›     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 600 operations in 43 countries which are aggregated and organized for internal reporting purposes into the following five continuing segments: Engineered Products—North America; Engineered Products—International; Specialty Systems—North America; Specialty Systems—International; and Leasing and Investments. These segments are described below.

     In November 1999, a wholly owned subsidiary of ITW merged with Premark International, Inc. (“Premark”), a commercial manufacturer of food equipment and laminate products. 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.

     In December 2001, the Company’s Board of Directors authorized the divestiture of the Consumer Products segment. These businesses became part of ITW in 1999 with the Premark merger. The consolidated financial statements for all periods have been restated to present these businesses as discontinued operations. See the Discontinued Operations section for further information.

Engineered Products—North America

Businesses in this segment are located in North America and manufacture short lead-time plastic and metal components and fasteners, and specialty products such as polymers, fluid products and resealable packaging. In 2001, this segment primarily served the construction (47%), automotive (29%) and general industrial (8%) markets.

Dollars in thousands	2001			2000			1999
Operating revenues	$	2,974,104		$	3,184,033		$	2,964,782
Operating income		478,314			610,321			561,742
Margin %		16.1	%		19.2	%		18.9	%

Operating revenues declined 7% in 2001 versus 2000 mainly due to lower demand in the construction, automotive, electronics and consumer durable end markets. The base business revenue decline of 10% was partially offset by revenue increases from acquisitions of 3%. Operating income declined 22% due to lower revenues and higher nonrecurring costs in 2001. Margins declined 310 basis points in 2001 as a result of lower sales and higher nonrecurring costs.

     Operating revenues increased 7% in 2000 versus 1999. The base business revenue growth was 4%, with the biggest contributors being the construction (including the Wilsonart laminate operation), automotive and industrial plastics businesses. Acquisitions also contributed 3% to the 2000 revenue increase. Operating income increased 9% and margins improved 30 basis points, mainly due to revenue increases and operating efficiencies at the base businesses, primarily the construction, automotive and industrial plastics operations.

Engineered Products—International

Businesses in this segment are located outside North America and manufacture short lead-time plastic and metal components and fasteners, and specialty products such as polymers, fluid products and electronic component packaging. In 2001, this segment primarily served the construction (36%), automotive (32%) and general industrial (16%) markets.

Dollars in thousands	2001			2000			1999
Operating revenues	$	1,471,559		$	1,466,982		$	1,321,658
Operating income		160,714			151,706			132,808
Margin %		10.9	%		10.3	%		10.0	%

Operating revenues were flat in 2001 versus 2000, as revenue growth from acquisitions of 7% was offset by negative foreign currency translation of 6%. Base business revenues declined by 1% as higher sales for the construction and automotive businesses were offset by lower revenues for the electronic component packaging and industrial plastics businesses. Operating income increased 6% in 2001 primarily due to 2000 asset writedowns related to a laminate business in Europe, partially offset by a decline in the electronic component packaging and industrial plastics businesses and the effect of currency translation, which reduced operating income by 6%. Margins increased 60 basis points in 2001 mainly as a result of the 2000 asset writedowns.

     In 2000, operating revenues increased 11% versus the prior year mainly due to acquisitions, which increased revenues 23%, partially offset by reduced revenues of 13% due to currency translation. The base business revenue growth was 1% in 2000. Operating income increased 14% in 2000, primarily due to the revenue growth and cost reductions in the base businesses, partially offset by the 2000 asset writedowns. Margins increased 30 basis points in 2000 due to cost reductions, partially offset by the fourth quarter asset writedowns and the lower margins of acquired businesses. The changes in foreign currency rates in 2000 versus 1999 reduced operating income by 16%.

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Specialty Systems—North America

Businesses in this segment are located in North America and produce longer lead-time machinery and related consumables, and specialty equipment for applications such as food service and industrial finishing. In 2001, this segment primarily served the food retail and service (31%), general industrial (22%), construction (10%), and food and beverage (8%) markets.

Dollars in thousands	2001			2000			1999
Operating revenues	$	3,381,950		$	3,337,387		$	3,161,435
Operating income		424,132			559,738			537,555
Margin %		12.5	%		16.8	%		17.0	%

In 2001, operating revenues grew 1% versus 2000 due primarily to acquisitions, which increased revenues by 11%. Base business revenues decreased 9% as continued slow demand in most end markets negatively impacted the industrial packaging, food equipment, welding and finishing businesses. Operating income declined 24% and margins fell 430 basis points in 2001 due to revenue declines, higher nonrecurring costs and the impact of lower margins of acquired businesses.

     In 2000, operating revenues increased 6% versus 1999 primarily due to acquisitions, which contributed 4% to the revenue increase. Base business revenue grew 2% as a result of contributions from the food equipment, industrial packaging and welding businesses. Operating income increased 4% in 2000 due to the higher revenues, partially offset by higher nonrecurring costs. Margins declined 20 basis points in 2000, as the improved productivity in the food equipment and welding operations was more than offset by the lower margins of acquired companies and higher nonrecurring costs.

Specialty Systems—International

Businesses in this segment are located outside North America and manufacture longer lead-time machinery and related consumables, and specialty equipment for applications such as food service and industrial finishing. In 2001, this segment primarily served the general industrial (27%), food retail and service (22%), and food and beverage (13%) markets.

Dollars in thousands	2001			2000			1999
Operating revenues	$	1,668,895		$	1,741,629		$	1,599,988
Operating income		163,545			171,790			154,022
Margin %		9.8	%		9.9	%		9.6	%

In 2001, operating revenues decreased 4% due mainly to the effect of currency fluctuations, which reduced revenues by 6%. The acquisition-related revenue growth of 6% was partially offset by revenue decreases of 1% due to divestitures. Base business revenue declined 3% primarily related to the industrial packaging and food equipment operations. Operating income decreased 5% and margins declined 10 basis points due to lower demand in the industrial packaging and food equipment markets and the lower margins of acquired companies, partially offset by lower 2001 nonrecurring costs. Currency fluctuations reduced operating income by 7%.

     Operating revenues increased 9% in 2000 primarily due to acquisitions, which grew revenues 17%, partially offset by decreased revenues of 9% due to currency translation. Base business revenue growth was 2% in 2000. Operating income increased 12% due to the revenue increase and operating efficiencies in the industrial packaging and food equipment businesses, partially offset by nonrecurring costs in the fourth quarter of 2000 related to the European food equipment businesses. Margins improved 30 basis points due to the productivity improvements in the base businesses, partially offset by higher nonrecurring costs. Foreign currency fluctuations in 2000 versus 1999 decreased operating income by 12%.

Leasing and Investments

This segment makes opportunistic investments in mortgage-related assets, leveraged and direct financing leases of aircraft and other equipment, properties and property developments, affordable housing and a venture capital fund.

In thousands	2001		2000		1999
Operating revenues	$	149,691	$	154,278	$	157,385
Operating income		79,398		83,898		84,931

Operating revenues and income declined in 2001 versus 2000 due to higher gains on the sales of mortgage-related assets in 2000 and start-up losses related to a new venture capital limited partnership investment.

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     In 2000, both revenues and operating income decreased slightly due to gains on the 1999 sales of affordable housing investments, partially offset by higher 2000 gains on the sales of mortgage-related assets.

     The net assets attributed to the Leasing and Investments segment at December 31, 2001 and 2000 are summarized as follows:

In thousands		2001		2000
Assets:
	Investments	$	1,278,285	$	1,170,392
	Deferred tax assets		165,576		237,323
	Other assets		375		1,269
			1,444,236		1,408,984
Liabilities:
	Debt—
	Nonrecourse notes payable		600,537		647,824
	Allocated general corporate debt		189,139		160,976
	Deferred investment income		186,517		228,726
	Affordable housing capital obligations		210,774		1,425
	Preferred stock of subsidiaries		60,000		60,000
	Other liabilities		31,976		28,315
			1,278,943		1,127,266
Net assets		$	165,293	$	281,718

In 1995, 1996 and 1997, the Company acquired pools of mortgage-related assets in exchange for 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 are located throughout the U.S. and include 10 subperforming, variable rate, balloon loans and 41 foreclosed properties at December 31, 2001. In conjunction with these transactions, the Company 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 Company’s nonrecourse notes payable. In addition, in the event that the pools of mortgage-related assets do not generate income of $26 million a year, the Company has a collateral right against the cash flow generated by three separate pools of mortgage-related assets (owned by third parties in which the Company has minimal interests) which have a total fair value of approximately $2.1 billion at December 31, 2001. The Company entered into the swaps and other related agreements in order to reduce its credit and interest rate risks relative to the mortgage-related assets.

     The net investment in mortgage-related assets at December 31, 2001 and 2000 was as follows:

In thousands		2001			2000
Mortgage-related assets		$	972,480		$	1,010,251
Nonrecourse notes payable			(600,537	)		(647,824	)
	Net investment	$	371,943		$	362,427

The Company expects to recover its net investment in mortgage-related assets as of December 31, 2001 through the following estimated future cash flows:

In thousands		2002		2003		2004		2005		2006		2007		Total
ITW’s annual operating cash flow		$	26,467	$	26,000	$	26,000	$	21,500	$	8,000	$	4,000	$	111,967
ITW’s portion of disposition proceeds			—		—		—		133,341		156,093		165,947		455,381
	Total estimated future cash flow	$	26,467	$	26,000	$	26,000	$	154,841	$	164,093	$	169,947	$	567,348

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The Company believes that because the swaps’ counter party is AAA-rated and significant collateral secures the annual cash flow, its risk of not recovering that portion of its net investment has been significantly reduced. The Company believes that its share of the disposition proceeds will be sufficient to recover the remainder of its net investment. However, there can be no assurances that all of the net investment will be recovered.

     In connection with the commercial mortgage and several other investment transactions, deferred investment income has been recorded for the effect of the difference between the book bases of the assets acquired and their tax bases. This deferred investment income is being amortized to income on a straight-line basis over the lives of the related transactions. The deferred investment income of $186.5 million at December 31, 2001 will be recognized in income as follows:

In thousands
2002	$	42,211
2003		42,211
2004		33,315
2005		33,315
2006		22,340
2007		11,188
2008		1,937
	$	186,517

Operating Revenues

Total operating revenues decreased 2.3% in 2001 versus 2000 primarily as a result of a decline in sales volume in the Company’s North American base businesses. Operating revenues increased 7.6% in 2000 versus 1999. Overall, the Company believes that the majority of the changes in operating revenues is due to changes in sales volume rather than changes in sales prices.

Cost of Revenues

Cost of revenues as a percent of revenues increased to 66.6% in 2001 from 64.3% in 2000 due to decreased sales volume in the North American base businesses and lower margins at acquired businesses. Cost of revenues as a percent of revenues decreased in 2000 from 64.4% in 1999.

Selling, Administrative and R&D Expenses

Selling, administrative and research and development expenses as a percent of revenues increased to 18.2% in 2001 versus 17.9% in 2000 as a result of lower sales and higher nonrecurring costs. Selling, administrative and research and development expenses decreased in 2000 from 18.1% in 1999 because of increased revenues and reduced administrative expenses.

Premark Merger-Related Costs

In the fourth quarter of 1999, the Company incurred pretax nonrecurring transaction and compensation costs related to the Premark merger of $81.0 million (after-tax of $70.8 million or $.23 per diluted share).

Amortization of Goodwill and Other Intangibles

Amortization of goodwill and other intangibles decreased to $104.6 million in 2001 versus $118.9 in 2000. The decline is the result of lower asset writedowns in 2001 versus 2000, partially offset by higher amortization in 2001 related to more recent acquisitions. Amortization of goodwill and other intangibles increased in 2000 from $71.5 million in 1999 due to asset writedowns of $30.3 million at certain Premark businesses and increased amortization expense in 2000 related to newer acquisitions.

     In 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). The Company is required to adopt SFAS 142 in 2002. Under SFAS 142, the Company will no longer be required to amortize goodwill and intangible assets with indefinite lives. The estimated pro forma effect of not amortizing goodwill would have increased diluted income per share from continuing operations by $.23, $.20 and $.16 in 2001, 2000 and 1999, respectively. SFAS 142 also requires that the Company test goodwill and intangibles with indefinite lives at least annually for impairment, based on the fair value of the related reporting unit. The Company is currently in the process of determining the 2002 impairment charge as a result of adopting the new standard.

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Interest Expense

Interest expense decreased to $68.1 million in 2001 versus $70.0 million in 2000 primarily due to the repayment of notes payable of $225.0 million in 2000. Interest expense increased in 2000 from $64.6 million in 1999 primarily due to higher commercial paper borrowings in 2000 and a full year of interest expense on the 5.75% notes payable, partially offset by lower interest expense on the notes which were repaid in 2000. Interest costs attributed to the Leasing and Investments segment of $51.7 million in 2001, $58.7 million in 2000 and $57.9 million in 1999 have been classified in the segment’s cost of revenues.

Other Income (Expense)

Other income (expense) was an expense of $7.2 million in 2001 versus an expense of $11.5 million in 2000. The decline is primarily due to lower minority interest expense on less-than-100%-owned subsidiaries and lower losses on currency translation, partially offset by higher losses on the sale of plant and equipment in 2001. Other income (expense) was an expense of $11.5 million in 2000 versus income of $15.5 million in 1999, primarily due to losses on the sale of plant and equipment and on the sale of operations in 2000 versus gains in 1999, and higher minority interest expense on less-than-100%-owned subsidiaries in 2000.

Income Taxes

The effective tax rate was 34.8% in 2001, 35.2% in 2000, and 37.7% in 1999. 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 $636.7 million at December 31, 2001 and $649.9 million at December 31, 2000 as it expects to continue to generate significant taxable income in most tax jurisdictions in future years.

Income from Continuing Operations

Income from continuing operations in 2001 of $802.4 million ($2.62 per diluted share) was 17.2% lower than 2000 income of $969.5 million ($3.18 per diluted share). Income from continuing operations in 2000 was 16.0% higher than 1999 income of $835.9 million ($2.74 per diluted share).

     The Company is anticipating improved economic trends in 2002, with full year income from continuing operations per diluted share expected to be higher than 2001.

Foreign Currency

The strengthening of the U.S. dollar against foreign currencies resulted in decreased operating revenues of $184 million in 2001, $289 million in 2000, and $59 million in 1999, and decreased income from continuing operations by approximately 4 cents per diluted share in 2001, 7 cents per diluted share in 2000, and 1 cent per diluted share in 1999.

Discontinued Operations

In December 2001, the Company’s Board of Directors authorized the divestiture of the Consumer Products segment. Businesses in this segment are located primarily in North America and manufacture household products that are used by consumers, including West Bend small electric appliances, Precor specialty exercise equipment and Florida Tile ceramic tile. The Company intends to dispose of these businesses through sale transactions in 2002, and does not expect to incur a net loss on the disposal of the segment. In 2001, these businesses primarily served the consumer durables (68%) and construction (31%) markets.

Dollars in thousands	2001			2000			1999
Operating revenues	$	405,146		$	471,930		$	492,731
Operating income (loss)		13,767			(14,016	)		15,326
Margin %		3.4	%		(3.0	%)		3.1	%

In 2001, operating revenues decreased 14% primarily due to lower sales volume for the ceramic tile and small appliance businesses. Operating income increased significantly in 2001 as a result of nonrecurring charges in 2000. Operating margins increased due to the effect of 2000 nonrecurring costs and improved operating performance for the ceramic tile operation.

     Operating revenues declined 4% in 2000, as increased sales of fitness equipment were more than offset by lower sales in the small appliance and ceramic tile businesses. Operating income and margins were significantly lower in 2000 compared with 1999 due to lower sales and 2000 nonrecurring costs.

Net income (loss) from discontinued operations was income of $3.2 million ($.01 per diluted share) in 2001, a loss of $11.5 million ($.04 per diluted share) in 2000 and income of $5.2 million ($.02 per diluted share) in 1999.

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Liquidity and Capital Resources

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.

     Summarized cash flow information for the three years ended December 31, 2001 was as follows:

In thousands	2001			2000			1999
Net cash provided by operating activities	$	1,351,026		$	1,115,571		$	1,018,455
Net cash used for investing activities, excluding acquisitions		(105,775	)		(205,689	)		(104,553	)
Free operating cash flow	$	1,245,251		$	909,882		$	913,902
Acquisitions	$	(556,199	)	$	(798,838	)	$	(805,664	)
Cash dividends paid		(249,141	)		(223,009	)		(183,587	)
Net proceeds (payments) of debt		(363,656	)		38,272			245,835
Other		54,674			(7,965	)		(47,059	)
Net increase (decrease) in cash and equivalents	$	130,929		$	(81,658	)	$	123,427

Return on average invested capital for the three years ended December 31, 2001 was as follows:

Dollars in thousands	2001			2000			1999
Operating income after taxes	$	851,579		$	1,022,190		$	865,994
Total debt	$	1,580,588		$	1,974,827		$	1,914,401
Less: Leasing and investments debt		(789,676	)		(808,800	)		(911,971	)
Less: Cash		(282,224	)		(151,295	)		(232,953	)
Adjusted net debt		508,688			1,014,732			769,477
Total stockholders’ equity		6,040,738			5,400,987			4,815,423
Invested capital	$	6,549,426		$	6,415,719		$	5,584,900
Average invested capital	$	6,482,573		$	6,000,310		$	5,198,799
Return on average invested capital		13.1	%		17.0	%		16.7	%

The 390 basis point decline in return on average invested capital (“ROIC”) in 2001 versus 2000 was due primarily to a 16.7% decline in operating income, mainly due to decreases in base business revenues. Also contributing to the lower 2001 ROIC was a 2.1% increase in invested capital, mainly due to acquisitions of $556.2 million. The impact of acquisitions was partially offset by lower capital expenditures and reduced working capital related to base businesses.

     In 2000, ROIC increased by 30 basis points over 1999 due to an 18.0% increase in after-tax operating income, partially offset by a 14.9% increase in invested capital, primarily due to acquisitions of $798.8 million.

     Net working capital at December 31, 2001 and 2000 is summarized as follows:

						Increase
Dollars in thousands		2001		2000		(Decrease)
Current Assets:
	Cash and equivalents	$	282,224	$	151,295	$	130,929
	Trade receivables		1,450,029		1,583,389		(133,360	)
	Inventories		994,156		1,107,734		(113,578	)
	Net current assets of discontinued operations		100,181		102,040		(1,859	)
	Other		336,654		323,690		12,964
			3,163,244		3,268,148		(104,904	)
Current Liabilities:
	Short-term debt		313,447		425,789		(112,342	)
	Accounts payable and accrued expenses		1,104,705		1,221,105		(116,400	)
	Other		100,006		109,803		(9,797	)
			1,518,158		1,756,697		(238,539	)
Net Working Capital		$	1,645,086	$	1,511,451	$	133,635
	Current Ratio		2.08		1.86

     The decrease in trade receivables, inventories, and accounts payable and accrued expenses is the result of lower sales volume in 2001.

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     Total debt at December 31, 2001 and 2000 was as follows:

							Increase
Dollars in thousands	2001			2000			(Decrease)
Short-term debt	$	313,447		$	425,789		$	(112,342	)
Long-term debt		1,267,141			1,549,038			(281,897	)
Total debt	$	1,580,588		$	1,974,827		$	(394,239	)
Total debt to total capitalization		20.7	%		26.8	%
Total debt to total capitalization (excluding Leasing and Investments segment)		11.9	%		18.6	%

Debt decreased during 2001 as a result of higher free operating cash flow and fewer acquisitions.

     The Company has additional debt capacity to fund larger acquisitions. As of December 31, 2001, the Company has unused capacity of $750 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 needed.

     The Company’s contractual cash obligations as of December 31, 2001 were as follows:

											2007 and
In thousands	2002		2003		2004		2005		2006		future years
Total debt excluding nonrecourse notes payable	$	282,381	$	9,704	$	13,777	$	6,065	$	4,126	$	663,998
Minimum lease payments		75,542		59,010		42,667		28,004		18,897		33,486
Affordable housing capital obligations		57,754		47,273		14,194		19,522		13,629		58,402
Maximum venture capital contribution		50,000		35,896		—		—		—		—
Preferred stock of subsidiaries		—		—		—		—		—		60,000
Total contractual cash obligations	$	465,677	$	151,883	$	70,638	$	53,591	$	36,652	$	815,886

The Company has provided guarantees related to the debt of certain unconsolidated affiliates of $21,000,000 at December 31, 2001. The Company had no material commitments for capital expenditures at December 31, 2001.

     The changes to stockholders’ equity during 2001 were as follows:

In thousands
Total stockholders’ equity, December 31, 2000	$	5,400,987
Net income		805,659
Cash dividends declared		(255,735	)
Exercise of stock options, including tax benefits		91,641
Currency translation adjustments		(3,213	)
Other equity changes		1,399
Total stockholders’ equity, December 31, 2001	$	6,040,738

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 and certain mortgage-related investments.

     The Company has no cash flow exposure on its long-term obligations related to changes in market interest rates. The Company primarily enters into long-term debt obligations for general corporate purposes, including the funding of capital expenditures and acquisitions. The Company has not entered into any derivative financial instruments to hedge interest rate risk on these general corporate borrowings.

     The Company has also issued nonrecourse notes in connection with the three commercial mortgage transactions. The holders of these notes have recourse only against certain mortgage-related assets.

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     The mortgage-related assets acquired in the commercial mortgage transactions include 10 and 11 subperforming, variable rate, balloon loans at December 31, 2001 and 2000, respectively. The fair value of these commercial mortgage loans fluctuates as market interest rates change. The Company has entered into swap and other related agreements to reduce its credit and interest rate risks relative to the commercial mortgage loans and other mortgage-related assets. See the Leasing and Investments section for additional details regarding the net swap receivables.

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

		General Corporate Debt						Mortgage-Related Investments and Related Nonrecourse Debt
		5.75%			6.875%
		Notes Due			Notes Due			Commercial				6.59%			7.00%			6.44%
		March 1,			November 15,			Mortgage		Net Swap		Nonrecourse			Nonrecourse			Nonrecourse
In thousands		2009			2008			Loans		Receivables		Note			Note			Note
As of December 31, 2001:
Estimated cash inflow (outflow) by year of principal maturity—
	2002	$	—		$	—		$	29,834	$	53,667	$	(16,000	)	$	(13,979	)	$	(1,087	)
	2003		—			—			98		36,117		(16,000	)		(23,431	)		(2,174	)
	2004		—			—			199		19,691		(16,000	)		(23,431	)		(2,174	)
	2005		—			—			152,588		46,350		(121,500	)		(23,431	)		(39,139	)
	2006		—			—			—		88,398		—			(129,325	)		(78,822	)
	2007 and thereafter		(500,000	)		(150,000	)		97,924		25,242		—			—			(94,044	)
	Total		(500,000	)		(150,000	)		280,643		269,465		(169,500	)		(213,597	)		(217,440	)
Estimated fair value			(500,391	)		(157,031	)		259,422		268,955		(183,314	)		(231,851	)		(238,065	)
Carrying value			(500,000	)		(150,000	)		174,285		268,955		(169,500	)		(213,597	)		(217,440	)
As of December 31, 2000:
Total estimated cash inflow (outflow)		$	(500,000	)	$	(150,000	)	$	308,629	$	320,502	$	(185,500	)	$	(244,884	)	$	(217,440	)
Estimated fair value			(479,219	)		(147,188	)		289,218		316,620		(192,747	)		(252,873	)		(223,823	)
Carrying value			(500,000	)		(150,000	)		199,578		316,620		(185,500	)		(244,884	)		(217,440	)

Foreign Currency Risk

The Company operates in the United States and 42 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 which are subject to foreign currency risk at December 31, 2001 or 2000.

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Critical Accounting Policies

The Company has three 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. Each of the Company’s 600 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:

Usage Classification	Criteria	Reserve %
Active	Quantity on hand is less than prior 6 months’ usage	0%
Slow-moving	Some usage in last 12 months, but quantity on hand exceeds prior 6 months’ usage	50%
Obsolete	No usage in the last 12 months	90%

In addition, for the majority of the 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 effect of inflation.

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 rules.

     The Company believes that the above critical policies have resulted in past actual results approximating the estimated recorded 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 adequacy of internally generated funds, the recoverability of the Company’s investment in mortgage-related assets, the meeting of dividend payout objectives, the profitable divestiture of the Consumer Products segment in 2002, Premark’s target operating margins, the availability of additional financing and the Company’s 2002 forecasts. These statements are subject to certain risks, uncertainties, and other factors, which could cause actual results to differ materially from those anticipated, including, without limitation, the risks described herein. Important factors that may influence future results include (1) a further downturn in the construction, automotive, general industrial, food retail and service, or real estate markets, (2) further deterioration in global and domestic business and economic conditions, particularly in North America, Europe and Australia, (3) an interruption in, or reduction in, introducing new products into the Company’s product line, (4) an unfavorable environment for making acquisitions or dispositions, domestic and international, including adverse accounting or regulatory requirements and market values of candidates, and (5) uncertainties arising from the aftermath of the September 11th tragedy.

PAGE 33

›     STATEMENT OF INCOME
Illinois Tool Works Inc. and Subsidiaries

		For the Years Ended December 31
In thousands except for per share amounts		2001			2000			1999
Operating Revenues		$	9,292,791		$	9,511,647		$	8,840,454
	Cost of revenues		6,191,253			6,111,392			5,694,713
	Selling, administrative, and research and development expenses		1,690,850			1,703,897			1,603,143
	Amortization of goodwill and other intangible assets		104,585			118,905			71,540
	Premark merger-related costs		—			—			81,020
Operating Income			1,306,103			1,577,453			1,390,038
	Interest expense		(68,051	)		(69,995	)		(64,565	)
	Other income (expense)		(7,203	)		(11,456	)		15,467
Income from Continuing Operations Before Income Taxes			1,230,849			1,496,002			1,340,940
	Income taxes		428,400			526,551			505,045
Income from Continuing Operations			802,449			969,451			835,895
Income (Loss) from Discontinued Operations			3,210			(11,471	)		5,217
Net Income		$	805,659		$	957,980		$	841,112
Income Per Share from Continuing Operations:
	Basic	$	2.64		$	3.21		$	2.78
	Diluted	$	2.62		$	3.18		$	2.74
Income (Loss) Per Share from Discontinued Operations:
	Basic	$	0.01		$	(0.04	)	$	0.02
	Diluted	$	0.01		$	(0.04	)	$	0.02
Net Income Per Share:
	Basic	$	2.65		$	3.18		$	2.80
	Diluted	$	2.63		$	3.15		$	2.76

›     STATEMENT OF INCOME REINVESTED IN THE BUSINESS
Illinois Tool Works Inc. and Subsidiaries

	For the Years Ended December 31
In thousands	2001			2000			1999
Balance, Beginning of Year	$	5,214,098		$	4,485,515		$	3,864,024
Net income		805,659			957,980			841,112
Cash dividends declared		(255,735	)		(229,397	)		(193,981	)
Adjustment to prior pooling-of-interests transaction		1,399			—			—
Adjustment to conform year-ends of Premark’s international subsidiaries		—			—			2,323
Treasury stock issued for incentive plans		—			—			(27,963	)
Balance, End of Year	$	5,765,421		$	5,214,098		$	4,485,515

›     STATEMENT OF COMPREHENSIVE INCOME
Illinois Tool Works Inc. and Subsidiaries

		For the Years Ended December 31
In thousands		2001			2000			1999
Net Income		$	805,659		$	957,980		$	841,112
Other comprehensive income:
	Foreign currency translation adjustments		(5,109	)		(203,561	)		(77,696	)
	Income tax related to foreign currency translation adjustments		1,896			(6,624	)		1,803
Comprehensive income		$	802,446		$	747,795		$	765,219

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

PAGE 34

›     STATEMENT OF FINANCIAL POSITION

Illinois Tool Works Inc. and Subsidiaries

			December 31
In thousands except shares			2001			2000
Assets Current Assets:
	Cash and equivalents		$	282,224		$	151,295
	Trade receivables			1,450,029			1,583,389
	Inventories			994,156			1,107,734
	Deferred income taxes			197,428			175,892
	Prepaid expenses and other current assets			139,226			147,798
	Net current assets of discontinued operations			100,181			102,040
		Total current assets		3,163,244			3,268,148
Plant and Equipment:
	Land			114,649			111,157
	Buildings and improvements			960,232			932,710
	Machinery and equipment			2,800,341			2,625,361
	Equipment leased to others			123,422			118,570
	Construction in progress			105,316			101,845
				4,103,960			3,889,643
	Accumulated depreciation			(2,470,270	)		(2,259,760	)
		Net plant and equipment		1,633,690			1,629,883
Investments				1,278,285			1,170,392
Goodwill and Other Intangibles				2,738,694			2,413,248
Deferred Income Taxes				439,278			474,001
Other Assets				459,429			418,461
Net Noncurrent Assets of Discontinued Operations				109,729			140,714
			$	9,822,349		$	9,514,847
Liabilities and Stockholders’ Equity
Current Liabilities:
	Short-term debt		$	313,447		$	425,789
	Accounts payable			367,249			438,436
	Accrued expenses			737,456			782,669
	Cash dividends payable			67,084			60,490
	Income taxes payable			32,922			49,313
		Total current liabilities		1,518,158			1,756,697
Noncurrent Liabilities:
	Long-term debt			1,267,141			1,549,038
	Other			996,312			808,125
		Total noncurrent liabilities		2,263,453			2,357,163
Stockholders’ Equity:
	Common stock: Issued—305,169,742 shares in 2001 and 302,709,094 shares in 2000			3,052			3,027
	Additional paid-in-capital			675,856			584,357
	Income reinvested in the business			5,765,421			5,214,098
	Common stock held in treasury			(1,666	)		(1,783	)
	Cumulative translation adjustment			(401,925	)		(398,712	)
		Total stockholders’ equity		6,040,738			5,400,987
			$	9,822,349		$	9,514,847

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

PAGE 35

›     STATEMENT OF CASH FLOWS

Illinois Tool Works Inc. and Subsidiaries

				For the Years Ended December 31
In thousands				2001			2000			1999
Cash Provided by (Used for) Operating Activities:
	Net income			$	805,659		$	957,980		$	841,112
	Adjustments to reconcile net income to cash provided by operating activities:
		(Income) loss from discontinued operations			(3,210	)		11,471			(5,217	)
		Depreciation and amortization			386,308			391,565			321,659
		Change in deferred income taxes			38,612			(16,238	)		100,770
		Provision for uncollectible accounts			21,862			10,198			17,362
		(Gain) loss on sale of plant and equipment			11,106			7,479			(711	)
		Income from investments			(139,842	)		(151,692	)		(153,593	)
		Non-cash interest on nonrecourse notes payable			42,885			44,871			46,398
		(Gain) loss on sale of operations and affiliates			4,389			6,014			(828	)
		Other non-cash items, net			(7,479	)		(7,704	)		(9,678	)
			Cash provided by operating activities		1,160,290			1,253,944			1,157,274
Change in assets and liabilities:
	(Increase) decrease in— Trade receivables				156,794			47,622			(107,292	)
		Inventories			158,502			(13,493	)		8,638
		Prepaid expenses and other assets			(18,757	)		(50,975	)		(35,675	)
		Net assets of discontinued operations			36,054			31,410			22,853
	Increase (decrease) in— Accounts payable				(105,758	)		(69,522	)		2,683
		Accrued expenses and other liabilities			(62,401	)		(94,455	)		650
		Income taxes payable			26,288			11,209			(29,157	)
	Other, net				14			(169	)		(1,519	)
		Net cash provided by operating activities			1,351,026			1,115,571			1,018,455
Cash Provided by (Used for) Investing Activities:
	Acquisition of businesses (excluding cash and equivalents) and additional interest in affiliates				(556,199	)		(798,838	)		(805,664	)
	Additions to plant and equipment				(256,562	)		(305,954	)		(317,069	)
	Purchase of investments				(101,329	)		(14,651	)		(38,863	)
	Proceeds from investments				210,669			84,102			81,064
	Proceeds from sale of plant and equipment				20,000			28,595			25,653
	Proceeds from sale of operations and affiliates				14,015			7,758			8,679
	Sales (purchases) of short-term investments				3,844			(7,409	)		132,986
	Other, net				3,588			1,870			2,997
		Net cash used for investing activities			(661,974	)		(1,004,527	)		(910,217	)
Cash Provided by (Used for) Financing Activities:
	Cash dividends paid				(249,141	)		(223,009	)		(183,587	)
	Issuance of common stock				54,699			25,410			21,887
	Net proceeds (repayments) of short-term debt				(351,743	)		302,076			(214,465	)
	Proceeds from long-term debt				4,122			1,125			499,681
	Repayments of long-term debt				(16,035	)		(264,929	)		(39,381	)
	Repurchase of treasury stock				—			—			(44,995	)
	Other, net				1,330			(493	)		(15,567	)
		Net cash provided by (used for) financing activities			(556,768	)		(159,820	)		23,573
Effect of Exchange Rate Changes on Cash and Equivalents					(1,355	)		(32,882	)		(8,384	)
Cash and Equivalents:
	Increase (decrease) during the year				130,929			(81,658	)		123,427
	Beginning of year				151,295			232,953			109,526
	End of year			$	282,224		$	151,295		$	232,953
Cash Paid During the Year for Interest				$	79,541		$	92,062		$	69,977
Cash Paid During the Year for Income Taxes				$	338,864		$	507,783		$	414,200
Liabilities Assumed from Acquisitions				$	96,963		$	282,891		$	278,711

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

PAGE 36

›     REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

We have audited the accompanying statements of financial position of Illinois Tool Works Inc. (a Delaware corporation) and Subsidiaries as of December 31, 2001 and 2000, and the related statements of income, income reinvested in the business, cash flows and comprehensive income for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Premark International, Inc., as of and for the year ended December 31, 1999. Such statements are included in the consolidated financial statements of Illinois Tool Works Inc. and Subsidiaries and represent 27% of consolidated revenues from continuing operations for the year ended December 31, 1999. The financial statements of Premark International, Inc. prior to restatement for discontinued operations were audited by other auditors whose report has been furnished to us and our opinion, insofar as it relates to amounts included for Premark International, Inc., for 1999 is based solely upon the report of the other auditors.

     We conducted our audits in accordance with auditing standards generally accepted in the 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors for 1999 provide a reasonable basis for our opinion.

     In our opinion, based on our audit and the report of the other auditors for 1999, the financial statements referred to above present fairly, in all material respects, the financial position of Illinois Tool Works Inc. and Subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.

Chicago, Illinois
January 28, 2002

PAGE 37

›     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 retail and service, and general industrial markets.

     Significant accounting principles and policies of the Company are highlighted in italics. Certain reclassifications of prior years’ data have been made to conform to current year reporting. All prior year amounts and share data in the financial statements and notes to financial statements have been restated to reflect the anticipated divestiture of the Consumer Products segment (see Discontinued Operations note below).

     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 most significant estimates included in the preparation of the financial statements are related to investments, income taxes, accounts receivable, inventories, pensions, postretirement benefits, product liability and environmental matters.

     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 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, its experience in contesting, litigating and settling other similar matters, and any related insurance coverage. The Company does not currently anticipate the amount of any ultimate liability with respect to these matters will materially affect the Company’s financial position or results of operations.

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

     Foreign subsidiaries’ assets and liabilities are translated to U.S. dollars at end-of-period exchange rates. Revenues and expenses page 38 are translated at average rates for the period. Translation adjustments are not included in income but are reported as a separate component of stockholders’ equity.

Premark Merger—In November 1999, a wholly owned subsidiary of ITW merged with Premark International, Inc. (“Premark”), a commercial manufacturer of 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 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 and 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.

     In the fourth quarter of 1999, the Company incurred pretax nonrecurring transaction and compensation costs related to the Premark merger of $81,020,000 (after-tax of $70,792,000 or $.23 per diluted share).

Discontinued Operations—In December 2001, the Company’s Board of Directors authorized the divestiture of the Consumer Products segment. The segment is comprised of the following businesses: Precor specialty exercise equipment, West Bend appliances and premium cookware, and Florida Tile ceramic tile. The consolidated financial statements for all periods have been restated to present these businesses as discontinued operations in accordance with Accounting Principles Board Opinion No. 30. The Company intends to dispose of these businesses through sale transactions in 2002, and does not expect to incur a loss on their disposal.

     Results of the discontinued operations for the years ended December 31, 2001, 2000 and 1999 were as follows:

In thousands		2001		2000			1999
Operating revenues		$	405,146	$	471,930		$	492,731
Operating income		$	13,767	$	(14,016	)	$	15,326
Income (loss) before income taxes		$	8,710	$	(17,822	)	$	11,772
	Income taxes		5,500		(6,351	)		6,555
Net income (loss) from discontinued operations		$	3,210	$	(11,471	)	$	5,217

The Company has allocated general corporate interest expense to discontinued operations based on proportional net assets excluding debt. Interest expense allocated to discontinued operations was $1,876,000 in 2001, $2,382,000 in 2000 and $2,945,000 in 1999.

PAGE 38

     The net assets of the discontinued operations as of December 31, 2001 and 2000 were as follows:

In thousands	2001			2000
Accounts receivable	$	64,897		$	71,243
Inventory		71,481			73,651
Accounts payable		(14,258	)		(16,981	)
Accrued liabilities		(40,686	)		(43,438	)
Other, net		18,747			17,565
Net current assets of discontinued operations	$	100,181		$	102,040
Net plant and equipment	$	79,730		$	92,641
Net goodwill and intangibles		68,200			70,634
Other, net		(38,201	)		(22,561	)
Net noncurrent assets of discontinued operations	$	109,729		$	140,714

Acquisitions—Summarized information related to acquisitions during 2001, 2000 and 1999 was as follows:

In thousands except number of acquisitions	2001		2000		1999
Number of acquisitions		29		45		31
Net cash paid	$	556,199	$	798,838	$	805,664
Goodwill and other intangibles recorded	$	412,180	$	635,022	$	501,766

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 at the time of product shipment. No single customer accounted for more than 10% of consolidated revenues in 2001, 2000 or 1999. Export sales from U.S. operations to third parties were less than 10% of total operating revenues during those years.

Research and Development Expenses are recorded as expense in the year incurred. These costs were $102,288,000 in 2001, $106,118,000 in 2000 and $104,882,000 in 1999.

Rental Expense was $92,300,000 in 2001, $85,336,000 in 2000 and $82,601,000 in 1999. Future minimum lease payments for the years ended December 31 are as follows:

In thousands
2002	$	75,542
2003		59,010
2004		42,667
2005		28,004
2006		18,897
2007 and future years		33,486
	$	257,606

Advertising Expenses are recorded as expense in the year incurred. These costs were approximately $65,875,000 in 2001, $75,799,000 in 2000 and $84,364,000 in 1999.

Other Income (Expense) consisted of the following:

In thousands	2001			2000			1999
Interest income	$	16,176		$	15,783		$	17,374
Gain (loss) on sale of operations and affiliates		(4,389	)		(6,014	)		828
Gain (loss) on sale of plant and equipment		(11,106	)		(7,479	)		711
Loss on foreign currency translation		(5,282	)		(8,065	)		(5,258	)
Other, net		(2,602	)		(5,681	)		1,812
	$	(7,203	)	$	(11,456	)	$	15,467

PAGE 39

Income Taxes—The Company utilizes the 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		2001			2000			1999
U.S. federal income taxes:
	Current	$	245,733		$	359,108		$	311,752
	Deferred		64,460			30,446			47,684
			310,193			389,554			359,436
Foreign income taxes:
	Current		115,821			122,241			77,283
	Deferred		(17,103	)		(20,460	)		11,557
			98,718			101,781			88,840
State income taxes:
	Current		10,987			26,468			49,163
	Deferred		8,502			8,748			7,606
			19,489			35,216			56,769
		$	428,400		$	526,551		$	505,045

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

In thousands	2001		2000		1999
Domestic	$	922,723	$	1,243,474	$	983,224
Foreign		308,126		252,528		357,716
	$	1,230,849	$	1,496,002	$	1,340,940

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

	2001			2000			1999
U.S. federal statutory tax rate		35.0	%		35.0	%		35.0	%
State income taxes, net of U.S. federal tax benefit		1.3			2.0			2.8
Nondeductible goodwill amortization		1.5			1.2			1.1
Differences between U.S. federal statutory and foreign tax rates		(.6	)		.4			—
Other, net		(2.4	)		(3.4	)		(1.2	)
Effective tax rate		34.8	%		35.2	%		37.7	%

Deferred U.S. federal income taxes and foreign withholding taxes have not been provided on undistributed earnings of international subsidiaries of $1,470,000,000 as of December 31, 2001, as the earnings are considered permanently invested. Upon distribution of these earnings to the U.S. 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.

     The components of deferred income tax assets and liabilities at December 31, 2001 and 2000 were as follows:

	2001						2000
In thousands	Asset			Liability			Asset			Liability
Acquisition asset basis differences	$	58,400		$	(25,571	)	$	40,661		$	(22,768	)
Inventory reserves, capitalized tax cost and LIFO inventory		57,115			(19,286	)		41,980			(15,447	)
Investments		216,625			(51,049	)		261,575			(24,252	)
Plant and equipment		21,722			(50,125	)		13,643			(64,942	)
Accrued expenses and reserves		128,611			—			107,803			—
Employee benefit accruals		203,469			—			184,877			—
Foreign tax credit carryforwards		35,438			—			75,466			—
Net operating loss carryforwards		45,978			—			55,102			—
Allowances for uncollectible accounts		13,290			—			12,752			—
Prepaid pension assets		—			(42,189	)		—			(36,960	)
Other		74,324			(15,278	)		61,583			(18,342	)
Gross deferred income tax assets (liabilities)		854,972			(203,498	)		855,442			(182,711	)
Valuation allowances		(14,768	)		—			(22,838	)		—
Total deferred income tax assets (liabilities)	$	840,204		$	(203,498	)	$	832,604		$	(182,711	)

PAGE 40

The valuation allowances recorded at December 31, 2001 and 2000 relate primarily to net operating loss carryforwards. No additional valuations allowances have been recorded on the net deferred income tax assets of $636,706,000 and $649,893,000 at December 31, 2001 and 2000, respectively, as the Company expects to continue to generate significant taxable income in most tax jurisdictions in future years.

     At December 31, 2001, the Company had foreign tax credit and net operating loss carryforwards available to offset future taxable income in the U.S. and certain foreign jurisdictions, which expire as follows:

	Foreign Tax Credit		Gross Net Operating
In thousands	Carryforwards		Loss Carryforwards
2002	$	—	$	2,166
2003		1,616		1,176
2004		8,392		2,081
2005		25,430		7,281
2006		—		31,581
2007		—		1,464
2008		—		2,267
2009		—		538
2010		—		1,493
2011		—		847
2012		—		2,360
2013		—		2,123
2014		—		2,987
2015		—		3,983
2016		—		4,919
Do not expire		—		79,969
	$	35,438	$	147,235

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. Dilutive shares reflect the potential additional shares that would be outstanding if the dilutive stock options outstanding were exercised during the period. The computation of net income per share was as follows:

In thousands except per share data		2001		2000		1999
Income from continuing operations		$	802,449	$	969,451	$	835,895
Income from continuing operations per share—Basic:
	Weighted average common shares		304,112		301,573		300,158
	Income from continuing operations per share—Basic	$	2.64	$	3.21	$	2.78
Income from continuing operations per share—Diluted:
	Weighted average common shares		304,112		301,573		300,158
	Effect of dilutive stock options		2,194		2,841		4,491
	Weighted average common shares assuming dilution		306,306		304,414		304,649
	Income from continuing operations per share—Diluted	$	2.62	$	3.18	$	2.74

PAGE 41

Options which had exercise prices greater than the average market price of the common shares were not included in the computation of diluted income from continuing operations. The antidilutive options outstanding as of December 31, 2001 and 2000 were as follows:

	2001		2000
Shares issuable under antidilutive options		1,289,983		1,355,212
Average exercise price per share		$65.50		$65.49

The majority of these options will expire in 2009. There were no significant options outstanding at December 31, 1999, that had an exercise price greater than the average market price.

Cash and Equivalents included interest-bearing deposits of $95,305,000 at December 31, 2001, and $75,555,000 at December 31, 2000. Interest-bearing deposits have maturities of 90 days or less and are stated at cost, which approximates market.

Trade Receivables as of December 31, 2001 and 2000 were net of allowances for uncollectible accounts of $61,065,000 and $52,274,000, respectively.

Inventories at December 31, 2001 and 2000 were as follows:

In thousands	2001		2000
Raw material	$	287,067	$	333,147
Work-in-process		101,418		128,336
Finished goods		605,671		646,251
	$	994,156	$	1,107,734

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 36% and 40% of total inventories as of December 31, 2001 and 2000, respectively. The first-in, first-out (“FIFO”) method is used for all other inventories. Under the FIFO method, which approximates current cost, total inventories would have been approximately $95,457,000 and $92,360,000 higher than reported at December 31, 2001 and 2000, 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 $281,723,000 in 2001 compared with $272,660,000 in 2000 and $250,119,000 in 1999 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, 2001 and 2000 consisted of the following:

In thousands	2001		2000
Commercial mortgage loans	$	174,285	$	199,578
Commercial real estate		481,648		431,763
Net swap receivables		268,955		316,620
Receivable from mortgage servicer		34,179		49,987
Annuity contract		7,159		6,550
U.S. Treasury security		6,254		5,753
Prepaid forward contract		23,398		22,297
Leveraged, direct financing and sales-type leases of equipment		82,864		56,118
Properties held for sale		19,921		26,150
Property developments		32,352		45,014
Affordable housing limited partnerships		129,714		3,629
Venture capital limited partnership		13,071		—
Other		4,485		6,933
	$	1,278,285	$	1,170,392

PAGE 42

In 1995, 1996 and 1997, the Company acquired pools of mortgage-related assets in exchange for nonrecourse notes payable of $739,705,000, preferred stock of subsidiaries of $60,000,000 and cash of $240,000,000. The mortgage-related assets acquired in these transactions are located throughout the U.S. and include 10 and 11 subperforming, variable rate, balloon loans at December 31, 2001 and 2000, respectively, and 41 foreclosed properties at both December 31, 2001 and 2000. In conjunction with these transactions, the Company 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 $26,000,000 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 Company’s nonrecourse notes payable. In addition, in the event that the pools of mortgage-related assets do not generate income of $26,000,000 a year, the Company has a collateral right against the cash flow generated by three separate pools of mortgage-related assets (owned by third parties in which the Company has minimal interests) which have a total fair value of approximately $2,100,000,000 at December 31, 2001. The Company entered into the swaps and other related agreements in order to reduce its credit and interest rate risks relative to the mortgage-related assets.

     The Company expects to recover its net investment in the mortgage-related assets of $371,943,000 at December 31, 2001, (net of the related nonrecourse notes payable) through its expected net cash flow of $26,000,000 per year for the remainder of the ten-year periods and its estimated $455,381,000 share of the total proceeds from disposition of the mortgage-related assets and principal repayments.

     The Company evaluates whether the commercial mortgage loans have been impaired by reviewing the discounted estimated future cash flows of the loans versus the carrying value of the loans. If the carrying value exceeds the discounted cash flows, an impairment loss is recorded through income. At December 31, 2001 and 2000, the impairment loss allowance was $11,993,000 and $4,576,000, respectively. The estimated fair value of the commercial mortgage loans, based on discounted future cash flows, exceeds the carrying value at December 31, 2001 and 2000 by $85,137,000 and $89,640,000, respectively. The net swap receivables are recorded at fair value, based on the estimated future cash flows discounted at current market interest rates. Any adjustments to the carrying value of the net swap receivables due to changes in expected future cash flows or interest rates are recorded through income.

     The Company’s investment in leveraged and direct financing leases relates to aircraft and other equipment used in the transportation industry. The components of the investment in leveraged, direct financing and sales-type leases at December 31, 2001 and 2000 were as shown below:

In thousands	2001			2000
Gross lease contracts receivable	$	222,279		$	70,523
Nonrecourse debt		(159,287	)		(14,683	)
Estimated residual value of leased assets		47,822			19,073
Unearned and deferred income		(27,950	)		(18,795	)
Investment in leveraged, direct financing and sales-type leases		82,864			56,118
Deferred income taxes related to leveraged and direct financing leases		(22,616	)		(23,781	)
Net investment in leveraged, direct financing and sales-type leases	$	60,248		$	32,337

The components of the income from leveraged, direct financing and sales-type leases for the years ended December 31, 2001, 2000 and 1999 were as shown below:

In thousands	2001			2000			1999
Leveraged lease income before income taxes	$	3,941		$	3,695		$	3,964
Investment tax credits recognized		430			652			1,353
Income tax expense		(1,471	)		(1,124	)		(1,614	)
	$	2,900		$	3,223		$	3,703

In 2001, the Company entered into a leveraged lease of a Boeing 777 aircraft with a major commercial airline. The Company’s cash investment in this leveraged lease was $29,198,000.

     The Company entered into a venture capital limited partnership in 2001, which will invest 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 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.

PAGE 43

     The Company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”) in 2001. SFAS 133 requires that an entity recognize certain derivatives in the Statement of Financial Position and measure those instruments at fair value. The adoption of SFAS 133 did not have any effect on the Company’s financial position or results of operations.

Goodwill and Other Intangibles—Goodwill represents the excess cost over fair value of the net assets of purchased businesses. Goodwill has been amortized on a straight-line basis over 15 to 40 years. Goodwill amortization expense was $80,077,000 in 2001, $86,633,000 in 2000 and $55,168,000 in 1999. Accumulated goodwill amortization was $358,508,000 and $281,498,000 at December 31, 2001 and 2000, respectively.

     Other intangible assets represent patents, brands, noncompete agreements and other assets acquired with purchased businesses and are being amortized primarily on a straight-line basis over five to 17 years. Amortization expense was $24,508,000 in 2001, $32,272,000 in 2000 and $16,372,000 in 1999. Accumulated amortization was $114,367,000 and $96,071,000 at December 31, 2001 and 2000, respectively.

     The Company assesses the recoverability of unamortized goodwill, other intangible assets, and other long-lived assets whenever events or changes in circumstances indicate that such assets may be impaired by reviewing the sufficiency of future undiscounted cash flows of the related entity to cover the amortization or depreciation over the remaining useful life of the asset. For any long-lived assets which are determined to be impaired, a loss is recognized for the difference between the carrying value and the fair value for assets to be held or the net realizable value for assets to be disposed of. Included in amortization expense for 2000 are impairment charges of $30,300,000, primarily related to a laminate business in Europe which was acquired by Premark in 1998. Estimated future cash flows related to this operation indicated that the carrying value of its goodwill and intangible assets would not be realized. No significant impairment charges were recorded in 2001 or 1999.

     In 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). The Company is required to adopt SFAS 142 in 2002. Under SFAS 142, the Company will no longer be required to amortize goodwill and intangible assets with indefinite lives. The estimated pro forma effect of not amortizing goodwill would have increased diluted income per share from continuing operations by $.23, $.20 and $.16 in 2001, 2000 and 1999, respectively. SFAS 142 also requires that the Company test goodwill and intangibles with indefinite lives at least annually for impairment, based on the fair value of the related reporting unit. The Company is currently in the process of determining the 2002 impairment charge as a result of adopting the new standard.

Other Assets as of December 31, 2001 and 2000 consisted of the following:

In thousands	2001		2000
Cash surrender value of life insurance policies	$	172,468	$	157,713
Prepaid pension assets		146,728		124,820
Investment in unconsolidated affiliates		41,802		39,889
Other		98,431		96,039
	$	459,429	$	418,461

Retirement Plans and Postretirement Benefits—Summarized information regarding the Company’s significant defined benefit pen- sion and postretirement health care and life insurance benefit plans related to both continuing and discontinued operations was as follows:

			Pension									Other Postretirement Benefits
In thousands			2001			2000			1999			2001		2000			1999
Components of net periodic benefit cost:
		Service cost	$	57,841		$	43,981		$	50,105		$	13,982	$	10,628		$	5,954
		Interest cost		73,924			73,060			72,125			27,808		25,254			17,446
		Expected return on plan assets		(137,374	)		(123,505	)		(102,568	)		—		—			—
	Amortization of prior service (benefit) cost			(4,125	)		(1,896	)		6,174			6,675		4,563			(574	)
	Amortization of actuarial (gain) loss			(4,041	)		(2,555	)		1,147			—		(199	)		(21	)
	Amortization of transition amount			(986	)		(6,692	)		(6,813	)		—		—			—
	Net periodic benefit cost (income)		$	(14,761	)	$	(17,607	)	$	20,170		$	48,465	$	40,246		$	22,805

PAGE 44

			Pension						Other Postretirement Benefits
In thousands			2001			2000			2001			2000
Change in benefit obligation as of September 30:
	Benefit obligation at beginning of period		$	1,094,025		$	1,071,707		$	384,035		$	348,468
	Service cost			57,841			43,981			13,982			10,628
	Interest cost			73,924			73,060			27,808			25,254
	Plan participant contributions			1,541			2,284			7,053			4,044
	Amendments			2,826			(25,178	)		—			31,683
	Actuarial (gain) loss			27,699			16,473			28,007			(6,372	)
	Acquisitions and divestitures			—			8,101			—			—
	Benefits paid			(91,123	)		(72,993	)		(34,371	)		(29,670	)
	Liabilities (to) from other plans			(8,832	)		5,767			—			—
	Foreign currency translation			(569	)		(29,177	)		—			—
	Benefit obligation at end of period		$	1,157,332		$	1,094,025		$	426,514		$	384,035
Change in plan assets as of September 30:
	Fair value of plan assets at beginning of period		$	1,508,828		$	1,292,115		$	—		$	—
	Actual return on plan assets			(258,629	)		272,920			—			—
	Acquisitions and divestitures			—			6,266			—			—
	Company contributions			10,836			25,749			27,318			25,626
	Plan participant contributions			1,541			2,284			7,053			4,044
	Benefits paid			(91,123	)		(72,993	)		(34,371	)		(29,670	)
	Assets (to) from other plans			(12,174	)		6,757			—			—
	Foreign currency translation			(1,876	)		(24,270	)		—			—
	Fair value of plan assets at end of period		$	1,157,403		$	1,508,828		$	—		$	—
Net prepaid (accrued) benefit cost as of September 30:
	Funded status		$	71		$	414,803		$	(426,514	)	$	(384,035	)
	Unrecognized net actuarial (gain) loss			118,032			(307,451	)		16,912			(11,095	)
	Unrecognized prior service (benefit) cost			(41,457	)		(49,167	)		78,503			85,178
	Unrecognized net transition amount			(2,242	)		(3,376	)		—			—
	Net prepaid (accrued) benefit cost		$	74,404		$	54,809		$	(331,099	)	$	(309,952	)
Plans with accumulated benefit obligation in excess of plan assets as of September 30:
		Projected benefit obligation	$	198,028		$	81,849
		Accumulated benefit obligation	$	190,935		$	76,980
		Fair value of plan assets	$	84,135		$	2,196

		Pension									Other Postretirement Benefits
		2001			2000			1999			2001			2000			1999
Weighted average assumptions:
	Discount rate		7.05	%		7.19	%		7.19	%		7.25	%		7.50	%		7.50	%
	Expected return on plan assets		10.51	%		10.55	%		9.68	%		—			—			—
	Rate of compensation increases		4.09	%		4.05	%		4.24	%		—			—			—
	Current health care cost trend rate		—			—			—			12.00	%		5.00	%		5.43	%
	Ultimate health care cost trend rate in 2008		—			—			—			5.00	%		5.00	%		5.00	%

In 2000, the Company amended the primary postretirement health care plan to extend benefits to substantially all domestic employees, which increased the other postretirement benefit obligation, and amended the primary pension plan to change the benefit formula, which decreased the pension obligation.

PAGE 45

     Assumed health care cost trend rates have an effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:

	1-Percentage-Point Increase			1-Percentage-Point Decrease
Effect on total of service and interest cost components		1.96	%		(1.59	%)
Effect on postretirement benefit obligation		2.81	%		(2.29	%)

In addition to the above pension benefits, the Company sponsors defined contribution retirement plans covering the majority of domestic employees. The Company’s contributions to these plans were $24,811,000 in 2001, $26,236,000 in 2000 and $27,596,000 in 1999.

Short-Term Debt as of December 31, 2001 and 2000 consisted of the following:

In thousands	2001		2000
Bank overdrafts	$	59,016	$	79,679
Commercial paper		82,898		196,271
Australian facilities		56,065		67,988
United Kingdom facilities		52,447		—
Current maturities of long-term debt		43,434		55,285
Other borrowings by foreign subsidiaries		19,587		26,566
	$	313,447	$	425,789

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 1.8% at December 31, 2001, and 6.6% at December 31, 2000.

     The Company had two Australian short-term credit facilities with combined maximum available borrowings of Australian $135,000,000 as of December 31, 2001. The facilities had a weighted average interest rate of 4.6% at December 31, 2001 and 6.5% at December 31, 2000.

     The Company had three United Kingdom short-term credit facilities with combined maximum available borrowings of 41,800,000 British pounds. The facilities had a weighted average interest rate of 4.3% at December 31, 2001.

     The weighted average interest rate on other foreign borrowings was 3.7% at December 31, 2001 and 5.1% at December 31, 2000.

     In 1999, the Company entered into a $400,000,000 Line of Credit Agreement. In 2001, the Company extended the termination date of the Line of Credit from June 22, 2001 to June 21, 2002. No amounts were outstanding under this facility at December 31, 2001.

     During 2001, the Company issued extendible commercial notes (“ECN’s”). ECN’s are unsecured notes issued at a discount. The notes may be issued with a maximum initial maturity date of 90 days, but may be extended to a final maturity date of 390 days at the Company’s discretion. The Company’s maximum ECN available borrowings are $150,000,000. At December 31, 2001, there were no ECN’s outstanding.

Accrued Expenses as of December 31, 2001 and 2000 consisted of accruals for:

In thousands	2001		2000
Compensation and employee benefits	$	253,875	$	266,219
Warranties and accrued maintenance service agreements		91,821		80,906
Taxes other than income		35,912		48,641
Current portion of deferred investment income		42,211		42,211
Other		313,637		344,692
	$	737,456	$	782,669

PAGE 46

Long-Term Debt at December 31, 2001 and 2000 consisted of the following:

In thousands	2001			2000
6.875% notes due November 15, 2008	$	150,000		$	150,000
5.75% notes due March 1, 2009		500,000			500,000
6.59% nonrecourse note due semiannually through December 31, 2005		169,500			185,500
7.00% nonrecourse note due semiannually through November 30, 2006		213,597			244,884
6.44% nonrecourse note due semiannually from August 31, 2002 through February 29, 2008		217,440			217,440
Commercial paper		—			250,000
Other borrowings		60,038			56,499
		1,310,575			1,604,323
Current maturities		(43,434	)		(55,285	)
	$	1,267,141		$	1,549,038

In 1998, the Company issued $150,000,000 of 6.875% notes due November 15, 2008, 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 $7,031,000 at December 31, 2001, and was below the carrying value by approximately $2,812,000 at December 31, 2000.

     In 1999, the Company issued $500,000,000 of 5.75% redeemable notes due March 1, 2009, at 99.281% of face value. The effective rate of the notes is 5.8%. The quoted market price of the notes exceeded the carrying value by approximately $391,000 at December 31, 2001, and was below the carrying value by approximately $20,781,000 at December 31, 2000.

     In connection with the commercial mortgage transactions, the Company issued a $256,000,000, 6.28% nonrecourse note at face value in 1995, a $266,265,000, 7.0% nonrecourse note at face value in 1996 and a $217,440,000, 6.44% nonrecourse note at face value in 1997. In 1997, the Company refinanced the 6.28% nonrecourse note with a 6.59% nonrecourse note with similar terms. The holders of these notes only have recourse against the commercial mortgage loans, commercial real estate and net swap receivables, which are included in investments. The estimated fair value of the three nonrecourse notes, based on discounted cash flows, exceeded the carrying value by $52,693,000 at December 31, 2001, and $21,619,000 at December 31, 2000.

     In 1992, the Company entered into a $300,000,000 revolving credit facility (RCF). In 1994, the Company canceled $150,000,000 of the RCF. In 1996, the Company amended the RCF to increase the maximum available borrowings to $250,000,000 and extended the termination date to May 30, 2001. In 1998, the Company amended the RCF to increase the maximum available borrowings to $350,000,000 and extend the termination date to September 30, 2003. The amended RCF provides for borrowings under a number of options and may be reduced or canceled at the Company’s option. There were no amounts outstanding under the RCF as of December 31, 2001 or 2000. At December 31, 2001, the Company was in compliance with the financial covenants in the amended RCF, as follows:

Dollars in thousands	Per Debt Covenants			Actual as of December 31, 2001
Maximum total debt to total capitalization percentage		50	%		20	%
Minimum consolidated tangible net worth	$	1,528,914		$	6,442,663

In 2000, the commercial paper balance expected to remain outstanding beyond one year was classified as long-term, reflecting the Company’s intent and ability to finance the borrowings on a long-term basis. The remaining commercial paper balance was classified as short-term.

     Other debt outstanding at December 31, 2001, bears interest at rates ranging from 1.0% to 13.0%, with maturities through the year 2018.

PAGE 47

     Scheduled maturities of long-term debt for the years ended December 31 are as follows:

In thousands
2003	$	51,310
2004		55,382
2005		190,135
2006		212,273
2007 and future years		758,041
	$	1,267,141

The Company has provided guarantees related to the debt of certain unconsolidated affiliates of $21,000,000 and $24,000,000 at December 31, 2001 and 2000, respectively.

Other Noncurrent Liabilities at December 31, 2001 and 2000 consisted of the following:

In thousands	2001		2000
Deferred investment income	$	144,306	$	186,515
Postretirement benefit obligation		328,778		307,732
Affordable housing capital obligations		210,774		1,425
Preferred stock of subsidiaries		60,000		60,000
Other		252,454		252,453
	$	996,312	$	808,125

In connection with the commercial mortgage and several other investment transactions, the Company has recorded deferred investment income for the effect of the difference between the book bases of the assets acquired and their tax bases. This deferred investment income is being amortized to income on a straight-line basis over the lives of the related transactions. The portion of the deferred investment income that will be amortized in the next year has been classified as current in accrued expenses.

     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 Company received net cash of $79,024,000 in 2001, which represented excess borrowings of the partnerships. The Company is required to repay these excess borrowings via capital contributions as the limited partnerships require the funds.

     The Company’s capital contributions to all of the affordable housing limited partnerships are expected to be paid as follows:

In thousands
2002	$	57,754
2003		47,273
2004		14,194
2005		19,522
2006		13,629
2007 and future years		58,402
	$	210,774

Other than the capital contributions above, the Company has no future obligations, guarantees or commitments to the affordable housing limited partnerships.

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 commitments to issue its preferred stock.

PAGE 48

Common Stock, with a par value of $.01, Additional Paid-In-Capital and Common Stock Held in Treasury transactions during 2001, 2000 and 1999 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, 1998			306,150,973		$	3,062		$	730,822			(6,058,908	)	$	(238,502	)
During 1999—
	Shares surrendered on exercise of stock options		(54,437	)		(1	)		(3,703	)		(72,633	)		(3,449	)
	Tax benefits related to stock options exercised		—			—			22,497			—			—
	Repurchase of treasury stock		—			—			—			(1,058,611	)		(44,995	)
	Shares issued for stock incentive and restricted stock grants		713,019			7			13,180			957,503			40,118
	Cash paid for Premark’s fractional shares		(8,226	)		—			(601	)		—			—
	Cancellation of Premark’s treasury shares		(5,972,113	)		(60	)		(244,985	)		5,972,113			245,045
Balance, December 31, 1999			300,829,216			3,008			517,210			(260,536	)		(1,783	)
During 2000—
	Shares surrendered on exercise of stock options		(47,015	)		—			(2,753	)		(2,354	)		(138	)
	Tax benefits related to stock options exercised		—			—			29,391			—			—
	Shares issued for acquisitions		213,897			2			12,363			—			—
	Shares issued for stock incentive and restricted stock grants		1,712,996			17			28,146			2,354			138
Balance, December 31, 2000			302,709,094			3,027			584,357			(260,536	)		(1,783	)
During 2001—
	Shares surrendered on exercise of stock options		(22,689	)		—			(1,414	)		—			—
	Tax benefits related to stock options exercised		—			—			36,347			—			—
	Escrow shares returned from prior acquisitions		(194	)		—			—			—			—
	Shares issued for stock incentive and restricted stock grants		2,483,531			25			56,566			17,200			117
Balance, December 31, 2001			305,169,742		$	3,052		$	675,856			(243,336	)	$	(1,666	)
Authorized, December 31, 2001			350,000,000

Cash Dividends declared were $.84 per share in 2001, $.76 per share in 2000 and $.65 per share in 1999. Cash dividends paid were $.82 per share in 2001, $.74 per share in 2000 and $.61 per share in 1999.

Comprehensive Income—Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, established standards for reporting and displaying comprehensive income and its components in a separate financial statement. 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 only component of other comprehensive income is foreign currency translation adjustments.

PAGE 49

Stock Options have been issued to officers and other employees under ITW’s 1996 Stock Incentive Plan and Premark’s 1994 Incentive Plan. The stock options generally vest over a four-year period. At December 31, 2001, 21,932,510 shares of ITW common stock were reserved for issuance under these plans. Option prices are 100% of the common stock fair market value on the date of grant. Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), allows the recognition of compensation cost related to employee stock options. The Company has elected to continue to apply Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, which does not require that compensation cost be recognized. The pro forma net income effect of applying SFAS 123 was as follows:

In thousands except per share data		2001		2000		1999
Net Income:
	As reported	$	805,659	$	957,980	$	841,112
	Pro forma		775,078		941,239		807,301
Net income per basic share:
	As reported	$	2.65	$	3.18	$	2.80
	Pro forma		2.55		3.12		2.69
Net income per diluted share:
	As reported	$	2.63	$	3.15	$	2.76
	Pro forma		2.53		3.09		2.65

The estimated fair value of the options granted by ITW and Premark is calculated using the Black-Scholes option pricing model. The following summarizes the assumptions used in the model:

	ITW									Premark
	2001			2000			1999			1999
Risk-free interest rate		5.2	%		5.4	%		6.5	%		5.8	%
Expected stock volatility		28.9	%		28.4	%		27.1	%		28.7	%
Dividend yield		1.02	%		1.04	%		1.11	%		1.20	%
Expected years until exercise		5.7			5.7			5.5			5.1

Stock option activity during 2001, 2000 and 1999, including the retroactive effect of converting Premark’s options into ITW options, is summarized as follows:

		2001					2000					1999
		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			13,324,203		$	42.01		11,950,643		$	34.41		11,849,368		$	27.74
	Granted		2,710,700			62.25		3,248,479			55.88		1,864,925			60.30
	Exercised		(2,483,531	)		22.70		(1,711,453	)		15.90		(1,667,509	)		15.56
	Canceled or expired		(81,768	)		47.09		(163,466	)		34.81		(96,141	)		42.83
Under option at end of year			13,469,604			49.26		13,324,203			42.01		11,950,643			34.41
Exercisable at year-end			7,609,614					8,228,561					9,100,013
Available for grant at year-end			8,462,906					11,079,149					14,114,802
Weighted average fair value of options granted during the year					$	21.18				$	19.03				$	20.69

The following table summarizes information on stock options outstanding as of December 31, 2001:

	Options Outstanding					Options Exercisable
	Number		Weighted Average			Number
Range of	Outstanding		Remaining	Weighted Average		Exercisable		Weighted Average
Exercise Prices	2001		Contractual Life	Exercise Price		2001		Exercise Price
$  5.21 - 18.87		1,605,684	3.00 years	$	16.78		1,605,684	$	16.78
19.80 - 31.43		1,138,243	3.87 years		29.19		1,138,243		29.19
33.38 - 46.59		1,589,611	6.03 years		39.03		1,589,611		39.03
51.06 - 65.50		9,136,066	8.56 years		59.25		3,276,076		58.06
		13,469,604	7.20 years		49.26		7,609,614		41.06

PAGE 50

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 600 operations in 43 countries which are aggregated and organized for internal reporting purposes into the following five continuing segments:

     Engineered Products—North America: Businesses that are located in North America and that manufacture short lead-time plastic and metal components and fasteners, and specialty products such as polymers, fluid products and resealable packaging.

     Engineered Products—International: Businesses that are located outside North America and that manufacture short lead-time plastic and metal components and fasteners, and specialty products such as polymers, fluid products and electronic component packaging.

     Specialty Systems—North America: Businesses that are located in North America and that produce longer lead-time machinery and related consumables, and specialty equipment for applications such as food service and industrial finishing.

     Specialty Systems—International: Businesses that are located outside North America and that manufacture longer lead-time machinery and related consumables, and specialty equipment for applications such as food service and industrial finishing.

     Leasing & Investments: Businesses that make opportunistic investments in mortgage-related assets, leveraged and direct financing leases of aircraft and other equipment, properties and property developments, affordable housing and a venture capital fund.

Segment information for 2001, 2000 and 1999 was as follows:

In thousands		2001			2000			1999
Operating Revenues:
	Engineered Products—North America	$	2,974,104		$	3,184,033		$	2,964,782
	Engineered Products—International		1,471,559			1,466,982			1,321,658
	Specialty Systems—North America		3,381,950			3,337,387			3,161,435
	Specialty Systems—International		1,668,895			1,741,629			1,599,988
	Leasing & Investments		149,691			154,278			157,385
	Intersegment revenues		(353,408	)		(372,662	)		(364,794	)
		$	9,292,791		$	9,511,647		$	8,840,454
Operating Income:
	Engineered Products—North America	$	478,314		$	610,321		$	561,742
	Engineered Products—International		160,714			151,706			132,808
	Specialty Systems—North America		424,132			559,738			537,555
	Specialty Systems—International		163,545			171,790			154,022
	Leasing & Investments		79,398			83,898			84,931
	Premark merger-related costs		—			—			(81,020	)
		$	1,306,103		$	1,577,453		$	1,390,038
Depreciation and Amortization:
	Engineered Products—North America	$	125,202		$	118,068		$	103,415
	Engineered Products—International		74,081			99,182			66,447
	Specialty Systems—North America		120,389			105,978			99,391
	Specialty Systems—International		65,873			67,325			51,339
	Leasing & Investments		763			1,012			1,067
		$	386,308		$	391,565		$	321,659
Plant & Equipment Additions:
	Engineered Products—North America	$	74,325		$	110,435		$	126,646
	Engineered Products—International		57,775			68,700			63,766
	Specialty Systems—North America		73,479			75,423			84,752
	Specialty Systems—International		50,983			51,396			41,875
	Leasing & Investments		—			—			30
		$	256,562		$	305,954		$	317,069
Identifiable Assets:
	Engineered Products—North America	$	1,806,626		$	1,791,948		$	1,707,499
	Engineered Products—International		1,411,905			1,444,270			1,446,988
	Specialty Systems—North America		2,419,368			2,339,084			1,997,202
	Specialty Systems—International		1,564,176			1,535,945			1,334,908
	Leasing & Investments		1,444,236			1,408,984			1,449,649
	Corporate		966,128			751,862			756,103
	Net assets of discontinued operations		209,910			242,754			285,980
		$	9,822,349		$	9,514,847		$	8,978,329

PAGE 51

Identifiable assets by segment are those assets that are specifically used in that segment. Corporate assets are principally cash and equivalents, investments and other general corporate assets.

     Enterprise-wide information for 2001, 2000 and 1999 was as follows:

In thousands			2001		2000		1999
Operating Revenues by Product Line:
	Engineered Products—North America— Fasteners & Components		$	2,345,481	$	2,526,342	$	2,343,140
		Specialty Products		628,623		657,691		621,642
			$	2,974,104	$	3,184,033	$	2,964,782
	Engineered Products—International— Fasteners & Components		$	1,284,127	$	1,263,281	$	1,178,569
		Specialty Products		187,432		203,701		143,089
			$	1,471,559	$	1,466,982	$	1,321,658
	Specialty Systems—North America— Equipment & Consumables		$	1,858,223	$	1,757,099	$	1,677,814
		Specialty Equipment		1,523,727		1,580,288		1,483,621
			$	3,381,950	$	3,337,387	$	3,161,435
	Specialty Systems—International— Equipment & Consumables		$	1,056,008	$	1,064,577	$	899,986
		Specialty Equipment		612,887		677,052		700,002
			$	1,668,895	$	1,741,629	$	1,599,988
Operating Revenues by Geographic Region:
	United States		$	5,880,762	$	6,051,750	$	5,729,006
	Europe			2,350,008		2,392,235		2,257,435
	Asia			322,971		371,554		295,788
	Other			739,050		696,108		558,225
			$	9,292,791	$	9,511,647	$	8,840,454

Total noncurrent assets excluding deferred tax assets and financial instruments were $5,366,000,000 and $4,965,000,000 at December 31, 2001 and 2000, respectively. Of these amounts, approximately 61% was attributed to U.S. operations for both years. The remaining amounts were attributed to the Company’s foreign operations, with no single country accounting for a significant portion.

PAGE 52

›     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		2001		2000		2001			2000			2001		2000		2001		2000
Operating revenues		$	2,295,840	$	2,287,297	$	2,417,502		$	2,472,166		$	2,301,168	$	2,361,964	$	2,278,281	$	2,390,220
Cost of revenues			1,537,365		1,482,349		1,595,250			1,571,486			1,527,862		1,512,579		1,530,776		1,544,978
Operating income			296,273		356,484		379,872			454,540			324,649		431,369		305,309		335,060
Income from continuing operations			182,401		218,505		234,458			279,269			197,881		262,774		187,709		208,903
Income (loss) from discontinued operations, net of tax			357		624		(1,682	)		(5,997	)		1,174		1,311		3,361		(7,409	)
Net income			182,758		219,129		232,776			273,272			199,055		264,085		191,070		201,494
Income per share from continuing operations:
	Basic		.60		.73		.77			.93			.65		.87		.62		.69
	Diluted		.60		.72		.77			.92			.65		.86		.61		.69
Net income per share:
	Basic		.60		.73		.77			.91			.65		.87		.63		.67
	Diluted		.60		.72		.76			.90			.65		.87		.62		.66

Prior quarterly periods have been restated to reflect the Consumer Products segment as a discontinued operation.

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 2001 and 2000 were as shown below:

	Market Price Per Share				Dividends
					Declared
	High		Low		Per Share
2001 Fourth quarter	$	69.40	$	52.75	$	.22
Third quarter		66.85		49.15		.22
Second quarter		71.99		54.50		.20
First quarter		67.67		54.62		.20
2000 Fourth quarter	$	61.75	$	49.50	$	.20
Third quarter		59.94		51.00		.20
Second quarter		65.38		54.19		.18
First quarter		69.00		51.06		.18

The approximate number of holders of record of common stock as of February 1, 2002, was 15,330. This number does not include beneficial owners of the Company’s securities held in the name of nominees.

PAGE 53

›     ELEVEN-YEAR FINANCIAL SUMMARY^(a)

Dollars and shares in thousands except per share amounts			2001		2000			1999
Income:
Operating revenues			$	9,292,791		9,511,647			8,840,454
Operating income			$	1,306,103		1,577,453			1,390,038
Income from continuing operations before income taxes			$	1,230,849		1,496,002			1,340,940
Income taxes			$	428,400		526,551			505,045
Income from continuing operations			$	802,449		969,451			835,895
Income (loss) from discontinued operations (net of tax)			$	3,210		(11,471	)		5,217
Cumulative effect of changes in accounting principles (net of tax)			$	—		—			—
Net income			$	805,659		957,980			841,112
Net income per common share—assuming dilution(b):
	Income from continuing operations		$	2.62		3.18			2.74
	Income (loss) from discontinued operations		$	0.01		(0.04	)		0.02
	Cumulative effect of changes in accounting principle		$	—		—			—
	Net income		$	2.63		3.15			2.76
Financial Position:
Net working capital			$	1,645,086		1,511,451			1,227,570
Net plant and equipment			$	1,633,690		1,629,883			1,529,455
Total assets			$	9,822,349		9,514,847			8,978,329
Long-term debt			$	1,267,141		1,549,038			1,360,746
Total debt			$	1,580,588		1,974,827			1,914,401
Total invested capital			$	6,549,426		6,415,719			5,584,900
Stockholders’ equity			$	6,040,738		5,400,987			4,815,423
Cash Flow:
Free operating cash flow			$	1,245,251		909,882			913,902
Cash dividends paid			$	249,141		223,009			183,587
	Per share—paid		$	0.82		0.74			0.61
		—declared	$	0.84		0.76			0.65
Plant and equipment additions			$	256,562		305,954			317,069
Depreciation			$	281,723		272,660			250,119
Amortization of goodwill and other intangible assets			$	104,585		118,905			71,540
Financial Ratios:
Operating income margin			%	14.1		16.6			15.7
Return on operating revenues			%	8.6		10.2			9.5
Return on average stockholders’ equity			%	14.0		19.0			18.5
Return on average invested capital			%	13.1		17.0			16.7
Book value per share			$	19.81		17.86			16.02
Total debt to total capitalization			%	20.7		26.8			28.4
Total debt to total capitalization (excluding Leasing and Investments segment)			%	11.9		18.6			17.8
Other Data:
Market price per share at year-end			$	67.72		59.56			67.56
Shares outstanding at December 31				304,926		302,449			300,569
Weighted average shares outstanding				304,112		301,573			300,158
Research and development expenses			$	102,288		106,118			104,882
Employees at December 31				52,000		55,300			52,800

(a) Restated to reflect the Consumer Products segments as a discontinued operation.   (b) Includes Premark merger-related costs of $.23 in 1999.

PAGE 54

›     ELEVEN-YEAR FINANCIAL SUMMARY^(a)

Dollars and shares in thousands except per share amounts				1998	1997		1996		1995		1994		1993		1992			1991
Income:
Operating revenues			$	7,898,285		7,148,588		6,811,503		5,959,104		5,141,222		4,656,085		4,317,756			4,059,776
Operating income			$	1,294,749		1,082,525		929,805		764,092		580,760		436,780		400,042			353,568
Income from continuing operations before income taxes			$	1,268,179		1,079,779		851,491		722,606		538,925		395,393		356,783			317,081
Income taxes			$	466,284		401,352		328,068		270,713		202,598		147,239		133,856			114,883
Income from continuing operations			$	801,895		678,427		523,423		451,893		336,327		248,154		222,927			202,198
Income (loss) from discontinued operations (net of tax)			$	7,852		13,162		82,699		174,169		167,966		132,410		(29,212	)		77,033
Cumulative effect of changes in accounting principles (net of tax)			$	—		—		—		—		—		—		(172,524	)		—
Net income			$	809,747		691,589		606,122		626,062		504,293		380,564		21,191			279,231
Net income per common share—assuming dilution(b):
	Income from continuing operations		$	2.63		2.23		1.74		1.57		1.20		0.88		0.80			0.74
	Income (loss) from discontinued operations		$	0.03		0.04		0.27		0.60		0.60		0.47		(0.10	)		0.28
	Cumulative effect of changes in accounting principle		$	—		—		—		—		—		—		(0.62	)		—
	Net income		$	2.66		2.27		2.01		2.17		1.80		1.35		0.08			1.02
Financial Position:
Net working capital			$	1,176,163		1,232,862		1,076,167		958,158		915,600		848,706		754,318			613,641
Net plant and equipment			$	1,386,455		1,156,306		1,067,022		975,860		903,176		841,294		790,874			796,021
Total assets			$	8,133,424		7,087,775		6,391,995		5,495,474		4,378,541		3,634,455		3,486,826			3,480,644
Long-term debt			$	1,208,046		966,628		934,847		737,257		394,887		497,941		372,879			429,282
Total debt			$	1,636,065		1,279,606		1,328,772		1,046,445		487,189		608,414		461,423			713,789
Total invested capital			$	4,812,698		3,535,214		3,380,186		3,314,225		2,803,927		2,400,812		2,303,899			2,568,364
Stockholders’ equity			$	4,243,372		3,615,221		3,171,924		2,832,175		2,412,105		1,967,793		1,945,659			2,035,677
Cash Flow:
Free operating cash flow			$	650,427		822,721		529,935		192,848		403,149		308,294		175,532			410,572
Cash dividends paid			$	150,934		128,396		142,281		129,783		104,462		88,975		79,290			70,008
	Per share—paid		$	0.50		0.43		0.48		0.45		0.38		0.32		0.29			0.26
		—declared	$	0.53		0.45		0.45		0.48		0.40		0.33		0.30			0.27
Plant and equipment additions			$	296,530		240,334		224,647		214,905		185,260		164,039		160,800			147,094
Depreciation			$	226,868		197,178		195,937		176,385		157,530		153,524		144,491			136,278
Amortization of goodwill and other intangible assets			$	47,646		39,062		34,009		29,114		29,816		27,486		28,024			30,803
Financial Ratios:
Operating income margin			%	16.4		15.1		13.7		12.8		11.3		9.4		9.3			8.7
Return on operating revenues			%	10.2		9.5		7.7		7.6		6.5		5.3		5.2			5.0
Return on average stockholders’ equity			%	20.4		20.0		17.4		17.2		15.4		12.7		11.2			10.4
Return on average invested capital			%	19.6		19.7		17.1		15.6		13.9		11.7		10.3			8.7
Book value per share			$	14.14		12.07		10.63		9.91		8.63		7.08		7.06			7.45
Total debt to total capitalization			%	27.8		26.1		29.5		27.0		16.8		23.6		19.2			26.0
Total debt to total capitalization (excluding Leasing and Investments segment)			%	14.3		6.8		15.3		18.2		16.8		23.6		19.2			26.0
Other Data:
Market price per share at year-end			$	58.00		60.13		39.94		29.50		21.88		19.50		16.31			15.94
Shares outstanding at December 31				300,092		299,541		298,461		285,844		279,557		277,860		275,425			273,139
Weighted average shares outstanding				299,912		299,663		297,706		285,604		278,202		277,428		274,653			272,261
Research and development expenses			$	89,148		88,673		87,855		84,175		77,512		74,315		68,680			62,519
Employees at December 31				48,500		42,900		40,700		38,600		36,100		34,900		34,000			34,500

PAGE 55