key Employee during the applicable performance period, shall immediately be paid in cash to the Key Employee.

Section 13. General Provisions.

(a) Employment . Nothing in the Plan or in any related instrument shall confer upon any employee any right to continue in the employ of the Company or shall affect the right of the Company to terminate the employment of any employee with or without cause.

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(b) Legality of Issuance of Shares . No Common Stock shall be issued pursuant to an Incentive unless and until all legal requirements applicable to such issuance have been satisfied.

(c) Ownership of Common Stock Allocated to Plan . No employee (individually or as a member of a group), and no beneficiary or other person claiming under or through such employee, shall have any right, title or interest in or to any Common Stock allocated or reserved for purposes of the Plan or subject to any Incentive except as to shares of Common Stock, if any, as shall have been issued to such employee.

(d) Governing Law . The Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Illinois.

(e) Withholding of Taxes . The Company may withhold, or allow an Incentive holder to remit to the Company, any Federal, state or local taxes applicable to any grant, exercise, vesting, distribution or other event giving rise to income tax liability with respect to an Incentive. In order to satisfy all or a portion of the income tax liability that arises with respect to any Incentive, the holder of the Incentive may elect to surrender previously acquired Common Stock or to have the Company withhold Common Stock that would otherwise have been issued pursuant to the exercise of an Option or in connection with any other Incentive; provided that any withheld Common Stock, or any surrendered Common Stock previously acquired from the Company and held by the Incentive holder for less than six months, may only be used to satisfy the minimum tax withholding required by law.

(f) Non-transferability; Exceptions . Except as provided in this Section 13(f), no Incentive may be assigned or subjected to any encumbrance, pledge or charge of any nature. Under such rules and procedures as the Committee may establish, the holder of an Incentive may transfer such Incentive to members of the holder’s immediate family (i.e., children, grandchildren and spouse) or to one or more trusts for the benefit of such family members or to partnerships in which such family members are the only partners, provided that (i) the agreement, if any, with respect to such Incentives, expressly so permits or is amended to so permit, (ii) the holder does not receive any consideration for such transfer, and (iii) the holder provides such documentation or information concerning any such transfer or transferee as the Committee may reasonably request. Any Incentives held by any transferees shall be subject to the same terms and conditions that applied immediately prior to their transfer. The Committee may also amend the agreements applicable to any outstanding Incentives to permit such transfers. Any Incentive not granted pursuant to any agreement expressly permitting its transfer or amended expressly to permit its transfer shall not be transferable. Such transfer rights shall in no event apply to any Incentive Stock Option.

(g) Forfeiture of Incentives . Except for an Incentive that becomes vested pursuant to Section 12, the Committee may immediately forfeit an Incentive, whether vested or unvested, if the holder competes with the Company or engages in conduct that, in the opinion of the Committee, adversely affects the Company.

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(h) Beneficiary Designation . Under such rules and procedures as the Committee may establish, each Key Employee may designate a beneficiary or beneficiaries to succeed to any rights which the Key Employee may have with respect to Options, Stock Appreciation Rights, Stock Awards or Performance Units at the time of his or her death. The designation may be changed or revoked by the Key Employee at any time. No such designation, revocation or change shall be effective unless made in writing on a form provided by the Company and delivered to the Company prior to the Key Employee’s death. If a Key Employee does not designate a beneficiary or no designated beneficiary survives the Key Employee, then his or her beneficiary shall be the Key Employee’s estate.

Section 14. Amendment or Discontinuance of the Plan.

(a) Amendment or Discontinuance . The Plan may be amended or discontinued by the Board from time to time, provided that without the approval of stockholders, no amendment shall be made which (i) amends Section 4 to increase the aggregate Common Stock that may be issued pursuant to Incentives, (ii) amends the provisions of Section 12, (iii) permits any person who is not a Key Employee to be granted an Incentive, (iv) permits Common Stock to be valued at, or permits the exercise price of Options at the grant date to be, less than Fair Market Value, (v) amends the provisions of Section 8 to change the method of establishing the amount the Company shall distribute upon exercise of a Stock Appreciation Right, (vi) amends the provisions of Section 7(b) to increase the value which may be specified for Performance Units or amends any other provision of the Plan, the amendment of which would require stockholder approval in order to continue to satisfy the performance-based compensation exemption under Code Section 162(m) and the related regulations with respect to any Incentive awarded to any Covered Employee, (vii) changes the maximum number of shares of Common Stock that may be awarded to any employee in any year pursuant to Options, Stock Awards or Stock Appreciation Rights, or (viii) amends this Section 14.

(b) Effect of Amendment or Discontinuance on Incentives . No amendment or discontinuance of the Plan by the Board or the stockholders of the Company shall adversely affect any Incentive theretofore granted without the consent of the holder.

Section 15. Options Granted Under the Premark Plan.

Pursuant to the merger of the Premark Plan into the 1996 Stock Incentive Plan effective May 9, 2003, each Option granted under the Premark Plan prior to such date shall be assumed by the 1996 Stock Incentive Plan and shall be subject to the requirements set forth below.

(a) Administration by the Committee . The Committee shall have the full power, discretion and authority to interpret and administer the Options previously granted under the Premark Plan in a manner which is consistent with the provisions of the 1996 Stock Incentive Plan, the terms of the applicable Option agreements, and the requirements of applicable law.

(b) Option Grants . Any grants of Options to individuals who had previously been eligible for grants under the Premark Plan prior to the Company’s merger with Premark

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International, Inc. have been made under the 1996 Stock Incentive Plan subsequent to the merger and will continue to be granted pursuant to the terms of the 1996 Stock Incentive Plan.

(c) Option Agreements . Each Option granted under the Premark Plan is evidenced by an Option agreement, the terms of which shall continue in effect.

(d) Premark Plan Provisions . Except as set forth in this Section 15 or in any outstanding Option agreement, the provisions of the Premark Plan shall terminate and have no effect as of May 9, 2003.

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Exhibit 10(j)

ILLINOIS TOOL WORKS INC.

EXECUTIVE CONTRIBUTORY RETIREMENT INCOME PLAN

Illinois Tool Works Inc. hereby amends and restates in its entirety, effective as of January 1, 1999, the Illinois Tool Works Inc. Executive Contributory Retirement Income Plan, which was originally established April 1, 1993.

I. PURPOSE

The purpose of this Illinois Tool Works Inc. Executive Contributory Retirement Income Plan is to provide a further means whereby Illinois Tool Works Inc. and its subsidiaries and affiliated companies may afford financial security to certain employees.

II. DEFINITIONS

2.1   “Agreement” means the Illinois Tool Works Inc. Executive Contributory Retirement Income Plan Deferral Agreement(s) executed between a Participant and the Company, whereby a Participant agrees to defer a portion of his/her Salary and/or Bonus pursuant to the provisions of the Plan and/or specifies the number of years over which payments might be made pursuant to Section 4.8 (subject to the provisions of Section 4.10), and the Company agrees to make benefit payments in accordance with the provisions of the Plan. To the extent a Participant’s deferral agreement changes the number of payments specified in a prior deferral agreement the most recent agreement shall be deemed to amend all prior agreements.

2.2   “Beneficiary” means the person or persons so designated by a Participant pursuant to Section 4.11.

2.3   “Board of Directors” means the Board of Directors of Illinois Tool Works Inc. Notwithstanding anything herein to the contrary, except in regard to a Change in Control, the Executive Committee of the Board of Directors can act under the Plan in lieu of the entire Board.

2.4   “Bonus” means the amount(s) earned during a calendar year by the Participant under the Company’s Executive Incentive Plan, if the Participant is eligible for such Bonus.

2.5   A “Change in Control” means a Corporate Change as defined in the Illinois Tool Works Inc. 1996 Stock Incentive Plan.

2.6   “Committee” means the Employee Benefits Committee of the Company appointed by the Board of Directors to manage and administer the Plan.

2.7   “Company” means Illinois Tool Works Inc. and any subsidiaries and affiliated companies of which Illinois Tool Works Inc. owns more than 80% of the outstanding common stock or other ownership interest.

2.8   “Company Matching Contribution” means the contribution made by the Company to a Participant’s Deferred Compensation Account pursuant to Section 3.7.

2.9   “Company Savings Plan” means the Illinois Tool Works Inc. Savings and Investment Plan.

2.10   “Deferral Year” means any calendar year.

2.11   “Deferred Benefit Account” means the account maintained on the books of the Company for each Participant pursuant to Article III. One Deferred Benefit Account shall be maintained for all Agreements entered into by a Participant and the Company pursuant to this Plan. A Participant’s Deferred Benefit Account shall not constitute or be treated as a trust fund of any kind.

2.12   “Determination Date” means the date on which the amount of a Participant’s Deferred Benefit Account is determined as provided in Article III hereof. The last day of each calendar quarter or the date of a Participant’s Termination of Service shall be a Determination Date.

2.13   “Disability” shall have the same meaning as Disabled under the Illinois Tool Works Inc. Pension Plan.

2.14   “Early Benefit Date” means the date of Termination of Service of the Participant on or after he/she attains age 55 and has 10 Years of Service with the Company and before attaining age 65.

2.15   “Interest Yield” means either the Retirement Interest Yield, Death Interest Yield or the Termination Interest Yield as defined below:

(a) “Retirement Interest Yield” or “Death Interest Yield” means 130 percent of Moody’s. The maximum Retirement Interest Yield or Death Interest Yield pursuant to this Plan shall be 15.6%.

(b) “Termination Interest Yield” means 100 percent of Moody’s. The maximum Termination Interest Yield pursuant to this Plan shall be 12%.

2.16 “Moody’s” means the average Moody’s Long-Term Corporate Bond Yield for the preceding calendar quarter as determined from the Moody’s Bond Record published by Moody’s Investor’s Service, Inc. (or any successor thereto). For purposes of this Plan, Moody’s shall not exceed 12%. In the event that Moody’s exceeds 12%, for purposes of calculating the appropriate Interest Yield, 12% shall be used.

2.17 “Normal Benefit Date” means the date of Termination of Service of the Participant on or after he/she attains age 65 and has completed five Years of Service with the Company.

2.18   “Participant” means an executive of the Company who is designated to be eligible pursuant to Section 3.1 who enters into an Agreement, and who has commenced Salary and/or Bonus reductions pursuant to such Agreement.

2.19   “Plan” means the Illinois Tool Works Inc. Executive Contributory Retirement Income Plan as amended from time-to-time.

2.20   “Plan Effective Date” means April 1, 1993.

2.21   “Salary” means the Participant’s base pay.

2.22   “Termination of Service” means the Participant’s cessation of his/her service with the Company for any reason whatsoever, whether voluntarily or involuntarily, including by reason of retirement, death, or Disability.

2.23   “Years of Service” shall have the same meaning as Eligibility Service under the Illinois Tool Works Inc. Pension Plan.

III. PARTICIPANT AND COMPENSATION REDUCTION

3.1   Participation. Participation in the Plan shall be limited to executives of the Company who qualify for inclusion in a “select group of management or highly compensated employees” as provided in Sections 201(2), 301(a)(3), 401(a)(1) and 4021(b)(6) of ERISA and who are designated to be eligible by the Chief Executive Officer (CEO) of the Company. The CEO of the Company must be designated to be eligible by the Board of Directors. In addition, to be eligible to participate in the Plan, an eligible employee must file an Agreement with the Company prior to the first day of the deferral period on which a Participant’s participation commences in the Plan. The election to participate shall be effective upon the receipt by the Company of an Agreement that is properly completed and executed in conformity with the Plan.

    A Participant must be designated to be eligible for each deferral period as outlined in Section 3.2.

3.2   Minimum and Maximum Deferral and Length of Participation. For Deferral Years commencing prior to January 1, 2001, a Participant may elect to defer between 5% and 50% of his/her Salary in l% increments during a Deferral Year. In addition, a Participant may elect to defer up to 100% of his/her Bonus in 1% increments earned during a Deferral Year.

    For Deferral Years commencing on or after January 1, 2001, a Participant may elect to defer either 0% or between 6% and 50% of his/her Salary in 1% increments during a Deferral Year. In addition, a Participant may elect to defer either 0% or between 6% and 100% of his/her Bonus in 1% increments earned during a Deferral Year.

    In the event a Participant elects to defer an amount of his or her Bonus that would not allow for the full payment of all FICA, federal, state and/or local income tax liabilities, the actual amount which shall be credited to the Participant’s Deferred Compensation Account shall be the maximum amount allowable after all applicable taxes.

    At the time of election, a Participant may elect to defer a different percentage of his/her Salary or Bonus for each Deferral Year and may also elect not to defer any portion of his/her Salary or Bonus in a Deferral Year. An eligible Participant must complete a separate Agreement for each deferral period.

3.3   Timing of Deferral Credits. The amount of Salary and Bonus that a Participant elects to defer in an Agreement shall cause an equivalent reduction in the Participant’s Salary and Bonus. Salary and Bonus deferrals shall be credited to the Participant’s Deferred Benefit Account throughout each Plan year at the end of each calendar quarter.

3.4   New Participants. Subsequent to January 1, 1999, an employee shall be eligible to participate after being approved by the CEO. The eligible employee may begin participation pursuant to Section 3.1 and shall be bound by all terms and conditions of the Plan, provided, however, that his/her Agreement must be filed no later than 30 days following notification of his/her eligibility to participate.

3.5   Alteration of Salary and Bonus Deferral. Except as provided in this Section 3.5 and in Section 3.6, a Participant’s election to defer Salary and Bonus shall be irrevocable. Pursuant to this Section 3.5, a Participant may increase or decrease his/her original Salary and/or Bonus deferral percentage prior to December 1 of the year preceding the Deferral Year for which such adjustment is requested. A Participant may increase or decrease the deferral percentage of his/her Salary and/or Bonus by the greater of 5% for Salary and 10% for Bonus or a percentage which is not more than 50% of the Participant’s original election if changed prior to December 1 of the year preceding the Deferral Year for which the adjustment is effective. In the event that the maximum adjustment percentage is not an integer percentage it shall be rounded up to the next highest integer percentage.

    For Deferral Years commencing prior to January 1, 2001, a Participant may not decrease his/her Salary deferral percentage below 5%. For Deferral Years commencing on or after January 1, 2001, a Participant may not decrease his/her Salary and/or Bonus deferral percentage below 6%. In addition, a Participant may choose not to have any Salary and/or Bonus deferral in accordance with this section 3.5. For Deferral Years commencing prior to January 1, 2001, to the extent a Participant has elected to defer 0% of Salary and/or Bonus for any Deferral Year on his/her deferral agreement, the Participant may increase his/her Salary deferral from 0% to 5% and/or increase his/her Bonus deferral from 0% to 10%. For Deferral Years commencing on or after January 1, 2001, to the extent a Participant has elected to defer 0% of Salary and/or Bonus for any Deferral Year

    on his/her deferral agreement, the Participant may increase his/her Salary deferral from 0% to 6% and/or increase his/her Bonus deferral from 0% to 6%.

    A Participant may change his/her Salary and/or Bonus deferral by entering into a deferral Agreement by December 1 of the year preceding the Deferral Year for which such Agreement is to be effective.

3.6   Emergency Benefit: Waiver of Deferral. In the event that the Company, upon written petition of the Participant or his/her Beneficiary, determines in its sole discretion, that the Participant or his/her Beneficiary has suffered an unforeseeable financial emergency, the Company may pay to the Participant or his/her Beneficiary as soon as practicable following such determination, an amount, not in excess of the Participant’s Deferred Benefit Account, necessary to satisfy the emergency. For purposes of this Plan, an unforeseeable financial emergency is an unanticipated emergency that is caused by an event beyond the control of the Participant or Beneficiary and that would result in severe financial hardship to the individual if the emergency distribution were not permitted, as may result from illness, casualty loss or sudden financial reversal. Cash needs arising from foreseeable events, such as the purchase of a residence or education expenses for children shall not be considered the result of an unforeseeable financial emergency. The Company may also grant a waiver of the Participant’s agreement to defer a stated amount of Salary and Bonus upon finding that the Participant has suffered an unforeseeable financial emergency. The waiver shall be for such period of time as the Company deems necessary under the circumstances.

3.7   Company Matching Contribution. For Deferral Years commencing prior to January 1, 2001, the Company shall contribute an amount to a Participant’s Deferred Benefit Account as and when the Participant’s Salary deferrals are added pursuant to Section 3.3. The amount of the Company Matching Contribution shall be equal to 3% of the Participant’s Salary. In order for the Company Matching Contribution to be credited to a Participant’s Deferred Benefit Account, the Participant must elect to defer at least 5% of his/her Salary during the Deferral Year.

    Commencing with Deferral Years on or after January 1, 2001, the amount of the Company Matching Contribution shall be equal to 3.5% of the Participant’s Salary. In order to receive the Company Matching Contribution related to the Participant’s Salary, the Participant must elect to defer at least 6% of his/her Salary during the Deferral Year. In addition, the Participant shall be entitled to a Company Matching Contribution equal to 3.5% of the Participant’s Bonus. In order to receive the Company Matching Contribution related to the Participant’s Bonus, the Participant must elect to defer at least 6% of his/her Bonus during the Deferral Year.

    In the event a Participant elects to defer any amount of Salary and/or Bonus under this Plan, he/she will not receive a Company Matching Contribution under the Company Savings Plan.

    Notwithstanding the foregoing, when the CEO designates a Participant pursuant to Section 3.4, he may specify that such Participant is not entitled to a Company Matching Contribution.

3.8   Determination of Account. The balance of each Participant’s Deferred Benefit Account as of each Determination Date shall be calculated as follows, using the terms and methods in the order defined below:

(a)   Beginning Balance:

    The balance on the beginning of the first day of the quarter. This equals the Ending Balance as of the end of the day on the prior Determination Date.

(b)   Sub-Ending Balance:

    The Beginning Balance, plus Participant deferrals plus Company matching contributions less any distributions, made after the prior Determination Date and up through and including the current Determination Date.

(c)   Average Balance:

    The arithmetic average of the Beginning Balance and the Sub-Ending Balance from the current quarter.

(d)   Interest:

    The Average Balance times the appropriate Interest Yield divided by four, times the number of calendar days from the prior Determination Date to the current Determination Date (or the date of payment if applicable and deemed appropriate by the Company) divided by the total number of calendar days in the quarter.

(e)   Ending Balance:

    The Sub-Ending Balance plus Interest.

3.9 Vesting of a Participant’s Deferred Benefit Account. A Participant shall be 100% vested in his/her Deferred Benefit Account equal to the amount of Salary and Bonus he/she deferred into the Deferred Benefit Account and the interest credited thereon. The Company matching contributions and interest credited thereon shall vest in the same manner as under the Illinois Tool Works Inc. Savings and Investment Plan.

IV. BENEFITS

4.1   Return of Deferrals. At the time a Participant executes an Agreement, he/she may elect to receive a return of his/her deferrals made within a particular Deferral Year. The return of deferral election does not apply to either the Company’s matching contribution or the interest credited to the Participant’s Deferred Benefit Account. The return of deferral election shall specify the year (distribution year) in which payment shall be made, which shall be paid as of June 30, five or more years after the Deferral Year in which the Salary and/or Bonus deferral was initially credited to the Participant’s Deferred Benefit Account. Each such return of deferral shall be paid in a lump sum. A return of deferral shall only be paid prior to a Participant’s Termination of Service. Any return of deferral paid shall be deemed a distribution, and shall be deducted from the Participant’s Deferred Benefit Account. A separate return of deferrals election shall be made for each Deferral Year and for both Salary and Bonus deferrals.

4.2   Retirement Benefit. Subject to Section 4.8 below, upon a Participant’s Early Benefit Date or Normal Benefit Date, he/she shall be entitled to receive the amount of his/her Deferred Benefit Account determined under Section 3.8 using the Retirement Interest Yield. The form of benefit payment shall be as provided in Section 4.8.

4.3   Termination Benefit. Upon the Termination of Service of a Participant before becoming eligible for a retirement benefit, for reasons other than death or Disability, the Company shall pay to the Participant, a benefit equal to the vested portion of his/her Deferred Benefit Account using the Termination Interest Yield.

    Unless otherwise directed by the Committee, the termination benefit shall be payable in a lump sum within 60 days following his/her Termination of Service. Upon a Termination of Service, the Participant shall immediately cease to be eligible for any other benefit provided under this Plan.

4.4   Death Prior to Termination of Service. Upon the Termination of Service due to a Participant’s death, the Beneficiary of the deceased Participant shall be entitled to a death benefit equal to the Participant’s Deferred Benefit Account determined under Section 3.8 using the Death Interest Yield. The form of benefit shall be as provided in Section 4.8 and shall be in lieu of all other benefits under this Plan.

4.5   Death Subsequent to Early or Normal Benefit Date. Upon the death of a Participant subsequent to his/her Early or Normal Benefit Date, the Beneficiary of the deceased Participant shall receive the Participant’s remaining Deferred Benefit Account. Payment of a Participant’s remaining Deferred Benefit Account shall be in accordance with Section 4.8.

4.6   Disability. In the event of a Termination of Service due to Disability, which first manifests itself after the Plan Effective Date and prior to the commencement of Benefit Payments in Section 4.8, a disabled Participant may receive a benefit

    equal to the balance of his/her Deferred Benefit Account under Section 3.8 using the Retirement Interest Yield. The commencement of such benefit will be on the Participant’s earliest benefit date consistent with Sections 2.14 and 2.17. Payments shall be made in accordance with Section 4.8. The Company, in its sole discretion, may accelerate the payment of any disability benefit payable under this Section. Disability benefits shall be treated as distributions from a Participant’s Deferred Benefit Account.

4.7   Change of Status. In the event it is determined that the Participant ceases to be eligible to participate in this Plan or if the Participant’s Salary is materially reduced, the Participant may elect to reduce the amount of any remaining deferral. In such event, he/she shall not be treated as having terminated participation pursuant to this Plan.

4.8   Form of Benefit Payment.

(a)   Upon the happening of an event described in Section 4.2, 4.4, 4.5, or 4.6, the Company shall pay the Participant’s Deferred Benefit Account in a lump sum or in monthly installments payable in approximately equal amounts over 2 to 20 years, commencing on the event described in Section 4.2, 4.4, 4.5 or 4.6 in accordance with the Participant’s last Agreement. Interest on the unpaid principal balance equal to the applicable Retirement Interest Yield will be added to the Participant’s Deferred Benefit Account on each Determination Date. The amount of the installment payments shall be based on the prevailing Retirement Interest Yield at the commencement of payments, projected into the future using a method approved by the Company. The amount of the installment payments shall be recomputed once per calendar year at a date determined by the Company and the installment payments shall be increased or decreased to reflect any changes in the Retirement Interest Yield.

    A Participant may, by written request filed with the Company at least 13 months prior to the commencement of a distribution pursuant to this Plan, change the method of distribution elected in his/her Agreement to any other method permitted under this Section 4.8.

(b)   In the event of the death of the Participant, as described in Sections 4.4 or 4.5, the Participant’s Beneficiary may, with the consent of the Company, elect an alternative form of benefit payment, such as a lump-sum payment or a shorter installment period. In such event, the applicable Death Interest Yield shall be utilized in determining the Deferred Benefit Account until all payments have been made to the Beneficiary of the deceased Participant.

(c)   In the event that a Participant retires on or subsequent to his/her Early Benefit Date but prior to his/her Normal Benefit Date, the Participant may

file a written request with the Company requesting the deferral of his/her Retirement Benefit until up to age 70. The written request must be made at least 13 months prior to the Participant’s Termination of Service. The Company may, but is not required to, grant the Participant’s request.

4.9   Tax Withholding. To the extent required by law in effect at the time payments are made, the Company shall withhold any taxes required to be withheld by any Federal, State, or local government.

4.10   Commencement of Payments. Unless otherwise provided, commencement of payments under this Plan shall be within 60 days following receipt of notice by the Company of an event which entitles a Participant or a Beneficiary to payments under this Plan, or at such earlier date as may be determined by the Company. All payments shall be made as of the first day of the month. Benefits paid pursuant to Section 4.2 may commence no earlier than age 55 and Deferred Benefit Accounts must be paid out no later than age 85.

4.11   Recipients of Payments: Designation of Beneficiary. All payments to be made by the Company under the Plan shall be made to the Participant during his/her lifetime, provided that if the Participant dies prior to the completion of such payments, then all subsequent payments under the Plan shall be made by the Company to the Beneficiary determined in accordance with this Section 4.11. The Participant may designate a Beneficiary by filing a written notice of such designation with the Company in such form as the Company requires and may include contingent Beneficiaries. The Participant may from time-to-time change the designated Beneficiary by filing a new designation in writing with the Company. If no designation is in effect or if an existing designation is determined to be invalid or ineffective at the time any benefits payable under this Plan become due, the Beneficiary shall be the spouse of the Participant, or if no spouse is then living, the representatives of the Participant’s estate.

V. CLAIMS FOR BENEFITS PROCEDURE

5.1 Claim for Benefits. Any claim for benefits under the Plan shall be made in writing to the Company. If such claim is wholly or partially denied by the Company, the Company shall, within a reasonable period of time, but not later than 60 days after receipt of the claim, notify the claimant of the denial of the claim. Such notice of denial shall be in writing and shall contain:

(a)   The specific reason(s) for denial of the claim;

(b)   A reference to the relevant Plan provisions upon which the denial is based;

(c)   A description of any additional material or information necessary for the claimant to perfect the claim, together with an explanation of why such material or information is necessary; and

(d)   An explanation of the Plan’s claim review procedure.

If no such notice is provided, the claim shall be deemed granted.

5.2 Request for Review of a Denial of a Claim for Benefits. Upon the receipt by the claimant of written notice of a denial of a claim, the claimant may within 90 days file a written request to the Committee, requesting a review of the denial of the claim, which review shall include a hearing if deemed necessary by the Committee. In connection with the claimant’s appeal of the denial of his/her claim, he/she may review relevant documents and may submit issues and comments in writing.

5.3 Decision Upon Review of Denial of Claim for Benefits. The Committee shall render a decision on the claim review promptly, but no more than 60 days after the receipt of the claimant’s request for review, unless special circumstances (such as the need to hold a hearing) require an extension of time, in which case the 60 day period shall be extended to 120 days. Such decision shall:

(a)   Include specific reasons for the decision;

(b)   Be written in a manner calculated to be understood by the claimant; and

(c)   Contain specific references to the relevant Plan provisions upon which the decision is based.

The decision of the Committee shall be final and binding in all respects on both the Company and the claimant.

VI. ADMINISTRATION

6.1 In general, the Plan shall be administered by the Company.

6.2 Administrative Rights, Powers, and Duties. The Company shall be responsible for the management, operation, and administration of the Plan. In addition to any powers, rights and duties set forth elsewhere in the Plan, the Company shall have the following powers and duties:

(a)   To adopt such rules and regulations consistent with the provisions of the Plan as it deems necessary for the proper and efficient administration of the Plan;

(b)   To administer the Plan in accordance with its terms and any rules and regulations it establishes;

(c)   To maintain records concerning the Plan sufficient to prepare reports, returns and other information required by the Plan or by law;

(d)   To construe and interpret the Plan and to resolve all questions arising under the Plan;

(e)   To direct the payment of benefits under the Plan, and to give such other directions and instructions as may be necessary for the proper administration of the Plan;

(f)   To employ or retain agents, attorneys, actuaries, accountants or other persons, who may also be employed by or represent the Company in matters other than this Plan; and

(g)   To be responsible for the preparation, filing and disclosure on behalf of the Plan of such documents and reports as are required by any applicable Federal or State law.

6.3 Information to be Furnished to Committee. The Company shall furnish the Committee such data and information as it may require. The records of the Company shall be determinative of each Participant’s period of employment, termination of employment and the reason therefore, leave of absence, reemployment, Years of Service, personal data, and Salary and Bonus reductions. Participants and their Beneficiaries shall furnish to the Company such evidence, data, or information, and execute such documents as it requests.

6.4 Responsibility. No employee of the Company, member of the Committee or of the Board of Directors of the Company shall be liable to any person for any action taken or omitted in connection with the administration of this Plan.

VII. AMENDMENT AND TERMINATION

7.1   Amendment. The Plan may be amended in whole or in part by the Company at any time. Notice of any such amendment shall be given in writing to the Committee and to each Participant and each Beneficiary of a deceased Participant. An amendment may not decrease the value of a Participant’s Deferred Benefit Account.

7.2   Company’s Right to Terminate. The Company or the Committee may terminate the Plan and/or any Agreements pertaining to the Participant at any time after the Plan Effective Date. In the event of any such termination, the Participant shall be entitled to the amount of his/her Deferred Benefit Account determined under Section 3.8, using the Retirement Interest Yield as of the date of termination of the Plan and/or his/her Agreement. Such benefit shall be paid to the Participant in quarterly installments over a period of no more than 15 years, except that the Company, in its sole discretion, may pay out such benefit in a lump sum or in installments over a period shorter than 15 years.

7.3   Change in Control. If there is a Change in Control, notwithstanding any other provision of this Plan, any Participant or Beneficiary who has a Deferred Benefit Account hereunder shall, at any time during an 18 month period immediately following a Change in Control, have the right to request and be paid by the Company a lump sum payment equal to 90% of the Participant’s remaining Deferred Benefit Account. The remaining 10% of the Participant’s Deferred

Benefit Account shall be permanently forfeited and shall not be paid to, or in respect of, the Participant. In the event no such request is made by a Participant, the Plan and Agreement shall remain in full force and effect with respect to such Participant.

VIII. MISCELLANEOUS

8.1   No Implied Rights: Rights on Termination of Service. Neither the establishment of the Plan nor any amendment thereof shall be construed as giving any Participant, Beneficiary or any other person any legal or equitable right unless such right shall be specifically provided for in the Plan or conferred by specific action of the Company in accordance with the terms and provisions of the Plan. Except as expressly provided in this Plan, the Company shall not be required or be liable to make any payment under this Plan subsequent to the Termination of Service of the Participant.

8.2   No Right to Company Assets. Neither the Participant nor any other person shall acquire by reason of the Plan any right in or title to any assets, funds or property of the Company whatsoever including, without limiting the generality of the foregoing any specific funds, assets or other property which the Company, in its sole discretion, may set aside in anticipation of a liability hereunder. Any benefits which become payable hereunder shall be paid from the general assets of the Company. The Participant shall have only a contractual right to the amounts, if any, payable hereunder unsecured by any asset of the Company. Nothing contained in the Plan constitutes a guarantee by the Company that the assets of the Company shall be sufficient to pay any benefit to any person.

8.3   No Employment Rights. Nothing herein shall constitute a contract of continuing service or in any manner obligate the Company to continue the services of the Participant, or obligate the Participant to continue in the service of the Company, or as a limitation of the right of the Company to discharge any of its employees, with or without cause. Nothing herein shall be construed as fixing or regulating the Salary and Bonus payable to the Participant.

8.4   Offset. If at the time payments or installments of payments are to be made hereunder, the Participant or the Beneficiary or both are indebted or obligated to the Company, then the payments remaining to be made to the Participant or the Beneficiary or both may, at the discretion of the Company, be reduced by the amount of such indebtedness or obligation, provided, however, that an election by the Company not to reduce any such payment or payments shall not constitute a waiver of its claim for such indebtedness or obligation.

8.5   Non-assignability. Neither the Participant nor any other person shall have any voluntary or involuntary right to commute, sell, assign, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt the amounts, if any, payable hereunder, or any part thereof, which are expressly declared to be unassignable and non-transferable. No part of the

    amounts payable shall be, prior to actual payment, subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by the Participant or any other person, or be transferable by operation of law in the event of the Participant’s or any other person’s bankruptcy or insolvency.

8.6   Notice. Any notice required or permitted to be given under the Plan shall be sufficient if in writing and hand delivered, or sent by registered or certified mail, and if given to the Company, delivered to the principal office of the Company, directed to the attention of the CEO. Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark or the receipt for registration or certification.

8.7   Governing Laws. The Plan shall be construed and administered according to the laws of the State of Illinois.

IN WITNESS WHEREOF, the Company has adopted and restated this Illinois Tool Works Inc. Executive Contributory Retirement Income Plan on January 1, 1999, and as amended effective July 1, 2000 and December 10, 2004.

ILLINOIS TOOL WORKS INC.


By:		/s/ Robert T. Callahan


Its:		Senior Vice President, Human Resources

Exhibit 13

MANAGEMENT’S DISCUSSION AND ANALYSIS 31

Management’s Discussion and Analysis

INTRODUCTION

Illinois Tool Works Inc. (the “Company” or “ITW”) is a worldwide manufacturer of highly engineered products and specialty systems. The Company has approximately 650 operations in 45 countries which are aggregated and organized for internal reporting purposes into the following five segments: Engineered Products—North America; Engineered Products—International; Specialty Systems—North America; Specialty Systems—International; and Leasing and Investments. These segments are described below.

Due to the large number of diverse businesses and the Company’s highly decentralized operating style, the Company does not require its business units to provide detailed information on operating results. Instead, the Company’s corporate management collects data on a few key measurements: operating revenues, operating income, operating margins, overhead costs, number of months on hand in inventory, past due receivables, return on invested capital and cash flow. These key measures are monitored by management and significant changes in operating results versus current trends in end markets and variances from forecasts are discussed with operating unit management.

The results of each segment are analyzed by identifying the effects of changes in the results of the base businesses, newly acquired companies, currency translation, restructuring costs, and goodwill and intangible impairment charges on the operating revenues and operating income of each segment. Base businesses are those businesses that have been included in the Company’s results of operations for more than a year. The changes to base business operating income include the estimated effects of both operating leverage and changes in variable margins and overhead costs. Operating leverage is the estimated effect of the base business revenue changes on operating income, assuming variable margins remain the same as the prior period. As manufacturing and administrative overhead costs do not significantly change as a result of revenues increasing or decreasing, the percentage change in operating income due to operating leverage is more than the percentage change in the base business revenues.

A key element of the Company’s business strategy is its continuous 80/20 business process. The basic concept of this 80/20 business process is to focus on what is most important (the 20% of the items which account for 80% of the value) and to spend less time and resources on the less important (the 80% of the items which account for 20% of the value). The Company’s operations use this 80/20 business process to simplify and focus on the key parts of their business, and as a result, reduce complexity that often disguises what is truly important. Each of the Company’s 650 operations utilizes the 80/20 process in all aspects of their business. Common applications of the 80/20 business process include:

•   Simplifying manufactured product lines by reducing the number of products offered by combining the features of similar products, outsourcing products or, as a last resort, eliminating products.

•   Simplifying the customer base by focusing on the 80/20 customers and finding different ways to serve the 20/80 customers.

•   Simplifying the supplier base by partnering with key 80/20 suppliers and reducing the number of 20/80 suppliers.

•   Designing business processes and systems around the key 80/20 activities.

The result of the application of this 80/20 business process is that the Company improves its operating and financial performance. These 80/20 efforts often result in restructuring projects that reduce costs and improve margins. Corporate management works closely with those business units that have operating results below expectations to help those units apply this 80/20 business process and improve their results.

CONSOLIDATED RESULTS OF OPERATIONS

The Company’s consolidated results of operations for 2004, 2003 and 2002 are summarized as follows:


DOLLARS IN THOUSANDS	2004			2003			2002

Operating revenues	$	11,731,425		$	10,035,623		$	9,467,740
Operating income		2,056,613			1,633,458			1,505,771
Margin %		17.5	%		16.3	%		15.9	%

32 2004 ANNUAL REPORT

In 2004 and 2003, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:


	2004 COMPARED TO 2003									2003 COMPARED TO 2002
							% POINT INCREASE									% POINT INCREASE
	% INCREASE (DECREASE)						(DECREASE)			% INCREASE (DECREASE)						(DECREASE)
	OPERATING			OPERATING			OPERATING			OPERATING			OPERATING			OPERATING
	REVENUES			INCOME			MARGINS			REVENUES			INCOME			MARGINS

Base manufacturing business:
Revenue change/Operating leverage		8.1	%		20.3	%		1.8	%		(1.8	)%		(4.5	)%		(0.4	)%
Changes in variable margins and overhead costs		—			(3.2	)		(0.5	)		—			3.9			0.7

Total		8.1			17.1			1.3			(1.8	)		(0.6	)		0.3

Acquisitions and divestitures		5.0			2.4			(0.4	)		2.9			1.7			(0.2	)
Translation		4.4			4.3			(0.1	)		5.5			4.9			(0.1	)
Restructuring costs		—			2.3			0.4			—			0.2			—
Impairment of goodwill and intangibles		—			(1.1	)		(0.2	)		—			0.2			—
Leasing and Investments		—			0.9			0.1			(0.3	)		2.1			0.4
Other		(0.6	)		—			0.1			(0.3	)		—			—

		16.9	%		25.9	%		1.2	%		6.0	%		8.5	%		0.4	%

Operating Revenues

The total company base business revenue increase in 2004 versus 2003 is primarily related to a 9% revenue increase in North American base business revenue. Industrial production levels in North America improved over the prior year’s sluggish levels. This improvement was evident in both the North American Specialty Systems and Engineered Products segments. Internationally, base business revenues increased 6% in 2004 over 2003 as a result of increased penetration in European industrial markets despite an only slightly improved European economic environment.

The total company base business revenue decrease in 2003 versus 2002 is primarily related to a 2% and 1% decline in North American and international base business revenues, respectively. In North America, industrial production activity showed modest improvement over the prior year, most of which occurred in the fourth quarter of 2003. Despite this improvement, capacity utilization and capital spending remained weak. Internationally, overall business conditions were flat, as indicated by low industrial production in the major European economies.

Operating Income

Operating income in 2004 improved over 2003 primarily due to leverage from the growth in base business revenue, the favorable effect of foreign currency translation, lower restructuring costs and income from acquired companies. These improvements were partially offset by higher raw material costs, increased overhead costs and higher impairment charges.

Operating income in 2003 improved over 2002, primarily due to favorable currency translation, acquisition income and operational cost savings as evidenced by a 50 basis point improvement in variable margin. Leasing and Investments income improved over the prior year primarily due to a $32 million impairment charge related to aircraft leases in 2002. These increases were partially offset by the negative effect of leverage from the decline in base revenue described above.

ENGINEERED PRODUCTS—NORTH AMERICA SEGMENT

Businesses in this segment are located in North America and manufacture a variety of short lead-time plastic and metal components and fasteners, as well as specialty products for a diverse customer base. These commercially oriented, value-added products become part of the customers’ products and typically are manufactured and delivered in a time period less than 30 days.

In the plastic and metal components and fasteners category, products include:

•   metal fasteners, fastening tools, and metal plate connecting components for the commercial and residential construction industries;

•   laminate products for the commercial and residential construction industries and furniture markets;

•   metal fasteners for automotive, appliance and general industrial applications;

•   metal components for automotive, appliance and general industrial applications;

•   plastic components for automotive, appliance, furniture and electronics applications; and

•   plastic fasteners for automotive, appliance and electronics applications.

MANAGEMENT’S DISCUSSION AND ANALYSIS 33

In the specialty products category, products include:

•   reclosable packaging for consumer food applications;

•   swabs, wipes and mats for clean room usage in the electronics and pharmaceutical industries;

•   hand wipes for industrial purposes;

•   chemical fluids which clean or add lubrication to machines;

•   adhesives for industrial, construction and consumer purposes;

•   epoxy and resin-based coating products for industrial applications;

•   components for industrial machines; and

•   manual and power operated chucking equipment for industrial applications.

In 2004, this segment primarily served the construction (47%), automotive (29%) and general industrial (9%) markets.

The results of operations for the Engineered Products—North America segment for 2004, 2003 and 2002 were as follows:


DOLLARS IN THOUSANDS	2004			2003			2002

Operating revenues	$	3,314,093		$	3,053,961		$	3,034,734
Operating income		552,985			489,416			533,459
Margin %		16.7	%		16.0	%		17.6	%

In 2004 and 2003, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:


	2004 COMPARED TO 2003									2003 COMPARED TO 2002
							% POINT INCREASE									% POINT INCREASE
	% INCREASE (DECREASE)						(DECREASE)			% INCREASE (DECREASE)						(DECREASE)
	OPERATING			OPERATING			OPERATING			OPERATING			OPERATING			OPERATING
	REVENUES			INCOME			MARGINS			REVENUES			INCOME			MARGINS

Base manufacturing business:
Revenue change/Operating leverage		7.0	%		18.3	%		1.7	%		(2.5	)%		(5.9	)%		(0.6	)%
Changes in variable margins and overhead costs		—			(7.0	)		(1.0	)		—			(2.2	)		(0.4	)

Total		7.0			11.3			0.7			(2.5	)		(8.1	)		(1.0	)

Acquisitions and divestitures		1.3			0.8			(0.1	)		3.0			1.1			(0.3	)
Translation		0.2			0.2			—			0.3			0.2			—
Restructuring costs		—			2.0			0.3			—			(1.4	)		(0.2	)
Impairment of goodwill and intangibles		—			(1.3	)		(0.2	)		—			(0.1	)		(0.1	)
Other		—			—			—			(0.2	)		—			—

		8.5	%		13.0	%		0.7	%		0.6	%		(8.3	)%		(1.6	)%

Operating Revenues

Revenues increased in 2004 over 2003 primarily due to higher base business revenues and revenues from acquisitions. The base revenue increase was a result of stronger end market demand and price increases that partially offset raw material cost increases. Construction base business revenues increased 9% in 2004 as a result of growth in the residential remodeling/rehab and commercial construction markets. As a result of increased penetration, automotive base revenues were flat in 2004 despite a 4% decline in automotive production at the large domestic automotive manufacturers. Revenues from the other industrial base businesses in this segment grew 11% in 2004 as they benefited from increased demand in a broad array of end markets.

Revenues increased in 2003 compared with 2002 due mainly to revenues from acquisitions, partially offset by lower base business revenues. In 2003, construction base business revenues decreased 2% versus 2002 as a result of a slow down in the commercial and residential construction markets during the first half of the year. Automotive base business revenues declined 4% due to a 6% decline in automotive production at the large domestic automotive manufacturers in 2003. Revenues from the other businesses in this segment declined 2% in 2003 due to sluggishness in the various industrial and commercial markets that these businesses serve.

34 2004 ANNUAL REPORT

Operating Income

Operating income increased in 2004 over 2003 primarily due to leverage from the growth in base business revenues described above, lower restructuring costs and income from acquisitions. These increases were partially offset by base business variable margin declines of 40 basis points, primarily due to steel cost increases. In addition, income in 2004 was negatively impacted by a $9 million charge associated with a warranty issue related to a discontinued product at the Wilsonart business. Also partially offsetting the base business increases were first quarter 2004 goodwill and impairment charges of $7 million, primarily related to the goodwill of a U.S. electrical components business and the trademarks and brands of a U.S. manufacturer of clean room mats.

Operating income declined in 2003 over 2002 primarily due to the negative effect of leverage from the decline in 2003 base business revenues described above, increased restructuring expense and higher corporate-related expenses primarily associated with pensions, restricted stock and medical benefits. Partially offsetting these declines was income from acquisitions.

ENGINEERED PRODUCTS—INTERNATIONAL SEGMENT

Businesses in this segment are located outside North America and manufacture a variety of short lead-time plastic and metal components and fasteners, as well as specialty products for a diverse customer base. These commercially oriented, value-added products become part of the customers’ products and typically are manufactured and delivered in a time period less than 30 days.

In the plastic and metal components and fastener category, products include:

•   metal fasteners, fastening tools, and metal plate connecting components for the commercial and residential construction industries;

•   laminate products for the commercial and residential construction industries and furniture markets;

•   metal fasteners for automotive, appliance and general industrial applications;

•   metal components for automotive, appliance and general industrial applications;

•   plastic components for automotive, appliance and electronics applications; and

•   plastic fasteners for automotive, appliance and electronics applications.

In the specialty products category, products include:

•   electronic component packaging trays used for the storage, shipment and manufacturing insertion of electronic components and microchips;

•   swabs, wipes and mats for clean room usage in the electronics and pharmaceutical industries;

•   adhesives for industrial, construction and consumer purposes;

•   chemical fluids which clean or add lubrication to machines;

•   epoxy and resin-based coating products for industrial applications; and

•   manual and power operated chucking equipment for industrial applications.

In 2004, this segment primarily served the construction (37%), automotive (30%), and general industrial (15%) markets.

The results of operations for the Engineered Products—International segment for 2004, 2003 and 2002 were as follows:


DOLLARS IN THOUSANDS	2004			2003			2002

Operating revenues	$	2,465,941		$	1,873,767		$	1,566,387
Operating income		369,188			260,701			212,824
Margin %		15.0	%		13.9	%		13.6	%

MANAGEMENT’S DISCUSSION & ANALYSIS 35

In 2004 and 2003, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:


	2004 COMPARED TO 2003									2003 COMPARED TO 2002
							% POINT INCREASE									% POINT INCREASE
	% INCREASE (DECREASE)						(DECREASE)			% INCREASE (DECREASE)						(DECREASE)
	OPERATING			OPERATING			OPERATING			OPERATING			OPERATING			OPERATING
	REVENUES			INCOME			MARGINS			REVENUES			INCOME			MARGINS

Base manufacturing business:
Revenue change/Operating leverage		7.3	%		21.0	%		1.8	%		2.3	%		6.7	%		0.6	%
Changes in variable margins and overhead costs		—			(0.2	)		—			—			(0.1	)		—

Total		7.3			20.8			1.8			2.3			6.6			0.6

Acquisitions and divestitures		12.5			8.8			(0.6	)		1.5			1.3			—
Translation		11.8			13.9			0.1			15.8			17.9			0.2
Restructuring costs		—			1.4			0.2			—			(3.4	)		(0.5	)
Impairment of goodwill and intangibles		—			(3.3	)		(0.4	)		—			0.1			—

		31.6	%		41.6	%		1.1	%		19.6	%		22.5	%		0.3	%

Operating Revenues

Revenues increased in 2004 over 2003 due to contributions from acquisition, increased base business revenues and the favorable effect of currency translation primarily as a result of the euro strengthening versus the U.S. dollar. The acquisition revenue is primarily related to the acquisitions of an Australian construction business and a European polymer business in the first quarter of 2004 and two European fluid product businesses in the second quarter of 2004. Base business construction revenues increased 8% in 2004 due to a rise in commercial construction activity in Europe, as well as increased commercial and residential demand in the Australasia region. Automotive base revenues grew 7% primarily due to increased product penetration at the European automotive manufacturers. The other businesses in the segment serve a broad array of industrial and commercial markets, and revenues from these businesses increased 6% in 2004.

Revenues increased in 2003 over 2002 mainly due to the favorable effect of currency translation, primarily the euro. Base business construction revenues increased 2% in 2003 mainly due to an increase in commercial construction activity in Europe as well as commercial and residential construction activity in the Australasia region. Automotive base revenues increased 2% and revenues in the other base businesses grew 3% in 2003.

Operating Income

Operating income increased in 2004 over 2003 primarily due to leverage from the increase in base business revenues described above, the favorable effect of currency translation, income from acquisitions and lower restructuring expense. Partially offsetting the above income increases was a goodwill impairment charge of $8.5 million incurred in the first quarter of 2004. This impact primarily was related to the diminished cash flow expectations of a European automotive components business.

Operating income increased in 2003 over 2002 primarily due to favorable currency translation, increased base business income due to operating leverage and income from the acquisitions. These increases were partially offset by higher restructuring expenses.

SPECIALTY SYSTEMS—NORTH AMERICA SEGMENT

Businesses in this segment are located in North America and design and manufacture longer lead-time machinery and related consumables, as well as specialty equipment for a diverse customer base. These commercially oriented, value-added products become part of the customers’ processes and typically are manufactured and delivered in a time period more than 30 days.

In the machinery and related consumables category, products include:

•   industrial packaging equipment and plastic and steel strapping for the bundling and shipment of a variety of products for customers in numerous end markets;

•   welding equipment and metal consumables for a variety of end market users;

•   equipment and plastic consumables that multi-pack cans and bottles for the food and beverage industry;

•   plastic stretch film and related packaging equipment for various industrial purposes;

•   paper and plastic products used to protect shipments of goods in transit;

•   marking tools and inks for various end users; and

•   foil and film and related equipment used to decorate a variety of consumer products.

36 2004 ANNUAL REPORT

In the specialty equipment category, products include:

•   commercial food equipment such as dishwashers, refrigerators, mixers, ovens, food slicers and specialty scales for use by restaurants, institutions and supermarkets;

•   paint spray equipment for a variety of general industrial applications;

•   static control equipment for electronics and industrial applications;

•   wheel balancing and tire uniformity equipment used in the automotive industry; and

•   airport ground power generators for commercial and military applications.

In 2004, this segment primarily served the food institutional and retail (25%), general industrial (23%), construction (13%), and food and beverage (8%) markets.

The results of operations for the Specialty Systems—North America segment for 2004, 2003 and 2002 were as follows:


DOLLARS IN THOUSANDS	2004			2003			2002

Operating revenues	$	3,862,556		$	3,365,219		$	3,357,504
Operating income		688,303			549,038			509,299
Margin %		17.8	%		16.3	%		15.2	%

In 2004 and 2003, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:


	2004 COMPARED TO 2003									2003 COMPARED TO 2002
							% POINT INCREASE									% POINT INCREASE
	% INCREASE (DECREASE)						(DECREASE)			% INCREASE (DECREASE)						(DECREASE)
	OPERATING			OPERATING			OPERATING			OPERATING			OPERATING			OPERATING
	REVENUES			INCOME			MARGINS			REVENUES			INCOME			MARGINS

Base manufacturing business:
Revenue change/Operating leverage		11.3	%		29.2	%		2.6	%		(2.1	)%		(5.8	)%		(0.6	)%
Changes in variable margins and overhead costs		—			(5.3	)		(0.8	)		—			7.0			1.1

Total		11.3			23.9			1.8			(2.1	)		1.2			0.5

Acquisitions and divestitures		3.1			1.3			(0.3	)		2.0			1.3			(0.1	)
Translation		0.4			0.4			—			0.5			0.6			—
Restructuring costs		—			0.2			0.1			—			5.4			0.8
Impairment of goodwill and intangibles		—			(0.4	)		(0.1	)		—			(0.7	)		(0.1	)
Other		—			—			—			(0.2	)		—			—

		14.8	%		25.4	%		1.5	%		0.2	%		7.8	%		1.1	%

Operating Revenues

Revenues increased in 2004 over 2003 due to increased base business revenues and revenues from acquisitions. The base revenue increase was a result of stronger end market demand and price increases that partially offset raw material cost increases. Base business revenue growth in 2004 is primarily due to an increase in demand in most of the end markets that this segment serves. Welding base revenues increased 27%, industrial packaging base revenues grew 11%, food equipment base revenues increased 2% and base revenues in the other businesses in this segment increased 9%.

Revenues increased slightly in 2003 versus 2002 as revenues from acquisitions were offset by lower base business revenues. Base business revenues declined in 2003 as a result of low capacity utilization in the various markets this segment serves, which resulted in slow demand for capital equipment. In addition, low industrial production activity reduced demand for consumable products. The lower market demand for the year was reflected in declines in food equipment revenue of 8%, industrial packaging revenue of 1% and other base business revenue of 5%. These declines were partially offset by an increase in welding revenues of 2%.

Operating Income

Operating income increased in 2004 over 2003 primarily due to leverage from the base business revenue increases described above. Additionally, income from acquisitions increased income in 2004. However, variable margins declined 60 basis points in 2004 primarily due to steel raw material cost increases. Additionally, income was adversely impacted in 2004 due to goodwill and intangible asset impairment charges of $6 million incurred in the first quarter of 2004. These charges were primarily related to the diminished cash flow expectations at two welding businesses and an industrial packaging unit.

MANAGEMENT’S DISCUSSION & ANALYSIS 37

Operating income increased in 2003 versus 2002 primarily due to lower base business costs and reduced restructuring expenses. Variable margins increased 40 basis points in 2003 as a result of cost reductions related to prior years’ restructuring activity and the continued benefits of the 80/20 business process. These improvements were offset by higher corporate-related expenses primarily related to pensions, restricted stock, and employee health and welfare. Income was also negatively impacted by the effect of leverage from the base business declines described above.

SPECIALTY SYSTEMS—INTERNATIONAL SEGMENT

Businesses in this segment are located outside North America and design and manufacture longer lead-time machinery and related consumables, as well as specialty equipment for a diverse customer base. These commercially oriented, value-added products become part of the customers’ processes and typically are manufactured and delivered in a time period more than 30 days.

In the machinery and related consumables category, products include:

•   industrial packaging equipment and plastic and steel strapping for the bundling and shipment of a variety of products for customers in numerous end markets;

•   welding equipment and metal consumables for a variety of end market users;

•   equipment and plastic consumables that multi-pack cans and bottles for the food and beverage industry;

•   plastic bottle sleeves and related equipment for the food and beverage industry;

•   plastic stretch film and related packaging equipment for various industrial purposes;

•   paper and plastic products used to protect shipments of goods in transit; and

•   foil and film and related equipment used to decorate a variety of consumer products.

In the specialty equipment category, products include:

•   commercial food equipment such as dishwashers, refrigerators, mixers, ovens, food slicers and specialty scales for use by restaurants, institutions and supermarkets;

•   paint spray equipment for a variety of general industrial applications;

•   static control equipment for electronics and industrial applications; and

•   airport ground power generators for commercial applications.

In 2004, this segment primarily served the general industrial (29%), food institutional and retail (21%), and food and beverage (13%) markets.

The results of operations for the Specialty Systems—International segment for 2004, 2003 and 2002 were as follows:


DOLLARS IN THOUSANDS	2004			2003			2002

Operating revenues	$	2,375,189		$	1,967,630		$	1,693,042
Operating income		314,535			217,366			164,656
Margin %		13.2	%		11.0	%		9.7	%

In 2004 and 2003, the changes in revenues, operating income and operating margins over the prior year were primarily due to the following factors:


	2004 COMPARED TO 2003									2003 COMPARED TO 2002
							% POINT INCREASE									% POINT INCREASE
	% INCREASE (DECREASE)						(DECREASE)			% INCREASE (DECREASE)						(DECREASE)
	OPERATING			OPERATING			OPERATING			OPERATING			OPERATING			OPERATING
	REVENUES			INCOME			MARGINS			REVENUES			INCOME			MARGINS

Base manufacturing business:
Revenue change/Operating leverage		4.2	%		14.3	%		1.1	%		(3.4	)%		(12.8	)%		(1.0	)%
Changes in variable margins and overhead costs		—			3.8			0.4			—			21.5			2.2

Total		4.2			18.1			1.5			(3.4	)		8.7			1.2

Acquisitions and divestitures		6.1			2.5			(0.5	)		5.0			6.5			0.1
Translation		10.4			13.1			—			14.7			18.7			0.2
Restructuring costs		—			11.1			1.2			—			(6.4	)		(0.6	)
Impairment of goodwill and intangibles		—			(0.1	)		—			—			4.5			0.4
Other		—			—			—			(0.1	)		—			—

		20.7	%		44.7	%		2.2	%		16.2	%		32.0	%		1.3	%

38 2004 ANNUAL REPORT

Operating Revenues

Revenues increased in 2004 over 2003 mainly due to favorable currency translation, primarily as a result of the euro strengthening versus the U.S. dollar. Revenues also grew due to acquisitions, including a second quarter 2003 acquisition of an Asian manufacturer of welding consumables. Base business revenues increased as demand increased in most end markets that this segment serves. Industrial packaging base revenues grew 5%, food equipment base business revenues grew 2%, and other base business revenues, including welding and finishing, increased 3%.

Revenues increased in 2003 versus 2002 primarily due to acquisitions and favorable currency translation, which was tied to the rise in the euro. Base business revenues declined primarily as a result of slow European industrial production. Industrial packaging revenues decreased 4%, food equipment revenues decreased 1%, and other base business revenues in this segment declined 3%.

Operating Income

Operating income increased in 2004 versus 2003 primarily as a result of leverage from higher base business revenues, lower restructuring expenses, the favorable effect of currency translation and income from acquisitions. In addition, variable margins improved 60 basis points reflecting the benefits of past restructuring efforts.

Operating income increased in 2003 versus 2002 mainly due to the favorable effect of currency translation and income from acquired companies. In addition, operational cost savings related to prior years’ restructuring programs increased operating income, reflected in a 110 basis point increase in variable margin. In addition, income was higher in 2003 due to a goodwill asset impairment charge of approximately $7 million related to industrial packaging businesses in Australia and Asia which was incurred in 2002. Partially offsetting these increases in income was increased restructuring expense in 2003.

LEASING AND INVESTMENTS SEGMENT

Businesses in this segment make investments in mortgage entities, leases of telecommunications, aircraft, air traffic control and other equipment, properties, affordable housing and a venture capital fund. As a result of the Company’s strong cash flow, the Company has historically had excess funds to make opportunistic investments that meet the Company’s desired returns. See the Investments note for a detailed discussion of the accounting policies for the various investments in this segment.

The results of operations for the Leasing and Investments segment for 2004, 2003 and 2002 were as follows:


IN THOUSANDS	2004		2003		2002

Operating revenues	$	148,791	$	152,585	$	181,570
Operating income		131,602		116,937		85,533

Operating income (loss) by investment for the years ended December 31, 2004, 2003 and 2002 was as follows:


IN THOUSANDS	2004		2003			2002

Mortgage investments	$	72,270	$	72,570		$	83,357
Leases of equipment		23,294		23,744			(6,658	)
Property developments		7,440		10,398			6,583
Properties held for sale		4,177		(3,044	)		5,532
Venture capital limited partnership		18,211		(924	)		(3,588	)
Other		6,210		14,193			307

	$	131,602	$	116,937		$	85,533

The net assets attributed to the Leasing and Investments segment at December 31, 2004 and 2003 are summarized by investment type as follows:


IN THOUSANDS	2004			2003

Mortgage investments	$	376,194		$	244,957
Leases of equipment		(14,821	)		3,946
Property developments		24,831			19,885
Properties held for sale		21,602			33,711
Affordable housing limited partnerships		7,110			(5,821	)
Other, net		49,344			18,277

	$	464,260		$	314,955

MANAGEMENT’S DISCUSSION & ANALYSIS 39

The net assets attributed to the Leasing and Investments segment as of December 31, 2004 and 2003 were as follows:


IN THOUSANDS	2004			2003

Investments	$	912,483		$	832,358
Deferred tax assets		201,954			198,166
Allocated general corporate debt		(78,991	)		(198,945	)
Deferred tax liabilities		(335,391	)		(295,150	)
Affordable housing capital obligations		(94,657	)		(117,838	)
Preferred stock of subsidiaries		(60,000	)		(60,000	)
Accrued dividends on preferred stock of subsidiaries		(32,700	)		(28,580	)
Other, net		(48,438	)		(15,056	)

	$	464,260		$	314,955

A portion of the Company’s general corporate debt has been attributed to the various investments of the Leasing and Investments segment based on the net cumulative after-tax cash investments in the applicable projects.

Mortgage Investments

In 1995, 1996 and 1997, the Company, through its investments in separate mortgage entities, acquired pools of mortgage-related assets in exchange for aggregate nonrecourse notes payable of $739.7 million, preferred stock of subsidiaries of $60 million and cash of $240 million. The mortgage-related assets acquired in these transactions relate to office buildings, apartment buildings and shopping malls located throughout the United States and included four variable-rate balloon loans and 24 properties at December 31, 2004. In conjunction with these transactions, the mortgage entities simultaneously entered into ten-year swap agreements and other related agreements whereby a third party receives the portion of the interest and net operating cash flow from the mortgage-related assets in excess of $26 million per year and a portion of the proceeds from the disposition of the mortgage-related assets and principal repayments, in exchange for the third party making the contractual principal and interest payments on the nonrecourse notes payable. In addition, in the event that the pools of mortgage-related assets do not generate interest and net operating cash flow of $26 million a year, the Company has the right to receive the shortfall from the cash flow generated by three separate pools of mortgage-related assets (owned by third parties in which the Company has minimal interests), which the swap counter party has estimated to have a total fair value of approximately $1.1 billion at December 31, 2004.

The mortgage entities entered into the swaps and other related agreements in order to reduce the Company’s real estate, credit and interest rate risks relative to its net mortgage investments. The swap counter party has assumed the majority of the real estate and credit risk related to the commercial mortgage loans and real estate, and has assumed all of the interest rate risk related to the nonrecourse notes payable.

On July 1, 2003, the Company adopted FASB Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”) relative to its investments in mortgage entities. See the Investments note for further discussion of the change in accounting for these investments.

Income (loss) from mortgage investments consisted of the following components for the years ended December 31, 2004, 2003 and 2002:


IN THOUSANDS	2004			2003			2002

Equity income from mortgage investments	$	81,030		$	23,298		$	—
Commercial mortgage loans		—			623			(7,584	)
Commercial real estate		—			(11,852	)		(11,498	)
Net swap receivables		—			69,547			116,003
Deferred mortgage investment income		—			15,362			30,723
Interest expense on nonrecourse debt		—			(18,696	)		(39,629	)
Interest expense on allocated debt		(3,582	)		(1,027	)		(1,465	)
Preferred stock dividend expense		(4,120	)		(4,120	)		(4,120	)
Other		(1,058	)		(565	)		927

	$	72,270		$	72,570		$	83,357

In 2004, mortgage investment income was flat versus 2003 as gains on sales of properties in 2004 of $45.3 million were essentially offset by the net income recorded in the first half of 2003 before the adoption of FIN 46, primarily related to a $39 million favorable swap mark-to-market adjustment in the second quarter of 2003.

40 2004 ANNUAL REPORT

In 2003, mortgage investment income declined primarily due to lower swap mark-to-market income versus 2002. In the second quarter of 2003, favorable swap mark-to-market adjustments of $39 million were recorded, primarily due to lower market interest rates and lower estimated future cash flows from the related mortgage loans and real estate. As a result of the adoption of FIN 46 relative to the mortgage investments, starting in the third quarter of 2003 and for future periods, income for the net mortgage investments was accounted for under the equity method, without any future mark-to-market adjustments. Accordingly, activity attributed to commercial mortgage loans, real estate, swap receivables, deferred mortgage investment income and nonrecourse debt was recorded only for the first six months of 2003.

The Company’s net assets related to mortgage investments as of December 31, 2004 and 2003 were as follows:


IN THOUSANDS	2004			2003

Net equity investments in mortgage entities	$	380,465		$	325,435
Deferred tax assets		106,722			51,293
Allocated general corporate debt		(18,422	)		(43,437	)
Preferred stock of subsidiaries		(60,000	)		(60,000	)
Accrued dividends on preferred stock of subsidiaries		(32,700	)		(28,580	)
Other, net		129			246

	$	376,194		$	244,957

As shown below, the amount of future cash flows which is greater than the Company’s net equity investments in mortgage entities at December 31, 2004 will be recorded as income during the remaining terms of the transactions:


	MORTGAGE		MORTGAGE		MORTGAGE
	TRANSACTION		TRANSACTION		TRANSACTION
	ENDING		ENDING		ENDING
	DECEMBER 31,		DECEMBER 31,		FEBRUARY 28,
IN THOUSANDS	2005		2006		2008		TOTAL

ITW’s estimated share of future cash flows:
Annual operating cash flows	$	4,500	$	9,000	$	20,000	$	33,500
Disposition proceeds		146,504		147,336		165,900		459,740

		151,004		156,336		185,900		493,240

Net equity investments in mortgage entities at December 31, 2004		120,854		118,456		141,155		380,465

Future income expected to be recorded	$	30,150	$	37,880	$	44,745	$	112,775

The Company believes that because the swaps’ counter party is AAA-rated, there is minimal risk that the nonrecourse notes payable of the mortgage entities will not be repaid by the swap counter party. In addition, because significant assets back the total annual cash flow, the Company believes its risk of not receiving the $33.5 million of cumulative annual operating cash flows is also minimal.

Under the terms of the servicing agreements, the swap counter party, upon sale of the mortgage loans and real estate by the mortgage entities, is entitled to receive most of the disposition proceeds in excess of specified levels. Currently, the projected disposition proceeds exceed the levels specified. Furthermore, the disposition value of certain properties has been guaranteed by the swap counter party to be at least equal to their original cost. As such, modest fluctuations in the market values of the mortgage loans and real estate held by the mortgage entities are expected to largely impact the swap counter party rather than ITW.

To illustrate the extent to which the Company’s risk related to its share of the disposition proceeds has been mitigated, the effects of decreases in the estimated disposition proceeds at December 31, 2004 are shown below:


	DISPOSITION PROCEEDS
			SWAP				FUTURE
			COUNTER				ITW
	ITW’S		PARTY’S				INCOME TO BE
IN THOUSANDS	SHARE		SHARE		TOTAL		RECOGNIZED

Current estimate	$	459,740	$	522,684	$	982,424		$112,775
10% reduction in disposition proceeds		447,162		437,019		884,181		100,197
20% reduction in disposition proceeds		417,004		368,935		785,939		70,039
30% reduction in disposition proceeds		392,233		295,463		687,696		45,268

If the swap counter party is unable to sell all of the commercial loans and real estate by the end of the tenth year for each transaction, the Company will begin receiving all of the annual operating cash flow from the remaining assets. Accordingly, the Company believes that it is unlikely that the assets will not be sold within the ten-year term of each transaction.

MANAGEMENT’S DISCUSSION & ANALYSIS 41

Leases of Equipment

Income (loss) from leases of equipment consisted of the following components for the years ended December 31, 2004, 2003 and 2002:


IN THOUSANDS	2004		2003		2002

Telecommunications equipment	$	11,214	$	17,393	$	15,759
Air traffic control equipment		9,211		2,419		—
Aircraft		2,129		3,488		(22,968	)
Other		740		444		551

	$	23,294	$	23,744	$	(6,658	)

The Company’s net assets related to investments in leases of equipment at December 31, 2004 and 2003 were as follows:


IN THOUSANDS	2004			2003

Investments in leases:
Telecommunications equipment	$	193,306		$	181,370
Air traffic control equipment		61,757			51,395
Aircraft		44,020			45,388
Manufacturing equipment		3,404			5,390
Railcars		—			499
Deferred tax liabilities		(245,723	)		(151,414	)
Allocated general corporate debt		(69,578	)		(126,597	)
Other, net		(2,007	)		(2,085	)

	$	(14,821	)	$	3,946

In the third quarter of 2003, the Company entered into a leveraged lease transaction related to air traffic control equipment in Australia with a cash investment of $48.8 million. In the first half of 2002, the Company entered into leveraged leasing transactions related to mobile telecommunications equipment with two major European telecommunications companies with cash investments of $144.7 million. Under the terms of the telecommunications and air traffic control lease transactions, the lessees have made upfront payments to creditworthy third party financial institutions that are acting as payment undertakers. These payment undertakers are obligated to make the required scheduled payments directly to the nonrecourse debt holders and to the lessors, including the Company. In the event of default by the lessees, the Company can recover its net investment from the payment undertakers. In addition, the lessees are required to purchase residual value insurance from a creditworthy third party at a date near the end of the lease term. As a result of the payment undertaker arrangements and the residual value insurance, the Company believes that any credit and residual value risks related to the telecommunications and air traffic control leases have been significantly mitigated.

In 2004, lease income was essentially flat compared to 2003 as higher income from the new air traffic control lease was offset by lower income from the telecommunications leases. In 2003, income from leases increased significantly from 2002 due to a 2002 impairment charge of $31.6 million related to aircraft leases, as well as the new air traffic control and telecommunications leases. The impairment charge related to the Company’s investments in aircraft leased to United Airlines, which declared bankruptcy in December 2002. Of this impairment charge, $28.6 million related to a direct financing lease of a Boeing 757 aircraft. This charge was estimated based on the reduced lease payments that United Airlines agreed to pay in the future versus the Company’s lease receivable under the existing lease agreement. Although some credit risk exists relating to the remaining investments in aircraft due to financial difficulties and overcapacity in the airline industry, the Company believes that its net remaining investments of $44.0 million at December 31, 2004 will be realizable as sufficient collateral exists in the event of default by the lessees.

Other Investments

Income from property developments was $7.4 million in 2004 compared to $10.4 million in 2003 and $6.6 million in 2002 as a result of more residential home sales in 2003 than either 2004 or 2002.

Income from properties held for sale was higher in 2004 versus 2003 due to net gains of $8.2 million on the sale of eight former manufacturing facilities in 2004 versus net gains of $1.2 million on the sale of four properties in 2003 and a 2003 asset writedown of $1.2 million. Income related to properties held for sale was lower in 2003 compared with 2002 primarily due to a gain on the sale of a Chicago-area property of $7.4 million in 2002.

Operating income from the venture capital limited partnership was $18.2 million in 2004 versus losses of $0.9 million in 2003 and $3.6 million in 2002 due to favorable mark-to-market gains in 2004. In addition, in 2002 a $2.5 million writedown related to one of the partnership’s investments was recorded.

42 2004 ANNUAL REPORT

Operating income from other investments was lower in 2004 versus 2003 due primarily to lower amortization of deferred investment income. Operating income from other investments was higher in 2003 compared with 2002 due primarily to higher interest expense related to affordable housing investments in 2002.

AMORTIZATION AND IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS

Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). Under SFAS 142, the Company does not amortize goodwill and intangible assets that have indefinite lives. SFAS 142 also requires that the Company assess goodwill and intangible assets with indefinite lives for impairment at least annually, based on the fair value of the related reporting unit or intangible asset. The Company performs its annual impairment assessment in the first quarter of each year.

As the first step in the SFAS 142 implementation process, the Company assigned its recorded goodwill and intangible assets as of January 1, 2002 to approximately 300 of its 600 reporting units based on the operating unit that includes the business acquired. Then, the fair value of each reporting unit was compared to its carrying value. Fair values were determined by discounting estimated future cash flows at the Company’s estimated cost of capital of 10%. Estimated future cash flows were based either on current operating cash flows or on a detailed cash flow forecast prepared by the relevant operating unit. If the fair value of an operating unit was less than its carrying value, an impairment loss was recorded for the difference between the fair value of the unit’s goodwill and intangible assets and the carrying value of those assets.

Based on the Company’s initial impairment testing, goodwill was reduced by $254.6 million and intangible assets were reduced by $8.2 million, and a net after-tax impairment charge of $221.9 million ($0.72 per diluted share) was recognized as a cumulative effect of change in accounting principle in the first quarter of 2002. The impairment charge was related to approximately 40 businesses and primarily resulted from evaluating impairment under SFAS 142 based on discounted cash flows, instead of using undiscounted cash flows as required by the previous accounting standard.

Other than the cumulative effect of the change in accounting principle discussed above, amortization and impairment of goodwill and other intangible assets for the years ended December 31, 2004, 2003 and 2002 were as follows:


IN THOUSANDS		2004		2003		2002

Goodwill:
Impairment	$	11,492	$	702	$	7,877
Intangible Assets:
Amortization		37,409		19,813		20,056
Impairment		10,220		3,761		—

	$	59,121	$	24,276	$	27,933

Other than the cumulative effect of the change in accounting principle discussed above, total goodwill and intangible asset impairment charges by segment for the years ended December 31, 2004, 2003 and 2002 were as follows:


IN THOUSANDS		2004		2003		2002

Engineered Products—North America	$	7,007	$	762	$	—
Engineered Products—International		8,492		—		285
Specialty Systems—North America		276		3,701		—
Specialty Systems—International		5,937		—		7,592

	$	21,712	$	4,463	$	7,877

INTEREST EXPENSE

Interest expense of $69.2 million in 2004 was essentially flat as compared to the interest expense of $70.7 million in 2003. Interest expense increased to $70.7 million in 2003 versus $68.5 million in 2002 primarily as a result of a full year interest expense on the $250.0 million preferred debt securities issued in April 2002, partially offset by a benefit resulting from an interest rate swap on the 5.75% notes and lower interest expense at international operations.

OTHER INCOME (EXPENSE)

Other income was $12.0 million in 2004 versus $13.3 million in 2003. The decline was primarily due to lower gain on sale of operating affiliates and higher losses on currency translation, partially offset by a gain on forgiveness of debt and lower losses on sale of fixed assets. Other income (expense) was income of $13.3 million in 2003 versus an expense of $3.8 million primarily due to gains in 2003 versus losses in 2002 on the sale of operations and affiliates and higher interest income in 2003.

MANAGEMENT’S DISCUSSION & ANALYSIS 43

INCOME TAXES

The effective tax rate was 33.0% in 2004, 34.0% in 2003, and 35.0% in 2002. See the Income Taxes note for a reconciliation of the U.S. federal statutory rate to the effective tax rate. The Company has not recorded additional valuation allowances on the net deferred income tax assets of $380.6 million at December 31, 2004 and $588.4 million at December 31, 2003 as it expects to generate adequate taxable income in the applicable tax jurisdictions in future years.

In October 2004, the American Jobs Creation Act of 2004 (“AJCA”) was enacted in the United States. The provisions of the AJCA that are expected to have the most impact on the U.S. federal taxes paid by the Company in the future are as follows:

•   A special one-time dividends-received deduction of 85% for the repatriation of foreign earnings during 2005 only. See the Income Taxes note for further information regarding the estimated effect of this provision.

•   A deduction related to U.S. manufacturing income of 3% of eligible income in 2005 and 2006, 6% in 2007 through 2009 and 9% in 2010 and thereafter. The Company believes that substantially all of the U.S. pretax income from its manufacturing segments would qualify as eligible income under this provision. However, because the detailed guidelines for determining eligible manufacturing income have not yet been finalized by the U.S. government, the amount of future tax benefit related to this provision cannot yet be determined.

•   A gradual repeal of the exclusion of certain extraterritorial income (“ETI”) related to export sales from the U.S. This provision provides that the ETI benefit is reduced to 80% in 2005, 60% in 2006 and 0% in 2007 and thereafter. Because the Company generally manufactures locally in the major foreign countries in which it sells products, the repeal of the ETI benefit will not have a significant impact on the Company’s future U.S. tax payments. In 2004, the benefit of the ETI exclusion was approximately $7.4 million.

INCOME FROM CONTINUING OPERATIONS

Income from continuing operations in 2004 of $1,339.6 million ($4.39 per diluted share) was 28.8% higher than 2003 income of $1,040.2 million ($3.37 per diluted share). Income from continuing operations in 2003 was 11.6% higher than 2002 income of $931.8 million ($3.02 per diluted share).

FOREIGN CURRENCY

The weakening of the U.S. dollar against foreign currencies increased operating revenues by approximately $430 million in 2004, $520 million in 2003, and $90 million in 2002, and increased income from continuing operations by approximately 15 cents per diluted share in 2004, 16 cents per diluted share in 2003, and 3 cents per diluted share in 2002.

NEW ACCOUNTING PRONOUNCEMENT

In 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”). The Company is required to adopt SFAS 123R in the third quarter of 2005. SFAS 123R requires the Company to measure the cost of employee services received in exchange for an equity award based on the grant date fair value. The cost will be recognized as an expense in financial statements over the period during which an employee is required to provide service. If SFAS 123R had been in effect in 2004, the Company’s net income per diluted share would have been lower by 12 cents. If the Company continues to issue the same type and amount of equity compensation, the Company anticipates the future impact to be comparable.

2005 FORECAST

While the Company remains optimistic about its earning prospects, it is forecasting modest slowing in end markets in 2005. As a result, the Company is forecasting full-year 2005 income from continuing operations to be in a range of $4.91 to $5.11 per diluted share without consideration of the effect of adopting SFAS 123R. The following key assumptions were used for this forecast:

•   base business revenue growth in a range of 4.4% to 6.4%;

•   foreign exchange rates holding at year-end 2004 levels;

•   annualized revenues from acquired companies in a range of $600 million to $800 million;

•   restructuring costs of $30 million to $50 million;

•   income from the Leasing and Investments segment of $60 million to $70 million; and

•   an effective tax rate of 33%.

The Company updates its forecast and assumptions throughout the year via monthly press releases.

44 2004 ANNUAL REPORT

DISCONTINUED OPERATIONS

In December 2001, the Company’s Board of Directors authorized the divestiture of the Consumer Products segment. These businesses were acquired by ITW in 1999 as part of the Company’s merger with Premark International Inc. (“Premark”). Subsequent to the Premark merger, the Company determined that the consumer characteristics of the businesses in the Consumer Products segment were not a good long-term fit with the Company’s other industrially focused businesses. Businesses in this segment were located primarily in North America and manufacture household products that are used by consumers, including Precor specialty exercise equipment, West Bend small appliances and premium cookware, and Florida Tile ceramic tile. On October 31, 2002 the sales of Precor and West Bend were completed, resulting in cash proceeds of $211.2 million. On November 7, 2003 the sale of Florida Tile was completed, resulting in cash proceeds of $11.5 million. The Company’s net loss on disposal of the segment was as follows:


	PRETAX			TAX PROVISION			AFTER-TAX
IN THOUSANDS	GAIN (LOSS)			(BENEFIT)			GAIN (LOSS)

Realized gains on 2002 sales of Precor and West Bend	$	146,240		$	51,604		$	94,636
Estimated loss on 2003 sale of Florida Tile recorded in 2002		(123,874	)		(31,636	)		(92,238	)

Estimated net gain on disposal of the segment deferred at December 31, 2002		22,366			19,968			2,398
Gain adjustments related to 2002 sales of Precor and West Bend recorded in 2003		(752	)		(256	)		(496	)
Additional loss on sale of Florida Tile recorded in 2003		(28,784	)		(10,348	)		(18,436	)

Net loss on disposal of segment as of December 31, 2003		(7,170	)		9,364			(16,534	)
Adjustments to Florida Tile loss on sale recorded in 2004		263			1,174			(911	)

Net loss on disposal of segment as of December 31, 2004	$	(6,907	)	$	10,538		$	(17,445	)

Results of the discontinued operations for the years ended December 31, 2004, 2003 and 2002 were as follows:


IN THOUSANDS	2004			2003			2002

Operating revenues	$	—		$	102,194		$	344,419

Operating income (loss)	$	—		$	(4,003	)	$	10,804

Net income (loss) from discontinued operations	$	—		$	(4,027	)	$	2,672
Amount charged against reserve for Florida Tile operating losses		—			4,027			—

Income from discontinued operations (net of 2002 tax provision of $8,096)		—			—			2,672
Loss on disposal of the segment (net of 2004 and 2003 tax provisions of $1,174 and $9,364, respectively)		(911	)		(16,534	)		—

Income (loss) from discontinued operations	$	(911	)	$	(16,534	)	$	2,672

In 2003, operating revenues and income were significantly lower as 2003 only included Florida Tile while 2002 also included the Precor and West Bend businesses until their sale.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flow

The Company’s primary source of liquidity is free operating cash flow. Management continues to believe that such internally generated cash flow will be adequate to service existing debt and to continue to pay dividends that meet its dividend payout objective of 25%–30% of the last three years’ average net income. In addition, free operating cash flow is expected to be adequate to finance internal growth, small-to-medium sized acquisitions and additional investments.

The Company uses free operating cash flow to measure normal cash flow generated by its operations which is available for dividends, acquisitions, debt repayment and additional investments. In addition, in 2004 free operating cash flow was used to repurchase common stock. Free operating cash flow is a measurement that is not the same as net cash flow from operating activities per the statement of cash flows and may not be consistent with similarly titled measures used by other companies.

On April 19, 2004 the Company’s Board of Directors authorized a stock repurchase program, which provides for the buy back of up to 31,000,000 shares. As of December 31, 2004, the Company had repurchased 18,915,473 shares of its common stock for $1,729,806,000 at an average price of $91.45 per share.

MANAGEMENT’S DISCUSSION & ANALYSIS 45

Summarized cash flow information for the three years ended December 31, 2004, 2003 and 2002 was as follows:


IN THOUSANDS	2004			2003			2002

Net cash provided by operating activities	$	1,532,031		$	1,368,741		$	1,288,756
Proceeds from investments		85,412			59,509			77,780
Additions to plant and equipment		(282,560	)		(258,312	)		(271,424	)

Free operating cash flow	$	1,334,883		$	1,169,938		$	1,095,112

Acquisitions	$	(587,783	)	$	(203,726	)	$	(188,234	)
Cash dividends paid		(304,581	)		(285,399	)		(272,319	)
Purchase of investments		(64,442	)		(133,236	)		(194,741	)
Repurchases of common stock		(1,729,806	)		—			—
Proceeds from sale of operations and affiliates		6,495			21,421			211,075
Issuance of common stock		79,108			40,357			44,381
Net proceeds (repayments) of debt		127,487			(95,766	)		(3,495	)
Other		121,546			113,207			83,684

Net increase (decrease) in cash and equivalents	$	(1,017,093	)	$	626,796		$	775,463

Return on Invested Capital

The Company uses return on average invested capital (“ROIC”) to measure the effectiveness of the operations’ use of invested capital to generate profits. ROIC for the three years ended December 31, 2004, 2003 and 2002 was as follows:


DOLLARS IN THOUSANDS	2004			2003			2002

Operating income after taxes of 33%, 34%, and 35%, respectively	$	1,377,931		$	1,078,082		$	978,751

Total debt	$	1,124,621		$	976,454		$	1,581,985
Less: Leasing and Investments debt		(78,991	)		(198,945	)		(770,099	)
Less: Cash and equivalents		(667,390	)		(1,684,483	)		(1,057,687	)

Adjusted net debt		378,240			(906,974	)		(245,801	)
Total stockholders’ equity		7,627,610			7,874,286			6,649,071

Invested capital	$	8,005,850		$	6,967,312		$	6,403,270

Average invested capital	$	7,465,240		$	6,685,291		$	6,517,735

Return on average invested capital		18.5	%		16.1	%		15.0	%

The 240 basis point increase in ROIC in 2004 versus 2003 was due primarily to a 27.8% increase in after-tax operating income, mainly as a result of increased base business operating income and a decrease in the effective tax rate to 33% in 2004 from 34% in 2003.

The 110 basis point increase in ROIC in 2003 versus 2002 was due primarily to a 10.1% increase in after-tax operating income, mainly as a result of favorable currency translation and a decrease in the effective tax rate to 34% in 2003 from 35% in 2002.

46 2004 ANNUAL REPORT

Working Capital

Net working capital at December 31, 2004 and 2003 is summarized as follows:


					INCREASE
DOLLARS IN THOUSANDS	2004		2003		(DECREASE)

Current Assets:
Cash and equivalents	$	667,390	$	1,684,483	$	(1,017,093	)
Trade receivables		2,054,624		1,721,186		333,438
Inventories		1,281,156		991,979		289,177
Other		319,028		385,554		(66,526	)

		4,322,198		4,783,202		(461,004	)

Current Liabilities:
Short-term debt		203,523		56,094		147,429
Accounts payable and accrued expenses		1,563,191		1,352,357		210,834
Other		84,257		80,452		3,805

		1,850,971		1,488,903		362,068

Net Working Capital	$	2,471,227	$	3,294,299	$	(823,072	)

Current Ratio		2.34		3.21

Cash decreased primarily due to the repurchase of common stock. Trade receivables and inventories increased primarily as a result of increased sales, currency translation and acquisitions. Short-term debt increased primarily due to the issuance of commercial paper. Accounts payable and accrued expenses increased primarily as a result of currency translation and acquisitions.

Debt

Total debt at December 31, 2004 and 2003 was as follows:


							INCREASE
DOLLARS IN THOUSANDS	2004			2003			(DECREASE)

Short-term debt	$	203,523		$	56,094		$	147,429
Long-term debt		921,098			920,360			738

Total debt	$	1,124,621		$	976,454		$	148,167

Total debt to total capitalization		12.8	%		11.0	%

Short-term debt increased at December 31, 2004 due to commercial paper borrowings used primarily to fund 2004 acquisitions.

In 2004, the Company entered into a $400.0 million Line of Credit Agreement with a termination date of June 17, 2005. In 2003, the Company entered into a $350.0 million revolving credit facility with a termination date of June 20, 2008. This debt capacity is for use principally to support any issuances of commercial paper and to fund larger acquisitions.

The Company has cash on hand and additional debt capacity to fund larger acquisitions. As of December 31, 2004, the Company has unused capacity of $750.0 million under its current U.S. debt facilities. In addition, the Company believes that based on its current free operating cash flow and debt-to-capitalization ratios, it could readily obtain additional financing if necessary.

MANAGEMENT’S DISCUSSION & ANALYSIS 47

Stockholders’ Equity

The changes to stockholders’ equity during 2004 and 2003 were as follows:


IN THOUSANDS	2004			2003

Beginning balance	$	7,874,286		$	6,649,071
Net income		1,338,694			1,023,680
Cash dividends declared		(312,286	)		(288,833	)
Repurchases of common stock		(1,729,806	)		—
Stock option and restricted stock activity		151,490			78,845
Currency translation adjustments		306,653			407,811
Other		(1,421	)		3,712

Ending balance	$	7,627,610		$	7,874,286

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

The Company’s contractual obligations as of December 31, 2004 were as follows:


											2010 AND
											FUTURE
IN THOUSANDS	2005		2006		2007		2008		2009		YEARS

Total debt	$	203,523	$	2,440	$	1,316	$	150,832	$	499,988	$	266,522
Minimum lease payments		101,359		77,751		59,160		43,632		32,774		59,431
Affordable housing capital obligations		20,017		16,237		13,703		13,722		14,092		16,886
Maximum venture capital contribution		20,523		—		—		—		—		—
Preferred stock of subsidiaries		—		—		—		—		—		60,000
Accrued dividends on preferred stock of subsidiaries		10,800		11,680		10,220		—		—		—

	$	356,222	$	108,108	$	84,399	$	208,186	$	546,854	$	402,839

In 2001, the Company committed to two new affordable housing limited partnership investments. In connection with the formation and financing of these limited partnerships, the affordable housing limited partnerships borrowed the full amount of funds necessary for their affordable housing projects from a third party financial institution. The excess cash of $126.8 million was distributed to the Company in 2001 and will be repaid to the limited partnerships via capital contributions as the limited partnerships require the funds for their affordable housing projects. The financing of these limited partnerships was structured in this manner in order to receive the affordable housing tax credits and deductions without any substantial initial cash outlay by the Company.

The Company entered into a private equity limited partnership in 2001 that is investing in late stage venture capital and buy-out opportunities. In connection with this partnership investment, the Company has committed to total maximum capital contributions of $100 million over a five-year period, with a maximum of $50 million in any one year.

The Company has provided guarantees related to the debt of certain unconsolidated affiliates of $32 million at December 31, 2004. In the event one of these affiliates defaults on its debt, the Company would be liable for the debt repayment. The Company has recorded liabilities related to these guarantees of $16 million at December 31, 2004. At December 31, 2004, the Company had open stand-by letters of credit of $97 million, substantially all of which expire in 2005. The Company had no other significant off-balance sheet commitments at December 31, 2004.

48 2004 ANNUAL REPORT

MARKET RISK

Interest Rate Risk

The Company’s exposure to market risk for changes in interest rates relates primarily to the Company’s long-term debt.

The Company has no cash flow exposure on its long-term obligations related to changes in market interest rates, other than $100 million of debt which has been hedged by the interest rate swap discussed below. The Company primarily enters into long-term debt obligations for general corporate purposes, including the funding of capital expenditures and acquisitions. In December 2002, the Company entered into an interest rate swap with a notional value of $100 million to hedge a portion of the fixed rate debt. Under the terms of the interest rate swap, the Company receives interest at a fixed rate of 5.75% and pays interest at a variable rate of LIBOR plus 1.96%. The maturity date of the interest rate swap is March 1, 2009. The carrying value of the notes has been adjusted to reflect the fair value of the interest rate swap.

The following table presents the Company’s financial instruments for which fair value is subject to changing market interest rates:


			6.55%
	5.75%		PREFERRED DEBT		6.875%
	NOTES DUE		SECURITIES DUE		NOTES DUE
IN THOUSANDS	MARCH 1, 2009		DECEMBER 31, 2011		NOVEMBER 15, 2008

As of December 31, 2004:
Estimated cash outflow by year of principal maturity—
2005–2007	$	—	$	—	$	—
2008		—		—		150,000
2009		500,000		—		—
2010 and thereafter		—		250,000		—
Estimated fair value		533,895		282,693		165,903
Carrying value		499,343		249,705		149,929
As of December 31, 2003:
Total estimated cash outflow	$	500,000	$	250,000	$	150,000
Estimated fair value		550,243		285,918		172,489
Carrying value		500,110		249,672		149,911

Foreign Currency Risk

The Company operates in the United States and 44 other countries. In general, the Company’s products are primarily manufactured and sold in the same country. The initial funding for the foreign manufacturing operations was provided primarily through the permanent investment of equity capital from the U.S. parent company. Therefore, the Company and its subsidiaries do not have significant assets or liabilities denominated in currencies other than their functional currencies. As such, the Company does not have any significant derivatives or other financial instruments that are subject to foreign currency risk at December 31, 2004 or 2003.

CRITICAL ACCOUNTING POLICIES

The Company has four accounting policies which it believes are important to the Company’s financial condition and results of operations, and which require the Company to make estimates about matters that are inherently uncertain.

These critical accounting policies are as follows:

Realizability of Inventories —Inventories are stated at the lower of cost or market. Generally, the Company’s operating units perform an analysis of the historical sales usage of the individual inventory items on hand and a reserve is recorded to adjust inventory cost to market value based on the following usage criteria:

In addition, for the majority of U.S. operations, the Company has elected to use the last-in, first-out (“LIFO”) method of inventory costing. Generally, this method results in a lower inventory value than the first-in, first-out (“FIFO”) method due to the effects of inflation.

MANAGEMENT’S DISCUSSION & ANALYSIS 49

Collectibility of Accounts Receivable —The Company estimates the allowance for uncollectible accounts based on the greater of a specific reserve for past due accounts or a reserve calculated based on the historical write-off percentage over the last two years. In addition, the allowance for uncollectible accounts includes reserves for customer credits and cash discounts, which are also estimated based on past experience.

Depreciation of Plant and Equipment —The Company’s U.S. businesses compute depreciation on an accelerated basis, as follows:


Buildings and improvements		150% declining balance
Machinery and equipment		200% declining balance

The majority of the international businesses compute depreciation on a straight-line basis to conform to their local statutory accounting and tax regulations.

Income Taxes —The Company provides deferred income tax assets and liabilities based on the estimated future tax effects of differences between the financial and tax bases of assets and liabilities based on currently enacted tax laws. The Company’s tax balances are based on management’s interpretation of the tax regulations and rulings in numerous taxing jurisdictions. Income tax expense recognized by the Company also reflects its best estimates and assumptions regarding, among other things, the level of future taxable income and effect of the Company’s various tax planning strategies. Future tax authority rulings and changes in tax laws, changes in projected levels of taxable income, and future tax planning strategies could affect the actual effective tax rate and tax balances recorded by the Company.

The Company believes that the above critical policies have resulted in past actual results approximating the estimated amounts in those areas.

FORWARD-LOOKING STATEMENTS

This annual report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, without limitation, statements regarding the Company’s 2005 forecasts and assumptions, the adequacy of internally generated funds, the recoverability of the Company’s investments in mortgage entities, future cash flows and income from the Company’s mortgage investments, equipment leases, the meeting of dividend payout objectives, the impact of the adoption of SFAS 123R on stock-based compensation, impact of the repeal of the ETI benefit on the Company’s future U.S. tax payments, the amount of U.S. pre-tax manufacturing income that would qualify as eligible income, payments under guarantees, the Company’s portion of future benefit payments related to pension and postretirement benefits, and the availability of additional financing. These statements are subject to certain risks, uncertainties, and other factors, which could cause actual results to differ materially from those anticipated. Important risks that may influence future results include (1) a downturn in the construction, automotive, general industrial, food retail and service, or real estate markets, (2) deterioration in global and domestic business and economic conditions, particularly in North America, the European Community and Australia, (3) the unfavorable impact of foreign currency fluctuations and costs of raw materials, (4) an interruption in, or reduction in, introducing new products into the Company’s product lines, (5) an unfavorable environment for making acquisitions, domestic and international, including adverse accounting or regulatory requirements and market values of candidates, and (6) unfavorable tax law changes and tax authority rulings. The risks covered here are not all inclusive and given these and other possible risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

50 2004 ANNUAL REPORT

MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Illinois Tool Works Inc. (“ITW”) is responsible for establishing and maintaining adequate internal control over financial reporting. ITW’s internal control system was designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

ITW management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework . Based on our assessment we believe that, as of December 31, 2004, the Company’s internal control over financial reporting is effective based on those criteria.

ITW’s independent auditors have issued an audit report on our assessment of the Company’s internal control over financial reporting.



W. James Farrell		Jon C. Kinney
Chairman and Chief Executive Officer		Senior Vice President and Chief Financial Officer
March 1, 2005		March 1, 2005

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 51

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Illinois Tool Works Inc.:

We have audited the accompanying statements of financial position of Illinois Tool Works Inc. and Subsidiaries (the “Company”) as of December 31, 2004 and 2003, and the related statements of income, income reinvested in the business, comprehensive income and cash flows for each of the three years in the period ended December 31, 2004. We also have audited management’s assessment, included in the accompanying Management Report on Internal Control Over Financial Reporting, dated February 25, 2005, that the Company maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these financial statements, an opinion on management’s assessment, and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, a company’s principal executive and principal financial officers, or persons performing similar functions, and effected by a company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of a company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of a company are being made only in accordance with authorizations of management and directors of a company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of a company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

(-S- DELOITTE & TOUCHE LLP)

Deloitte & Touche LLP
Chicago, Illinois
March 1, 2005

52 2004 ANNUAL REPORT

Statement of Income

Illinois Tool Works Inc. and Subsidiaries


	FOR THE YEARS ENDED DECEMBER 31
IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS	2004			2003			2002

Operating Revenues	$	11,731,425		$	10,035,623		$	9,467,740
Cost of revenues		7,591,246			6,527,692			6,213,791
Selling, administrative, and research and development expenses		2,024,445			1,850,197			1,720,245
Amortization and impairment of goodwill and other intangible assets		59,121			24,276			27,933

Operating Income		2,056,613			1,633,458			1,505,771
Interest expense		(69,234	)		(70,672	)		(68,455	)
Other income (expense)		12,026			13,328			(3,756	)

Income from Continuing Operations Before Income Taxes		1,999,405			1,576,114			1,433,560
Income taxes		659,800			535,900			501,750

Income from Continuing Operations		1,339,605			1,040,214			931,810
Income (Loss) from Discontinued Operations		(911	)		(16,534	)		2,672
Cumulative Effect of Change in Accounting Principle		—			—			(221,890	)

Net Income	$	1,338,694		$	1,023,680		$	712,592

Income Per Share from Continuing Operations:
Basic	$	4.43		$	3.39		$	3.04

Diluted	$	4.39		$	3.37		$	3.02

Income (Loss) Per Share from Discontinued Operations:
Basic	$	—		$	(0.05	)	$	0.01

Diluted	$	—		$	(0.05	)	$	0.01

Cumulative Effect Per Share of Change in Accounting Principle:
Basic	$	—		$	—		$	(0.72	)

Diluted	$	—		$	—		$	(0.72	)

Net Income Per Share:
Basic	$	4.43		$	3.33		$	2.33

Diluted	$	4.39		$	3.32		$	2.31



Statement of Income Reinvested in the Business
Illinois Tool Works Inc. and Subsidiaries

	FOR THE YEARS ENDED DECEMBER 31
IN THOUSANDS	2004			2003			2002

Beginning Balance	$	6,937,110		$	6,202,263		$	5,765,421
Net income		1,338,694			1,023,680			712,592
Cash dividends declared		(312,286	)		(288,833	)		(275,750	)

Ending Balance	$	7,963,518		$	6,937,110		$	6,202,263



Statement of Comprehensive Income
Illinois Tool Works Inc. and Subsidiaries

	FOR THE YEARS ENDED DECEMBER 31
IN THOUSANDS	2004			2003			2002

Net Income	$	1,338,694		$	1,023,680		$	712,592
Other Comprehensive Income:
Foreign currency translation adjustments		306,653			407,811			135,144
Minimum pension liability adjustments		(5,009	)		6,124			(53,467	)
Income tax related to minimum pension liability adjustments		1,960			(1,748	)		17,872

Comprehensive Income	$	1,642,298		$	1,435,867		$	812,141

The Notes to Financial Statements are an integral part of these statements.

STATEMENT OF FINANCIAL POSITION 53

Statement of Financial Position

Illinois Tool Works Inc. and Subsidiaries


	DECEMBER 31
IN THOUSANDS EXCEPT SHARES	2004			2003

Assets
Current Assets:
Cash and equivalents	$	667,390		$	1,684,483
Trade receivables		2,054,624			1,721,186
Inventories		1,281,156			991,979
Deferred income taxes		147,416			217,638
Prepaid expenses and other current assets		171,612			167,916

Total current assets		4,322,198			4,783,202

Plant and Equipment:
Land		160,649			135,357
Buildings and improvements		1,236,541			1,140,033
Machinery and equipment		3,272,144			3,046,688
Equipment leased to others		150,412			145,657
Construction in progress		117,366			93,694

		4,937,112			4,561,429
Accumulated depreciation		(3,060,237	)		(2,832,791	)

Net plant and equipment		1,876,875			1,728,638

Investments		912,483			832,358
Goodwill		2,753,053			2,511,281
Intangible Assets		440,002			287,582
Deferred Income Taxes		233,172			370,737
Other Assets		814,151			679,523

	$	11,351,934		$	11,193,321

Liabilities and Stockholders’ Equity
Current Liabilities:
Short-term debt	$	203,523		$	56,094
Accounts payable		603,811			481,407
Accrued expenses		959,380			870,950
Cash dividends payable		81,653			73,948
Income taxes payable		2,604			6,504

Total current liabilities		1,850,971			1,488,903

Noncurrent Liabilities:
Long-term debt		921,098			920,360
Other		952,255			909,772

Total noncurrent liabilities		1,873,353			1,830,132

Stockholders’ Equity:
Common stock:
Issued—311,373,558 shares in 2004 and 308,877,225 shares in 2003		3,114			3,089
Additional paid-in-capital		978,941			825,924
Income reinvested in the business		7,963,518			6,937,110
Common stock held in treasury		(1,731,378	)		(1,648	)
Accumulated other comprehensive income		413,415			109,811

Total stockholders’ equity		7,627,610			7,874,286

	$	11,351,934		$	11,193,321

The Notes to Financial Statements are an integral part of this statement.

54 2004 ANNUAL REPORT

Statement of Cash Flows

Illinois Tool Works Inc. and Subsidiaries


	FOR THE YEARS ENDED DECEMBER 31
IN THOUSANDS	2004			2003			2002

Cash Provided by (Used for) Operating Activities:
Net income	$	1,338,694		$	1,023,680		$	712,592
Adjustments to reconcile net income to cash provided by operating activities:
(Income) loss from discontinued operations		911			16,534			(2,672	)
Cumulative effect of change in accounting principle		—			—			221,890
Depreciation		294,162			282,277			277,819
Amortization and impairment of goodwill and other intangible assets		59,121			24,276			27,933
Change in deferred income taxes		143,214			203,958			(60,471	)
Provision for uncollectible accounts		391			8,875			21,696
Loss on sale of plant and equipment		4,710			6,883			6,146
Income from investments		(142,621	)		(145,541	)		(147,024	)
Non-cash interest on nonrecourse notes payable		—			18,696			39,629
(Gain) loss on sale of operations and affiliates		(8	)		(5,109	)		4,777
Amortization of restricted stock		32,514			17,777			193
Other non-cash items, net		9,740			17,951			1,660
Change in assets and liabilities:
(Increase) decrease in—
Trade receivables		(128,868	)		(22,239	)		8,058
Inventories		(177,052	)		108,180			71,844
Prepaid expenses and other assets		(123,532	)		(186,714	)		10,981
Net assets of discontinued operations		—			30,736			1,433
Increase (decrease) in—
Accounts payable		31,947			(10,104	)		14,455
Accrued expenses and other liabilities		35,056			47,070			(9,649	)
Income taxes payable		153,457			(68,497	)		87,422
Other, net		195			52			44

Net cash provided by operating activities		1,532,031			1,368,741			1,288,756

Cash Provided by (Used for) Investing Activities:
Acquisition of businesses (excluding cash and equivalents) and additional interest in affiliates		(587,783	)		(203,726	)		(188,234	)
Additions to plant and equipment		(282,560	)		(258,312	)		(271,424	)
Purchase of investments		(64,442	)		(133,236	)		(194,741	)
Proceeds from investments		85,412			59,509			77,780
Proceeds from sale of plant and equipment		23,378			29,489			29,208
Proceeds from sale of operations and affiliates		6,495			21,421			211,075
Other, net		8,173			994			3,079

Net cash used for investing activities		(811,327	)		(483,861	)		(333,257	)

Cash Provided by (Used for) Financing Activities:
Cash dividends paid		(304,581	)		(285,399	)		(272,319	)
Issuance of common stock		79,108			40,357			44,381
Repurchases of common stock		(1,729,806	)		—			—
Net proceeds (repayments) of short-term debt		134,019			(68,159	)		(231,214	)
Proceeds from long-term debt		97			931			258,426
Repayments of long-term debt		(6,629	)		(28,538	)		(30,707	)
Other, net		—			12			2,790

Net cash used for financing activities		(1,827,792	)		(340,796	)		(228,643	)

Effect of Exchange Rate Changes on Cash and Equivalents		89,995			82,712			48,607

Cash and Equivalents:
Increase (decrease) during the year		(1,017,093	)		626,796			775,463
Beginning of year		1,684,483			1,057,687			282,224

End of year	$	667,390		$	1,684,483		$	1,057,687

Cash Paid During the Year for Interest	$	73,393		$	73,250		$	73,284

Cash Paid During the Year for Income Taxes	$	339,334		$	351,156		$	474,954

Liabilities Assumed from Acquisitions	$	150,913		$	120,825		$	34,267

The Notes to Financial Statements are an integral part of this statement. See the Investments note for information regarding non-cash transactions.

NOTES TO FINANCIAL STATEMENTS 55

Notes to Financial Statements

The Notes to Financial Statements furnish additional information on items in the financial statements. The notes have been arranged in the same order as the related items appear in the statements.

Illinois Tool Works Inc. (the “Company” or “ITW”) is a worldwide manufacturer of highly engineered products and specialty systems. The Company primarily serves the construction, automotive, food institutional and retail, and general industrial markets.

Significant accounting principles and policies of the Company are in italics. Certain reclassifications of prior years’ data have been made to conform to current year reporting.

The preparation of the Company’s financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the notes to financial statements. Actual results could differ from those estimates. The significant estimates included in the preparation of the financial statements are related to inventories, trade receivables, plant and equipment, income taxes, product liability matters, litigation, product warranties, pensions, other postretirement benefits, environmental matters and stock options.

Consolidation and Translation— The financial statements include the Company and substantially all of its majority-owned subsidiaries. All significant intercompany transactions are eliminated from the financial statements. Substantially all of the Company’s foreign subsidiaries outside North America have November 30 fiscal year-ends to facilitate inclusion of their financial statements in the December 31 consolidated financial statements .

Foreign subsidiaries’ assets and liabilities are translated to U.S. dollars at end-of-period exchange rates. Revenues and expenses are translated at average rates for the period. Translation adjustments are reported as a component of accumulated other comprehensive income in stockholders’ equity .

Acquisitions— Summarized information related to acquisitions during 2004, 2003 and 2002 is as follows:


IN THOUSANDS EXCEPT NUMBER OF ACQUISITIONS		2004		2003		2002

Number of acquisitions		24		28		21
Net cash paid during the year	$	587,783	$	203,726	$	188,234
Premium recorded:
Goodwill	$	230,073	$	100,374	$	94,916
Intangible assets	$	197,182	$	55,280	$	40,023

The acquisitions in these years, individually and in the aggregate, did not materially affect the Company’s results of operations or financial position.

Operating Revenues are recognized when the risks of ownership are transferred to the customer , which is generally at the time of product shipment. Operating revenues for the Leasing and Investments segment include income from mortgage investments, leases and other investments that is recognized based on the applicable accounting method for each type of investment. See the Investments note for the detailed accounting policies related to the Company’s significant investments.

No single customer accounted for more than 5% of consolidated revenues in 2004, 2003 or 2002.

Research and Development Expenses are recorded as expense in the year incurred . These costs were $123,486,000 in 2004, $106,777,000 in 2003 and $101,344,000 in 2002.

Rental Expense was $107,204,000 in 2004, $102,447,000 in 2003 and $94,395,000 in 2002. Future minimum lease payments for the years ending December 31 are as follows:


IN THOUSANDS

2005	$	101,359
2006		77,751
2007		59,160
2008		43,632
2009		32,774
2010 and future years		59,431

	$	374,107

Advertising Expenses are recorded as expense in the year incurred . These costs were $81,113,000 in 2004, $74,760,000 in 2003, and $73,894,000 in 2002.

56 2004 ANNUAL REPORT

Interest Expense related to debt has been recorded in the statement of income as follows:


IN THOUSANDS	2004		2003		2002

Cost of revenues	$	4,202	$	22,687	$	43,333
Interest expense		69,234		70,672		68,455
Income (loss) from discontinued operations		—		25		1,578

	$	73,436	$	93,384	$	113,366

The interest expense recorded as cost of revenues relates to the Leasing and Investment segment and includes interest expense related to both the direct debt of the segment and general corporate debt allocated to the segment based on the after-tax cash flows of the investments. The allocation of interest expense from general corporate debt to the segment was $4,202,000, $3,990,000 and $3,704,000 in 2004, 2003 and 2002, respectively.

Other Income (Expense) consisted of the following:


IN THOUSANDS	2004			2003			2002

Interest income	$	25,614		$	26,171		$	17,574
Gain (loss) on sale of operations and affiliates		8			5,109			(4,777	)
Loss on sale of plant and equipment		(4,710	)		(6,883	)		(6,146	)
Loss on foreign currency transactions		(9,810	)		(5,077	)		(9,070	)
Other, net		924			(5,992	)		(1,337	)

	$	12,026		$	13,328		$	(3,756	)

The interest income above relates to general corporate short-term investments. Interest income related to the investments of the Leasing and Investments segment is included in the operating income of that segment.

Income Taxes— The Company utilizes the asset and liability method of accounting for income taxes. Deferred income taxes are determined based on the estimated future tax effects of differences between the financial and tax bases of assets and liabilities given the provisions of the enacted tax laws. The components of the provision for income taxes on continuing operations were as shown below:


IN THOUSANDS	2004			2003			2002

U.S. federal income taxes:
Current	$	250,887		$	170,040		$	334,329
Deferred		92,526			239,618			35,064
Tax cost of expected dividend repatriation in 2005		25,000			—			—
Benefit of net operating loss carryforwards		(4,204	)		(33,816	)		(2,626	)
Tax benefit related to stock recorded through equity		36,322			19,139			25,366

		400,531			394,981			392,133

Foreign income taxes:
Current		226,699			201,136			153,949
Deferred		51,129			(47,769	)		(65,079	)
Benefit of net operating loss carryforwards		(51,425	)		(38,161	)		(2,642	)

		226,403			115,206			86,228

State income taxes:
Current		43,297			33,116			35,518
Deferred		(2,719	)		20,407			(6,420	)
Benefit of net operating loss carryforwards		(11,014	)		(29,355	)		(7,671	)
Tax benefit related to stock recorded through equity		3,302			1,545			1,962

		32,866			25,713			23,389

	$	659,800		$	535,900		$	501,750

NOTES TO FINANCIAL STATEMENTS 57

Income from continuing operations before income taxes for domestic and foreign operations was as follows:


IN THOUSANDS	2004			2003			2002

Domestic	$	1,354,301		$	1,066,575		$	1,185,606
Foreign		645,104			509,539			247,954

	$	1,999,405		$	1,576,114		$	1,433,560


The reconciliation between the U.S. federal statutory tax rate and the effective tax rate was as follows:

	2004			2003			2002

U.S. federal statutory tax rate		35.0	%		35.0	%		35.0	%
State income taxes, net of U.S. federal tax benefit		1.5			1.1			1.1
Differences between U.S. federal statutory and foreign tax rates		(0.6	)		(1.0	)		0.3
Nontaxable foreign interest income		(1.6	)		(2.7	)		(1.4	)
Tax effect of foreign dividends		(1.1	)		1.0			0.3
Other, net		(0.2	)		0.6			(0.3	)

Effective tax rate		33.0	%		34.0	%		35.0	%

In October 2004, the American Jobs Creation Act of 2004 (“AJCA”) was enacted in the United States. One of the provisions of the AJCA was to allow a special one-time dividends-received deduction of 85% on the repatriation of certain foreign earnings to U.S. taxpayers, provided certain criteria regarding the sources and uses of the repatriated funds are met. In November 2004, the Tax Technical Corrections Act of 2004 (“Technical Corrections Act”) was introduced in the U.S. House of Representatives which would clarify certain computations related to the dividends-received deduction in the AJCA. The Company has not finalized its 2005 repatriation plans related to the AJCA and the possible enactment of the Technical Corrections Act. The range of possible total repatriated amounts and the related tax effects are as follows:


			UNDER AJCA ASSUMING
	UNDER AJCA AS		AMENDMENT BY PROPOSED
	CURRENTLY ENACTED		TECHNICAL CORRECTIONS ACT
IN THOUSANDS			MINIMUM		MAXIMUM

Estimated repatriation	$	273,500	$	745,500	$	1,495,500

Estimated U.S. tax cost of repatriation	$	25,000	$	25,000	$	62,000

In 2004, the Company recorded a deferred tax liability of $25,000,000 to reflect the estimated tax cost of the minimum foreign dividends expected to be repatriated under the AJCA in 2005. Deferred U.S. federal income taxes and foreign withholding taxes have not been provided on undistributed earnings of certain international subsidiaries of $2,300,000,000 and $2,000,000,000 as of December 31, 2004 and 2003, respectively, as these earnings are considered permanently invested. Upon repatriation of these earnings to the United States in the form of dividends or otherwise, the Company may be subject to U.S. income taxes and foreign withholding taxes. The actual U.S. tax cost would depend on income tax laws and circumstances at the time of distribution. Determination of the related tax liability is not practicable because of the complexities associated with the hypothetical calculation.

58 2004 ANNUAL REPORT

The components of deferred income tax assets and liabilities at December 31, 2004 and 2003 were as follows:


	2004						2003
IN THOUSANDS	ASSET			LIABILITY			ASSET			LIABILITY

Goodwill and intangible assets	$	83,392		$	(117,471	)	$	84,563		$	(76,918	)
Inventory reserves, capitalized tax cost and LIFO inventory		41,159			(15,327	)		32,811			(17,517	)
Investments		201,954			(335,391	)		198,166			(295,150	)
Plant and equipment		36,345			(98,585	)		14,269			(81,156	)
Accrued expenses and reserves		196,195			—			240,117			—
Employee benefit accruals		229,572			—			209,466			—
Foreign tax credit carryforwards		11,540			—			20,954			—
Net operating loss carryforwards		261,624			—			230,427			—
Capital loss carryforwards		114,920			—			82,074			—
Allowances for uncollectible accounts		10,176			—			13,491			—
Prepaid pension assets		—			(87,654	)		—			(72,557	)
Other		43,057			(44,152	)		92,205			(17,809	)

Gross deferred income tax assets (liabilities)		1,229,934			(698,580	)		1,218,543			(561,107	)
Valuation allowances		(150,766	)		—			(69,061	)		—

Total deferred income tax assets (liabilities)	$	1,079,168		$	(698,580	)	$	1,149,482		$	(561,107	)

The valuation allowances recorded at December 31, 2004 and 2003 relate primarily to net operating loss carryforwards and capital loss carryforwards. No additional valuation allowances have been recorded on the net deferred income tax assets of $380,588,000 and $588,375,000 at December 31, 2004 and 2003, respectively, as the Company expects to generate adequate taxable income in the applicable tax jurisdictions in future years.

At December 31, 2004, the Company had net operating loss carryforwards available to offset future taxable income in the United States and certain foreign jurisdictions, which expire as follows:


IN THOUSANDS	GROSS NET OPERATING LOSS CARRYFORWARDS

2005		$	983
2006			4,821
2007			2,467
2008			33,052
2009			4,460
2010			3,090
2011			4,368
2012			5,078
2013			7,181
2014			2,638
2015			2,199
2016			1,370
2017			4,713
2018			29,517
2019			1
2020			13,002
2021			7,503
2022			1
2023			24,119
2024			94,629
Do not expire			619,948

		$	865,140

NOTES TO FINANCIAL STATEMENTS 59

Income from Continuing Operations Per Share is computed by dividing income from continuing operations by the weighted average number of shares outstanding for the period. Income from continuing operations per diluted share is computed by dividing income from continuing operations by the weighted average number of shares assuming dilution for stock options and restricted stock. Dilutive shares reflect the potential additional shares that would be outstanding if the dilutive stock options outstanding were exercised and the unvested restricted stock vested during the period. The computation of income from continuing operations per share was as follows:


IN THOUSANDS EXCEPT PER SHARE AMOUNTS	2004		2003		2002

Income from continuing operations	$	1,339,605	$	1,040,214	$	931,810

Income from continuing operations per share—Basic:
Weighted average common shares		302,376		307,069		306,157

Income from continuing operations per share—Basic	$	4.43	$	3.39	$	3.04

Income from continuing operations per share—Diluted:
Weighted average common shares		302,376		307,069		306,157
Effect of dilutive stock options and restricted stock		2,475		1,681		1,888

Weighted average common shares assuming dilution		304,851		308,750		308,045

Income from continuing operations per share—Diluted	$	4.39	$	3.37	$	3.02

Options that had exercise prices greater than the average market price of the common shares are considered antidilutive and were not included in the computation of diluted income from continuing operations per share. The antidilutive options outstanding as of December 31, 2004, 2003 and 2002 were as follows:


	2004		2003		2002

Weighted average shares issuable under antidilutive options		191,975		26,085		915
Weighted average exercise price per share	$	94.15	$	79.35	$	68.13

Discontinued Operations— In December 2001, the Company’s Board of Directors authorized the divestiture of the Consumer Products segment. The segment was comprised of the following businesses: Precor specialty exercise equipment, West Bend small appliances and premium cookware, and Florida Tile ceramic tile. The consolidated financial statements for all periods present these businesses as discontinued operations in accordance with Accounting Principles Board Opinion No. 30. On October 31, 2002, the sales of Precor and West Bend were completed, resulting in cash proceeds of $211,193,000. On November 7, 2003, the sale of Florida Tile was completed, resulting in cash proceeds of $11,450,000. The Company’s net loss on disposal of the segment was as follows:


	PRETAX GAIN			TAX PROVISION			AFTER-TAX
IN THOUSANDS	(LOSS)			(BENEFIT)			GAIN (LOSS)

Realized gains on 2002 sales of Precor and West Bend	$	146,240		$	51,604		$	94,636
Estimated loss on 2003 sale of Florida Tile recorded in 2002		(123,874	)		(31,636	)		(92,238	)

Estimated net gain on disposal of the segment deferred at December 31, 2002		22,366			19,968			2,398
Gain adjustments related to 2002 sales of Precor and West Bend recorded in 2003		(752	)		(256	)		(496	)
Additional loss on sale of Florida Tile recorded in 2003		(28,784	)		(10,348	)		(18,436	)

Net loss on disposal of segment as of December 31, 2003		(7,170	)		9,364			(16,534	)
Adjustments to Florida Tile loss on sale recorded in 2004		263			1,174			(911	)

Net loss on disposal of segment as of December 31, 2004	$	(6,907	)	$	10,538		$	(17,445	)

Results of the discontinued operations for the years ended December 31, 2004, 2003 and 2002 were as follows:


IN THOUSANDS	2004			2003			2002

Operating revenues	$	—		$	102,194		$	344,419

Operating income (loss)	$	—		$	(4,003	)	$	10,804

Net income (loss) from discontinued operations	$	—		$	(4,027	)	$	2,672
Amount charged against reserve for Florida Tile operating losses		—			4,027			—

Income from discontinued operations (net of 2002 tax provision of $8,096)		—			—			2,672
Loss on disposal of the segment (net of 2004 and 2003 tax provisions of $1,174 and $9,364, respectively)		(911	)		(16,534	)		—

Income (loss) from discontinued operations	$	(911	)	$	(16,534	)	$	2,672

As of December 31, 2004 and 2003, there were no assets or liabilities remaining from the discontinued operations.

60 2004 ANNUAL REPORT

Cash and Equivalents included interest-bearing instruments of $203,796,000 at December 31, 2004 and $1,281,492,000 at December 31, 2003. Interest-bearing instruments have maturities of 90 days or less and are stated at cost, which approximates market .

Trade Receivables were net of allowances for uncollectible accounts. The changes in the allowances for uncollectible accounts during 2004, 2003 and 2002 were as follows:


IN THOUSANDS	2004			2003			2002

Beginning balance	$	(62,364	)	$	(66,158	)	$	(61,065	)
Provision charged to expense		(391	)		(8,875	)		(21,696	)
Write-offs, net of recoveries		14,236			17,987			21,996
Acquisitions and divestitures		(4,285	)		(2,851	)		(3,437	)
Other		(3,401	)		(2,467	)		(1,956	)

Ending balance	$	(56,205	)	$	(62,364	)	$	(66,158	)

Inventories at December 31, 2004 and 2003 were as follows:


IN THOUSANDS	2004		2003

Raw material	$	385,036	$	286,550
Work-in-process		118,052		102,267
Finished goods		778,068		603,162

	$	1,281,156	$	991,979

Inventories are stated at the lower of cost or market and include material, labor and factory overhead. The last-in, first-out (“LIFO”) method is used to determine the cost of the inventories of a majority of the U.S. operations. Inventories priced at LIFO were 34% and 35% of total inventories as of December 31, 2004 and 2003, respectively. The first-in, first-out (“FIFO”) method, which approximates current cost, is used for all other inventories. If the FIFO method was used for all inventories, total inventories would have been approximately $126,774,000, and $93,511,000 higher than reported at December 31, 2004 and 2003, respectively.

Plant and Equipment are stated at cost less accumulated depreciation. Renewals and improvements that increase the useful life of plant and equipment are capitalized. Maintenance and repairs are charged to expense as incurred.

Depreciation was $294,162,000 in 2004, $282,277,000 in 2003 and $277,819,000 in 2002, and was reflected primarily in cost of revenues. Depreciation of plant and equipment for financial reporting purposes is computed principally on an accelerated basis.

The range of useful lives used to depreciate plant and equipment is as follows:



Buildings and improvements		10—50 years
Machinery and equipment		3—20 years
Equipment leased to others		Term of lease

Investments as of December 31, 2004 and 2003 consisted of the following:


IN THOUSANDS	2004		2003

Mortgage investments	$	380,465	$	325,435
Leases of equipment		302,487		284,042
Affordable housing limited partnerships		93,200		103,388
Venture capital limited partnership		75,333		47,487
Properties held for sale		22,868		32,689
Prepaid forward contract		27,040		25,767
Property developments		11,090		13,550

	$	912,483	$	832,358

Mortgage Investments

NOTES TO FINANCIAL STATEMENTS 61

entered into ten-year swap agreements and other related agreements whereby a third party receives the portion of the interest and net operating cash flow from the mortgage-related assets in excess of $26,000,000 per year and a portion of the proceeds from the disposition of the mortgage-related assets and principal repayments, in exchange for the third party making the contractual principal and interest payments on the nonrecourse notes payable. In addition, in the event that the pools of mortgage-related assets do not generate interest and net operating cash flow of $26,000,000 a year, the Company has the right to receive the shortfall from the cash flow generated by three separate pools of mortgage-related assets (owned by third parties in which the Company has minimal interests), which the swap counter party has estimated to have a total fair value of approximately $1,100,000,000 at December 31, 2004. The mortgage entities entered into the swaps and other related agreements in order to reduce their real estate, credit and interest rate risks relative to the mortgage-related assets and related nonrecourse notes payable.

As of December 31, 2004 and December 31, 2003, the book value of the assets held by the mortgage entities was as follows:


IN THOUSANDS	2004		2003

Cash on hand from dispositions	$	459,470	$	89,703
Real estate (24 and 37 properties, respectively)		348,004		646,269
Mortgage loans (4 and 5 loans, respectively)		78,766		79,820
Other assets		8,389		8,343

	$	894,629	$	824,135

Assuming all assets become worthless and the swap counterparty defaults, the Company’s maximum exposure to loss related to the mortgage entities is limited to its investment of $380,465,000 at December 31, 2004.

On July 1, 2003, the Company adopted FASB Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”) relative to its investments in the mortgage entities. FIN 46 requires consolidation of variable interest entities in which a company has a controlling financial interest, even if it does not have a majority voting interest. A company is deemed to have a controlling financial interest in a variable interest entity if it has either the majority of the risk of loss or the majority of the residual returns. Upon its adoption of FIN 46 for the mortgage investments as of July 1, 2003, the Company deconsolidated its investments in the mortgage entities as the Company neither bears the majority of the risk of loss nor enjoys the majority of any residual returns.

No gain or loss was recognized in connection with this change in accounting. The Company recorded its investments in the mortgage entities as of July 1, 2003 on a net carryover basis, as follows:


IN THOUSANDS

Mortgage-related assets	$	978,755
Current portion of nonrecourse notes payable		(41,606	)
Long-term portion of nonrecourse notes payable		(507,063	)
Accrued interest on nonrecourse notes payable		(9,849	)
Current portion of deferred mortgage investment income		(30,724	)
Noncurrent portion of deferred mortgage investment income		(74,433	)

Net book value of mortgage investments as of July 1, 2003	$	315,080

In 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities (“FIN 46R”). The adoption of FIN 46R had no impact on the Company.

Starting in the third quarter of 2003 and for subsequent periods, the Company accounts for its net investments in the mortgage entities using the equity method of accounting as provided in Statement of Position 78-9, Accounting for Investments in Real Estate Ventures. Under this method, the net mortgage investments are adjusted through income for changes in the Company’s share of the net assets of the mortgage entities. The excess of the liquidation value of the investments in the mortgage entities over their net book value as of July 1, 2003 of $178,333,000 is being recognized as income over the remaining term of each of the investments. The remaining amount of this excess liquidation value over book value at December 31, 2004 and December 31, 2003 was as follows:


IN THOUSANDS	2004		2003

Mortgage transaction ending December 31, 2005	$	25,243	$	59,998
Mortgage transaction ending December 31, 2006		35,307		56,079
Mortgage transaction ending February 28, 2008		28,964		40,293

	$	89,514	$	156,370

62 2004 ANNUAL REPORT

Prior to the adoption of FIN 46 for the mortgage investments as of July 1, 2003, the principal mortgage-related assets were accounted for as follows:

Commercial mortgage loans— Interest income was recorded based on the effective yield determined at the inception of the commercial mortgage transactions. The Company evaluated whether the commercial mortgage loans had been impaired by reviewing the discounted estimated future cash flows of the loans versus the carrying value of the loans. If the carrying value exceeded the discounted cash flows, an impairment loss was recorded through the operating income of the Leasing and Investments segment. Interest income was recognized on impaired mortgage loans based on the original effective yield of the loans. Loans that were foreclosed were transferred to commercial real estate at carrying value.

Commercial real estate— Recorded at cost and depreciated on a straight-line basis over an estimated useful life of 39 years. At least annually, the real estate assets were evaluated for impairment by comparing estimated future undiscounted cash flows to the carrying values. If the undiscounted future cash flows were less than the carrying value, an impairment loss was recorded equal to the difference between the estimated fair value and the carrying value of the impaired asset. Gains and losses were recorded on the sale of the real estate assets through the operating income of the Leasing and Investments segment based on the proceeds of the sale compared with the carrying value of the asset sold.

Net swap receivables— Recorded at fair value, based on the estimated future cash flows discounted at current market interest rates. All estimated future cash flows were provided by the swap counter party, who also is the servicer of the mortgage loans and real estate. Market interest rates for the swap inflows were based on the current market yield of a bond of the swap counter party. Discount rates for the swap outflows were based on an estimate of risk-adjusted rates for real estate assets. Any adjustments to the carrying value of the net swap receivables due to changes in expected future cash flows, discount rates or interest rates were recorded through the operating income of the Leasing and Investment segment.

Leases of Equipment

The components of the investment in leases of equipment at December 31, 2004 and 2003 were as shown below:


IN THOUSANDS	2004			2003

Leveraged, direct financing and sale type leases:
Gross lease contracts receivable, net of nonrecourse debt service	$	166,646		$	171,102
Estimated residual value of leased assets		255,119			255,538
Unearned income		(122,486	)		(145,734	)

		299,279			280,906

Equipment under operating leases		3,208			3,136

	$	302,487		$	284,042

Deferred tax liabilities related to leveraged and direct financing leases were $245,723,000 and $151,414,000 at December 31, 2004 and 2003, respectively.

The investment in leases of equipment at December 31, 2004 and 2003 relates to the following types of equipment:


IN THOUSANDS	2004		2003

Telecommunications	$	193,306	$	181,370
Air traffic control		61,757		51,395
Aircraft		44,020		45,388
Manufacturing		3,404		5,390
Railcars		—		499

	$	302,487	$	284,042

NOTES TO FINANCIAL STATEMENTS 63

In 2003, the Company entered into a leveraged lease transaction related to air traffic control equipment in Australia with a cash investment of $48,763,000. In 2002, the Company entered into leveraged leasing transactions related to mobile telecommunications equipment with two major European telecommunications companies with a cash investment of $144,676,000. Under the terms of the telecommunications and air traffic control lease transactions, the lessees have made upfront payments to creditworthy third party financial institutions that are acting as payment undertakers. These payment undertakers are obligated to make the required scheduled payments directly to the nonrecourse debt holders and to the lessors, including the Company. In the event of default by the lessees, the Company can recover its net investment from the payment undertakers. In addition, the lessees are required to purchase residual value insurance from a creditworthy third party at a date near the end of the lease term.

The components of the income from leveraged, direct financing and sales-type leases for the years ended December 31, 2004, 2003 and 2002 were as shown below:


IN THOUSANDS	2004			2003			2002

Lease income before income taxes	$	24,326		$	27,059		$	26,731
Impairment charge on aircraft leases		—			—			(31,565	)
Investment tax credits recognized		296			612			(548	)
Income tax benefit (expense)		(9,014	)		(10,077	)		2,258

	$	15,608		$	17,594		$	(3,124	)

Unearned income is recognized as lease income over the life of the lease based on the effective yield of the lease. The residual values of leased assets are estimated at the inception of the lease based on market appraisals and reviewed for impairment at least annually. In 2002, an impairment charge of $31,565,000 was recorded related to the Company’s investments in aircraft leased to United Airlines, which declared bankruptcy in December 2002.

Other Investments

The Company has entered into several affordable housing limited partnerships primarily to receive tax benefits in the form of tax credits and tax deductions from operating losses. These affordable housing investments are accounted for using the effective yield method, in which the investment is amortized to income tax expense as the tax benefits are received. The tax credits are credited to income tax expense as they are allocated to the Company.

The Company entered into a venture capital limited partnership in 2001 that invests in late-stage venture capital opportunities. The Company has committed to total capital contributions to this partnership of $100,000,000 over a five-year period. The Company has a 25% limited partnership interest and accounts for this investment using the equity method, whereby the Company recognizes its proportionate share of the partnership’s income or loss. The partnership’s financial statements are prepared on a mark-to-market basis.

Properties held for sale are former manufacturing or office facilities located primarily in the United States that are no longer used by the Company’s operations and are currently held for sale. These properties are recorded at the lower of cost or market.

The Company’s investment in the prepaid forward contract was initially recorded at cost. Interest income is being accrued for this contract based on the effective yield of the contract.

The Company has invested in property developments with a residential construction developer through partnerships in which the Company has a 50% interest. These partnership investments are accounted for using the equity method, whereby the Company recognizes its proportionate share of the partnerships’ income or loss.

The property development partnerships and affordable housing limited partnerships in which the Company has invested are considered variable interest entities under FIN 46R. Because the Company neither bears the majority of the risk of loss nor enjoys the majority of any residual returns relative to these variable interest entities, the Company was not required to consolidate the entities upon its adoption of FIN 46R. The Company has continued to account for the property development investments using the equity method and the affordable housing investments using the effective yield method as described above. The Company’s maximum exposure to loss related to these investments is $26,840,000 and $93,200,000, respectively, as of December 31, 2004.

64 2004 ANNUAL REPORT

Cash Flows and Non-Cash Transactions

Cash flows related to investments during 2004, 2003 and 2002 were as follows:


IN THOUSANDS	2004			2003			2002

Cash used to purchase investments:
Affordable housing limited partnerships	$	(28,449	)	$	(53,581	)	$	(29,065	)
Leveraged leases of equipment		(449	)		(48,763	)		(152,253	)
Venture capital limited partnership		(28,007	)		(26,069	)		(11,872	)
Property developments		(3,918	)		(3,830	)		(1,402	)
Other		(3,619	)		(993	)		(149	)

	$	(64,442	)	$	(133,236	)	$	(194,741	)

Cash proceeds from investments:
Mortgage investments	$	26,187		$	26,000		$	26,467
Property developments		13,810			19,584			20,810
Venture capital		19,428			—			—
Leases of equipment		8,041			9,767			16,755
Properties held for sale		17,888			3,929			13,609
Other		58			229			139

	$	85,412		$	59,509		$	77,780

There were no material non-cash transactions in 2004. The Company’s only material non-cash transactions during 2003 and 2002 relate to the debt service on the nonrecourse notes payable of the mortgage entities, which was paid by the mortgage swap counter party, as follows:


IN THOUSANDS	2003		2002

Payments by mortgage swap counter party—
Principal	$	20,803	$	31,066
Interest		19,295		40,201

	$	40,098	$	71,267

Non-cash interest expense	$	18,696	$	39,629

The principal and interest amounts for 2003 above only reflect activity for the first half of 2003 as a result of the adoption of FIN 46 relative to the mortgage investments as of July 1, 2003.

Goodwill and Intangible Assets— Goodwill represents the excess cost over fair value of the net assets of purchased businesses. Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). Under SFAS 142, the Company does not amortize goodwill and intangible assets that have indefinite lives. SFAS 142 also requires that the Company assess goodwill and intangible assets with indefinite lives for impairment at least annually, based on the fair value of the related reporting unit or intangible asset. The Company performs its annual impairment assessment in the first quarter of each year.

As the first step in the SFAS 142 implementation process, the Company assigned its recorded goodwill and intangible assets as of January 1, 2002 to approximately 300 of its 600 reporting units based on the operating unit that includes the business acquired. Then, the fair value of each reporting unit was compared to its carrying value. Fair values were determined by discounting estimated future cash flows at the Company’s estimated cost of capital of 10%. Estimated future cash flows were based either on current operating cash flows or a detailed cash flow forecast prepared by the relevant operating unit. If the fair value of an operating unit was less than its carrying value, an impairment loss was recorded for the difference between the fair value of the unit’s goodwill and intangible assets and the carrying value of those assets.

Based on the Company’s initial impairment testing, goodwill was reduced by $254,582,000 and intangible assets were reduced by $8,234,000, and a net after-tax impairment charge of $221,890,000 ($0.72 per diluted share) was recognized as a cumulative effect of change in accounting principle in the first quarter of 2002. The impairment charge was related to approximately 40 businesses and primarily resulted from evaluating impairment under SFAS 142 based on discounted cash flows, instead of using undiscounted cash flows as required by the previous accounting standard.

NOTES TO FINANCIAL STATEMENTS 65

Other than the cumulative effect of change in accounting principle discussed above, amortization and impairment of goodwill and other intangible assets for the years ended December 31, 2004, 2003, and 2002 were as follows:


IN THOUSANDS	2004		2003		2002

Goodwill:
Impairment	$	11,492	$	702	$	7,877
Intangible Assets:
Amortization		37,409		19,813		20,056
Impairment		10,220		3,761		—

	$	59,121	$	24,276	$	27,933

In the first quarter of 2004, the Company performed its annual impairment testing of its goodwill and intangible assets, which resulted in impairment charges of $21,712,000. The first quarter 2004 goodwill impairment charges of $11,492,000 were primarily related to a European automotive components business and a U.S. electrical components business, and resulted from lower estimated future cash flows than previously expected. Also in the first quarter of 2004, intangible asset impairments of $10,220,000 were recorded to reduce to estimated fair value the carrying value of trademarks and brands related primarily to several U.S. welding components businesses, a U.S. industrial packaging business in the Specialty Systems—North America segment and a U.S. business that manufactures clean room mats in the Engineered Products—North America segment.

In the first quarter of 2003, the Company performed its annual impairment testing of its goodwill and intangible assets, which resulted in impairment charges of $4,463,000. The 2003 goodwill impairment charge of $702,000 was related to a U.S. welding components business and primarily resulted from lower estimated future cash flows than previously expected. Also in the first quarter of 2003, intangible asset impairment charges of $3,761,000 were recorded to reduce to estimated fair value the carrying value of trademarks and brands related to several U.S. welding components businesses in the Specialty Systems—North America segment and a U.S. business that manufactures clean room mats in the Engineered Products—North America segment.

In the fourth quarter of 2002, an impairment charge of $7,877,000 was recognized to reduce to estimated fair value the carrying value of goodwill related to five businesses. The impairment charge primarily related to the goodwill of industrial packaging businesses in Australia and Asia, which was tested for impairment because actual results were lower than previously forecasted results.

The changes in the carrying amount of goodwill by segment for the years ended December 31, 2004 and December 31, 2003 were as follows:


	ENGINEERED			ENGINEERED			SPECIALTY			SPECIALTY
	PRODUCTS			PRODUCTS			SYSTEMS			SYSTEMS
IN THOUSANDS	NORTH AMERICA			INTERNATIONAL			NORTH AMERICA			INTERNATIONAL		TOTAL

Balance, December 31, 2002	$	541,590		$	441,476		$	805,299		$	606,154	$	2,394,519
2003 activity:
Acquisitions		(14,386	)		13,934			34,480			32,975		67,003
Impairment write-offs		—			—			(702	)		—		(702	)
Foreign currency translation		(44	)		27,646			125			22,734		50,461
Intersegment goodwill transfers		—			—			(2,391	)		2,391		—

Balance, December 31, 2003		527,160			483,056			836,811			664,254		2,511,281
2004 activity:
Acquisitions		103,300			93,762			17,348			20,842		235,252
Impairment write-offs		(3,000	)		(8,492	)		—			—		(11,492	)
Foreign currency translation		468			15,998			137			1,409		18,012
Intersegment goodwill transfers		(7,000	)		7,754			(5,083	)		4,329		—

Balance, December 31, 2004	$	620,928		$	592,078		$	849,213		$	690,834	$	2,753,053

66 2004 ANNUAL REPORT

Intangible assets as of December 31, 2004 and December 31, 2003 were as follows:


	2004							2003
			ACCUMULATED							ACCUMULATED
IN THOUSANDS	COST		AMORTIZATION			NET		COST		AMORTIZATION			NET

Amortizable Intangible Assets:
Trademarks and brands	$	68,353	$	(8,489	)	$	59,864	$	39,891	$	(3,982	)	$	35,909
Customer lists and relationships		112,315		(14,015	)		98,300		55,049		(6,293	)		48,756
Patents and proprietary technology		117,285		(55,021	)		62,264		103,982		(46,620	)		57,362
Noncompete agreements		80,562		(47,115	)		33,447		74,569		(36,980	)		37,589
Software		51,123		(5,472	)		45,651		—		—			—
Other		97,686		(38,597	)		59,089		52,280		(33,921	)		18,359
Indefinite-lived Intangible Assets:
Trademarks and brands		81,387		—			81,387		89,607		—			89,607

Total Intangible Assets	$	608,711	$	(168,709	)	$	440,002	$	415,378	$	(127,796	)	$	287,582

Intangible assets are being amortized primarily on a straight-line basis over their estimated useful lives of three to 20 years.

The estimated amortization expense of intangible assets for the future years ending December 31 is as follows:


IN THOUSANDS

2005	$	47,168
2006		44,992
2007		41,385
2008		35,571
2009		26,995

Other Assets as of December 31, 2004 and 2003 consisted of the following:


IN THOUSANDS	2004		2003

Prepaid pension assets	$	402,045	$	312,312
Cash surrender value of life insurance policies		266,581		221,884
Investment in unconsolidated affiliates		21,720		31,419
Other		123,805		113,908

	$	814,151	$	679,523

Retirement Plans and Postretirement Benefits— The Company has both funded and unfunded defined benefit pension plans. The major domestic plan covers substantially all of its U.S. employees and provides benefits based on years of service and final average salary. The Company also has other postretirement benefit plans covering substantially all of its U.S. employees. The primary postretirement health care plan is contributory with the participants’ contributions adjusted annually. The postretirement life insurance plans are noncontributory.

The Company has various defined benefit pension plans in foreign countries, predominantly the United Kingdom, Germany, Canada and Australia.

The Company uses a September 30 measurement date for the majority of its plans.

Summarized information regarding the Company’s significant defined benefit pension and postretirement health care and life insurance benefit plans is as follows:


	PENSION									OTHER POSTRETIREMENT BENEFITS
IN THOUSANDS	2004			2003			2002			2004			2003			2002

Components of net periodic benefit cost:
Service cost	$	78,991		$	70,168		$	58,222		$	13,471		$	12,613		$	15,902
Interest cost		82,518			77,606			78,695			34,666			31,302			29,868
Expected return on plan assets		(118,024	)		(102,536	)		(104,945	)		(3,466	)		(1,280	)		—
Amortization of prior service cost (income)		(2,304	)		(2,345	)		(4,030	)		6,736			6,601			6,675
Amortization of actuarial loss		5,074			3,555			741			5,595			926			536
Amortization of transition amount		(139	)		(893	)		(899	)		—			—			—
Settlement/curtailment (gain) loss		59			381			819			—			—			(3,272	)

Net periodic benefit cost	$	46,175		$	45,936		$	28,603		$	57,002		$	50,162		$	49,709

NOTES TO FINANCIAL STATEMENTS 67


	PENSION						OTHER POSTRETIREMENT BENEFITS
IN THOUSANDS	2004			2003			2004			2003

Change in benefit obligation as of September 30:
Benefit obligation at beginning of period	$	1,447,024		$	1,237,348		$	587,256		$	485,741
Service cost		78,991			70,168			13,471			12,613
Interest cost		82,518			77,606			34,666			31,302
Plan participants’ contributions		2,244			1,949			13,983			12,414
Amendments		(15	)		435			—			(210	)
Medicare subsidy impact		—			—			(30,465	)		—
Actuarial (gain) loss		32,428			114,834			(33,238	)		79,376
Acquisitions/Divestitures		4,442			—			9,145			11,568
Benefits paid		(97,053	)		(96,712	)		(48,706	)		(45,548	)
Liabilities (to) from other plans		(777	)		78			—			—
Foreign currency translation		39,454			41,318			—			—

Benefit obligation at end of period	$	1,589,256		$	1,447,024		$	546,112		$	587,256

Change in plan assets as of September 30:
Fair value of plan assets at beginning of period	$	1,200,435		$	992,709		$	36,192		$	—
Actual return on plan assets		158,133			181,257			2,360			4,172
Acquisitions		1,228			—			—			—
Company contributions		205,223			98,103			61,375			65,154
Plan participants’ contributions		2,244			1,949			13,983			12,414
Benefits paid		(97,053	)		(96,712	)		(48,706	)		(45,548	)
Assets to other plans		(4,456	)		(1,459	)		—			—
Foreign currency translation		25,820			24,588			—			—

Fair value of plan assets at end of period	$	1,491,574		$	1,200,435		$	65,204		$	36,192

Funded status	$	(97,682	)	$	(246,589	)	$	(480,908	)	$	(551,064	)
Unrecognized net actuarial loss		352,439			354,190			66,924			136,543
Unrecognized prior service cost (income)		(10,819	)		(13,250	)		58,998			65,734
Unrecognized net transition amount		2,220			(656	)		—			—
Contributions after measurement date		8,171			88,240			43,515			36,148
Other immaterial plans		(12,228	)		(13,348	)		(2,028	)		—

Net amount recognized	$	242,101		$	168,587		$	(313,499	)	$	(312,639	)

The amounts recognized in the statement of financial position as of December 31 consisted of:
Prepaid benefit cost	$	379,909		$	288,323		$	—		$	—
Accrued benefit liability		(212,296	)		(191,068	)		(313,499	)		(312,639	)
Intangible asset for minimum pension liability		22,136			23,989			—			—
Accumulated other comprehensive loss for minimum pension liability		52,352			47,343			—			—

Net amount recognized	$	242,101		$	168,587		$	(313,499	)	$	(312,639	)

Accumulated benefit obligation for all significant defined benefit pension plans	$	1,399,725		$	1,295,647

Plans with accumulated benefit obligation in excess of plan assets as of September 30:
Projected benefit obligation	$	288,393		$	254,341

Accumulated benefit obligation	$	268,836		$	241,772

Fair value of plan assets	$	94,263		$	80,365

Increase (decrease) in minimum liability included in other comprehensive income	$	5,009		$	(6,124	)

68 2004 ANNUAL REPORT

Assumptions

The weighted-average assumptions used in the valuations of pension and other postretirement benefits were as follows:


	PENSION									OTHER POSTRETIREMENT BENEFITS
	2004			2003			2002			2004			2003			2002

Weighted-average assumptions used to determine benefit obligation at September 30:
Discount rate		5.67	%		5.90	%		6.44	%		5.75	%		6.00	%		6.60	%
Rate of compensation increases		4.35	%		4.32	%		4.43	%		—			—			—
Weighted-average assumptions used to determine net cost for years ended December 31:
Discount rate		5.90	%		6.44	%		7.05	%		6.00	%		6.60	%		7.25	%
Expected return on plan assets		7.99	%		8.06	%		7.97	%		7.00	%		7.00	%		—
Rate of compensation increases		4.32	%		4.43	%		4.42	%		—			—			—

The expected long-term rate of return for pension plans was developed using historical returns while factoring in current market conditions such as inflation, interest rates and equity performance. The expected long-term rate of return for the postretirement health care plans was developed from the major domestic pension plan rate less 100 basis points.

Assumed health care cost trend rates have an effect on the amounts reported for the postretirement health care benefit plans. The assumed health care cost trend rates used to determine the postretirement benefit obligation at September 30 were as follows:


	2004			2003			2002

Health care cost trend rate assumed for the next year		10.00	%		10.00	%		11.00	%
Ultimate trend rate		5.00	%		5.00	%		5.00	%
Year that the rate reaches the ultimate trend rate		2009			2008			2008

A one-percentage-point change in assumed health care cost trend rates would have the following effects:


	1-PERCENTAGE-		1-PERCENTAGE-
IN THOUSANDS	POINT INCREASE		POINT DECREASE

Effect on total of service and interest cost components for 2004	$	1,043	$	(890	)
Effect on postretirement benefit obligation at September 30, 2004	$	15,819	$	(13,595	)

Plan Assets

The target asset allocation and weighted-average asset allocations for the Company’s significant pension plans at September 30, 2004 and 2003 were as follows:


				PERCENTAGE OF PLAN
				ASSETS AT SEPTEMBER 30
ASSET CATEGORY	TARGET ALLOCATION			2004			2003

Equity securities		60% -75	%		67	%		68	%
Debt securities		20% -35	%		30	%		29	%
Real estate		0% - 1	%		1	%		1	%
Other		0% -10	%		2	%		2	%

					100	%		100	%

The Company’s overall investment strategy for the assets in the pension funds is to achieve a balance between the goals of growing plan assets and keeping risk at a reasonable level over a long-term investment horizon. In order to reduce unnecessary risk, the pension funds are diversified across several asset classes, securities and investment managers with a focus on total return. The use of derivatives for the purpose of speculation, leverage, circumventing investment guidelines or taking risks that are inconsistent with specified guidelines is prohibited.

The assets in the Company’s postretirement health care plans are invested in life insurance policies. The Company’s overall investment strategy for the assets in the postretirement healthcare fund is to invest in assets that provide a reasonable rate of return while preserving capital and which are exempt from federal income taxes.

NOTES TO FINANCIAL STATEMENTS 69

Cash Flows

The Company generally funds its pension plans to the extent such contributions are tax deductible. The Company expects to contribute $104,000,000 to its pension plans and $72,200,000 to its other postretirement benefit plans in 2005.

The Company’s portion of the benefit payments that are expected to be paid during the years ending December 31 is as follows:


			OTHER
	PENSION		POSTRETIREMENT
IN THOUSANDS	BENEFITS		BENEFITS

2005	$	117,930	$	38,111
2006		120,760		40,472
2007		127,096		42,803
2008		137,633		45,016
2009		143,816		47,147
Years 2010—2014		809,128		264,858

In addition to the above pension benefits, the Company sponsors defined contribution retirement plans covering the majority of its U.S. employees. The Company’s contributions to these plans were $27,220,000 in 2004, $24,745,000 in 2003 and $25,029,000 in 2002.

Short-Term Debt as of December 31, 2004 and 2003 consisted of the following:


IN THOUSANDS	2004		2003

Bank overdrafts	$	33,937	$	25,535
Commercial paper		134,982		—
Current maturities of long-term debt		4,149		3,510
Other borrowings by foreign subsidiaries		30,455		27,049

	$	203,523	$	56,094

Commercial paper is issued at a discount and generally matures 30 to 90 days from the date of issuance. The weighted average interest rate on commercial paper was 2.4% at December 31, 2004.

The weighted average interest rate on other borrowings by foreign subsidiaries was 2.0% at December 31, 2004 and 1.7% at December 31, 2003.

In 2004, the Company entered into a $400,000,000 Line of Credit Agreement with a termination date of June 17, 2005. No amounts were outstanding under this facility at December 31, 2004.

Accrued Expenses as of December 31, 2004 and 2003 consisted of accruals for:


IN THOUSANDS	2004		2003

Compensation and employee benefits	$	363,929	$	337,991
Rebates		101,248		74,431
Warranties		79,020		69,415
Current portion of postretirement benefit obligation		38,111		38,111
Current portion of affordable housing capital obligations		20,017		14,765
Other		357,055		336,237

	$	959,380	$	870,950

The changes in accrued warranties during 2004, 2003 and 2002 were as follows:


IN THOUSANDS	2004			2003			2002

Beginning balance	$	69,415		$	58,861		$	55,493
Charges		(47,760	)		(49,423	)		(31,561	)
Provision charged to expense		57,365			59,977			34,929

Ending balance	$	79,020		$	69,415		$	58,861

70 2004 ANNUAL REPORT

Long-Term Debt at December 31, 2004 and 2003 consisted of the following:


IN THOUSANDS	2004			2003

6.875% notes due November 15, 2008	$	149,929		$	149,911
5.75% notes due March 1, 2009		499,343			500,110
6.55% preferred debt securities due December 31, 2011		249,705			249,672
Other borrowings		26,270			24,177

		925,247			923,870
Current maturities		(4,149	)		(3,510	)

	$	921,098		$	920,360

In 1998, the Company issued $150,000,000 of 6.875% notes at 99.228% of face value. The effective interest rate of the notes is 6.9%. The quoted market price of the notes exceeded the carrying value by approximately $15,974,000 at December 31, 2004 and $22,578,000 at December 31, 2003.

In 1999, the Company issued $500,000,000 of 5.75% redeemable notes at 99.281% of face value. The effective interest rate of the notes is 5.8%. The quoted market price of the notes exceeded the carrying value by approximately $34,552,000 at December 31, 2004 and $50,133,000 at December 31, 2003. In December 2002, the Company entered into an interest rate swap with a notional value of $100,000,000 to hedge a portion of the fixed-rate debt. Under the terms of the swap, the Company receives interest at a fixed rate of 5.75% and pays interest at a variable rate of LIBOR plus 1.96%. The variable interest rate under the swap was 4.36% at December 31, 2004 and 3.13% at December 31, 2003. The maturity date of the interest rate swap is March 1, 2009. The carrying value of the 5.75% notes has been adjusted to reflect the fair value of the interest rate swap.

In 2002, a subsidiary of the Company issued $250,000,000 of 6.55% preferred debt securities at 99.849% of face value. The effective interest rate of the preferred debt securities is 6.7%. The estimated fair value of the securities exceeded the carrying value by approximately $32,988,000 at December 31, 2004 and $36,246,000 at December 31, 2003.

In 2003, the Company entered into a $350,000,000 revolving credit facility with a termination date of June 20, 2008. No amounts were outstanding under this facility at December 31, 2004.

The Company’s debt agreements’ financial covenants limit total debt, including guarantees, to 50% of total capitalization. The Company’s total debt, including guarantees, was 14% of total capitalization as of December 31, 2004, which was in compliance with these covenants.

Other debt outstanding at December 31, 2004, bears interest at rates ranging from 2.2% to 12.0%, with maturities through the year 2027.

Scheduled maturities of long-term debt for the years ending December 31 are as follows:


IN THOUSANDS

2006	$	2,440
2007		1,316
2008		150,832
2009		499,988
2010 and future years		266,522

	$	921,098

In connection with forming joint ventures, the Company has provided debt guarantees of $32,000,000 and $31,000,000 at December 31, 2004 and 2003, respectively. As of December 31, 2004, the Company has recorded liabilities related to these guarantees of $16,000,000.

At December 31, 2004, the Company had open stand-by letters of credit of $97,000,000, substantially all of which expire in 2005. At December 31, 2003, the Company had open stand-by letters of credit of $66,000,000, substantially all of which expired in 2004.

NOTES TO FINANCIAL STATEMENTS 71

Other Noncurrent Liabilities at December 31, 2004 and 2003 consisted of the following:


IN THOUSANDS	2004		2003

Postretirement benefit obligation	$	275,388	$	274,528
Pension benefit obligation		212,296		191,068
Affordable housing capital obligations		74,640		103,073
Preferred stock of subsidiaries		60,000		60,000
Accrued dividends on preferred stock of subsidiaries		32,700		28,580
Other		297,231		252,523

	$	952,255	$	909,772

In connection with each of the three commercial mortgage transactions, various subsidiaries of the Company issued $20,000,000 of preferred stock. Dividends on this preferred stock are cumulative and accrue at a rate of 6% on the first $20,000,000 issuance and 7.3% on the second and third $20,000,000 issuances. The accrued dividends are recorded as an operating expense of the Leasing and Investments segment. The redemption dates for the three issuances are January 1, 2016, December 12, 2016 and December 23, 2017, respectively.

In 2001, the Company committed to two new affordable housing limited partnership investments. In connection with the formation and financing of these limited partnerships, the affordable housing limited partnerships borrowed the full amount of funds necessary for their affordable housing projects from a third party financial institution. The excess cash of $126,760,000 was distributed to the Company in 2001 and will be repaid to the limited partnerships via capital contributions as the limited partnerships require the funds for their affordable housing projects.

The noncurrent portion of the Company’s capital contributions to the affordable housing limited partnerships are expected to be paid as follows:


IN THOUSANDS

2006	$	16,237
2007		13,703
2008		13,722
2009		14,092
2010 and future years		16,886

	$	74,640

Other than the capital contributions above, the Company has no future obligations, guarantees or commitments to the affordable housing limited partnerships.

Commitments and Contingencies— The Company is subject to various legal proceedings and claims that arise in the ordinary course of business, including those involving environmental, tax, product liability (including toxic tort) and general liability claims. The Company accrues for such liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated. Such accruals are based on developments to date, the Company’s estimates of the outcomes of these matters and its experience in contesting, litigating and settling other similar matters. The Company believes resolution of these matters, individually and in the aggregate, will not have a material adverse effect on the Company’s financial position, liquidity or future operations.

Among the toxic tort cases in which the Company is a defendant, the Company as well as its subsidiaries Hobart Brothers Company and Miller Electric Mfg. Co., have been named, along with numerous other defendants, in lawsuits alleging injury from exposure to welding rod fumes. The plaintiffs in these suits claim unspecified damages for injuries resulting from the plaintiffs’ alleged exposure to asbestos, manganese and/or toxic fumes in connection with the welding process. Based upon the Company’s experience in litigating these claims, the Company believes that the resolution of these proceedings will not have a material adverse effect on the Company’s financial position, liquidity or future operations. The Company has not recorded any significant reserves related to these cases.

Wilsonart International, Inc. (“Wilsonart”), a wholly owned subsidiary of ITW, is a defendant in a consolidated class action lawsuit filed in 2000 in federal district court in White Plains, New York on behalf of purchasers of high-pressure laminate. The complaint alleges that Wilsonart participated in a conspiracy with competitors to fix, raise, maintain or stabilize prices for high-pressure laminate between 1994 and 2000 and seeks injunctive relief and treble damages. Indirect purchasers of high-pressure laminate filed similar purported class action cases under various state antitrust and consumer protection statutes in 13 states and the District of Columbia, all of which cases have been stayed pending the outcome of the consolidated class action. These lawsuits were brought following the commencement of a federal grand jury investigation into price-fixing in the high-pressure laminate industry,

72 2004 ANNUAL REPORT

which investigation was subsequently closed by the Department of Justice with no further proceedings and with all documents being returned to the parties. Plaintiffs are seeking damages in the range of $439,000,000 to $475,000,000 before trebling. Without admitting liability, two of Wilsonart’s co-defendants, International Paper Company and Panolam International, Inc., have settled the federal consolidated class action case for $31,000,000 and $9,500,000, respectively. The plaintiffs’ claims against Formica Corporation, the remaining co-defendant in the case, were dismissed with prejudice as a result of its bankruptcy proceedings on September 27, 2004. As a result, Wilsonart is the sole remaining defendant in the consolidated class action lawsuit. While no assurances can be given regarding the ultimate outcome or the timing of the resolution of these claims, the Company believes that the plaintiffs’ claims are without merit and intends to continue to defend itself vigorously in this action and all related actions that are now pending or that may be brought in the future. The Company has not recorded any reserves related to this case.

Preferred Stock , without par value, of which 300,000 shares are authorized, is issuable in series. The Board of Directors is authorized to fix by resolution the designation and characteristics of each series of preferred stock. The Company has no present commitment to issue its preferred stock.

Common Stock , with a par value of $.01, Additional Paid-In-Capital and Common Stock Held in Treasury transactions during 2004, 2003 and 2002 are shown below:


							ADDITIONAL
	COMMON STOCK						PAID-IN-CAPITAL			COMMON STOCK HELD IN TREASURY
IN THOUSANDS EXCEPT SHARES	SHARES			AMOUNT			AMOUNT			SHARES			AMOUNT

Balance, December 31, 2001		305,169,742		$	3,052		$	675,856			(243,336	)	$	(1,666	)
During 2002—
Shares issued for stock options		1,687,489			16			46,594			(2,380	)		(162	)
Shares surrendered on exercise of stock options		(31,604	)		—			(2,229	)		2,380			162
Tax benefits related to stock options		—			—			27,328			—			—
Amortization of restricted stock grants		—			—			193			—			—
Net shares issued for restricted stock grants		—			—			36			600			4

Balance, December 31, 2002		306,825,627			3,068			747,778			(242,736	)		(1,662	)
During 2003—
Shares issued for stock options		1,369,741			14			47,896			(8,911	)		(644	)
Shares surrendered on exercise of stock options and vesting of restricted stock		(97,554	)		(1	)		(7,552	)		8,911			644
Tax benefits related to stock options and restricted stock		—			—			20,684			—			—
Escrow shares returned from prior acquisitions		(8,847	)		—			(664	)		—			—
Net shares issued for restricted stock grants		788,258			8			5			1,996			14
Amortization of restricted stock grants		—			—			17,777			—			—

Balance, December 31, 2003		308,877,225			3,089			825,924			(240,740	)		(1,648	)
During 2004—
Shares issued for stock options		2,146,718			22			97,607			(27,867	)		(2,568	)
Shares surrendered on exercise of stock options and vesting of restricted stock		(201,639	)		(2	)		(18,518	)		27,867			2,568
Tax benefits related to stock options and restricted stock		—			—			39,624			—			—
Shares issued for acquisitions		19,257			—			1,628			—			—
Net shares issued for restricted stock grants		531,997			5			162			11,019			76
Amortization of restricted stock		—			—			32,514			—			—
Repurchases of common stock		—			—			—			(18,915,473	)		(1,729,806	)

Balance, December 31, 2004		311,373,558		$	3,114		$	978,941			(19,145,194	)	$	(1,731,378	)

Authorized, December 31, 2004		350,000,000

NOTES TO FINANCIAL STATEMENTS 73

Cash Dividends declared were $1.04 per share in 2004, $.94 per share in 2003, and $.90 per share in 2002. Cash dividends paid were $1.00 per share in 2004, $.93 per share in 2003 and $.89 per share in 2002.

Comprehensive Income is defined as the changes in equity during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. The Company’s components of other comprehensive income are shown below:


									TOTAL
								ACCUMULATED
	CUMULATIVE				MINIMUM				OTHER
	TRANSLATION				PENSION			COMPREHENSIVE
IN THOUSANDS	ADJUSTMENTS				LIABILITY				INCOME

Balance, January 1, 2002		$	(401,925	)	$	—			$	(401,925	)
Current period change			135,144			(35,595	)			99,549

Balance, December 31, 2002			(266,781	)		(35,595	)			(302,376	)
Current period change			407,811			4,376				412,187

Balance, December 31, 2003			141,030			(31,219	)			109,811
Current period change			306,653			(3,049	)			303,604

Balance, December 31, 2004		$	447,683		$	(34,268	)		$	413,415

Stock-Based Compensation— Stock options have been issued to officers and other management employees under ITW’s 1996 Stock Incentive Plan. The stock options generally vest over a four-year period and have a maturity of ten years from the issuance date. At December 31, 2004, 18,429,691 shares of ITW common stock were reserved for issuance under this plan. Option prices are 100% of the common stock fair market value on the date of grant.

The Company accounts for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), using the intrinsic value method, which does not require that compensation cost be recognized for stock options. The Company’s net income and net income per share would have been reduced if compensation cost related to stock options had been determined based on fair value at the grant dates in accordance with Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS 123”). The pro forma net income effect of applying SFAS 123 was as follows:


IN THOUSANDS EXCEPT PER SHARE AMOUNTS	2004			2003			2002

Net income as reported	$	1,338,694		$	1,023,680		$	712,592
Add: Restricted stock recorded as expense, net of tax		23,757			11,789			—
Deduct: Total stock-based employee compensation expense, net of tax		(61,282	)		(35,569	)		(25,199	)

Pro forma net income	$	1,301,169		$	999,900		$	687,393

Net income per share:
Basic—as reported	$	4.43		$	3.33		$	2.33
Basic—pro forma		4.30			3.26			2.25
Diluted—as reported		4.39			3.32			2.31
Diluted—pro forma		4.27			3.24			2.23

In 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”). The Company is required to adopt SFAS 123R in the third quarter of 2005. SFAS 123R requires the Company to measure the cost of employee services received in exchange for an equity award based on the grant date fair value. The cost will be recognized as an expense in financial statements over the period during which an employee is required to provide service. SFAS 123R supersedes SFAS 123 and APB 25. The Company anticipates that the future impact on diluted earnings per share upon adoption of SFAS 123R will be comparable to the 2004 amount of 12 cents per share disclosed above.

On January 2, 2004 and 2003, the Company granted 553,981 and 792,158 shares of restricted stock, respectively, to domestic key employees. The weighted-average grant-date fair value was $88.32 and $66.34 for 2004 and 2003, respectively. Compensation expense related to these grants is being recorded over the three-year vesting period as follows:


IN THOUSANDS	JANUARY 2, 2004			JANUARY 2, 2003			TOTAL

2003		$	—		$	17,438		$	17,438
2004			15,223			16,902			32,125
2005			15,223			16,902			32,125
2006			15,222			—			15,222

Total		$	45,668		$	51,242		$	96,910

74 2004 ANNUAL REPORT

The restricted shares will vest only if the employee is actively employed by the Company on the vesting date, and unvested shares are forfeited upon retirement, death or disability, unless the Compensation Committee of the Board of Directors determines otherwise. The restricted shares carry full voting and dividend rights until the stock is forfeited or sold.

The estimated fair value of the options granted during 2004 was calculated using a binomial option pricing model. Previous grants were valued using the Black-Scholes option-pricing model. The following summarizes the assumptions used in the models:


	2004			2003			2002

Risk-free interest rate		3.7	%		4.2	%		4.1	%
Expected stock volatility		24.6	%		27.6	%		28.4	%
Dividend yield		1.15	%		1.09	%		1.05	%
Expected years until exercise		5.5			6.0			5.7

Stock option activity during 2004, 2003 and 2002 is summarized as follows:


	2004					2003					2002
	NUMBER			WEIGHTED AVERAGE		NUMBER			WEIGHTED AVERAGE		NUMBER			WEIGHTED AVERAGE
	OF SHARES			EXERCISE PRICE		OF SHARES			EXERCISE PRICE		OF SHARES			EXERCISE PRICE

Under option at beginning of year		10,963,268			$55.65		12,106,919			$52.74		13,469,604			$49.26
Granted		2,395,832			94.24		279,664			81.21		357,580			65.70
Exercised		(2,174,585	)		46.08		(1,378,652	)		35.22		(1,689,869	)		27.69
Canceled or expired		(27,688	)		60.91		(44,663	)		58.47		(30,396	)		56.71

Under option at end of year		11,156,827			65.79		10,963,268			55.65		12,106,919			52.74

Exercisable at year-end		7,778,285			56.90		8,405,885			53.45		7,995,212			48.75
Available for grant at year-end		7,272,864					9,943,499					8,169,706
Weighted average fair value of options granted during the year					$21.99					$25.65					$20.47

The following table summarizes information on stock options outstanding as of December 31, 2004:


	OPTIONS OUTSTANDING					OPTIONS EXERCISABLE
	NUMBER		WEIGHTED AVERAGE			NUMBER
RANGE OF	OUTSTANDING		REMAINING	WEIGHTED AVERAGE		EXERCISABLE		WEIGHTED AVERAGE
EXERCISE PRICES	2004		CONTRACTUAL LIFE	EXERCISE PRICE		2004		EXERCISE PRICE

$ 14.57—31.43		375,734	1.04 years	$	28.01		375,734	$	28.01
33.38—46.59		521,652	3.67 years		41.28		521,652		41.28
54.03—65.69		7,586,520	5.82 years		59.80		6,804,002		59.43
72.30—94.26		2,672,921	9.84 years		92.88		76,897		80.43

		11,156,827	6.52 years		65.79		7,778,285		56.90

Segment Information —Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information, requires that segment information be reported based on the way the segments are organized within the Company for making operating decisions and assessing performance.

The Company has approximately 650 operations in 45 countries, which are aggregated and organized for internal reporting purposes into the following five segments:

Engineered Products—North America : Businesses in this segment are located in North America and manufacture a variety of short lead-time plastic and metal components and fasteners, as well as specialty products for a diverse customer base. These commercially oriented, value-added products become part of the customers’ products and typically are manufactured and delivered in a time period less than 30 days.

Engineered Products—International : Businesses in this segment are located outside North America and manufacture a variety of short lead-time plastic and metal components and fasteners, as well as specialty products for a diverse customer base. These commercially oriented, value-added products become part of the customers’ products and typically are manufactured and delivered in a time period less than 30 days.

NOTES TO FINANCIAL STATEMENTS 75

Specialty Systems—North America : Businesses in this segment are located in North America and design and manufacture longer lead-time machinery and related consumables, as well as specialty equipment for a diverse customer base. These commercially oriented value-added products become part of the customers’ processes and typically are manufactured and delivered in a time period more than 30 days.

Specialty Systems—International : Businesses in this segment are located outside North America and design and manufacture longer lead-time machinery and related consumables as well as specialty equipment for a diverse customer base. These commercially oriented, value-added products become part of the customers’ production process and typically are manufactured and delivered in a time period more than 30 days.

Leasing and Investments : Businesses in this segment make opportunistic investments in mortgage entities, leases of telecommunications, aircraft, air traffic control and other equipment, properties, affordable housing and a venture capital fund.

Segment information for 2004, 2003 and 2002 was as follows:


IN THOUSANDS	2004			2003			2002

Operating revenues:
Engineered Products—North America	$	3,314,093		$	3,053,961		$	3,034,734
Engineered Products—International		2,465,941			1,873,767			1,566,387
Specialty Systems—North America		3,862,556			3,365,219			3,357,504
Specialty Systems—International		2,375,189			1,967,630			1,693,042
Leasing and Investments		148,791			152,585			181,570
Intersegment revenues		(435,145	)		(377,539	)		(365,497	)

	$	11,731,425		$	10,035,623		$	9,467,740

Operating income:
Engineered Products—North America	$	552,985		$	489,416		$	533,459
Engineered Products—International		369,188			260,701			212,824
Specialty Systems—North America		688,303			549,038			509,299
Specialty Systems—International		314,535			217,366			164,656
Leasing and Investments		131,602			116,937			85,533

	$	2,056,613		$	1,633,458		$	1,505,771

Depreciation and amortization and impairment of goodwill and intangible assets:
Engineered Products—North America	$	103,451		$	92,855		$	102,788
Engineered Products—International		92,986			66,706			57,080
Specialty Systems—North America		89,249			90,025			90,820
Specialty Systems—International		67,332			56,904			54,355
Leasing and Investments		265			63			709

	$	353,283		$	306,553		$	305,752

Plant and equipment additions:
Engineered Products—North America	$	69,399		$	81,672		$	82,619
Engineered Products—International		75,923			64,195			63,786
Specialty Systems—North America		81,079			57,862			71,233
Specialty Systems—International		56,159			54,583			53,751
Leasing and Investments		—			—			35

	$	282,560		$	258,312		$	271,424

Identifiable assets:
Engineered Products—North America	$	2,050,126		$	1,753,085		$	1,787,984
Engineered Products—International		2,217,941			1,753,691			1,471,043
Specialty Systems—North America		2,336,951			2,185,964			2,171,129
Specialty Systems—International		2,134,383			1,923,661			1,647,230
Leasing and Investments		778,381			735,202			1,536,067
Corporate		1,834,152			2,841,718			1,957,958
Net assets of discontinued operations		—			—			51,690

	$	11,351,934		$	11,193,321		$	10,623,101

Identifiable assets by segment are those assets that are specifically used in that segment. Corporate assets are principally cash and equivalents and other general corporate assets.

76 2004 ANNUAL REPORT

Enterprise-wide information for 2004, 2003 and 2002 was as follows:


IN THOUSANDS	2004		2003		2002

Operating Revenues by Product Line:
Engineered Products—North America—
Fasteners and Components	$	2,569,355	$	2,379,599	$	2,392,882
Specialty Products		744,738		674,362		641,852

	$	3,314,093	$	3,053,961	$	3,034,734

Engineered Products—International—
Fasteners and Components	$	2,048,426	$	1,649,131	$	1,364,274
Specialty Products		417,515		224,636		202,113

	$	2,465,941	$	1,873,767	$	1,566,387

Specialty Systems—North America—
Equipment and Consumables	$	2,432,976	$	2,009,506	$	1,919,057
Specialty Equipment		1,429,580		1,355,713		1,438,447

	$	3,862,556	$	3,365,219	$	3,357,504

Specialty Systems—International—
Equipment and Consumables	$	1,560,372	$	1,258,658	$	1,079,018
Specialty Equipment		814,817		708,972		614,024

	$	2,375,189	$	1,967,630	$	1,693,042

Operating Revenues by Geographic Region:
United States	$	6,608,900	$	5,915,456	$	5,941,602
Europe		3,521,832		2,844,333		2,421,747
Australia		557,513		425,831		357,348
Asia		537,114		397,757		333,939
Other		506,066		452,246		413,104

	$	11,731,425	$	10,035,623	$	9,467,740

Operating revenues by geographic region are based on the location of the business unit that recorded the revenues.

Total noncurrent assets excluding deferred tax assets and financial instruments were $5,918,000,000 and $5,253,000,000 at December 31, 2004 and 2003, respectively. Of these amounts, approximately 54% and 55% was attributed to U.S. operations for 2004 and 2003, respectively. The remaining amounts were attributed to the Company’s foreign operations, with no single country accounting for a significant portion.

QUARTERLY AND COMMON STOCK DATA 77

Quarterly and Common Stock Data

Quarterly Financial Data (Unaudited)


	THREE MONTHS ENDED
	MARCH 31					JUNE 30					SEPTEMBER 30					DECEMBER 31
IN THOUSANDS
EXCEPT PER SHARE AMOUNTS	2004		2003			2004		2003			2004		2003			2004			2003

Operating revenues	$	2,710,349	$	2,313,790		$	3,002,271	$	2,563,990		$	2,967,168	$	2,531,885		$	3,051,637		$	2,625,958
Cost of revenues		1,750,343		1,513,792			1,929,803		1,659,400			1,934,831		1,634,056			1,976,269			1,720,444
Operating income		447,642		321,000			561,536		454,066			512,238		426,676			535,197			431,716
Income from continuing operations		290,025		199,484			360,350		284,045			330,051		269,776			359,179			286,909
Income (loss) from discontinued operations		171		(4,107	)		—		(7,941	)		—		(874	)		(1,082	)		(3,612	)
Net income		290,196		195,377			360,350		276,104			330,051		268,902			358,097			283,297
Income per share from continuing operations:
Basic		.94		.65			1.17		.93			1.10		.88			1.22			.93
Diluted		.93		.65			1.16		.92			1.09		.87			1.21			.93
Net income per share:
Basic		.94		.64			1.17		.90			1.10		.88			1.22			.92
Diluted		.93		.63			1.16		.90			1.09		.87			1.21			.91

Common Stock Price and Dividend Data — The common stock of Illinois Tool Works Inc. is listed on the New York Stock Exchange and the Chicago Stock Exchange. Quarterly market price and dividend data for 2004 and 2003 were as shown below:


		MARKET PRICE PER SHARE			DIVIDENDS
					DECLARED
	HIGH		LOW		PER SHARE

2004
Fourth quarter	$	96.62	$	87.48	$	.28
Third quarter		96.68		86.20		.28
Second quarter		96.70		78.52		.24
First quarter		85.00		74.51		.24

2003
Fourth quarter	$	84.70	$	65.88	$	.24
Third quarter		74.00		64.11		.24
Second quarter		68.27		57.05		.23
First quarter		68.02		54.56		.23

The approximate number of holders of record of common stock as of February 1, 2005, was 12,428. This number does not include beneficial owners of the Company’s securities held in the name of nominees.

Exhibit 21

ILLINOIS TOOL WORKS INC.
Subsidiaries and Affiliates
January 2005


Company	Ownership Type (a)	Ownership%			Jurisdiction
1245267 Ontario Limited	Indirect		100.00	%	Ontario
A 3 Sud S.r.l.	Indirect		100.00	%	Italy
A.J. Gerrard LLC	Direct		100.00	%	Delaware
Aardee Seals Limited	Indirect		100.00	%	United Kingdom
Accu-Lube Manufacturing GmbH	Direct		50.10	%	Germany
ACI Kardam Manufacturing Limited	Indirect		100.00	%	Ontario
Addix, S.A.	Indirect		100.00	%	France
Alubec Industries, Inc.	Direct		100.00	%	Quebec
Asbury Place Venture	Indirect		50.00	%	Illinois
AXA Power ApS	Indirect		100.00	%	Denmark
Azon Pty. Limited	Indirect		100.00	%	Australia
B.C. Immo S.C.I.	Indirect		100.00	%	France
B.C.H. S.A.S.	Indirect		100.00	%	France
Bates Cargo-Pak ApS	Indirect		100.00	%	Denmark
Berrington (UK)	Indirect		100.00	%	United Kingdom
BILCME L.L.C.	Indirect		100.00	%	Delaware
Binks	Indirect		100.00	%	United Kingdom
Buck Forkardt Inc.	Indirect		100.00	%	Michigan
Buell Industries, Inc.	Indirect		100.00	%	Delaware
Burseryds Bruk AB	Indirect		100.00	%	Sweden
Capital Ventures (Australasia) S.á r.l.	Indirect		100.00	%	Luxembourg
Carburol, S.A.	Indirect		100.00	%	France
CEMA Maschinenfabrik GmbH	Indirect		100.00	%	Germany
Cetram Pty. Limited	Indirect		100.00	%	Australia
Chapas Y Herrajes Eternos, S.A. de C.V.	Indirect		100.00	%	Mexico
Cheer Bright Ltd.	Indirect		10.59	%	British Virgin Islands
Chris Kay (UK) Limited	Indirect		100.00	%	United Kingdom


Company	Ownership Type (a)	Ownership%			Jurisdiction
Chris Kay Benelux B.V.	Indirect		100.00	%	Netherlands
Chris Kay Europe B.V	Indirect		100.00	%	Netherlands
Chris Kay Limited	Indirect		100.00	%	Ireland
CKFE Limited (HK)	Indirect		100.00	%	Hong Kong
Cofiva s.r.l.	Indirect		100.00	%	Italy
Comercializadora West Bend S.A. de C.V.	Indirect		100.00	%	Mexico
Compagnie de Materiel et d’Equipements Techniques - COMET S.A.S.	Direct & Indirect		100.00	%	France
Compagnie Hobart S.A.S.	Indirect		100.00	%	France
Corporacion Coral S.A. de C.V.	Indirect		100.00	%	Mexico
CS (Australasia) Limited	Indirect		100.00	%	Bermuda
CS (Australia) Pty. Ltd.	Indirect		100.00	%	Australia
CS (Europe) Holdings Ltd.	Indirect		100.00	%	Bermuda
CS (Finance) Europe S.a.r.l.	Indirect		100.00	%	Luxembourg
CS Capital I L.L.C.	Indirect		100.00	%	Delaware
CS Financing I L.L.C.	Indirect		100.00	%	Delaware
CS Packaging Corporation Ltd.	Indirect		100.00	%	British Virgin Islands
CS PMI Holdings Inc.	Indirect		100.00	%	Delaware
CS PMI Inc.	Indirect		100.00	%	Delaware
CSE GmbH	Indirect		100.00	%	Germany
Cumberland Leasing Co.	Direct		100.00	%	Illinois
Cyclone Industries Pty. Ltd.	Indirect		100.00	%	Australia
Dacro B.V.	Indirect		100.00	%	Netherlands
D’Arnaud B.V.	Indirect		100.00	%	Netherlands
Decorative Sleeves (Holdings)	Indirect		100.00	%	United Kingdom
Decorative Sleeves Limited	Indirect		100.00	%	United Kingdom
Deutsche Capital Solutions GmbH	Indirect		100.00	%	Germany
Devcon Limited	Indirect		100.00	%	Ireland
Devilbiss Company Limited, The	Indirect		100.00	%	United Kingdom
DeVilbiss Equipamentos para Pintura Industrial Ltda.	Direct		100.00	%	Brazil
DeVilbiss Europa Unterstuetzungskasse GmbH	Indirect		100.00	%	Germany
DeVilbiss Ransburg de Mexico S.A. de C. V.	Direct		100.00	%	Mexico
Dexion Srl	Indirect		100.00	%	Italy


Company	Ownership Type (a)	Ownership%			Jurisdiction
Diagraph Corporation Sdn. Bhd	Direct		100.00	%	Malaysia
Diagraph de Mexico, S.A. de C.V.	Direct		100.00	%	Mexico
Diagraph Europe Limited	Direct		100.00	%	United Kingdom
Dongguan CK Branding Co., Ltd.	Indirect		100.00	%	China
Duo-Fast (Singapore) Pte. Ltd.	Indirect		50.00	%	Singapore
Duo-Fast Corporation	Direct		100.00	%	Illinois
Duo-Fast CR, s.r.o.	Indirect		100.00	%	Czech Republic
Duo-Fast de Espana S.A.	Indirect		100.00	%	Spain
Duo-Fast Korea Co. Ltd.	Indirect		49.00	%	Korea
Electric Light (BVI)	Indirect		95.95	%	British Virgin Islands
Electrodos de Centroamérica S.A.	Direct		25.00	%	Guatemala
Elga AB	Indirect		100.00	%	Sweden
Elga Skandinavian AS	Indirect		100.00	%	Norway
Elga Welding Consumables	Indirect		100.00	%	United Kingdom
Eltex-Elektrostatik-GmbH	Indirect		100.00	%	Germany
Endra B.V.	Indirect		100.00	%	Netherlands
Envases Multipac, S.A. de C.V.	Direct		49.00	%	Mexico
Envopak Finance Limited	Indirect		100.00	%	United Kingdom
Envopak Group	Indirect		100.00	%	United Kingdom
Envopak Holdings	Indirect		100.00	%	United Kingdom
Epirez Australia Pty. Ltd.	Indirect		100.00	%	Australia
Equipment Technique Service S.A.R.L.	Indirect		100.00	%	France
Er-Çem Çemberleme Sanayi ve Ticaret Anonim Çirketi	Indirect		60.00	%	Turkey
Eurotec Refrigerazione S.r.l.	Indirect		100.00	%	Italy
Eurotec s.r.l.	Indirect		100.00	%	Italy
Falcon Leasing Systems Ltd.	Direct		51.00	%	Bermuda
FEG Investments L.L.C.	Indirect		100.00	%	Delaware
Forkardt (Great Britain) Limited	Indirect		100.00	%	United Kingdom
Forkardt Deutschland GmbH	Indirect		100.00	%	Germany
Forkardt France Sarl	Indirect		100.00	%	France
Forkardt Gefitec GmbH	Indirect		100.00	%	Germany
Forkardt International Limited	Indirect		100.00	%	United Kingdom


Company	Ownership Type (a)	Ownership%			Jurisdiction
Forkardt Italia Srl	Indirect		100.00	%	Italy
Forkardt Schweiz AG	Indirect		100.00	%	Switzerland
Fortune Mind Enterprise Limited	Indirect		95.95	%	Hong Kong
Foster Refrigerator (U.K.)	Indirect		100.00	%	United Kingdom
Foster Refrigerator (UK) Management Services Limited.	Indirect		100.00	%	United Kingdom
Foster Refrigerator France S.A.S.	Indirect		100.00	%	France
Fox Meadow Venture	Indirect		50.00	%	Illinois
Fuseon Graphics Limited	Indirect		100.00	%	United Kingdom
Gaylord Industries (Europe) Limited	Indirect		100.00	%	United Kingdom
Gerrard Signode Pty. Limited	Indirect		100.00	%	Australia
Glenbase Venture	Indirect		50.00	%	Illinois
Glenbase Venture II	Indirect		50.00	%	Illinois
H. Böhl GmbH	Indirect		100.00	%	Germany
H.A. Springer marine + industrie service GmbH	Indirect		100.00	%	Germany
H.T.C. S.A.R.L.	Indirect		100.00	%	France
Heger Belgium BVBA	Indirect		100.00	%	Belgium
Heger GmbH European Diamond Tools	Indirect		100.00	%	Germany
Heger Holland B.V.	Indirect		100.00	%	Netherlands
Heikaus Verpackungenssysteme GmbH	Indirect		100.00	%	Germany
Hinsdale Meadows Venture	Indirect		50.00	%	Illinois
Hobart (Japan) K.K.	Indirect		100.00	%	Japan
Hobart Andina S.A.	Indirect		100.00	%	Columbia
Hobart Brothers (International) AG	Indirect		100.00	%	Switzerland
Hobart Brothers Company	Direct		100.00	%	Ohio
Hobart Brothers International Limitada	Indirect		100.00	%	Chile
Hobart Corporation	Indirect		100.00	%	Delaware
Hobart Dayton Mexicana S.A. de C.V.	Indirect		100.00	%	Mexico
Hobart do Brasil Ltd.	Indirect		100.00	%	Brazil
Hobart Equipment Leasing	Indirect		100.00	%	United Kingdom
Hobart Food Equipment Co. Ltd.	Indirect		100.00	%	China
Hobart Food Equipment Pty. Ltd.	Indirect		100.00	%	Australia
Hobart Foster (South Africa) Pty. Ltd.	Indirect		100.00	%	South Africa


Company	Ownership Type (a)	Ownership%			Jurisdiction
Hobart Foster Belgium B.V.B.A.	Indirect		100.00	%	Belgium
Hobart Foster Holland B.V.	Indirect		100.00	%	Netherlands
Hobart Foster International GmbH	Indirect		100.00	%	Germany
Hobart Foster Scandinavia ApS	Indirect		100.00	%	Denmark
Hobart Foster Techniek B.V.	Indirect		100.00	%	Netherlands
Hobart G.m.b.H.	Indirect		100.00	%	Germany
Hobart Holdings, Inc.	Indirect		100.00	%	Delaware
Hobart International (Singapore) Pte. Ltd.	Indirect		100.00	%	Singapore
Hobart International (South Asia), Inc.	Indirect		100.00	%	Delaware
Hobart Korea Co. Ltd.	Indirect		100.00	%	Korea
Hobart Manufacturing Co. Pty. Ltd.	Indirect		100.00	%	Australia
Hobart Manufacturing Company, The	Indirect		100.00	%	United Kingdom
Hobart Sales & Service, Inc.	Indirect		100.00	%	Ohio
Hôpital Services Systemes S.A.S.	Indirect		100.00	%	France
Hwa Lu Pao Enterprise (Thailand) Co., Ltd.	Indirect		100.00	%	Thailand
Hycote Limited	Indirect		100.00	%	United Kingdom
Hylec Components Limited	Indirect		33.00	%	United Kingdom
I.T.W. Inc.	Direct		100.00	%	Illinois
ICBIL L.L.C.	Direct		100.00	%	Delaware
Ice Freeze de Mexico, S.A. de C.V.	Indirect		100.00	%	Mexico
Illinois Tool Works (ITW) Nederland B.V.	Indirect		100.00	%	Netherlands
Illinois Tool Works FSC Inc.	Indirect		100.00	%	Barbados
Illinois Tool Works Norway AS	Indirect		100.00	%	Norway
Immobiliere - Services - Industries - Isis SNC	Indirect		100.00	%	France
IMSA ITW, S.A. de C.V.	Direct		50.00	%	Mexico
IMSA Signode, S.A. de C.V.	Indirect		50.00	%	Mexico
Indiana Pickling and Processing Company	Direct		35.00	%	Indiana
Industrias Regard	Indirect		10.00	%	Spain
Inmobillaria Cit., S.A. de C.F.	Direct		49.00	%	Mexico
Intelligent Building Systems, Inc.	Indirect		100.00	%	Delaware
International Leasing Company	Indirect		100.00	%	Delaware
Interstrap B.V.	Indirect		100.00	%	Netherlands


Company	Ownership Type (a)	Ownership%			Jurisdiction
Irathane Limited	Indirect		100.00	%	United Kingdom
Ispracontrols Bulgaria EOOD	Indirect		100.00	%	Bulgaria
ITW (Deutschland) GmbH	Indirect		100.00	%	Germany
ITW (EU) Holdings Ltd.	Indirect		100.00	%	Bermuda
ITW Administration GmbH	Indirect		100.00	%	Germany
ITW AFC Pty. Limited	Indirect		100.00	%	Australia
ITW Aircraft Investments Inc.	Indirect		100.00	%	Delaware
ITW Alpha Sárl	Indirect		100.00	%	Luxembourg
ITW Ampang Industries Philippines, Inc.	Direct		100.00	%	Philippines
ITW Angleboard AB	Indirect		100.00	%	Sweden
ITW Asia (Private) Limited	Direct		100.00	%	Singapore
ITW Australia Pty. Ltd.	Indirect		100.00	%	Australia
ITW Austria Vertriebs GmbH	Indirect		100.00	%	Austria
ITW Automotive Fasteners (Shanghai) Co., Ltd.	Indirect		100.00	%	China
ITW Automotive Italia s.r.l.	Indirect		100.00	%	Italy
ITW Automotive Products GmbH & Co. K.G.	Indirect		100.00	%	Germany
ITW Automotive Products Verwaltungs GmbH	Indirect		100.00	%	Germany
ITW Bailly Comte S.A.S.	Indirect		100.00	%	France
ITW Befestigungssysteme GmbH	Indirect		100.00	%	Germany
ITW Belgium S.p.r.l.	Indirect		100.00	%	Belgium
ITW Beta Sárl	Indirect		100.00	%	Luxembourg
ITW Bevestigingssystemen B.V.	Indirect		100.00	%	Netherlands
ITW Binks Corporation	Direct		100.00	%	Delaware
ITW Brazilian Nominee L.L.C.	Indirect		100.00	%	Delaware
ITW Bulgaria EOOD	Indirect		100.00	%	Bulgaria
ITW Canada	Indirect		100.00	%	Ontario
ITW Canada Holdings Company	Indirect		100.00	%	Nova Scotia
ITW Canada Management Company/Compagnie Gestion ITW Canada	Indirect		100.00	%	Nova Scotia
ITW Canguru Rotulos Ltda.	Direct		81.60	%	Brazil
ITW Cayman	Indirect		100.00	%	Cayman Islands
ITW Chemical Products Ltda	Indirect		100.00	%	Brazil
ITW Chemical Products Scandinavia ApS	Indirect		100.00	%	Denmark


Company	Ownership Type (a)	Ownership%			Jurisdiction
ITW Chemische Produkte GmbH	Indirect		100.00	%	Germany
ITW China Components Inc.	Direct		100.00	%	Delaware
ITW Construction Products (Suzhou) Co. Ltd.	Direct		100.00	%	China
ITW Construction Products ApS	Indirect		100.00	%	Denmark
ITW Construction Products Espana S.A.	Indirect		100.00	%	Spain
ITW Construction Products Italy s.r.l.	Indirect		100.00	%	Italy
ITW CPM S.A.S.	Indirect		100.00	%	France
ITW Cupids Holding II L.L.C.	Indirect		100.00	%	Delaware
ITW Cupids Holding L.L.C.	Indirect		100.00	%	Delaware
ITW Cupids LLC	Indirect		100.00	%	Delaware
ITW Cupids, L.P.	Indirect		100.00	%	Delaware
ITW de Argentina S.A.	Indirect		100.00	%	Argentina
ITW de France S.A.S.	Indirect		100.00	%	France
ITW Decorating Systems AG	Indirect		100.00	%	Switzerland
ITW DelFast do Brasil Ltda.	Direct & Indirect		100.00	%	Brazil
ITW Delta Sárl	Indirect		100.00	%	Luxembourg
ITW Denmark ApS	Indirect		100.00	%	Denmark
ITW Devcon Industrial Products GmbH	Indirect		100.00	%	Germany
ITW do Brazil Industrial e Comercial Ltda.	Direct		100.00	%	Brazil
ITW Domestic Finance Company	Indirect		100.00	%	Delaware
ITW Domestic Finance II Inc.	Indirect		100.00	%	Delaware
ITW Domestic Holdings II Inc.	Indirect		100.00	%	Delaware
ITW Domestic Holdings Inc.	Indirect		100.00	%	Delaware
ITW Domestic Leasing I Inc.	Indirect		100.00	%	Delaware
ITW Domestic Leasing II Inc.	Indirect		100.00	%	Delaware
ITW D-Tech Holdings GmbH	Indirect		100.00	%	Germany
ITW Dynatec (Hong Kong) Limited	Direct		50.00	%	Hong Kong
ITW Dynatec G.m.b.H.	Indirect		100.00	%	Germany
ITW Dynatec Kabushiki Kaisha	Direct		100.00	%	Japan
ITW Dynatec Singapore Pte. Ltd.	Direct		50.00	%	Singapore
ITW Dynatec Thailand Ltd.	Direct		20.00	%	Thailand
ITW Electronic Business Asia Co., Limited	Direct		100.00	%	Taiwan


Company	Ownership Type (a)	Ownership%			Jurisdiction
ITW Electronic Component Manufacturing Company d.o.o.	Indirect		100.00	%	Slovenia
ITW Electronic Components Packaging Systems, S. de R.L. de C.V.	Indirect		100.00	%	Mexico
ITW Electronic Components/Products (Shanghai) Company Limited	Indirect		100.00	%	China
ITW Electronic Packaging (Malta) Ltd.	Indirect		100.00	%	Malta
ITW Epsilon Sárl	Indirect		100.00	%	Luxembourg
ITW Espana S.A.	Indirect		100.00	%	Spain
ITW etilab GmbH	Direct		100.00	%	Germany
ITW Europe — Servicos Internacionais, Sociedade Unipessoal, Lda.	Indirect		100.00	%	Madeira
ITW Fastex de Argentina S.A.	Indirect		100.00	%	Argentina
ITW Fastex France S.A.S.	Indirect		100.00	%	France
ITW Finance II L.L.C.	Direct & Indirect		100.00	%	Delaware
ITW Finishing L.L.C.	Indirect		100.00	%	Delaware
ITW Foils B.V.	Indirect		100.00	%	Netherlands
ITW Foils Gelot	Indirect		100.00	%	France
ITW Foils S.A.S.	Indirect		100.00	%	France
ITW Foils Spain S.L.	Indirect		100.00	%	Spain
ITW Foils Srl	Indirect		100.00	%	Italy
ITW Foils, S.L.	Indirect		100.00	%	Spain
ITW Food Equipment Group LLC	Indirect		100.00	%	Delaware
ITW Gamma Sárl	Indirect		100.00	%	Luxembourg
ITW Gema AG	Indirect		100.00	%	Switzerland
ITW Gema s.r.l.	Indirect		100.00	%	Italy
ITW Group France	Indirect		100.00	%	France
ITW Gunther S.A.S.	Indirect		100.00	%	France
ITW Heller GmbH	Indirect		100.00	%	Germany
ITW Henschel GmbH	Indirect		100.00	%	Germany
ITW Hi-Cone Japan Limited	Direct		100.00	%	Japan
ITW Holdings Pty. Ltd.	Indirect		100.00	%	Australia
ITW Holdings UK	Indirect		100.00	%	United Kingdom
ITW Hospitality Products Pty. Limited	Indirect		100.00	%	Australia
ITW Idle Facilities L.L.C.	Indirect		100.00	%	Delaware


Company	Ownership Type (a)	Ownership%			Jurisdiction
ITW ILC Holdings I Inc.	Indirect		100.00	%	Delaware
ITW ILC Holdings II Inc.	Indirect		100.00	%	Delaware
ITW Imaden Industria e Comercio Ltda.	Direct & Indirect		100.00	%	Brazil
ITW India Limited	Direct		96.67	%	India
ITW Industrial Components s.r.l.	Indirect		100.00	%	Italy
ITW Industry Co., Ltd.	Indirect		100.00	%	Japan
ITW International Finance S.A.S.	Indirect		100.00	%	France
ITW International Holdings Inc.	Indirect		100.00	%	Delaware
ITW Investments, Inc.	Direct & Indirect		100.00	%	Delaware
ITW Ireland	Indirect		100.00	%	Ireland
ITW Ireland Holdings	Indirect		100.00	%	Ireland
ITW Italy Finance Srl	Indirect		100.00	%	Italy
ITW Italy Holding S.r.l.	Indirect		100.00	%	Italy
ITW Limited	Indirect		100.00	%	United Kingdom
ITW Litec France S.A.S.	Indirect		100.00	%	France
ITW Lombard Holdings Inc.	Indirect		100.00	%	Delaware
ITW Ltd. Storbritannien Filal Sverige	Indirect		100.00	%	Sweden
ITW Madeira - Servicos de Consultadoria, Sociedade Unipessoal, Lda.	Indirect		100.00	%	Madeira
ITW Meritex (Singapore) Pte. Ltd.	Indirect		100.00	%	Singapore
ITW Meritex Sdn. Bhd.	Direct		100.00	%	Malaysia
ITW Mexico Holding Inc.	Indirect		100.00	%	Delaware
ITW Mima Films L.L.C.	Indirect		100.00	%	Delaware
ITW Mima Holdings L.L.C.	Indirect		100.00	%	Delaware
ITW Mima Service S.A.S.	Indirect		100.00	%	France
ITW Mima Systems S.A.S.	Indirect		100.00	%	France
ITW Morlock GmbH	Indirect		100.00	%	Germany
ITW Mortgage Investments I, Inc.	Indirect		100.00	%	Delaware
ITW Mortgage Investments II, Inc.	Indirect		100.00	%	Delaware
ITW Mortgage Investments III, Inc.	Indirect		100.00	%	Delaware
ITW Mortgage Investments IV, Inc.	Indirect		100.00	%	Delaware
ITW New Zealand Limited	Indirect		100.00	%	New Zealand
ITW Nominees Limited	Indirect		100.00	%	New Zealand


Company	Ownership Type (a)	Ownership%			Jurisdiction
ITW Novadan ApS	Indirect		100.00	%	Denmark
ITW Oberflaechentechnik GmbH & Co. K.G.	Indirect		100.00	%	Germany
ITW Operations Australia Pty. Ltd.	Indirect		100.00	%	Australia
ITW P&F Holdings Pty. Ltd.	Indirect		100.00	%	Australia
ITW Packaging (Malaysia) Sdn Bhd	Indirect		100.00	%	Malaysia
ITW Packaging (Shanghai) Limited	Indirect		100.00	%	China
ITW Paris E.U.R.L.	Indirect		100.00	%	France
ITW Participations S.a.r.l.	Indirect		100.00	%	Luxembourg
ITW Pension Funds Trustee Company	Indirect		100.00	%	United Kingdom
ITW Permatex Inc.	Direct		100.00	%	Delaware
ITW Philippines, Inc.	Indirect		100.00	%	Philippines
ITW PMI Investments, Inc.	Indirect		100.00	%	Delaware
ITW Poly Mex, S.A. de C.V.	Direct & Indirect		100.00	%	Mexico
ITW Poly Recycling GmbH	Indirect		100.00	%	Switzerland
ITW Polymers & Fluids Pty. Ltd.	Indirect		100.00	%	Australia
ITW Produits Chimiques S.A.S.	Indirect		100.00	%	France
ITW Pronovia Plus s.r.o.	Indirect		100.00	%	Czech Republic
ITW Pronovia s.r.o.	Indirect		100.00	%	Czech Republic
ITW Reid Holdings Pty Ltd	Indirect		100.00	%	Australia
ITW Residuals III L.L.C.	Indirect		100.00	%	Delaware
ITW Residuals IV L.L.C.	Indirect		100.00	%	Delaware
ITW Richmond Sdn. Bhd.	Indirect		100.00	%	Malaysia
ITW Rivex S.A.S.	Indirect		100.00	%	France
ITW Service Inc.	Indirect		100.00	%	Korea
ITW Sexton Inc.	Direct		100.00	%	Massachusetts
ITW Shippers S.p.r.l.	Indirect		100.00	%	Belgium
ITW Siewer Automotiv s.r.o	Indirect		100.00	%	Czech Republic
ITW Siewer Jarmutechnikai Bt	Indirect		100.00	%	Hungary
ITW Siewer Vagyonkezelo Kft	Indirect		100.00	%	Hungary
ITW Signode Australasia Pty. Limited	Indirect		100.00	%	Australia
ITW Signode Belgium B.V.B.A.	Indirect		100.00	%	Belgium
ITW Signode Holding GmbH	Indirect		100.00	%	Germany


Company	Ownership Type (a)	Ownership%			Jurisdiction
ITW Signode Polska Sp. z.o.o.	Indirect		100.00	%	Poland
ITW Signode Singapore Pte. Ltd.	Indirect		50.00	%	Singapore
ITW Singapore (Pte) Ltd.	Direct		100.00	%	Singapore
ITW SMPI S.A.S.	Indirect		100.00	%	France
ITW SP Europe S.a.r.l.	Indirect		100.00	%	Luxembourg
ITW Spain Holdings, S.L.	Indirect		100.00	%	Spain
ITW Specialty Film Co. Ltd.	Indirect		100.00	%	Korea
ITW Sportgeräte G.m.b.H.	Indirect		100.00	%	Germany
ITW Strapping Co. I, S.A. de C.V.	Indirect		100.00	%	Mexico
ITW Strapping Co. II, S.A. de C.V.	Indirect		100.00	%	Mexico
ITW Superannuation Fund 2 Pty. Ltd.	Indirect		100.00	%	Australia
ITW Superannuation Fund Pty. Ltd.	Indirect		100.00	%	Australia
ITW Surfaces & Finitions S.A.S.	Indirect		100.00	%	France
ITW Sverige AB	Indirect		100.00	%	Sweden
ITW Sweden Holding AB	Indirect		100.00	%	Sweden
ITW Thermal Films France	Indirect		100.00	%	France
ITW Thermal Films Italy Srl	Indirect		100.00	%	Italy
ITW UK	Indirect		100.00	%	United Kingdom
ITW Universal L.L.C.	Direct		100.00	%	Delaware
ITW Welding Products Asia Pacific Private Limited	Direct		100.00	%	Singapore
ITW Welding Products B.V.	Indirect		100.00	%	Netherlands
ITW Welding Products Group S.A. de C.V.	Indirect		100.00	%	Mexico
ITW Welding Products Italy Srl	Indirect		100.00	%	Italy
ITW Welding S.A.S.	Indirect		100.00	%	France
IVTEC AB	Indirect		100.00	%	Sweden
James Briggs	Indirect		100.00	%	United Kingdom
James Briggs Holdings	Indirect		100.00	%	United Kingdom
James Briggs Trustee Limited	Indirect		100.00	%	United Kingdom
James Glen Pty. Ltd.	Indirect		100.00	%	Australia
Japan Polymark Co. Ltd.	Indirect		34.00	%	Japan
Japit Inc.	Direct		19.00	%	Japan
Jemco de Mexico, S.A. de C.V.	Direct		100.00	%	Mexico


Company	Ownership Type (a)	Ownership%			Jurisdiction
KC Metal Products Pty. Ltd.	Indirect		100.00	%	Australia
Kormag Industries e Comercio Ltda.	Direct		40.00	%	Brazil
Korroflex AB	Indirect		100.00	%	Sweden
Korroflex Invest AB	Indirect		100.00	%	Sweden
KP Comercio e Industria de Productos Para Automoveis e Lubrificantes, S.A.	Indirect		100.00	%	Portugal
Krafft Argentina, S.A.	Indirect		80.00	%	Argentina
Krafft, S.A.	Indirect		100.00	%	Spain
Labels & Data Systems (U.K.) Limited	Indirect		100.00	%	United Kingdom
Liljendals Bruk AB	Indirect		100.00	%	Finland
Lombard Pressings Limited	Indirect		100.00	%	United Kingdom
LSPS Inc.	Indirect		100.00	%	Delaware
Lumex, Inc.	Direct		100.00	%	Illinois
Lys Fusion Poland Sp. z.o.o.	Indirect		100.00	%	Poland
Magna Industrial Co. Limited	Indirect		100.00	%	Hong Kong
Magnaflux Limited	Indirect		100.00	%	United Kingdom
Malborough Liners Limited	Indirect		100.00	%	United Kingdom
Manufacturing Avancee S.A.	Indirect		100.00	%	Morocco
Mazel (1980)	Indirect		100.00	%	United Kingdom
MBM France S.A.S.	Indirect		100.00	%	France
Meritex Technology (Suzhou) Co. Ltd.	Direct		100.00	%	China
Metales Industrializados S.A. de C.V.	Indirect		100.00	%	Mexico
Metalflex d.o.o.	Indirect		100.00	%	Slovenia
Meyercord Revenue Inc.	Direct		100.00	%	Delaware
Miller Beijing Electric Manufacturing Co. Ltd	Indirect		100.00	%	China
Miller Electric Mfg. Co.	Direct		100.00	%	Wisconsin
Miller Insurance Ltd.	Indirect		100.00	%	Bermuda
Mima Films L.L.C.	Indirect		100.00	%	Delaware
Mima Films S.a.r.l.	Indirect		100.00	%	Luxembourg
Mima Films SCA	Indirect		100.00	%	Belgium
Morgan Polimer Seals, S. de R.L. de C.V.	Direct		100.00	%	Mexico
Morgan Polymers Seals, L.L.C.	Direct		100.00	%	California
Mortgage Ally Inc.	Indirect		100.00	%	Delaware


Company	Ownership Type (a)	Ownership%			Jurisdiction
Mumm Products Inc.	Direct		100.00	%	New Jersey
N’ Seine Holdings SAS	Indirect		100.00	%	France
New West Products, Inc.	Direct		100.00	%	California
Nexkra 2004, S.L.	Indirect		100.00	%	Spain
Nextum, S.L.	Indirect		100.00	%	Spain
Nordic SAS	Indirect		100.00	%	France
Norsk Signode AS	Indirect		100.00	%	Norway
Novadan AS	Indirect		100.00	%	Norway
Novadan Sp. Z.o.o.	Indirect		100.00	%	Poland
Noza Holdings Pty. Ltd.	Indirect		100.00	%	Australia
NYCO-KRAFFT, S.A.	Indirect		50.00	%	Spain
Odesign, Inc.	Direct		100.00	%	Illinois
Orgapack GmbH	Indirect		100.00	%	Switzerland
Orgapack SARL	Indirect		100.00	%	France
Oy M. Haloila AB	Indirect		100.00	%	Finland
P.B. Sherman (London)	Indirect		100.00	%	United Kingdom
Packaging Leasing Systems Inc.	Direct		51.00	%	Delaware
Pack-Band Hagen GmbH	Indirect		100.00	%	Germany
PanCon GmbH	Indirect		100.00	%	Germany
Paslode Fasteners (Shanghai) Co. Ltd.	Indirect		100.00	%	China
Paslode/Duo Fast France S.A.S.	Indirect		100.00	%	France
Paul Forkardt GmbH	Indirect		100.00	%	Germany
Paul Forkardt Inc.	Indirect		100.00	%	Delaware
PB Fixations S.a.r.l.	Indirect		100.00	%	France
Permatex Canada, Inc.	Indirect		100.00	%	Canada
PMI FEG Holland B.V.	Indirect		100.00	%	Netherlands
PMI Food Equipment (Hong Kong) Limited	Indirect		100.00	%	Hong Kong
PMI Food Equipment Group (Malaysia), Inc.	Indirect		100.00	%	Delaware
Polimeros Morgan, S. de R.L. de C.V.	Direct		100.00	%	Mexico
Polymark (U.K.)	Indirect		100.00	%	United Kingdom
Polymark Export Limited	Direct		100.00	%	United Kingdom
Premark FEG Beteiligungsgesellschaft m.b.H.	Indirect		100.00	%	Germany


Company	Ownership Type (a)	Ownership%			Jurisdiction
Premark FEG G.m.b.H. & Co. KG	Indirect		100.00	%	Germany
Premark FEG L.L.C.	Indirect		100.00	%	Delaware
Premark Finance	Indirect		100.00	%	United Kingdom
Premark HII Holdings, Inc.	Indirect		100.00	%	Ohio
Premark Holdings	Indirect		100.00	%	United Kingdom
Premark International Holdings B.V.	Indirect		100.00	%	Netherlands
Premark International, Inc.	Indirect		100.00	%	Delaware
Premark N.V.	Indirect		100.00	%	Netherland Antilles
Premark RWP Holdings, Inc.	Indirect		100.00	%	Delaware
Pryda (Indonesia) Pty. Ltd.	Indirect		100.00	%	Australia
Pryda (Malaysia) Sdn Bhd	Indirect		100.00	%	Malaysia
Pryda (Thailand) Limited	Indirect		100.00	%	Thailand
PT2 Holdings Inc.	Indirect		100.00	%	Delaware
PTX de Mexico, S.A. de C.V.	Indirect		100.00	%	Mexico
Quimica TF, S.A. de C.V.	Direct & Indirect		100.00	%	Mexico
R.H. Phillips & Son (Engineers) Limited	Indirect		40.00	%	United Kingdom
Ramset Fasteners	Indirect		100.00	%	United Kingdom
Ramset Fasteners (Aust) Pty. Ltd.	Indirect		100.00	%	Australia
Ramset Fasteners (Hong Kong) Ltd.	Indirect		100.00	%	Hong Kong
Ransburg Industrial Finishing K.K.	Indirect		100.00	%	Japan
Ransburg Manufacturing Corporation	Direct		100.00	%	Indiana
Ransburg-Gema UK Limited	Indirect		100.00	%	United Kingdom
Reid Construction Systems Pty Ltd	Indirect		100.00	%	Australia
Resopal G.m.b.H.	Indirect		100.00	%	Germany
Resopal-Unterstutzungseinrichtung GmbH in Grob-Umstadt	Indirect		100.00	%	Germany
Rivex Limited	Indirect		100.00	%	United Kingdom
Rocol	Indirect		100.00	%	United Kingdom
Rocol Far East Limited	Indirect		100.00	%	Hong Kong
Rocol Group	Indirect		100.00	%	United Kingdom
Rocol Korea Limited	Indirect		100.00	%	Korea
Rocol Site Safety Systems	Indirect		100.00	%	United Kingdom
Sam Jung Signode Inc.	Indirect		100.00	%	Korea


Company	Ownership Type (a)	Ownership%			Jurisdiction
Sarsfield N.V.	Indirect		100.00	%	Netherland Antilles
Scanilec B.V.	Indirect		100.00	%	Netherlands
Scybele S.A.S.	Indirect		100.00	%	France
SEINE Investments EURL	Indirect		100.00	%	France
Servicios de Ingenieria Aguascallentes, S. de R.L. de C.V.	Indirect		100.00	%	Mexico
Servicios de Reynosa, S.A. de C.V.	Indirect		100.00	%	Mexico
SG Invest Holdings GmbH	Indirect		100.00	%	Germany
Shanghai ITW Plastic & Metal Company Limited	Indirect		93.00	%	China
Sherman Allied Products Limited	Indirect		100.00	%	United Kingdom
Sherman Treaters	Indirect		100.00	%	United Kingdom
Sherman Treaters Operations	Indirect		100.00	%	United Kingdom
Siddons Ramset Holdings Pty. Limited	Indirect		100.00	%	Australia
Sifbronze Limited	Indirect		17.00	%	United Kingdom
Signode (Thailand) Limited	Direct		100.00	%	Thailand
Signode AB	Indirect		100.00	%	Sweden
Signode B.V.	Indirect		100.00	%	Netherlands
Signode Bernpak GmbH	Direct		100.00	%	Germany
Signode Brasileria Ltda.	Direct & Indirect		100.00	%	Brazil
Signode France S.A.S.	Indirect		100.00	%	France
Signode Hong Kong Limited	Indirect		100.00	%	Hong Kong
Signode Ireland Limited	Indirect		100.00	%	United Kingdom
Signode Kabushiki Kaisha	Indirect		100.00	%	Japan
Signode Limited	Indirect		100.00	%	United Kingdom
Signode Packaging Systems Limited	Direct		20.00	%	East Africa
Signode PGP Limited	Indirect		100.00	%	United Kingdom
Signode Singapore Investments Pte. Ltd.	Indirect		100.00	%	Singapore
Signode Singapore Pte. Ltd.	Indirect		100.00	%	Singapore
Signode System GmbH	Indirect		100.00	%	Germany
Sima Industri ApS	Indirect		100.00	%	Denmark
Simco (Nederland) B.V.	Indirect		100.00	%	Netherlands
Simco Japan, Inc.	Indirect		100.00	%	Japan
Sisvend Soluciones de Seguridad, S.L.	Indirect		40.00	%	Spain


Company	Ownership Type (a)	Ownership%			Jurisdiction
Smart Home Products Pty. Ltd.	Indirect		100.00	%	Australia
Snoddis Tesmar Limited	Indirect		100.00	%	Australia
Société Civile Immobilière des Baquets	Indirect		100.00	%	France
Société Civile Immobilière Rousseau Ivry	Indirect		100.00	%	France
Societe de Rectification et de Decolletage SARL (SRD Sarl)	Indirect		100.00	%	France
Solutions Group Transaction Subsidiary Inc.	Indirect		100.00	%	Delaware
South Common Venture	Indirect		50.00	%	Illinois
SpaceJoist TE, LLC	Indirect		100.00	%	Texas
SPIT S.A.S. (Societe de Prospection et d’Inventions Techniques S.A.S.)	Indirect		100.00	%	France
SPL Group Ltd.	Indirect		100.00	%	Australia
Sraennik Pty Ltd	Indirect		100.00	%	Australia
SS OMG Holding Limited	Direct		50.00	%	British Virgin Islands
Stahl, S.A. de C.V.	Indirect		50.00	%	Mexico
Steelfast Asia Sdn Bhd	Indirect		100.00	%	Malaysia
Strapex (Canada) Corporation	Indirect		100.00	%	Nova Scotia
Strapex ApS	Indirect		100.00	%	Denmark
Strapex Embalagem L.d.a.	Indirect		100.00	%	Portugal
Strapex GmbH	Indirect		100.00	%	Austria
Strapex GmbH	Indirect		100.00	%	Switzerland
Strapex GmbH	Indirect		100.00	%	Germany
Strapex Holding GmbH	Indirect		100.00	%	Switzerland
Strapex Nederland B.V.	Indirect		100.00	%	Netherlands
Strapex Packaging India Limited	Indirect		100.00	%	India
Strapex S.A.S.	Indirect		100.00	%	France
Strapex S.p.r.l.	Indirect		100.00	%	Belgium
Strapex s.r.l.	Indirect		100.00	%	Italy
Strapex U.K.	Indirect		100.00	%	United Kingdom
Strategic Holdings L.L.C.	Indirect		100.00	%	Delaware
Surfmill	Indirect		100.00	%	United Kingdom
TAG Staples Sdn Bhd	Indirect		100.00	%	Malaysia
TEK International Limited	Indirect		100.00	%	United Kingdom
Ten Plus S.A.S.	Indirect		100.00	%	France


Company	Ownership Type (a)	Ownership%			Jurisdiction
Texwipe Philippines, Inc.	Direct		100.00	%	Philippines
Thermal Transfer Media Ltd.	Indirect		100.00	%	United Kingdom
Tien Tai Electrode (Kun Shan) Co., Ltd.	Indirect		95.95	%	China
Tien Tai Electrode Co., Ltd.	Direct		95.95	%	Taiwan
Tien Tai Tokyo Co., Ltd.	Indirect		95.95	%	Japan
Trilectron Europe Limited	Indirect		100.00	%	United Kingdom
Truswal Systems Corporation	Direct		100.00	%	Texas
Unipac Corporation	Indirect		100.00	%	Ontario
Unipac, Inc.	Indirect		100.00	%	Delaware
Universal Fastgoerelse ApS	Indirect		100.00	%	Denmark
Universal Fastgoerelse ApS	Indirect		100.00	%	Denmark
Valeron Strength Films B.V.B.A.	Indirect		100.00	%	Belgium
Valeron Strength Films UK	Indirect		100.00	%	United Kingdom
Varybond Chemie AG	Indirect		100.00	%	Switzerland
Varybond Chemie Holding AG	Indirect		100.00	%	Liechtenstein
Varybond Chemie-Gesellschaft mbH	Indirect		100.00	%	Austria
Veneta Decalcogomme s.r.l.	Indirect		100.00	%	Italy
Victor Ridder GmbH	Indirect		100.00	%	Germany
Volstatic International Limited	Indirect		100.00	%	United Kingdom
Wavebest Limited	Indirect		100.00	%	United Kingdom
Welding Industries Ltd.	Indirect		100.00	%	Australia
Welding Products Group FZE	Indirect		100.00	%	Dubai
West Bend de Mexico S.A. de C.V.	Indirect		100.00	%	Mexico
Wilsonart (Shanghai) Co. Ltd.	Indirect		100.00	%	China
Wilsonart (Thailand) Co. Ltd.	Indirect		75.00	%	Thailand
Wilsonart Holdings Limited	Indirect		100.00	%	United Kingdom
Wilsonart Hong Kong Limited	Indirect		100.00	%	Hong Kong
Wilsonart International Holdings, Inc.	Indirect		100.00	%	Delaware
Wilsonart International, Inc.	Indirect		100.00	%	Delaware
Wilsonart Limited	Indirect		100.00	%	United Kingdom
Wilsonart South Africa (Pty.) Ltd.	Indirect		100.00	%	South Africa
Wilsonart Taiwan Corp. Ltd.	Indirect		100.00	%	Taiwan


Company	Ownership Type (a)	Ownership%			Jurisdiction
Wolf Catering Equipment (UK) Limited	Indirect		100.00	%	United Kingdom
Wuxi Signode Sekisui Jushi Strapping Co., Ltd.	Indirect		100.00	%	China
Wynn Oil (NZ) Limited	Indirect		100.00	%	New Zealand
Wynn Oil (South Africa) (Pty) Ltd.	Indirect		100.00	%	South Africa
Wynn Oil (UK) Limited	Indirect		100.00	%	United Kingdom
Wynn Oil Holdings BV	Indirect		100.00	%	Netherlands
Wynn Oil Venezuela SA	Indirect		51.00	%	Venezuela
Wynn’s Australia Pty. Ltd.	Indirect		100.00	%	Australia
Wynn’s Belgium NV	Indirect		100.00	%	Belgium
Wynn’s Canada Ltd.	Indirect		100.00	%	Canada
Wynn’s Deutschland GmbH	Indirect		100.00	%	Germany
Wynn’s France Automotive SAS	Indirect		100.00	%	France
Wynn’s Friction Proofing Mexico	Indirect		100.00	%	Mexico
Wynn’s Italia SpA	Indirect		100.00	%	Italy
Wynn’s Mekuba India Pvt Ltd	Indirect		51.00	%	India
Wynn’s Nederland BV	Indirect		100.00	%	Netherlands
Zip-Pak International B.V.	Indirect		100.00	%	Netherlands
Zip-Pak Japan Company Limited	Direct		60.00	%	Japan

(a) Ownership type indicates whether each subsidiary or affiliate is directly owned by Illinois Tool Works Inc., indirectly owned by a subsidiary of Illinois Tool Works Inc., or a combination thereof.

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the previously filed Registration Statements of Illinois Tool Works Inc. on Form S-8 (File No.’s 333-105731, 333-108088, 333-75767 and 333-69542), Form S-4 (File No.’s 333-02671, 333-25471 and 333-88801), Form S-3 (File No.’s 33-5780 and 333-70691) and Premark International, Inc.’s previously filed Registration Statements on Form S-3 (File No.’s 33-35137 and 333-62105) of our report dated March 1, 2005, relating to the financial statements of Illinois Tool Works Inc. and management’s report on the effectiveness of internal control over financial reporting incorporated by reference in the Annual Report on Form 10-K of Illinois Tool Works Inc. for the year ended December 31, 2004.

/s/ DELOITTE & TOUCHE LLP

Chicago, Illinois
March 4, 2005

Exhibit 24

ILLINOIS TOOL WORKS INC.

Form 10-K Annual Report

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that the undersigned whose signature appears below constitutes and appoints W. James Farrell and Stewart S. Hudnut, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution for her or him and in his or her name, place and stead, in any and all capacities, to sign the Company’s Form 10-K Annual Report and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue thereof.

IN WITNESS WHEREOF, the undersigned has executed this power of attorney this 15th day of February, 2005.

/s/ William F. Aldinger

William F. Aldinger

ILLINOIS TOOL WORKS INC.

Form 10-K Annual Report

POWER OF ATTORNEY

IN WITNESS WHEREOF, the undersigned has executed this power of attorney this 15th day of February, 2005.

/s/ Michael J. Birck

Michael J. Birck

ILLINOIS TOOL WORKS INC.

Form 10-K Annual Report

POWER OF ATTORNEY

IN WITNESS WHEREOF, the undersigned has executed this power of attorney this 15th day of February, 2005.

/s/ Marvin D. Brailsford

Marvin D. Brailsford

ILLINOIS TOOL WORKS INC.

Form 10-K Annual Report

POWER OF ATTORNEY

IN WITNESS WHEREOF, the undersigned has executed this power of attorney this 15th day of February, 2005.

/s/ Susan Crown

Susan Crown

ILLINOIS TOOL WORKS INC.

Form 10-K Annual Report

POWER OF ATTORNEY

IN WITNESS WHEREOF, the undersigned has executed this power of attorney this 15th day of February, 2005.

/s/ Don H. Davis, Jr.

Don H. Davis, Jr.

ILLINOIS TOOL WORKS INC.

Form 10-K Annual Report

POWER OF ATTORNEY

IN WITNESS WHEREOF, the undersigned has executed this power of attorney this 15th day of February, 2005.

/s/ Robert C. McCormack

Robert C. McCormack

ILLINOIS TOOL WORKS INC.

Form 10-K Annual Report

POWER OF ATTORNEY

IN WITNESS WHEREOF, the undersigned has executed this power of attorney this 15th day of February, 2005.

/s/ Robert S. Morrison

Robert S. Morrison

ILLINOIS TOOL WORKS INC.

Form 10-K Annual Report

POWER OF ATTORNEY

IN WITNESS WHEREOF, the undersigned has executed this power of attorney this 15th day of February, 2005.

/s/ Harold B. Smith

Harold B. Smith

Exhibit 31

Rule 13a-14(a) Certification

I, W. James Farrell, Chairman and Chief Executive Officer, certify that:

1.   I have reviewed this report on Form 10-K of Illinois Tool Works Inc.;

2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)   designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)   designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)   evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)   disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Dated: March 4, 2005		/s/ W. James Farrell

		W. James Farrell
		Chairman and Chief Executive Officer

Exhibit 31

Rule 13a-14(a) Certification

I, Jon C. Kinney, Chief Financial Officer, certify that:


Dated: March 4, 2005		/s/ Jon C. Kinney

		Jon C. Kinney, Senior Vice President
		and Chief Financial Officer

Exhibit 32

Section 1350 Certification

The following statement is being made to the Securities and Exchange Commission solely for purposes of Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350), which carries with it certain criminal penalties in the event of a knowing or willful misrepresentation.

Each of the undersigned hereby certifies that the Annual Report on Form 10-K for the period ended December 31, 2004 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the registrant.


Dated: March 4, 2005		/s/ W. James Farrell

		W. James Farrell
		Chairman and Chief Executive Officer


Dated: March 4, 2005		/s/ Jon C. Kinney

		Jon C. Kinney, Senior Vice President
		and Chief Financial Officer

USAGE CLASSIFICATION

Quantity on hand is less than prior 6 months’ usage

Slow-moving

Some usage in last 12 months, but quantity on hand exceeds prior 6 months’ usage

No usage in the last 12 months

	2.1	“Agreement” means the Illinois Tool Works Inc. Executive Contributory Retirement Income Plan Deferral Agreement(s) executed between a Participant and the Company, whereby a Participant agrees to defer a portion of his/her Salary and/or Bonus pursuant to the provisions of the Plan and/or specifies the number of years over which payments might be made pursuant to Section 4.8 (subject to the provisions of Section 4.10), and the Company agrees to make benefit payments in accordance with the provisions of the Plan. To the extent a Participant’s deferral agreement changes the number of payments specified in a prior deferral agreement the most recent agreement shall be deemed to amend all prior agreements.

	2.2	“Beneficiary” means the person or persons so designated by a Participant pursuant to Section 4.11.

	2.3	“Board of Directors” means the Board of Directors of Illinois Tool Works Inc. Notwithstanding anything herein to the contrary, except in regard to a Change in Control, the Executive Committee of the Board of Directors can act under the Plan in lieu of the entire Board.

	2.4	“Bonus” means the amount(s) earned during a calendar year by the Participant under the Company’s Executive Incentive Plan, if the Participant is eligible for such Bonus.

	2.5	A “Change in Control” means a Corporate Change as defined in the Illinois Tool Works Inc. 1996 Stock Incentive Plan.

	2.6	“Committee” means the Employee Benefits Committee of the Company appointed by the Board of Directors to manage and administer the Plan.

	2.7	“Company” means Illinois Tool Works Inc. and any subsidiaries and affiliated companies of which Illinois Tool Works Inc. owns more than 80% of the outstanding common stock or other ownership interest.

	2.8	“Company Matching Contribution” means the contribution made by the Company to a Participant’s Deferred Compensation Account pursuant to Section 3.7.

	2.9	“Company Savings Plan” means the Illinois Tool Works Inc. Savings and Investment Plan.

	2.10	“Deferral Year” means any calendar year.

	2.11	“Deferred Benefit Account” means the account maintained on the books of the Company for each Participant pursuant to Article III. One Deferred Benefit Account shall be maintained for all Agreements entered into by a Participant and the Company pursuant to this Plan. A Participant’s Deferred Benefit Account shall not constitute or be treated as a trust fund of any kind.

	2.12	“Determination Date” means the date on which the amount of a Participant’s Deferred Benefit Account is determined as provided in Article III hereof. The last day of each calendar quarter or the date of a Participant’s Termination of Service shall be a Determination Date.

	2.13	“Disability” shall have the same meaning as Disabled under the Illinois Tool Works Inc. Pension Plan.

	2.14	“Early Benefit Date” means the date of Termination of Service of the Participant on or after he/she attains age 55 and has 10 Years of Service with the Company and before attaining age 65.

	2.15	“Interest Yield” means either the Retirement Interest Yield, Death Interest Yield or the Termination Interest Yield as defined below:

	(a)	“Retirement Interest Yield” or “Death Interest Yield” means 130 percent of Moody’s. The maximum Retirement Interest Yield or Death Interest Yield pursuant to this Plan shall be 15.6%.

	(b)	“Termination Interest Yield” means 100 percent of Moody’s. The maximum Termination Interest Yield pursuant to this Plan shall be 12%.

	2.16	“Moody’s” means the average Moody’s Long-Term Corporate Bond Yield for the preceding calendar quarter as determined from the Moody’s Bond Record published by Moody’s Investor’s Service, Inc. (or any successor thereto). For purposes of this Plan, Moody’s shall not exceed 12%. In the event that Moody’s exceeds 12%, for purposes of calculating the appropriate Interest Yield, 12% shall be used.

	2.17	“Normal Benefit Date” means the date of Termination of Service of the Participant on or after he/she attains age 65 and has completed five Years of Service with the Company.

	2.18	“Participant” means an executive of the Company who is designated to be eligible pursuant to Section 3.1 who enters into an Agreement, and who has commenced Salary and/or Bonus reductions pursuant to such Agreement.

	2.19	“Plan” means the Illinois Tool Works Inc. Executive Contributory Retirement Income Plan as amended from time-to-time.

	2.20	“Plan Effective Date” means April 1, 1993.

	2.21	“Salary” means the Participant’s base pay.

	2.22	“Termination of Service” means the Participant’s cessation of his/her service with the Company for any reason whatsoever, whether voluntarily or involuntarily, including by reason of retirement, death, or Disability.

	2.23	“Years of Service” shall have the same meaning as Eligibility Service under the Illinois Tool Works Inc. Pension Plan.

	3.1	Participation. Participation in the Plan shall be limited to executives of the Company who qualify for inclusion in a “select group of management or highly compensated employees” as provided in Sections 201(2), 301(a)(3), 401(a)(1) and 4021(b)(6) of ERISA and who are designated to be eligible by the Chief Executive Officer (CEO) of the Company. The CEO of the Company must be designated to be eligible by the Board of Directors. In addition, to be eligible to participate in the Plan, an eligible employee must file an Agreement with the Company prior to the first day of the deferral period on which a Participant’s participation commences in the Plan. The election to participate shall be effective upon the receipt by the Company of an Agreement that is properly completed and executed in conformity with the Plan.

		A Participant must be designated to be eligible for each deferral period as outlined in Section 3.2.

	3.2	Minimum and Maximum Deferral and Length of Participation. For Deferral Years commencing prior to January 1, 2001, a Participant may elect to defer between 5% and 50% of his/her Salary in l% increments during a Deferral Year. In addition, a Participant may elect to defer up to 100% of his/her Bonus in 1% increments earned during a Deferral Year.

		For Deferral Years commencing on or after January 1, 2001, a Participant may elect to defer either 0% or between 6% and 50% of his/her Salary in 1% increments during a Deferral Year. In addition, a Participant may elect to defer either 0% or between 6% and 100% of his/her Bonus in 1% increments earned during a Deferral Year.

		In the event a Participant elects to defer an amount of his or her Bonus that would not allow for the full payment of all FICA, federal, state and/or local income tax liabilities, the actual amount which shall be credited to the Participant’s Deferred Compensation Account shall be the maximum amount allowable after all applicable taxes.

		At the time of election, a Participant may elect to defer a different percentage of his/her Salary or Bonus for each Deferral Year and may also elect not to defer any portion of his/her Salary or Bonus in a Deferral Year. An eligible Participant must complete a separate Agreement for each deferral period.

	3.3	Timing of Deferral Credits. The amount of Salary and Bonus that a Participant elects to defer in an Agreement shall cause an equivalent reduction in the Participant’s Salary and Bonus. Salary and Bonus deferrals shall be credited to the Participant’s Deferred Benefit Account throughout each Plan year at the end of each calendar quarter.

	3.4	New Participants. Subsequent to January 1, 1999, an employee shall be eligible to participate after being approved by the CEO. The eligible employee may begin participation pursuant to Section 3.1 and shall be bound by all terms and conditions of the Plan, provided, however, that his/her Agreement must be filed no later than 30 days following notification of his/her eligibility to participate.

	3.5	Alteration of Salary and Bonus Deferral. Except as provided in this Section 3.5 and in Section 3.6, a Participant’s election to defer Salary and Bonus shall be irrevocable. Pursuant to this Section 3.5, a Participant may increase or decrease his/her original Salary and/or Bonus deferral percentage prior to December 1 of the year preceding the Deferral Year for which such adjustment is requested. A Participant may increase or decrease the deferral percentage of his/her Salary and/or Bonus by the greater of 5% for Salary and 10% for Bonus or a percentage which is not more than 50% of the Participant’s original election if changed prior to December 1 of the year preceding the Deferral Year for which the adjustment is effective. In the event that the maximum adjustment percentage is not an integer percentage it shall be rounded up to the next highest integer percentage.

		For Deferral Years commencing prior to January 1, 2001, a Participant may not decrease his/her Salary deferral percentage below 5%. For Deferral Years commencing on or after January 1, 2001, a Participant may not decrease his/her Salary and/or Bonus deferral percentage below 6%. In addition, a Participant may choose not to have any Salary and/or Bonus deferral in accordance with this section 3.5. For Deferral Years commencing prior to January 1, 2001, to the extent a Participant has elected to defer 0% of Salary and/or Bonus for any Deferral Year on his/her deferral agreement, the Participant may increase his/her Salary deferral from 0% to 5% and/or increase his/her Bonus deferral from 0% to 10%. For Deferral Years commencing on or after January 1, 2001, to the extent a Participant has elected to defer 0% of Salary and/or Bonus for any Deferral Year

		on his/her deferral agreement, the Participant may increase his/her Salary deferral from 0% to 6% and/or increase his/her Bonus deferral from 0% to 6%.

		A Participant may change his/her Salary and/or Bonus deferral by entering into a deferral Agreement by December 1 of the year preceding the Deferral Year for which such Agreement is to be effective.

	3.6	Emergency Benefit: Waiver of Deferral. In the event that the Company, upon written petition of the Participant or his/her Beneficiary, determines in its sole discretion, that the Participant or his/her Beneficiary has suffered an unforeseeable financial emergency, the Company may pay to the Participant or his/her Beneficiary as soon as practicable following such determination, an amount, not in excess of the Participant’s Deferred Benefit Account, necessary to satisfy the emergency. For purposes of this Plan, an unforeseeable financial emergency is an unanticipated emergency that is caused by an event beyond the control of the Participant or Beneficiary and that would result in severe financial hardship to the individual if the emergency distribution were not permitted, as may result from illness, casualty loss or sudden financial reversal. Cash needs arising from foreseeable events, such as the purchase of a residence or education expenses for children shall not be considered the result of an unforeseeable financial emergency. The Company may also grant a waiver of the Participant’s agreement to defer a stated amount of Salary and Bonus upon finding that the Participant has suffered an unforeseeable financial emergency. The waiver shall be for such period of time as the Company deems necessary under the circumstances.

	3.7	Company Matching Contribution. For Deferral Years commencing prior to January 1, 2001, the Company shall contribute an amount to a Participant’s Deferred Benefit Account as and when the Participant’s Salary deferrals are added pursuant to Section 3.3. The amount of the Company Matching Contribution shall be equal to 3% of the Participant’s Salary. In order for the Company Matching Contribution to be credited to a Participant’s Deferred Benefit Account, the Participant must elect to defer at least 5% of his/her Salary during the Deferral Year.

		Commencing with Deferral Years on or after January 1, 2001, the amount of the Company Matching Contribution shall be equal to 3.5% of the Participant’s Salary. In order to receive the Company Matching Contribution related to the Participant’s Salary, the Participant must elect to defer at least 6% of his/her Salary during the Deferral Year. In addition, the Participant shall be entitled to a Company Matching Contribution equal to 3.5% of the Participant’s Bonus. In order to receive the Company Matching Contribution related to the Participant’s Bonus, the Participant must elect to defer at least 6% of his/her Bonus during the Deferral Year.

		In the event a Participant elects to defer any amount of Salary and/or Bonus under this Plan, he/she will not receive a Company Matching Contribution under the Company Savings Plan.

		Notwithstanding the foregoing, when the CEO designates a Participant pursuant to Section 3.4, he may specify that such Participant is not entitled to a Company Matching Contribution.

	3.8	Determination of Account. The balance of each Participant’s Deferred Benefit Account as of each Determination Date shall be calculated as follows, using the terms and methods in the order defined below:

	(a)	Beginning Balance:

		The balance on the beginning of the first day of the quarter. This equals the Ending Balance as of the end of the day on the prior Determination Date.

	(b)	Sub-Ending Balance:

		The Beginning Balance, plus Participant deferrals plus Company matching contributions less any distributions, made after the prior Determination Date and up through and including the current Determination Date.

	(c)	Average Balance:

		The arithmetic average of the Beginning Balance and the Sub-Ending Balance from the current quarter.

	(d)	Interest:

		The Average Balance times the appropriate Interest Yield divided by four, times the number of calendar days from the prior Determination Date to the current Determination Date (or the date of payment if applicable and deemed appropriate by the Company) divided by the total number of calendar days in the quarter.

	(e)	Ending Balance:

		The Sub-Ending Balance plus Interest.

	4.1	Return of Deferrals. At the time a Participant executes an Agreement, he/she may elect to receive a return of his/her deferrals made within a particular Deferral Year. The return of deferral election does not apply to either the Company’s matching contribution or the interest credited to the Participant’s Deferred Benefit Account. The return of deferral election shall specify the year (distribution year) in which payment shall be made, which shall be paid as of June 30, five or more years after the Deferral Year in which the Salary and/or Bonus deferral was initially credited to the Participant’s Deferred Benefit Account. Each such return of deferral shall be paid in a lump sum. A return of deferral shall only be paid prior to a Participant’s Termination of Service. Any return of deferral paid shall be deemed a distribution, and shall be deducted from the Participant’s Deferred Benefit Account. A separate return of deferrals election shall be made for each Deferral Year and for both Salary and Bonus deferrals.

	4.2	Retirement Benefit. Subject to Section 4.8 below, upon a Participant’s Early Benefit Date or Normal Benefit Date, he/she shall be entitled to receive the amount of his/her Deferred Benefit Account determined under Section 3.8 using the Retirement Interest Yield. The form of benefit payment shall be as provided in Section 4.8.

	4.3	Termination Benefit. Upon the Termination of Service of a Participant before becoming eligible for a retirement benefit, for reasons other than death or Disability, the Company shall pay to the Participant, a benefit equal to the vested portion of his/her Deferred Benefit Account using the Termination Interest Yield.

		Unless otherwise directed by the Committee, the termination benefit shall be payable in a lump sum within 60 days following his/her Termination of Service. Upon a Termination of Service, the Participant shall immediately cease to be eligible for any other benefit provided under this Plan.

	4.4	Death Prior to Termination of Service. Upon the Termination of Service due to a Participant’s death, the Beneficiary of the deceased Participant shall be entitled to a death benefit equal to the Participant’s Deferred Benefit Account determined under Section 3.8 using the Death Interest Yield. The form of benefit shall be as provided in Section 4.8 and shall be in lieu of all other benefits under this Plan.

	4.5	Death Subsequent to Early or Normal Benefit Date. Upon the death of a Participant subsequent to his/her Early or Normal Benefit Date, the Beneficiary of the deceased Participant shall receive the Participant’s remaining Deferred Benefit Account. Payment of a Participant’s remaining Deferred Benefit Account shall be in accordance with Section 4.8.

	4.6	Disability. In the event of a Termination of Service due to Disability, which first manifests itself after the Plan Effective Date and prior to the commencement of Benefit Payments in Section 4.8, a disabled Participant may receive a benefit

		equal to the balance of his/her Deferred Benefit Account under Section 3.8 using the Retirement Interest Yield. The commencement of such benefit will be on the Participant’s earliest benefit date consistent with Sections 2.14 and 2.17. Payments shall be made in accordance with Section 4.8. The Company, in its sole discretion, may accelerate the payment of any disability benefit payable under this Section. Disability benefits shall be treated as distributions from a Participant’s Deferred Benefit Account.

	4.7	Change of Status. In the event it is determined that the Participant ceases to be eligible to participate in this Plan or if the Participant’s Salary is materially reduced, the Participant may elect to reduce the amount of any remaining deferral. In such event, he/she shall not be treated as having terminated participation pursuant to this Plan.

	4.8	Form of Benefit Payment.

	(a)	Upon the happening of an event described in Section 4.2, 4.4, 4.5, or 4.6, the Company shall pay the Participant’s Deferred Benefit Account in a lump sum or in monthly installments payable in approximately equal amounts over 2 to 20 years, commencing on the event described in Section 4.2, 4.4, 4.5 or 4.6 in accordance with the Participant’s last Agreement. Interest on the unpaid principal balance equal to the applicable Retirement Interest Yield will be added to the Participant’s Deferred Benefit Account on each Determination Date. The amount of the installment payments shall be based on the prevailing Retirement Interest Yield at the commencement of payments, projected into the future using a method approved by the Company. The amount of the installment payments shall be recomputed once per calendar year at a date determined by the Company and the installment payments shall be increased or decreased to reflect any changes in the Retirement Interest Yield.

		A Participant may, by written request filed with the Company at least 13 months prior to the commencement of a distribution pursuant to this Plan, change the method of distribution elected in his/her Agreement to any other method permitted under this Section 4.8.

	(b)	In the event of the death of the Participant, as described in Sections 4.4 or 4.5, the Participant’s Beneficiary may, with the consent of the Company, elect an alternative form of benefit payment, such as a lump-sum payment or a shorter installment period. In such event, the applicable Death Interest Yield shall be utilized in determining the Deferred Benefit Account until all payments have been made to the Beneficiary of the deceased Participant.

	(c)	In the event that a Participant retires on or subsequent to his/her Early Benefit Date but prior to his/her Normal Benefit Date, the Participant may

	4.9	Tax Withholding. To the extent required by law in effect at the time payments are made, the Company shall withhold any taxes required to be withheld by any Federal, State, or local government.

	4.10	Commencement of Payments. Unless otherwise provided, commencement of payments under this Plan shall be within 60 days following receipt of notice by the Company of an event which entitles a Participant or a Beneficiary to payments under this Plan, or at such earlier date as may be determined by the Company. All payments shall be made as of the first day of the month. Benefits paid pursuant to Section 4.2 may commence no earlier than age 55 and Deferred Benefit Accounts must be paid out no later than age 85.

	4.11	Recipients of Payments: Designation of Beneficiary. All payments to be made by the Company under the Plan shall be made to the Participant during his/her lifetime, provided that if the Participant dies prior to the completion of such payments, then all subsequent payments under the Plan shall be made by the Company to the Beneficiary determined in accordance with this Section 4.11. The Participant may designate a Beneficiary by filing a written notice of such designation with the Company in such form as the Company requires and may include contingent Beneficiaries. The Participant may from time-to-time change the designated Beneficiary by filing a new designation in writing with the Company. If no designation is in effect or if an existing designation is determined to be invalid or ineffective at the time any benefits payable under this Plan become due, the Beneficiary shall be the spouse of the Participant, or if no spouse is then living, the representatives of the Participant’s estate.

	(a)	The specific reason(s) for denial of the claim;

	(b)	A reference to the relevant Plan provisions upon which the denial is based;

	(c)	A description of any additional material or information necessary for the claimant to perfect the claim, together with an explanation of why such material or information is necessary; and

	(d)	An explanation of the Plan’s claim review procedure.

	5.2	Request for Review of a Denial of a Claim for Benefits. Upon the receipt by the claimant of written notice of a denial of a claim, the claimant may within 90 days file a written request to the Committee, requesting a review of the denial of the claim, which review shall include a hearing if deemed necessary by the Committee. In connection with the claimant’s appeal of the denial of his/her claim, he/she may review relevant documents and may submit issues and comments in writing.

	5.3	Decision Upon Review of Denial of Claim for Benefits. The Committee shall render a decision on the claim review promptly, but no more than 60 days after the receipt of the claimant’s request for review, unless special circumstances (such as the need to hold a hearing) require an extension of time, in which case the 60 day period shall be extended to 120 days. Such decision shall:

	(a)	Include specific reasons for the decision;

	(b)	Be written in a manner calculated to be understood by the claimant; and

	(c)	Contain specific references to the relevant Plan provisions upon which the decision is based.

	The decision of the Committee shall be final and binding in all respects on both the Company and the claimant.

	6.1	In general, the Plan shall be administered by the Company.

	6.2	Administrative Rights, Powers, and Duties. The Company shall be responsible for the management, operation, and administration of the Plan. In addition to any powers, rights and duties set forth elsewhere in the Plan, the Company shall have the following powers and duties:

	(a)	To adopt such rules and regulations consistent with the provisions of the Plan as it deems necessary for the proper and efficient administration of the Plan;

	(b)	To administer the Plan in accordance with its terms and any rules and regulations it establishes;

	(c)	To maintain records concerning the Plan sufficient to prepare reports, returns and other information required by the Plan or by law;

	(d)	To construe and interpret the Plan and to resolve all questions arising under the Plan;

	(e)	To direct the payment of benefits under the Plan, and to give such other directions and instructions as may be necessary for the proper administration of the Plan;

	(f)	To employ or retain agents, attorneys, actuaries, accountants or other persons, who may also be employed by or represent the Company in matters other than this Plan; and

	(g)	To be responsible for the preparation, filing and disclosure on behalf of the Plan of such documents and reports as are required by any applicable Federal or State law.

	7.1	Amendment. The Plan may be amended in whole or in part by the Company at any time. Notice of any such amendment shall be given in writing to the Committee and to each Participant and each Beneficiary of a deceased Participant. An amendment may not decrease the value of a Participant’s Deferred Benefit Account.

	7.2	Company’s Right to Terminate. The Company or the Committee may terminate the Plan and/or any Agreements pertaining to the Participant at any time after the Plan Effective Date. In the event of any such termination, the Participant shall be entitled to the amount of his/her Deferred Benefit Account determined under Section 3.8, using the Retirement Interest Yield as of the date of termination of the Plan and/or his/her Agreement. Such benefit shall be paid to the Participant in quarterly installments over a period of no more than 15 years, except that the Company, in its sole discretion, may pay out such benefit in a lump sum or in installments over a period shorter than 15 years.

	7.3	Change in Control. If there is a Change in Control, notwithstanding any other provision of this Plan, any Participant or Beneficiary who has a Deferred Benefit Account hereunder shall, at any time during an 18 month period immediately following a Change in Control, have the right to request and be paid by the Company a lump sum payment equal to 90% of the Participant’s remaining Deferred Benefit Account. The remaining 10% of the Participant’s Deferred

	8.1	No Implied Rights: Rights on Termination of Service. Neither the establishment of the Plan nor any amendment thereof shall be construed as giving any Participant, Beneficiary or any other person any legal or equitable right unless such right shall be specifically provided for in the Plan or conferred by specific action of the Company in accordance with the terms and provisions of the Plan. Except as expressly provided in this Plan, the Company shall not be required or be liable to make any payment under this Plan subsequent to the Termination of Service of the Participant.

	8.2	No Right to Company Assets. Neither the Participant nor any other person shall acquire by reason of the Plan any right in or title to any assets, funds or property of the Company whatsoever including, without limiting the generality of the foregoing any specific funds, assets or other property which the Company, in its sole discretion, may set aside in anticipation of a liability hereunder. Any benefits which become payable hereunder shall be paid from the general assets of the Company. The Participant shall have only a contractual right to the amounts, if any, payable hereunder unsecured by any asset of the Company. Nothing contained in the Plan constitutes a guarantee by the Company that the assets of the Company shall be sufficient to pay any benefit to any person.

	8.3	No Employment Rights. Nothing herein shall constitute a contract of continuing service or in any manner obligate the Company to continue the services of the Participant, or obligate the Participant to continue in the service of the Company, or as a limitation of the right of the Company to discharge any of its employees, with or without cause. Nothing herein shall be construed as fixing or regulating the Salary and Bonus payable to the Participant.

	8.4	Offset. If at the time payments or installments of payments are to be made hereunder, the Participant or the Beneficiary or both are indebted or obligated to the Company, then the payments remaining to be made to the Participant or the Beneficiary or both may, at the discretion of the Company, be reduced by the amount of such indebtedness or obligation, provided, however, that an election by the Company not to reduce any such payment or payments shall not constitute a waiver of its claim for such indebtedness or obligation.

	8.5	Non-assignability. Neither the Participant nor any other person shall have any voluntary or involuntary right to commute, sell, assign, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt the amounts, if any, payable hereunder, or any part thereof, which are expressly declared to be unassignable and non-transferable. No part of the

		amounts payable shall be, prior to actual payment, subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by the Participant or any other person, or be transferable by operation of law in the event of the Participant’s or any other person’s bankruptcy or insolvency.

	8.6	Notice. Any notice required or permitted to be given under the Plan shall be sufficient if in writing and hand delivered, or sent by registered or certified mail, and if given to the Company, delivered to the principal office of the Company, directed to the attention of the CEO. Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark or the receipt for registration or certification.

	8.7	Governing Laws. The Plan shall be construed and administered according to the laws of the State of Illinois.

	•	A special one-time dividends-received deduction of 85% for the repatriation of foreign earnings during 2005 only. See the Income Taxes note for further information regarding the estimated effect of this provision.

	•	A deduction related to U.S. manufacturing income of 3% of eligible income in 2005 and 2006, 6% in 2007 through 2009 and 9% in 2010 and thereafter. The Company believes that substantially all of the U.S. pretax income from its manufacturing segments would qualify as eligible income under this provision. However, because the detailed guidelines for determining eligible manufacturing income have not yet been finalized by the U.S. government, the amount of future tax benefit related to this provision cannot yet be determined.

	•	A gradual repeal of the exclusion of certain extraterritorial income (“ETI”) related to export sales from the U.S. This provision provides that the ETI benefit is reduced to 80% in 2005, 60% in 2006 and 0% in 2007 and thereafter. Because the Company generally manufactures locally in the major foreign countries in which it sells products, the repeal of the ETI benefit will not have a significant impact on the Company’s future U.S. tax payments. In 2004, the benefit of the ETI exclusion was approximately $7.4 million.

	•	base business revenue growth in a range of 4.4% to 6.4%;

	•	foreign exchange rates holding at year-end 2004 levels;

	•	annualized revenues from acquired companies in a range of $600 million to $800 million;

	•	restructuring costs of $30 million to $50 million;

	•	income from the Leasing and Investments segment of $60 million to $70 million; and

	•	an effective tax rate of 33%.

	1.	I have reviewed this report on Form 10-K of Illinois Tool Works Inc.;

	2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

	3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

	4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

	a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.