10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the Fiscal Year Ended December 31, 2006
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-11625

Pentair, Inc.

(Exact name of Registrant as specified in its charter)

Minnesota	41-0907434
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification number)
5500 Wayzata Boulevard, Suite 800, Golden Valley, Minnesota (Address of principal executive offices)	55416-1259 (Zip code)

Registrant’s telephone number, including area code: (763) 545-1730

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

Title of each class	Name of each exchange on which registered
Common Shares, $0.162/3 par value		New York Stock Exchange
Preferred Share Purchase Rights		New York Stock Exchange

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ      No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Act).  Large accelerated filer þ Accelerated filer o  Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ

Aggregate market value of voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of $34.19 per share as reported on the New York Stock Exchange on July 1, 2006 (the last day of Registrant’s most recently completed second quarter): $3,256,840,095

The number of shares outstanding of Registrant’s only class of common stock on February 16, 2007 was 99,893,254.

DOCUMENTS INCORPORATED BY REFERENCE

Parts of the Registrant’s definitive proxy statement for its annual meeting to be held on May 3, 2007, are incorporated by reference in this Form 10-K in response to Part III, ITEM 10, 11, 12, 13 and 14.

Pentair, Inc.

Annual Report on Form 10-K

For the Year Ended December 31, 2006

		Page
PART I
ITEM 1.	Business		3
ITEM 1A.	Risk Factors		8
ITEM 1B.	Unresolved Staff Comments		12
ITEM 2.	Properties		12
ITEM 3.	Legal Proceedings		12
ITEM 4.	Submission of Matters to a Vote of Security Holders		14
PART II
ITEM 5.	Market for Registrant’s Common Stock, Related Security Holder Matters and Issuer Purchases of Equity Securities		17
ITEM 6.	Selected Financial Data		20
ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
ITEM 7A.	Quantitative and Qualitative Disclosures about Market Risk		39
ITEM 8.	Financial Statements and Supplementary Data		40
ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		93
ITEM 9A.	Controls and Procedures		93
ITEM 9B.	Other Information		93
PART III
ITEM 10.	Directors, Executive Officers and Corporate Governance		94
ITEM 11.	Executive Compensation		94
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		94
ITEM 13.	Certain Relationships and Related Transactions, and Director Independence		95
ITEM 14.	Principal Accounting Fees and Services		95
PART IV
ITEM 15.	Exhibits and Financial Statement Schedules		96
	Signatures		97

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PART I

ITEM 1.   BUSINESS

GENERAL

Pentair, Inc. is a focused diversified industrial manufacturing company comprised of two operating segments: Water and Technical Products. Our Water Group is a global leader in providing innovative products and systems used worldwide in the movement, storage, treatment, and enjoyment of water. Our Technical Products Group, formerly referred to as our Enclosures Group, is a leader in the global enclosures and thermal management markets, designing and manufacturing standard, modified and custom enclosures that house and protect sensitive electronics and electrical components; thermal management products; and accessories.

Pentair Strategy

Our strategy is to achieve benchmark Return on Invested Capital (ROIC) performance for diversified industrial manufacturing companies by:

•  building operational excellence through the Pentair Integrated Management System (PIMS) consisting of strategy deployment, lean enterprise, and IGNITE, which is our process to drive organic growth;

•  driving long-term growth in sales, income and cash flows, through internal growth initiatives and acquisitions;

•  developing new products and enhancing existing products;

•  penetrating attractive growth markets, particularly international;

•  expanding multi-channel distribution; and

•  proactively managing our business portfolio, including consideration of new business platforms.

Pentair Financial Objectives

Our long-term financial objectives are to:

•  Achieve 5-8% annual organic sales growth, plus acquisitions

•  Achieve benchmark financial performance:

• EBIT Margin	14%
• Return on Invested Capital (ROIC)(pre-tax)	20%
• Free Cash Flow (FCF)	100% conversion of net income
• EPS Growth	10+% (sales growth plus margin expansion)
• Debt/Total Capital	£40%

•  Achieve 5% annual productivity improvement on core business cost

Unless the context otherwise indicates, references herein to “Pentair”, the “Company,” and such words as “we,” “us,” and “our” include Pentair, Inc. and its subsidiaries. Pentair is a Minnesota corporation that was incorporated in 1966.

BUSINESS AND PRODUCTS

Business segment and geographical financial information is contained in ITEM 8, Note 14 of the Notes to Consolidated Financial Statements, included in this Form 10-K.

WATER GROUP

Our Water Group is a global leader in providing innovative products and systems used worldwide in the movement, storage, treatment, and enjoyment of water. Our Water Group offers a broad array of products and systems to multiple markets and customers. The core competencies of our Water Group center around flow and filtration. We have identified a target market totaling $60 billion, with our current primary focus on three markets: Pump (approximately 40% of group sales), Filtration (approximately 30% of group sales), and Pool & Spa (approximately 30% of group sales).

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Pump Market

We address the Pump market with products ranging from light duty diaphragm pumps to high-flow turbine pumps and solid handling pumps designed for water and wastewater applications, and agricultural spraying, as well as pressure tanks for residential applications. Applications for our broad range of products include pumps for residential and municipal wells, water treatment, wastewater solids handling, pressure boosting, engine cooling, fluid delivery, circulation, and transfer.

Brand names for the Pump market include STA-RITE^®, Myers^®, Aurora^®, Hydromatic^®, Fairbanks Morse^tm, Flotec^®, Hypro^®, Water Ace^®, Berkeley^®, Aermotor^tm, Layne & Bowler^®, Simer^®, Verti-line^®, Sherwood^®, SherTech^®, Diamond^®, FoamPro^®, Onga^tm, Nocchi^tm, Shur-Dri^®, SHURflo^®, Edwards^®, JUNG PUMPEN^®, oxynaut^®, and JUNG^®.

Filtration Market

We address the Filtration market with control valves, tanks, filter systems, filter cartridges, pressure vessels, and specialty dispensing pumps providing flow solutions for specific end-user market applications including residential, commercial, foodservice, industrial, recreation vehicles, marine, and aviation. Filtration products are used in the manufacture of water softeners; filtration, deionization, and desalination systems; and industrial, commercial and residential water filtration applications.

Brand names for the Filtration market include Everpure^®, SHURflo^®, Fleck^®, CodeLine^®, Structural^tm, Pentek^®, SIATA^tm, WellMate^tm, American Plumber^®, Armor^®, OMNIFILTER^®, Park International^tm, Fibredyne^tm, and Krystil Klear^®.

Pool & Spa Market

We address the Pool & Spa market with a complete line of commercial and residential pool/spa equipment and accessories including pumps, filters, heaters, lights, automatic controls, automatic pool cleaners, commercial deck equipment, barbeque deck equipment, aquatic pond products and accessories, pool tile and interior finishing surfaces, maintenance equipment, spa/jetted tub hydrotherapy fittings, and pool/spa accessories. Applications for our pool products include commercial and residential pool and spa construction, maintenance, repair, and service.

Brand names for the Pool & Spa market include Pentair Pool Products^®, Pentair Water Pool and Spa^tm, National Pool Tile Group^®, Pentair Aquatics^®, STA-RITE^®, Paragon Aquatics^®, Pentair Spa & Bath^tm, Kreepy Krauly^®, Compool^®, WhisperFlo^®, PoolShark^®, Legend^tm, Rainbow^tm, Ultra Jet^®, Vico^®, FIBERworks^®, IntelliTouch^tm, and Acu-Trol^®.

Customers

Our Water Group distributes its products through wholesale distributors, retail distributors, original equipment manufacturers, and home centers. Information regarding significant customers in our Water Group is contained in ITEM 8, Note 14 of the Notes to Consolidated Financial Statements, included in this Form 10-K.

Seasonality

We experience seasonal demand in a number of markets within our Water Group. End-user demand for pool equipment follows warm weather trends and is at seasonal highs from April to August. The magnitude of the sales spike is partially mitigated by employing some advance sales “early buy” programs (generally including extended payment terms and/or additional discounts). Demand for residential and agricultural water systems is also impacted by weather patterns, particularly by heavy flooding and droughts.

Competition

Our Water Group faces numerous domestic and international competitors, some of which have substantially greater resources. Consolidation, globalization, and outsourcing are continuing trends in the water industry. Competition in commercial and residential pump markets focuses on brand names, product performance, quality, and price. While home center and national retailers are important for residential lines of water and wastewater pumps, they are much less important for commercial pumps. For municipal pumps, competition

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focuses on performance to meet required specifications, service, and price. Competition in water treatment and filtration components focuses on product performance and design, quality, delivery, and price. For pool and spa equipment, competition focuses on brand names, product performance, quality, and price. We compete by offering a wide variety of innovative and high-quality products, which are competitively priced. We believe our distribution channels and reputation for quality also contribute to our continuing industry penetration.

TECHNICAL PRODUCTS GROUP

Our Technical Products Group is a leader in the global enclosures and thermal management markets, designing and manufacturing standard, modified, and custom enclosures that house and protect sensitive electronics and electrical components; thermal management products; and accessories. We have identified a target market of $30 billion. Our Technical Products Group focuses its business portfolio on four primary industries: Commercial and Industrial (55% of group sales), Telecom and Datacom (25% of group sales), Electronics (15% of group sales), and Networking (5% of group sales). The primary brand names for the Technical Products Group are: Hoffman^®, Schroff^®, Pentair Electronic Packaging^tm, Taunus^tm, McLean^®, Electronic Solutions^tm, Birtcher^tm, and Aspen Motion^tm.  Products and related accessories of the Technical Products Group include metallic and composite enclosures, cabinets, cases, subracks, backplanes, heat exchangers, and blowers. Applications served include industrial machinery, data communications, networking, telecommunications, test and measurement, automotive, medical, security, defense, and general electronics.

Customers

Our Technical Products Group distributes its products through electrical and data contractors, electrical and electronic components distributors, and original equipment manufacturers. Information regarding significant customers in our Technical Products Group is contained in ITEM 8, Note 14 of the Notes to Consolidated Financial Statements, included in this Form 10-K.

Seasonality

Our Technical Products Group is not significantly impacted by seasonal demand fluctuations.

Competition

Competition in the technical products markets can be intense, particularly in telecom and datacom markets, where product design, prototyping, global supply, price competition, and customer service are significant factors. Our Technical Products Group has continued to focus on cost control and improving profitability. Recent growth in the Technical Products Group is a result of acquisitions, overall market growth, new product development, continued channel penetration, growth in targeted market segments, and geographic expansion. Consolidation, globalization, and outsourcing are visible trends in the technical products marketplace and typically play to the strengths of a large and globally positioned supplier. We believe our Technical Products Group has the broadest array of enclosures products available for commercial and industrial uses.

RECENT DEVELOPMENTS

Growth of our business

We continually look at each of our businesses to determine whether they fit with our strategic vision. Our primary focus is on businesses with strong fundamentals and growth opportunities, especially in international markets. We seek growth through product and service innovation, market expansion, and acquisitions. Acquisitions have played an important part in the growth of our business, and we expect acquisitions will continue to be an important part of our future growth.

Acquisitions

On December 11, 2006 we entered into an agreement to acquire all of the share capital of Jung Pumpen GmbH, a German-based manufacturer of municipal and residential wastewater pumps and related products, subject to German Federal Cartel Office approval. The acquisition was completed on February 2, 2007 for approximately $227 million, net of cash acquired of $13 million, excluding transaction costs and subject to a post-closing net asset value adjustment.

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On April 12, 2006, we acquired, as part of our Water Group, the assets of Geyer’s Manufacturing & Design Inc. and FTA Filtration, Inc. (together “Krystil Klear”), two privately-held companies, for $15.5 million in cash. Krystil Klear expands our industrial filtration product offering to include a full range of steel and stainless steel tanks which house filtration solutions. Goodwill recorded as part of the initial purchase price allocation was $9.2 million, all of which is tax deductible. We continue to evaluate the purchase price allocation for the Krystil Klear acquisition, including intangible assets, contingent liabilities, plant rationalization costs, and property, plant and equipment. We expect to revise the purchase price allocation as better information becomes available.

During 2006, we completed several other small acquisitions totaling $14.2 million in cash and notes payable, adding to both our Water and Technical Products Groups. Total goodwill recorded as part of the initial purchase price allocations was $7.9 million, of which $2.9 million is tax deductible. We continue to evaluate the purchase price allocations for these acquisitions and expect to revise the purchase price allocations as better information becomes available.

On December 1, 2005, we acquired, as part of our Technical Products Group, the McLean Thermal Management, Aspen Motion Technologies, and Electronic Solutions businesses from APW, Ltd. (collectively, “Thermal”) for $143.9 million, including a cash payment of $140.6 million and transaction costs of $3.3 million. These businesses provide thermal management solutions and integration services to the telecommunications, data communications, medical, and security markets. Final goodwill recorded as part of the purchase price allocation was $71.1 million, all of which is tax deductible. Final identifiable intangible assets acquired as part of the acquisition were $45.6 million, including definite-lived intangibles, such as proprietary technology and customer relationships, of $23.1 million with a weighted average amortization period of approximately 12 years.

On February 23, 2005, we acquired, as part of our Water Group, certain assets of Delta Environmental Products, Inc. and affiliates (collectively, “DEP”), a privately-held company, for $10.3 million, including a cash payment of $10.0 million, transaction costs of $0.2 million, and debt assumed of $0.1 million. The DEP product line addressees the water and wastewater markets. Final goodwill recorded as part of the purchase price allocation was $7.2 million, all of which is tax deductible.

Effective July 31, 2004, we completed the acquisition of all of the shares of capital stock of WICOR, Inc. (“WICOR”) from Wisconsin Energy Corporation (“WEC”) for $874.7 million, including a cash payment of $871.1 million, transaction costs of $11.2 million, and debt assumed of $21.6 million, less a favorable final purchase price adjustment of $14.0 million and less cash acquired of $15.2 million. This includes an additional $0.4 million in transaction costs recorded in the first three quarters of 2005. WICOR manufactured water system, filtration, and pool equipment products primarily under the STA-RITE^®, SHURflo^® and Hypro^® brands.

Also refer to ITEM 7, Management’s Discussion and Analysis, and ITEM 8, Note 2 of the Notes to Consolidated Financial Statements, included in this Form 10-K.

Discontinued operations/divestitures

Effective after the close of business on October 2, 2004, we completed the sale of our former Tools Group to The Black & Decker Corporation (“BDK”). In January 2006, pursuant to the purchase agreement for the sale of our former Tools Group, we completed the repurchase of a manufacturing facility in Suzhou, China from BDK for approximately $5.7 million. We recorded no gain or loss on the repurchase. In March 2006, we completed an outstanding net asset value arbitration with BDK relating to the purchase price for the sale of our former Tools Group. The decision by the arbitrator constituted a final resolution of all disputes between BDK and us regarding the net asset value. We paid the final net asset value purchase price adjustment pursuant to the purchase agreement of $16.1 million plus interest of $1.1 million in March 2006, resulting in an incremental pre-tax loss on disposal of discontinued operations of $3.4 million, or $1.6 million net of tax. In the third quarter of 2006, we resolved a prior year tax item that resulted in a $1.4 million income tax benefit related to our former Tools Group.

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In 2001, we completed the sale of our former Service Equipment businesses (Century Mfg. Co./Lincoln Automotive Company) to Clore Automotive, LLC. In the fourth quarter of 2003, we reported an additional loss from discontinued operations of $2.9 million related to exiting the remaining two facilities. In March 2006, we exited a leased facility from our former Service Equipment business resulting in a net cash outflow of $2.2 million and an immaterial gain from disposition.

Also refer to ITEM 7, Management’s Discussion and Analysis, and ITEM 8, Note 3 of the Notes to Consolidated Financial Statements, included in this Form 10-K.

INFORMATION REGARDING ALL BUSINESS SEGMENTS

Backlog

Our backlog of orders as of December 31 by segment was:

In thousands	2006		2005		$ change			% change
Water	$	238,191	$	165,737	$	72,454			43.7	%
Technical Products		100,205		106,587		(6,382	)		(6.0	)%
Total	$	338,396	$	272,324	$	66,072			24.3	%

The $72.5 million increase in Water Group backlog was primarily due to better than anticipated fourth quarter 2006 early buy orders in our pool business that are scheduled to ship in the first quarter of 2007, growth in Asian markets, and increased backlog for pumps used in municipal market applications. The $6.4 million decrease in Technical Products Group backlog reflected a decline in orders from the telecommunications market and data communications projects which have reached end-of-life. Due to the relatively short manufacturing cycle and general industry practice for the majority of our businesses, backlog, which typically represents approximately 30 days of shipments, is not deemed to be a significant item. A substantial portion of our revenues result from orders received and product sold in the same month. We expect that most of our backlog at December 31, 2006 will be filled in 2007.

Research and development

We conduct research and development activities in our own facilities, which consist primarily of the development of new products, product applications, and manufacturing processes. Research and development expenditures during 2006, 2005, and 2004 were $58.1 million, $46.0 million, and $31.5 million, respectively.

Environmental

Environmental matters are discussed in ITEM 3, ITEM 7, and in ITEM 8, Note 15 of the Notes to Consolidated Financial Statements, included in this Form 10-K.

Raw materials

The principal materials used in the manufacturing of our products are electric motors, mild steel, stainless steel, electronic components, plastics (resins, fiberglass, epoxies), and paint (powder and liquid). In addition to the purchase of raw materials, we purchase some finished goods for distribution through our sales channels.

The materials used in the various manufacturing processes are purchased on the open market, and the majority are available through multiple sources and are in adequate supply. We have not experienced any significant work stoppages to-date due to shortages of materials. We have certain long-term commitments, principally price commitments, for the purchase of various component parts and raw materials and believe that it is unlikely that any of these agreements would be terminated prematurely. Alternate sources of supply at competitive prices are available for most materials for which long-term commitments exist, and we believe that the termination of any of these commitments would not have a material adverse effect on operations.

Certain commodities, such as metals and resin, are subject to market and duty-driven price fluctuations. We manage these fluctuations through several mechanisms, including long-term agreements with escalator/de-escalator clauses. Prices for raw materials, such as metals and resins, may continue to trend higher in the future.

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Intellectual property

Patents, non-compete agreements, proprietary technologies, customer relationships, trade marks, trade names, and brand names are important to our business. However, we do not regard our business as being materially dependent upon any single patent, non-compete agreement, proprietary technology, customer relationship, trade mark, trade name, or brand name.

Patents, patent applications, and license agreements will expire or terminate over time by operation of law, in accordance with their terms or otherwise. We do not expect the termination of patents, patent applications, and license agreements to have a material adverse effect on our financial position, results of operations or cash flows.

Employees

As of December 31, 2006, we employed approximately 14,800 people worldwide. Total employees in the United States were approximately 9,100, of whom approximately 900 are represented by six different trade unions having collective bargaining agreements. Generally, labor relations have been satisfactory.

Captive Insurance Subsidiary

We insure certain general and product liability, property, workers’ compensation, and automobile liability risks through our regulated wholly-owned captive insurance subsidiary, Penwald Insurance Company (“Penwald”). Reserves for policy claims are established based on actuarial projections of ultimate losses. Accruals with respect to liabilities insured by third parties, such as liabilities arising from acquired businesses, pre-Penwald liabilities and those of certain foreign operations, are established without regard to the availability of insurance.

Matters pertaining to Penwald are discussed in ITEM 3 and ITEM 8, Note 1 of the Notes to Consolidated Financial Statements, included in this Form 10-K.

Available information

We make available free of charge (other than an investor’s own Internet access charges) through our Internet website (http://www.pentair.com) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Reports of beneficial ownership filed by our directors and executive officers pursuant to Section 16(a) of the Securities Exchange Act of 1934 are also available on our website. We are not including the information contained on our website as part of, or incorporating it by reference into, this Annual Report on Form 10-K.

ITEM 1A.   RISK FACTORS

You should carefully consider the following risk factors and warnings before making an investment decision. If any of the risks described below actually occur, our business, financial condition, results of operations or prospects could be materially adversely affected. In that case, the price of our securities could decline and you could lose all or part of your investment. You should also refer to other information set forth in this document.

Demand for our products will be affected by general economic conditions.

We compete globally in varied markets. Among these, the most significant are North American industrial and commercial markets (for both the Water and Technical Products Groups) and the North American residential market (for the Water Group). Economic conditions in the United States affect the robustness of our North American markets; important factors include the overall strength of the economy and our customers’ confidence in the economy; industrial and municipal capital spending; the strength of the residential and commercial real estate markets; the age of existing housing stock; unemployment rates; availability of consumer financing; and, interest rates. New construction for residential housing and home improvement activity fell dramatically in 2006, which reduced revenue growth in our Water Group, especially in the pool and spa and pump markets we address. We cannot give any assurance that we will not continue to encounter

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weakness in these markets. Further, while we attempt to minimize our exposure to economic or market fluctuations by serving a balanced mix of end markets and geographic regions, we cannot assure you that a significant or sustained downturn in a specific end market or geographic region would not have a material adverse effect on us.

Our businesses operate in highly competitive markets, so we may be forced to cut prices or to incur additional costs.

Our businesses generally face substantial competition in each of their respective markets. Competition may force us to cut prices or to incur additional costs to remain competitive. We compete on the basis of product design, quality, availability, performance, customer service and price. Present or future competitors may have greater financial, technical or other resources which could put us at a disadvantage in the affected business or businesses. We cannot assure you that these and other factors will not have a material adverse effect on our future results of operations.

Our inability to sustain consistent organic growth could adversely affect our financial performance.

In 2006 and 2005, our organic growth was generated in part from expanding international sales, entering new distribution channels, and introducing new products. To grow more rapidly than our end markets, we will have to continue to expand our geographic reach, further diversify our distribution channels, continue to introduce new products, and increase sales of existing products to our customer base. We may not be able to successfully meet those challenges, which could adversely affect our ability to sustain consistent organic growth. If we are unable to sustain consistent organic growth, we will be less likely to meet our stated revenue growth targets, which together with any resulting impact on our net income growth, would likely adversely affect the market price of our stock.

Our inability to complete or successfully complete and integrate acquisitions could adversely affect our financial performance.

A significant percentage of our net sales growth in 2006 and 2005 was generated as a result of acquisitions completed in 2004 or subsequent periods, including our acquisition of WICOR and the Thermal businesses. We may not be able to sustain this level of growth from acquisition activity in the future. We intend to continue to evaluate strategic acquisitions primarily in our current business segments, and we may consider acquisitions outside of these segments as well. Our ability to expand through acquisitions is subject to various risks, including the following:

•  increased competition for acquisitions, especially in the water industry;

•  higher acquisition prices;

•  lack of suitable acquisition candidates in targeted product or market areas;

•  diversion of management time and attention to acquisitions and acquired businesses;

•  inability to integrate acquired businesses effectively or profitably; and

•  inability to achieve anticipated synergies or other benefits from acquisitions.

Acquisitions could have a material adverse effect on our operating results, particularly in the fiscal quarters immediately following the acquisitions, while we attempt to integrate operations of the acquired businesses into our operations. Once integrated, acquired operations may not achieve the levels of profitability originally anticipated.

Material cost and other inflation could adversely affect our results of operations.

We are experiencing material cost and other inflation in a number of our businesses. We are striving for greater productivity improvements and implementing selective increases in selling prices to help mitigate cost increases in base materials such as metals and other costs such as pension, health care and insurance. We also

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are continuing to implement our excellence in operations initiatives in order to continuously reduce our costs. We cannot assure you, however, that these actions will be successful in managing our costs or increasing our productivity. Continued cost inflation or failure of our initiatives to generate cost savings or improve productivity may negatively impact our results of operations.

Seasonality of sales and weather conditions may adversely affect our financial results.

We experience seasonal demand in a number of markets within our Water Group. End-user demand for pool equipment follows warm weather trends and is at seasonal highs from April to August. The magnitude of the sales spike is partially mitigated by employing some advance sales “early buy” programs (generally including extended payment terms and/or additional discounts). Demand for residential and agricultural water systems is also impacted by weather patterns, particularly by heavy flooding and droughts. We cannot assure you that seasonality and weather conditions will not have a material adverse effect on our results of operations.

Intellectual property challenges may hinder product development and marketing.

Patents, non-compete agreements, proprietary technologies, customer relationships, trade marks, trade names, and brand names are important to our business. Intellectual property protection, however, may not preclude competitors from developing products similar to ours or from challenging our names or products. Over the past few years, we have noticed an increasing tendency for participants in our markets to use conflicts over and challenges to intellectual property as a means to compete. Patent and trademark challenges increase our costs to develop, engineer and market our products.

Our results of operations may be negatively impacted by litigation.

Our business exposes us to potential litigation, especially product liability suits that are inherent in the design, manufacture, and sale of our products, such as the Horizon litigation discussed in ITEM 3 of this annual report on Form 10-K. While we currently maintain what we believe to be suitable product liability insurance, we cannot assure you that we will be able to maintain this insurance on acceptable terms or that this insurance will provide adequate protection against potential liabilities. In addition, we self-insure a portion of product liability claims. A series of successful claims against us could materially and adversely affect our product reputation, financial condition, results of operations, and cash flows.

The availability and cost of capital could have a negative impact on our continued growth.

Our plans to continue growth in our chosen markets will require additional capital for future acquisitions, capital expenditures for existing businesses, growth of working capital, and continued international and regional expansion. In the past, we have financed our growth primarily through debt financing. Any significant future acquisitions will require us to expand our debt financing resources or to issue equity securities. Our financial results may be adversely affected if interest costs under our debt financings are higher than the income generated by acquisitions or other internal growth. In addition, future acquisitions could be dilutive to your equity investment if we issue additional stock to fund acquisitions. There can be no assurance that we will be able to issue equity securities or to obtain future debt financing at favorable terms. Without sufficient financing, we will not be able to pursue our growth strategy, which will limit our growth and revenues in the future.

Our international operations are subject to foreign market and currency fluctuation risks.

We expect the percentage of our sales outside of North America to increase in the future. Over the past few years, the economies of some of the foreign countries in which we do business have had slower growth than the U.S. economy. The European Union currently accounts for the majority of our foreign sales and income, in which our most significant European market is Germany. In addition, we have a significant and growing business in the Asia-Pacific area. We cannot predict how changing market conditions in these regions will impact our financial results.

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We are also exposed to the risk of fluctuation of foreign currency exchange rates which may affect our financial results. As of December 31, 2006, we held immaterial positions in foreign exchange-forward contracts.

We are exposed to political, economic and other risks that arise from operating a multinational business.

Sales outside of North America, including export sales from North American businesses, accounted for approximately 23% of our net sales in 2006. Further, most of our businesses obtain some raw materials and finished goods from foreign suppliers. Accordingly, our business is subject to the political, economic and other risks that are inherent in operating in numerous countries. These risks include:

•  the difficulty of enforcing agreements and collecting receivables through foreign legal systems;

•  trade protection measures and import or export licensing requirements;

•  tax rates in certain foreign countries that exceed those in the U.S. and the imposition of withholding requirements on foreign earnings;

•  the possibility of terrorist action against us or our operations;

•  the imposition of tariffs, exchange controls or other restrictions;

•  difficulty in staffing and managing widespread operations in non-U.S. labor markets;

•  the protection of intellectual property in foreign countries may be more difficult;

•  required compliance with a variety of foreign laws and regulations; and

•  changes in general economic and political conditions in countries where we operate, particularly in emerging markets.

Our business success depends in part on our ability to anticipate and effectively manage these and other risks. We cannot assure you that these and other factors will not have a material adverse effect on our international operations or on our business as a whole.

We are exposed to potential environmental liabilities and litigation.

Compliance with environmental regulations could require us to satisfy environmental liabilities, increase the cost of manufacturing our products or otherwise adversely affect our business, financial condition and results of operations. We are subject to federal, state, local and foreign laws and regulations governing public and worker health and safety and the indoor and outdoor environment. Any violations of these laws by us could cause us to incur unanticipated liabilities that could harm our operating results and cause our business to suffer. We are also required to comply with various environmental laws and maintain permits, some of which are subject to discretionary renewal from time to time, for many of our businesses, and we could suffer if we are unable to renew existing permits or to obtain any additional permits that we may require.

We have been named as defendants, targets, or potentially responsible parties (“PRP”) in a number of environmental clean-ups relating to our current or former business units. We have disposed of a number of businesses in recent years and, in certain cases, we have retained responsibility and potential liability for certain environmental obligations. We have received claims for indemnification from certain purchasers. We may be named as a PRP at other sites in the future for existing business units, as well as both divested and acquired businesses.

We cannot ensure that environmental requirements will not change or become more stringent over time or that our eventual environmental clean-up costs and liabilities will not exceed the amount of our current reserves.

11

Provisions of our Restated Articles of Incorporation, Bylaws and Minnesota law could deter takeover attempts.

Anti-takeover provisions in our charter documents, under Minnesota law, and in our shareholder rights plan could prevent or delay transactions that our shareholders may favor.

Our Restated Articles of Incorporation and Bylaws include provisions relating to the election, appointment and removal of directors, as well as shareholder notice and shareholder voting requirements which could delay, prevent or make more difficult a merger, tender offer, proxy contest or other change of control. In addition, our common share purchase rights could cause substantial dilution to a person or group that attempts to acquire us, which could deter some acquirers from making takeover proposals or tender offers. Also, the Minnesota Business Corporations Act contains control share acquisition and business combination provisions which could delay, prevent or make more difficult a merger, tender offer, proxy contest or other change of control. Our shareholders might view any such transaction as being in their best interests since the transaction could result in a higher stock price than the current market price for our common stock.

ITEM 1B.   UNRESOLVED STAFF COMMENTS

None.

ITEM 2.   PROPERTIES

Our principal executive office is in leased premises located in Golden Valley, Minnesota. We carry out our Water Group manufacturing operations at 24 plants located throughout the United States and at 19 plants located in 10 other countries. In addition, our Water Group has 67 distribution facilities and 17 sales offices located in numerous countries throughout the world. We carry out our Technical Products Group manufacturing operations at 8 plants located throughout the United States and 9 plants located in 7 other countries. In addition, our Technical Products Group has 11 distribution facilities and 31 sales offices located in numerous countries throughout the world.

We believe that our production facilities are suitable for their purpose and are adequate to support our businesses.

ITEM 3.   LEGAL PROCEEDINGS

We have been made parties to a number of actions filed or have been given notice of potential claims relating to the conduct of our business, including those pertaining to commercial disputes, product liability, environmental, safety and health, patent infringement, and employment matters.

We comply with the requirements of Statement of Financial Accounting Standards (“SFAS”) No. 5, Accounting for Contingencies, and related guidance, and record liabilities for an estimated loss from a loss contingency where the outcome of the matter is probable and can be reasonably estimated. Factors that are considered when determining whether the conditions for accrual have been met include the (a) nature of the litigation, claim, or assessment, (b) progress of the case, including progress after the date of the financial statements but before the issuance date of the financial statements, (c) opinions of legal counsel, and (d) management’s intended response to the litigation, claim, or assessment. Where the reasonable estimate of the probable loss is a range, we record the most likely estimate of the loss. When no amount within the range is a better estimate than any other amount, however, the minimum amount in the range is accrued. Gain contingencies are not recorded until realized.

While we believe that a material adverse impact on our consolidated financial position, results of operations, or cash flows from any such future charges is unlikely, given the inherent uncertainty of litigation, a remote possibility exists that a future adverse ruling or unfavorable development could result in future charges that could have a material adverse impact. We do and will continue to periodically reexamine our estimates of probable liabilities and any associated expenses and receivables and make appropriate adjustments to such estimates based on experience and developments in litigation. As a result, the current estimates of the potential

12

impact on our consolidated financial position, results of operations, and cash flows for the proceedings and claims described in “Legal Proceedings” could change in the future.

Environmental

We have been named as defendants, targets, or potentially responsible parties (“PRP”) in a small number of environmental clean-ups, in which our current or former business units have generally been given de minimis status. To date, none of these claims have resulted in clean-up costs, fines, penalties, or damages in an amount material to our financial position or results of operations. We have disposed of a number of businesses in recent years and in certain cases, such as the disposition of the Cross Pointe Paper Corporation uncoated paper business in 1995, the disposition of the Federal Cartridge Company ammunition business in 1997, the disposition of Lincoln Industrial in 2001, and the disposition of the Tools Group in 2004, we have retained responsibility and potential liability for certain environmental obligations. We have received claims for indemnification from purchasers of these businesses and have established what we believe to be adequate accruals for potential liabilities arising out of retained responsibilities. We settled some of the claims in prior years; to date our recorded accruals have been adequate.

In addition, there are ongoing environmental issues at a limited number of sites, including one site acquired in the acquisition of Essef Corporation in 1999, which relate to operations no longer carried out at the sites. We have established what we believe to be adequate accruals for remediation costs at these sites. We do not believe that projected response costs will result in a material liability.

We may be named as a PRP at other sites in the future, for both divested and acquired businesses. When the outcome of the matter is probable and it is possible to provide reasonable estimates of our liability with respect to environmental sites, provisions have been made in accordance with generally accepted accounting principles in the United States. As of December 31, 2006 and 2005, our undiscounted reserves for such environmental liabilities were approximately $5.6 million and $6.4 million, respectively. We cannot ensure that environmental requirements will not change or become more stringent over time or that our eventual environmental clean-up costs and liabilities will not exceed the amount of our current reserves.

Product liability claims

We are subject to various product liability lawsuits and personal injury claims. A substantial number of these lawsuits and claims are insured and accrued for by Penwald, our captive insurance subsidiary. See discussion in ITEM 1 and ITEM 8, Note 1 of the Notes to Consolidated Financial Statements — Insurance subsidiary. Penwald records a liability for these claims based on actuarial projections of ultimate losses. For all other claims, accruals covering the claims are recorded, on an undiscounted basis, when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on existing information. The accruals are adjusted periodically as additional information becomes available. We have not experienced significant unfavorable trends in either the severity or frequency of product liability lawsuits or personal injury claims.

Horizon litigation

Twenty-eight separate lawsuits involving 29 primary plaintiffs, a class action, and claims for indemnity by Celebrity Cruise Lines, Inc. (“Celebrity”) were brought against Essef Corporation (“Essef”) and certain of its subsidiaries prior to our acquisition of Essef in August 1999. The claims against Essef and its involved subsidiaries were based upon the allegation that Essef designed, manufactured, and marketed two sand swimming pool filters that were installed as a part of the spa system on the Horizon cruise ship, and allegations that the spa and filters contained Legionnaire’s disease bacteria that infected certain passengers on cruises from April 1994 through July 1994.

The individual and class claims by passengers were tried and resulted in an adverse jury verdict finding liability on the part of the Essef defendants (70%) and Celebrity and its sister company, Fantasia (together 30%). After expiration of post-trial appeals, we paid all outstanding punitive damage awards of $7.0 million in the Horizon cases, plus interest of approximately $1.6 million, in January 2004. All of the personal injury cases have now been resolved through either settlement or judgment.

13

The only remaining unresolved claims in this case were those brought by Celebrity for damages resulting from the outbreak. Celebrity filed an amended complaint seeking attorney fees and costs for prior litigation as well as out-of-pocket losses, lost profits, and loss of business enterprise value. On June 28, 2006, a jury returned a verdict against the Essef defendants in the total amount of $193.0 million for its claims for out-of-pocket expenses ($10.4 million), lost profits ($47.6 million) and lost enterprise value ($135.0 million). The verdict was exclusive of pre-judgment interest and attorneys’ fees.

On January 17, 2007, the Court ruled on our post-trial motions, granting judgment in our favor as a matter of law with respect to Celebrity’s claim for lost enterprise value ($135.0 million). The Court also granted a new trial with respect to lost profits ($47.6 million). In addition, the Court denied without prejudice our claim for contribution to reduce Celebrity’s recovery by 30% to account for its contributory negligence, with leave to renew the motion following retrial.

Celebrity’s claim for lost profits at trial amounted to approximately $60.3 million. We believe that actual lost profits suffered, if any, are substantially less. In a new trial, there remain questions of causation, contribution and proof of damages to be determined. We intend to vigorously defend against Celebrity’s claims. We cannot predict whether Celebrity will appeal the ruling on lost enterprise value, nor whether and to what extent Essef may eventually be found liable on Celebrity’s claims.

Several issues have not been decided by the Court, including whether Celebrity is entitled to recovery of its attorneys’ fees and related costs in the passenger claims phase of the case ($4.1 million), and, with respect to pre-judgment interest, the length of the interest period and the rate of interest on any eventual judgment. We have assessed the impact of the ruling on our previously established reserves for this matter and, based on information available at this time, have not changed our reserves following this ruling, except to take into account quarterly interest accruals.

We believe that any judgment we pay in this matter would be tax-deductible in the year paid or in subsequent years. In addition to the impact of any loss on this matter on our earnings per share when recognized, we may need to borrow funds from our banks or other sources to pay any judgment finally determined after exhaustion of all appeals. We expect that we would have available adequate funds to allow us to do so, based on discussions with our lending sources and our estimates of the results of our business operations over the foreseeable future.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

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EXECUTIVE OFFICERS OF THE REGISTRANT

Current executive officers of Pentair, their ages, current position, and their business experience during at least the past five years are as follows:

Name	Age	Current Position and Business Experience
Randall J. Hogan	51	Chief Executive Officer since January 2001 and Chairman of the Board effective May 1, 2002; President and Chief Operating Officer, December 1999 — December 2000; Executive Vice President and President of Pentair’s Electrical and Electronic Enclosures Group, March 1998 — December 1999; United Technologies Carrier Transicold President 1995 — 1997; Pratt & Whitney Industrial Turbines Vice President and General Manager 1994 — 1995; General Electric various executive positions 1988 — 1994; McKinsey & Company consultant 1981 — 1987.
Richard J. Cathcart	62	Vice Chairman of Pentair since February 2005; President and Chief Operating Officer of Water Technologies Group January 2001 — January 2005; Executive Vice President and President of Pentair’s Water Technologies Group, February 1996 — December 2000; Executive Vice President, Corporate Development, March 1995 — January 1996.
Michael V. Schrock	54	President and Chief Operating Officer since September 2006; President and Chief Operating Officer of Filtration and Technical Products, October 2005 — September 2006; President and Chief Operating Officer of Enclosures October 2001 — September 2005; President, Pentair Water Technologies — Americas, January 2001 — October 2001; President, Pentair Pump and Pool Group, August 2000 — January 2001; President, Pentair Pump Group, January 1999 — August 2000; Vice President and General Manager, Aurora, Fairbanks Morse and Pentair Pump Group International, March 1998 — December 1998; Divisional Vice President and General Manager, Honeywell Inc., 1994 — 1998.
David D. Harrison*	59	Executive Vice President and Chief Financial Officer February 2000 — February 2007 ; Executive Vice President and Chief Financial Officer of The Scotts Company, August 1999 — February 2000; Executive Vice President and Chief Financial Officer of Coltec Industries, August 1996 — August 1999; Executive Vice President and Chief Financial Officer of Pentair, Inc., March 1994 — July 1996; Senior Executive with General Electric Technical Services organization, January 1990 — March 1994. Various executive positions with General Electric Plastics/Borg-Warner Chemicals 1972-1990.
John L. Stauch*	42	Executive Vice President since February 2007; Chief Financial Officer of the Automation and Control Systems unit of Honeywell International Inc., July 2005 — February 2007; Vice President, Finance and Chief Financial Officer of the Sensing and Controls unit of Honeywell International Inc., January 2004 — July 2005; Vice President, Finance and Chief Financial Officer of the Automation & Control Products unit of Honeywell International Inc., July 2002 — January 2004; Chief Financial Officer and IT Director of PerkinElmer Optoelectronics, a unit of PerkinElmer, Inc., April 2000 — April 2002; Various executive, investor relations and managerial finance positions with Honeywell International Inc. and its predecessor AlliedSignal Inc., 1994 — 2000.
Louis L. Ainsworth	59	Senior Vice President and General Counsel since July 1997 and Secretary since January 2002; Shareholder and Officer of the law firm of Henson & Efron, P.A., November 1985 — June 1997.

15

Name	Age	Current Position and Business Experience
Jack J. Dempsey	45	President, Filtration Division and Senior Vice President, Operations, since May 2006; Senior Vice President of Operations and Technology, April 2005 — May 2006; Director, McKinsey and Company July 1999 — March 2005; Prior McKinsey and Company experience: Principal, July 1993 — June 1999, Consultant, August 1987 — June 1993; Chase Manhattan Bank, various retail banking roles September 1983 — August 1985.
Karen A. Durant	47	Senior Vice President of Finance and Analysis since January 2006; Vice President of Finance and Controller April 2002 — December 2005; Vice President, Controller, September 1997 — March 2002; Controller, January 1996 — August 1997; Assistant Controller, September 1994 — December 1995; Director of Financial Planning and Control of Hoffman Enclosures Inc. (subsidiary of Pentair), October 1989 — August 1994; various finance and accounting positions with Honeywell Inc., 1981-1989.
Frederick S. Koury	46	Senior Vice President, Human Resources, since August 2003; Vice President of Human Resources of the Victoria’s Secret Stores unit of Limited Brands, September 2000 — August 2003; PepsiCo, Inc., various executive positions, June 1985 — September 2000.
Michael G. Meyer	48	Vice President of Treasury and Tax since April 2004; Treasurer, January 2002 — March 2004; Assistant Treasurer, September 1994 — December 2001. Various executive positions with Federal-Hoffman, Inc. (former subsidiary of Pentair), August 1985 — August 1994.

*  David D. Harrison will retire from Pentair at the end of February 2007. He will be succeeded by John L. Stauch as Chief Financial Officer.

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PART II

ITEM 5.   MARKET FOR REGISTRANT’S COMMON STOCK, RELATED SECURITY HOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is listed for trading on the New York Stock Exchange and trades under the symbol “PNR.” As of December 31, 2006, there were 3,907 shareholders of record.

The high, low, and closing sales price for our common stock and the dividends declared for each of the quarterly periods for 2006 and 2005 were as follows:

	2006								2005
	First		Second		Third		Fourth		First		Second		Third		Fourth
High	$	41.90	$	41.55	$	34.43	$	33.49	$	44.32	$	46.03	$	45.17	$	38.41
Low	$	34.01	$	32.05	$	25.69	$	26.25	$	38.39	$	37.45	$	36.11	$	30.80
Close	$	40.75	$	34.19	$	26.19	$	31.40	$	39.14	$	42.62	$	36.50	$	34.52
Dividends declared	$	0.14	$	0.14	$	0.14	$	0.14	$	0.13	$	0.13	$	0.13	$	0.13

Pentair has paid 124 consecutive quarterly dividends and has increased dividends each year for 30 consecutive years.

Stock Performance Graph

The following information under the caption “Stock Performance Graph” in this ITEM 5 of this Annual Report on Form 10-K is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934 or to the liabilities of Section 18 of the Securities Exchange Act of 1934, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent we specifically incorporate it by reference into such a filing.

The following graph sets forth the cumulative total shareholder return on our common stock for the last five years, assuming the investment of $100 on December 31, 2001 and the reinvestment of all dividends since that date to December 31, 2006. The graph also contains for comparison purposes the S&P 500 Index and the S&P MidCap 400 Index, assuming the same investment level and reinvestment of dividends.

By virtue of its market capitalization, Pentair is a component of the S&P MidCap 400 Index. On the basis of our size and diversity of businesses, we have not found a readily identifiable peer group. We believe the S&P MidCap 400 Index is an appropriate comparison. We have evaluated other published indices, but have determined that the results are skewed by significantly larger companies included in the indices. We believe such a comparison would not be meaningful.

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	Base Period		INDEXED RETURNS
	December		Years Ending December 31:
Company/Index	2001		2002		2003		2004		2005		2006
PENTAIR INC		100		96.46		130.29		252.02		202.42		187.17
S&P 500 INDEX		100		77.90		100.25		111.15		116.61		135.03
S&P MIDCAP 400 INDEX		100		85.49		115.94		135.05		152.00		167.69

Purchases of Equity Securities

The following table provides information with respect to purchases made by Pentair of common stock during the fourth quarter of 2006:

	(a)		(b)		(c)		(d)
					Total Number of		Dollar Value of
					Shares Purchased		Shares that
	Total Number				as Part of Publicly		May Yet Be
	of Shares		Average Price		Announced Plans		Purchased Under the
Period	Purchased		Paid per Share		or Programs		Plans or Programs
October 1-October 28, 2006		348,916	$	27.94		336,000	$	40,640,979
October 29-November 25, 2006		18,495	$	33.04		—	$	40,640,979
November 26-December 31, 2006		14,452	$	31.58		—	$	40,640,979
Total		381,863				336,000

(a)	The purchases in this column include shares repurchased as part of our publicly announced programs and in addition, 12,916 shares for the period October 1-October 28, 2006, 18,495 shares for the period October 29-November 25, 2006 and 14,452 shares for the period November 26-December 31, 2006 deemed surrendered to us by participants in our Omnibus Stock Incentive Plan and the Outside Directors Nonqualified Stock Option Plan (the “Plans”) to satisfy the exercise price or withholding of tax obligations related to the exercise of stock options and non-vested shares.
(b)	The average price paid in this column includes shares repurchased as part of our publicly announced programs and shares deemed surrendered to us by participants in the Plans to satisfy the exercise price or withholding of tax obligations related to the exercise price of stock options and non-vested shares.
(c)	The number of shares in this column represents the number of shares repurchased as part of publicly announced programs to repurchase up to $100 million of our common stock in 2006.

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^(d) In December 2005, the Board of Directors authorized the repurchase of shares of our common stock up to a maximum dollar limit of $25 million of our common stock. On July 28, 2006, the Board of Directors increased our repurchase authorization to $50 million, and on September 28, 2006, the Board of Directors further increased our repurchase authorization to $100 million. As of December 31, 2006, we had purchased 1,986,026 shares for $59.4 million pursuant to these programs during 2006. In December 2006, the Board of Directors authorized the continuation of the repurchase program in 2007 with a maximum dollar limit of $40.6 million. This authorization expires on December 31, 2007. As of February 16, 2007, we had not repurchased any additional shares under this plan and, accordingly, we have the authority in 2007 to repurchase shares up to a maximum dollar limit of $40.6 million. In 2005 and 2004, respectively, we repurchased 755,663 shares and 105,500 shares of our common stock under similar authorizations.

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ITEM 6.  SELECTED FINANCIAL DATA

Dollars in thousands,		Years ended December 31
except per-share data		2006			2005(1)			2004			2003			2002			2001			2000			1999
Statement of operations
Net sales	Water	$	2,155,225		$	2,131,505		$	1,563,394		$	1,060,303		$	932,420		$	882,615		$	898,247		$	579,236
	Technical   Products		999,244			815,074			714,735			582,684			556,033			689,820			777,725			657,500
	Total		3,154,469			2,946,579			2,278,129			1,642,987			1,488,453			1,572,435			1,675,972			1,236,736
Sales growth			7.1	%		29.3	%		38.7	%		10.4	%		(5.3	%)		(6.2	%)		35.5	%		20.6	%
Cost of goods sold			2,248,219			2,098,558			1,623,419			1,196,757			1,107,212			1,163,001			1,199,122			883,737
Gross profit			906,250			848,021			654,710			446,230			381,241			409,434			476,850			352,999
Margin %			28.7	%		28.8	%		28.7	%		27.2	%		25.6	%		26.0	%		28.5	%		28.5	%
Selling, general and administrative			541,209			478,907			376,015			253,088			230,994			266,229			267,518			231,100
Research and development			58,055			46,042			31,453			22,932			18,952			15,941			18,138			11,927
Restructuring charge	Technical   Products		—			—			—			—			—			38,427			(1,625	)		16,743
	Other		—			—			—			—			—			1,678			21,018			—
	Total		—			—			—			—			—			40,105			19,393			16,743
Operating income	Water		212,498			267,138			197,310			143,962			126,559			109,792			120,732			73,362
	Technical   Products		148,905			109,229			87,844			51,094			29,942			1,857			96,268			46,346
	Other		(54,417	)		(53,295	)		(37,912	)		(24,846	)		(25,206	)		(25,444	)		(45,197	)		(26,480	)
	Total		306,986			323,072			247,242			170,210			131,295			86,205			171,803			93,228
Margin %			9.7	%		11.0	%		10.9	%		10.4	%		8.8	%		5.5	%		10.3	%		7.5	%
Net interest expense			51,881			44,989			37,210			26,395			28,412			40,325			46,435			30,467
(Gain) loss on sale of investment			(364	)		(5,435	)		—			—			—			2,985			—			—
Provision for income taxes			71,702			98,469			73,008			45,665			27,884			12,147			41,580			21,406
Income from continuing operations			183,767			185,049			137,024			98,150			74,999			30,748			83,788			41,355
Income (loss) from discontinued operations, net of tax			—			—			40,248			46,138			54,903			26,768			(27,872	)		61,954
Loss on disposal of discontinued operations, net of tax			(36	)		—			(6,047	)		(2,936	)		—			(24,647	)		—			—
Cumulative effect of accounting change, net of tax			—			—			—			—			—			—			(29	)		—
Net income		$	183,731		$	185,049		$	171,225		$	141,352		$	129,902		$	32,869		$	55,887		$	103,309
Common share data*
Basic EPS — continuing operations		$	1.84		$	1.84		$	1.38		$	1.00		$	0.76		$	0.31		$	0.86		$	0.47
Basic EPS — discontinued operations			—			—			0.34			0.44			0.56			0.02			(0.29	)		0.71
Basic EPS — net income		$	1.84		$	1.84		$	1.72		$	1.44			1.32		$	0.33		$	0.57		$	1.18
Diluted EPS — continuing operations		$	1.81		$	1.80		$	1.35		$	0.99		$	0.75		$	0.31		$	0.86		$	0.47
Diluted EPS — discontinued operations			—			—			0.33			0.43			0.56			0.02			(0.29	)		0.70
Diluted EPS — net income		$	1.81		$	1.80		$	1.68		$	1.42		$	1.31		$	0.33		$	0.57		$	1.17
Cash dividends declared per common share			0.56			0.52			0.43			0.41			0.37			0.35			0.33			0.32
Stock dividends declared per common share			—			—			100	%		—			—			—			—			—
Market value per share (December 31)			31.40			34.52			43.56			22.85			17.28			18.26			12.09			19.25

(1)	In 2005 we early adopted SFAS 123R retroactively to January 1, 2005. The incremental impact of SFAS 123R to the results of operations for 2006 and 2005 include after tax expense of $9.9 million and $12.0 million, respectively, or ($0.10) and ($0.12) diluted EPS, respectively.
*	All share and per share information presented in this Form 10-K has been retroactively restated to reflect the effect of a 100% stock dividend in 2004.

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Dollars in thousands,		Years ended December 31
except per-share data		2006			2005			2004			2003			2002			2001			2000			1999
Balance sheet data
Accounts receivable, net		$	422,134		$	423,847		$	396,459		$	251,475		$	223,778		$	229,455		$	284,674		$	247,404
Inventories			398,857			349,312			323,676			166,862			165,389			178,464			208,267			179,073
Property, plant and equipment, net			330,372			311,839			336,302			233,106			236,322			231,615			248,576			265,027
Goodwill			1,718,771			1,718,207			1,620,404			997,183			843,243			743,499			786,984			800,937
Total assets			3,364,979			3,253,755			3,120,575			2,780,677			2,514,450			2,372,198			2,644,025			2,706,516
Total debt			744,061			752,614			736,105			806,493			735,085			723,706			913,974			1,035,084
Shareholders’ equity			1,669,999			1,555,610			1,447,794			1,261,478			1,105,724			1,015,002			1,010,591			990,771
Other data
Debt/total capital			30.8	%		32.6	%		33.7	%		39.0	%		39.9	%		41.6	%		47.5	%		51.1	%
Depreciation
	Water		35,978			35,842			26,751			20,517			19,478			19,472			19,157			15,453
	Technical   Products		19,617			19,318			19,408			19,721			19,026			23,008			20,701			26,846
	Other		1,304			1,405			904			571			73			561			2,633			167
	Total		56,899			56,565			47,063			40,809			38,577			43,041			42,491			42,466
Goodwill amortization(1)
	Water		—			—			—			—			—			18,560			18,074			12,714
	Technical   Products		—			—			—			—			—			8,273			9,088			8,413
	Total		—			—			—			—			—			26,833			27,162			21,127
Tax effect of goodwill amortization(1)			—			—			—			—			—			(3,861	)		(3,768	)		(3,453	)
Diluted EPS effect of goodwill amortization(1)																		0.24			0.25			0.20
Other amortization			18,197			15,995			7,501			377			434			—			8			—
Net cash provided by operating activities			231,611			247,858			264,091			262,939			270,794			232,334			184,947			144,296
Capital expenditures — continuing operations			51,078			62,471			43,107			29,004			24,346			37,008			42,238			23,694
Capital expenditures — discontinued operations			—			—			5,760			14,618			32,350			16,660			25,803			29,977
Capital expenditures — continuing and discontinued operations			51,078			62,471			48,867			43,622			56,696			53,668			68,041			53,671
Employees of continuing operations			14,800			14,700			12,900			9,000			8,600			8,700			9,900			8,700
Days sales outstanding in receivables(2)			54			54			52			54			58			65			65			58
Days inventory on hand(2)			76			70			62			59			64			72			64			67

(1)

Effective January 1, 2002 we adopted SFAS No. 142, Goodwill and Other Intangible Assets. This standard requires goodwill and intangible assets deemed to have an indefinite life no longer be amortized. This standard did not require restatement of prior period amounts to be consistent with the current year presentation and therefore, we have not made any adjustments to the historical financial information presented. However, we have provided supplemental tax and diluted EPS information as we believe it is necessary to the understanding of our financial performance trend. Our accounting policy prior to the adoption of SFAS No. 142 was to amortize goodwill on a straight-line basis over the estimated future periods to be benefited, principally between 25 and 40 years.

(2)

Calculated using a 13-month average.

In 2004, we divested our Tools Group. Our financial statements have been restated to reflect the Tools Group as a discontinued operation for all periods presented. The 2004 results reflect a pre-tax gain on the sale of the Tools Group of $3.0 million ($6.0 million loss after tax).

In 2002, capital expenditures from discontinued operations included $23.0 million for the acquisition of a previously leased facility.

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In 2001, we adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, resulting in an increase to other assets and other noncurrent liabilities of $7.5 million and $0.8 million, respectively, and a cumulative transition adjustment of $6.7 million in OCI. The transition adjustment relates to our hedging activities through December 31, 2000. Prior to the adoption of SFAS No. 133, financial instruments designated as hedges were not recorded in the financial statements, but cash flows from such contracts were recorded as adjustments to earnings as the hedged items affected earnings.

In 2001, cost of goods sold included $1.0 million related to the 2001 restructuring charge for our Technical Products segment.

In 2000, we discontinued our Equipment segment (Century Mfg. Co./Lincoln Automotive and Lincoln Industrial businesses). Our financial statements have been restated to reflect the Equipment segment as a discontinued operation for all periods presented. The 2001 results reflected a pre-tax loss on the sale of these businesses of $36.3 million ($24.6 million loss after tax).

In 2000, operations reflected a non-cash pre-tax cumulative effect of accounting change related to revenue recognition that reduced income by $0.03 million, net of tax. Reference should be made to the Notes to Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report contains statements that we believe to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give our current expectations or forecasts of future events. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “project,” or “continue,” or the negative thereof or similar words. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. Any or all of our forward-looking statements in this report and in any public statements we make could be materially different from actual results. They can be affected by assumptions we might make or by known or unknown risks or uncertainties. Consequently, we cannot guarantee any forward-looking statements. Investors are cautioned not to place undue reliance on any forward-looking statements. Investors should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties.

The following factors and those discussed in ITEM 1A, Risk Factors, of this Form 10-K may impact the achievement of forward-looking statements:

•  changes in general economic and industry conditions, such as:

•  the strength of product demand and the markets we serve;

•  the intensity of competition, including that from foreign competitors;

•  pricing pressures;

•  market acceptance of new product introductions and enhancements;

•  the introduction of new products and enhancements by competitors;

•  our ability to maintain and expand relationships with large customers;

•  our ability to source raw material commodities from our suppliers without interruption and at reasonable prices;

•  our ability to source components from third parties, in particular from foreign manufacturers, without interruption and at reasonable prices; and

•  the financial condition of our customers;

•  our ability to successfully limit damages arising out of the Horizon litigation;

•  our ability to identify, complete, and integrate acquisitions successfully and to realize expected synergies on our anticipated timetable;

•  changes in our business strategies, including acquisition, divestiture, and restructuring activities;

•  domestic and foreign governmental and regulatory policies;

•  general economic and political conditions, such as political instability, the rate of economic growth in our principal geographic or product markets, or fluctuations in exchange rates;

•  changes in operating factors, such as continued improvement in manufacturing activities and the achievement of related efficiencies, cost reductions, and inventory risks due to shifts in market demand and costs associated with moving production overseas;

•  our ability to continue to successfully generate savings from our excellence in operations initiatives consisting of lean enterprise, supply management and cash flow practices;

•  unanticipated developments that could occur with respect to contingencies such as litigation, intellectual property matters, product liability exposures and environmental matters;

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•  our ability to accurately evaluate the effects of contingent liabilities such as tax, product liability, environmental, and other claims; and

•  our ability to access capital markets and obtain anticipated financing under favorable terms.

The foregoing factors are not exhaustive, and new factors may emerge or changes to the foregoing factors may occur that would impact our business. We assume no obligation, and disclaim any duty, to update the forward-looking statements in this report.

Overview

We are a focused diversified industrial manufacturing company comprised of two operating segments: Water and Technical Products. Our Water Group is a global leader in providing innovative products and systems used worldwide in the movement, storage, treatment, and enjoyment of water. Our Technical Products Group is a leader in the global enclosures and thermal management markets, designing and manufacturing standard, modified, and custom enclosures that house and protect sensitive electronics and electrical components; thermal management products; and accessories. In 2007, we expect our Water Group and Technical Products Group to generate approximately 70% and 30% of total revenues, respectively.

Our Water Group has progressively become a more important part of our business portfolio with sales increasing from approximately $125 million in 1995 to approximately $2.2 billion in 2006. We believe the water industry is structurally attractive as a result of a growing demand for clean water and the large global market size (of which we have identified a target market totaling $60 billion). Our vision is to be a leading global provider of innovative products and systems used in the movement, storage, treatment, and enjoyment of water.

Our Technical Products Group operates in a large global market with significant potential for growth in industry segments such as defense, security, medical, and networking. We believe we have the largest enclosures industrial and commercial distribution network in North America and the highest enclosures brand recognition in the industry in North America. From mid-2001 through 2003, the Technical Products Group experienced significantly lower sales volumes as a result of severely reduced capital spending in the industrial and commercial markets and over-capacity and weak demand in the datacom and telecom markets. From 2004 through 2006, sales volumes increased due to the addition of new distributors, new products, and higher demand in targeted markets. In addition, through the success of our Pentair Integrated Management System (“PIMS”) initiatives, we have increased Technical Products’ segment operating margins to our goal of 15% and achieved 17 consecutive quarters of year-over-year operating margin expansion.

Key Trends and Uncertainties

The following trends and uncertainties affected our financial performance in 2006 and will likely impact our results in the future:

•  The housing market and new pool starts slowed dramatically in the first quarter of 2006 and shrank in the last three quarters of the year. We believe that construction of new homes and new pools starts in North America affects approximately 25% of the sales of our Water Group, especially for our pool and spa businesses. The impact of this downturn reduced our expected revenues in 2006 and will likely continue to have an uncertain impact on our revenues in 2007.

•  We experience seasonal demand in a number of markets within our Water Group. End-user demand for pool equipment follows warm weather trends and is at seasonal highs from April to August. The magnitude of the sales spike is partially mitigated by employing some advance sales “early buy” programs (generally including extended payment terms and/or additional discounts). Demand for residential and agricultural water systems is also impacted by economic conditions and weather patterns, particularly by heavy flooding and droughts.

•  We expect our operations to continue to benefit from our PIMS initiatives which include strategy deployment; lean enterprise with special focus on sourcing and supply management, cash flow management, and lean operations; and IGNITE, our process to drive organic growth.

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•  We are experiencing material cost and other inflation in a number of our businesses. We are striving for greater productivity improvements and implementing selective increases in selling prices to help mitigate cost increases in base materials such as metals and other costs such as pensions, health care and insurance.

•  We have a long-term goal to consistently generate free cash flow that equals or exceeds 100% of our net income. Free cash flow, which we define as cash flow from operating activities less capital expenditures, including both continuing and discontinued operations, plus proceeds from sale of property and equipment, exceeded $200 million for the fourth consecutive year in 2005 and was $181 million in 2006. See our discussion of Other financial measures under the caption “Liquidity and Capital Resources” of this report.

•  We experienced unfavorable foreign currency effects on net sales in the first quarter of 2006 and favorable foreign currency effects in the second, third and fourth quarters of 2006. Overall, we experienced favorable foreign currency effect on net sales in 2006. Our currency effect is primarily for the U.S. dollar against the euro, which may or may not trend favorably in the future.

•  The effective tax rate for 2006 was 28.1% due in part to favorable resolution of prior tax years and higher utilization of foreign tax credits. We continue to actively pursue initiatives to reduce our effective tax rate. The tax rate in any quarter can be affected positively or negatively by adjustments that are required to be reported in the specific quarter of resolution. We expect our full year effective tax rate in 2007 to be between 35% and 36%.

Outlook

In 2007, our operating objectives include the following:

•  Continue to drive operating excellence through lean enterprise initiatives, with special focus on sourcing and supply management, cash flow management, and lean operations;

•  Continue the integration of acquisitions and realize identified synergistic opportunities;

•  Continue proactive talent development, particularly in international management and other key functional areas;

•  Achieve organic sales growth (in excess of market growth rates), particularly in international markets; and

•  Continue to make strategic acquisitions to grow and expand our existing platforms in our Water and Technical Products Groups.

The ability to achieve our operating objectives will depend, to a certain extent, on factors outside our control. See “Risk Factors” under Part I of this report.

RESULTS OF OPERATIONS

Net sales

The components of the net sales change were:

Percentages	2006 vs. 2005		2005 vs. 2004
Volume		4.4		25.8
Price		2.5		3.1
Currency		0.2		0.4
Total		7.1		29.3

The 7.1 percent increase in consolidated net sales in 2006 from 2005 was primarily the result of:

•  an increase in sales volume due to our acquisitions, primarily the December 1, 2005 acquisition of the McLean Thermal Management, Aspen Motion Technologies, and Electronic Solutions businesses from APW, Ltd. (collectively, “Thermal”); and

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•  organic sales growth of approximately two percent (excluding the effects of acquisitions and foreign currency exchange), which includes selective increases in selling prices to mitigate inflationary cost increases.

The 29.3 percent increase in consolidated net sales in 2005 from 2004 was primarily the result of:

•  an increase in sales volume driven by our July 31, 2004 acquisition of WICOR, February 23, 2005 acquisition of DEP and December 1, 2005 acquisition of Thermal;

•  pro forma sales growth from continuing operations of approximately six percent, assuming we had acquired WICOR at the beginning of 2004, excluding the Thermal acquisition, and excluding the effects of foreign currency translation;

•  selective increases in selling prices in our Water and Technical Products Groups to mitigate inflationary cost increases; and

•  favorable foreign currency effects.

Sales by segment and the year-over-year changes were as follows:

							2006 vs. 2005				2005 vs. 2004
In thousands	2006		2005		2004		$ change		% change		$ change		% change
Water	$	2,155,225	$	2,131,505	$	1,563,394	$	23,720		1.1%	$	568,111		36.3%
Technical Products		999,244		815,074		714,735		184,170		22.6%		100,339		14.0%
Total	$	3,154,469	$	2,946,579	$	2,278,129	$	207,890		7.1%	$	668,450		29.3%

Water

The 1.1 percent increase in Water segment sales in 2006 from 2005 was primarily the result of:

•  organic sales growth of approximately one percent (excluding foreign currency exchange), which includes selective increases in selling prices to mitigate inflationary cost increases;

•  strong pump sales in our commercial markets;

•  increased sales in Europe driven by higher pump and filtration sales;

•  sales growth in emerging markets in Asia-Pacific;

•  sales growth of filtration products in our foodservice, commercial, and industrial markets; and

•  favorable foreign currency effects.

These increases were partially offset by:

•  lower sales of pool and spa products due to softening of the U.S. residential housing market and inventory draw-downs by pool distribution customers to position themselves for the softening market.

The 36.3 percent increase in Water segment sales in 2005 from 2004 was primarily the result of:

•  an increase in sales volume driven by our July 31, 2004 acquisition of WICOR and our February 23, 2005 acquisition of DEP;

•  selective increases in selling prices to mitigate inflationary cost increases;

•  sales growth on a pro forma basis (assuming we had acquired WICOR at the beginning of 2004 and excluding favorable foreign currency exchange) of approximately four percent for the year;

•  an increase in sales of pool and spa equipment due to market share gains, favorable weather conditions, and successful early buy programs;

•  growth in international markets; and

•  favorable foreign currency effects.

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Technical Products

The 22.6 percent increase in Technical Products segment sales in 2006 from 2005 was primarily the result of:

•  an increase in sales volume due to our December 1, 2005 acquisition of the Thermal businesses;

•  organic sales growth of approximately six percent (excluding acquisitions and foreign currency exchange), which includes selective increases in selling prices to mitigate inflationary cost increases:

•  increased sales in our commercial and industrial markets;

•  increased sales in European test and measurement and telecom markets;

•  higher sales in Asia driven by key OEM programs in China and stronger sales in the telecom and semiconductor markets in Japan; and

•  favorable foreign currency effects.

These increases were partially offset by:

•  lower sales to North American telecom businesses due to weaker markets conditions, customer consolidation and certain key projects reaching end-of-life; and

•  lower sales in data markets related to OEM projects that reached end-of-life or were transitioned to our Asian operations.

The 14.0 percent increase in Technical Products segment sales in 2005 from 2004 was primarily the result of:

•  growth in new products including Advanced Telecommunications Computing Architecture (ATCA), slide rails for datacom applications and a new cabinet line targeted toward the telecom and electronic markets;

•  improved service and delivery resulting in increased sales volume in North America with strong sales in commercial and medical industry segments;

•  selective increases in selling prices to mitigate inflationary cost increases;

•  an increase in sales volume driven by our December 1, 2005 acquisition of the Thermal businesses;

•  higher sales in China; and

•  favorable foreign currency effects.

Gross profit

In thousands	2006	% of sales	2005	% of sales	2004	% of sales
Gross profit	$906,250	28.7%	$848,021	28.8%	$654,710	28.7%
Percentage point change		(0.1) pts		0.1 pts

The 0.1 percentage point decrease in gross profit as a percent of sales in 2006 from 2005 was primarily the result of:

•  inflationary increases related to material, labor and freight costs;

•  increased reserves for inventory and warranty expenses in our Water Group due to the effects of the U.S. residential housing market downturn on the spa and bath markets and new pool starts, and also due to inventory reserves established for pump motors that we no longer expect to need;

•  lower sales of pool and spa products related to the U.S. residential housing market downturn; and

•  operating inefficiencies related to product moves and plant consolidations.

These decreases were partially offset by:

•  selective increases in selling prices in our Water and Technical Products Groups to mitigate inflationary cost increases;

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•  savings generated from our PIMS initiatives including lean and supply management practices;

•  cost leverage from increased sales volume in our Technical Products Group; and

•  absence of start-up costs in new water facilities (incurred in 2005).

The 0.1 percentage point increase in gross profit as a percent of sales in 2005 from 2004 was primarily the result of:

•  selective increases in selling prices in our Water and Technical Products Groups to mitigate inflationary cost increases;

•  savings generated from our PIMS initiatives including lean enterprise and supply management practices;

•  cost leverage from our increase in sales volume; and

•  synergy benefits, net of integration costs, related to the acquisition of the former WICOR businesses.

These increases were partially offset by:

•  inflationary cost increases in our Water and Technical Products Groups;

•  lower margins associated with our July 31, 2004 acquisition of WICOR; and

•  operating inefficiencies related to WICOR product moves, plant consolidations, and start-up costs in new water facilities.

Selling, general and administrative (SG&A)

In thousands	2006	% of sales	2005	% of sales	2004	% of sales
SG&A	$541,209	17.2%	$478,907	16.2%	$376,015	16.5%
Percentage point change		1.0 pts		(0.3) pts

The 1.0 percentage point increase in SG&A expense as a percent of sales in 2006 from 2005 was primarily the result of:

•  higher selling, general and administrative expense to fund investments in future growth in our Water Group, including personnel and business infrastructure, with an emphasis on growth in our international markets; and

•  severance costs in our Water Group and at our corporate headquarters, and increased reserves for accounts receivable due to the effects of the U.S. residential housing market downturn on the spa and bath markets and new pool starts in our Water Group.

These increases were partially offset by:

•  cost leverage from our increase in sales volume in the Technical Products Group.

The 0.3 percentage point decrease in SG&A expense as a percent of sales in 2005 from 2004 was primarily the result of:

•  favorable cost leverage from the combined larger company of Pentair and the former WICOR businesses.

These decreases were partially offset by:

•  adoption of SFAS 123R which requires us to record expense for the fair value of stock-based compensation;

•  investments made to support future growth; and

•  higher amortization of intangibles due to acquisitions and amortization of a tax strategy-based investment.

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Research and development (R&D)

In thousands	2006	% of sales	2005	% of sales	2004	% of sales
R&D	$58,055	1.8%	$46,042	1.6%	$31,453	1.4%
Percentage point change		0.2 pts		0.2 pts

The 0.2 percentage point increase in R&D expense as a percent of sales in 2006 from 2005 was primarily the result of:

•  additional investments related to new product development initiatives in our Water and Technical Products Groups; and

•  proportionately higher R&D spending in the acquired Thermal businesses.

The 0.2 percentage point increase in R&D expense as a percent of sales in 2005 from 2004 was primarily the result of:

•  increased spending for new product and new markets, especially for water filtration.

Operating income

Water

In thousands	2006	% of sales	2005	% of sales	2004	% of sales
Operating income	$212,498	9.9%	$267,138	12.5%	$197,310	12.6%
Percentage point change		(2.6) pts		(0.1) pts

The 2.6 percentage point decrease in Water segment operating income as a percent of net sales in 2006 from 2005 was primarily the result of:

•  inflationary increases related to material, labor, and freight costs;

•  lower sales of pool and spa products related to the U.S. residential housing market downturn;

•  planned investments in new products and new customers, reinforcing international talent, and implementing a unified business infrastructure in Europe;

•  unfavorable product mix;

•  increased inventory, warranty, and accounts receivable reserves and severance costs due to the effects of the U.S. residential housing market downturn on the spa and bath markets and new pool starts; and

•  manufacturing inefficiencies resulting from plant and product line moves.

These decreases were partially offset by:

•  selective increases in selling prices to mitigate inflationary cost increases; and

•  savings realized from continued success of PIMS, including lean and supply management activities.

The 0.1 percentage point decrease in Water segment operating income as a percent of net sales in 2005 from 2004 was primarily the result of:

•  lower initial margins associated with our July 31, 2004 acquisition of WICOR during the first half of 2005;

•  inflationary cost increases for certain production materials;

•  operating inefficiencies related to WICOR product moves, plant consolidations, and start-up costs associated with new water facilities;

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•  adoption of SFAS 123R which requires us to record expense for the fair value of stock-based compensation; and

•  investments made to support future growth.

These decreases were partially offset by:

•  synergy benefits, net of integration costs, related to the acquisition of the former WICOR businesses;

•  favorable operating leverage provided by supply management savings and productivity gains from higher sales volume; and

•  selective increases in selling prices to mitigate inflationary cost increases.

Technical Products

In thousands	2006	% of sales	2005	% of sales	2004	% of sales
Operating income	$148,905	14.9%	$109,229	13.4%	$87,844	12.3%
Percentage point change		1.5 pts		1.1 pts

The 1.5 percentage point increase in Technical Products segment operating income as a percent of net sales in 2006 from 2005 was primarily the result of:

•  leverage gained on volume expansion through market share growth;

•  savings realized from the continued success of PIMS, including lean and supply management activities; and

•  selective increases in selling prices to mitigate inflationary cost increases.

These increases were partially offset by:

•  inflationary increases related to materials, labor and freight costs.

The 1.1 percentage point increase in Technical Products segment operating income as a percent of net sales in 2005 from 2004 was primarily the result of:

•  selective increases in selling prices to mitigate inflationary cost increases;

•  leverage gained on volume expansion through new product sales and market share growth; and

•  savings from the continued success of PIMS, including lean enterprise and supply management activities.

These increases were partially offset by:

•  material cost inflation, primarily aluminum and steel; and

•  adoption of SFAS 123R which requires us to record expense for the fair value of stock-based compensation.

Net interest expense

In thousands	2006		2005		Difference		% change		2005		2004		Difference		% change
Net interest expense	$	51,881	$	44,989	$	6,892		15.3%	$	44,989	$	37,210	$	7,779		20.9%

The 15.3 percent increase in interest expense from continuing operations in 2006 from 2005 was primarily the result of:

•  increases in interest rates;

•  higher average outstanding debt in 2006 primarily as a result of the acquired Thermal businesses and an increase in inventory; and

•  incremental interest expense related to the payments made in connection with the final resolution of the net asset value dispute with The Black and Decker Corporation (“BDK”) in the first quarter of 2006.

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These increases were partially offset by:

•  favorable adjustments to interest expense related to the favorable settlement of prior years’ federal tax returns in the second and third quarters of 2006.

The 20.9 percent increase in interest expense from continuing operations in 2005 from 2004 was primarily the result of:

•  a portion of interest expense in 2004 being allocated to discontinued operations for our former Tools Group versus all the interest expense in 2005 being attributed to continuing operations; and

•  higher interest rates in 2005.

Provision for income taxes

In thousands	2006			2005			2004
Income from continuing operations before income taxes	$	255,469		$	283,518		$	210,032
Provision for income taxes		71,702			98,469			73,008
Effective tax rate		28.1	%		34.7	%		34.8	%

The 6.6 percentage point decrease in the tax rate in 2006 from 2005 was primarily the result of:

•  higher utilization of foreign tax credits;

•  the favorable settlement in 2006 of prior years’ federal tax returns; and

•  an unfavorable settlement in 2005 for a routine tax exam for prior years in Germany.

These decreases were partially offset by:

•  a favorable settlement in 2005 related to prior years’ federal tax returns; and

•  a favorable adjustment in 2005 related to the filing of our 2004 federal tax return.

The 0.1 percentage point decrease in the tax rate in 2005 from 2004 was primarily the result of:

•  a favorable benefit related to R&D tax credits;

•  a favorable settlement in 2005 related to prior years’ federal tax returns;

•  a favorable adjustment in 2005 related to the filing of our 2004 federal tax return; and

•  a benefit related to the deduction for qualified production activities.

These decreases were partially offset by:

•  an unfavorable settlement in 2005 for a routine tax examination of prior years in Germany; and

•  higher effective tax rate in 2005 due to the non-deductibility of certain SFAS 123R expenses related to stock options.

We expect our full year effective tax rate in 2007 to be between 35% and 36%. We will continue to pursue tax rate reduction opportunities.

LIQUIDITY AND CAPITAL RESOURCES

Cash requirements for working capital, capital expenditures, equity investments, acquisitions, debt repayments, and dividend payments are generally funded from cash generated from operations, availability under existing committed revolving credit facilities, and in certain instances, public and private debt and equity offerings. In 2006, we invested $29 million in acquisitions, repurchased $59 million of our stock, paid $57 million in dividends, and decreased our debt by $9 million.

We experience seasonal cash flows primarily due to seasonal demand in a number of markets within our Water Group. End-user demand for pool equipment follows warm weather trends and is at seasonal highs from April

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to August. The magnitude of the sales spike is partially mitigated by employing some advance sales “early buy” programs (generally including extended payment terms and/or additional discounts). Demand for residential and agricultural water systems is also impacted by weather patterns, particularly by heavy flooding and droughts.

The following table presents selected working capital measurements calculated from our monthly operating results based on a 13-month moving average:

	December 31		December 31		December 31
Days	2006		2005		2004
Days of sales in accounts receivable		54		54		52
Days inventory on hand		76		70		62
Days in accounts payable		56		56		57

Operating activities

Cash provided by operating activities was $231.6 million in 2006, or $16.2 million lower compared with the same period in 2005. The decrease in cash provided by operating activities was due primarily to working capital increases related to increased inventory levels and decreases in various accruals. The increase in days inventory on hand as of December 31, 2006 compared to December 31, 2005 was attributable to increased inventory levels to support product moves and plant rationalizations, inventory to support product sourced from low cost countries, higher value of inventories due to rising raw material input costs, and due to the purchase of additional submersible pump motors for competitive reasons. In the future, we expect our working capital ratios to improve as we complete our facility rationalization activities and capitalize on our PIMS initiatives.

Cash provided by operating activities was $247.9 million in 2005, or $16.2 million lower compared with the same period in 2004. The decrease in cash provided by operating activities was due to working capital increases related to increased sales volume, the rationalization of Water Group operations, and increases in various customer rebates. The increased days of sales in accounts receivable as of December 31, 2005 compared to December 31, 2004 was the result of the differences in sales terms offered by the former WICOR business compared to the terms offered by our former Tools Group and the sale of approximately a $22.0 million interest in a pool of accounts receivable to a third-party financial institution in 2004. The increased days inventory on hand as of December 31, 2005 compared to December 31, 2004 was driven by the increased inventory levels attributable to increased sourcing out of Asia, higher value of inventories due to rising raw material input costs, and inventory redundancies associated with the ramp-up of new facilities and the wind-down of old facilities.

Cash provided by operating activities was $264.1 million in 2004, or $1.2 million higher compared with the same period in 2003. The increase in net cash provided by operating activities was primarily attributable to an increase in net income offset by higher levels of inventory due to inventory builds to support customers during product transfers and plant consolidation activities in Water. The WICOR acquisition also increased our working capital ratios, primarily inventory days.

In December 2006 and 2004, we sold approximately $30.0 million and $22.0 million, respectively, of accounts receivable to a third-party financial institution to mitigate accounts receivable concentration risk because we did not offer or the customer did not take advantage of the early pay discounts and to provide additional financing capacity. In compliance with SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, sales of accounts receivable are reflected as a reduction of accounts receivable in our Consolidated Balance Sheets and the proceeds are included in the cash flows from operating activities in our Consolidated Statements of Cash Flows. In 2006, a loss in the amount of $0.8 million related to the sale of accounts receivable is included in the line item Gain on sale of assets, net in our Consolidated Statements of Income. In 2004, no gain or loss was recorded as the estimated present value of the receivables sold approximated the carrying amount.

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Investing activities

Capital expenditures in 2006, 2005, and 2004 were $51.1 million, $62.5 million and $48.9 million (including $43.1 million for continuing operations), respectively. We anticipate capital expenditures for fiscal 2007 to be approximately $70 to $80 million, primarily for capacity expansions in our low cost country manufacturing facilities, implementation of a unified business systems infrastructure in Europe, new product development, and general maintenance capital.

On April 12, 2006, we acquired, as part of our Water Group, the assets of Geyer’s Manufacturing & Design Inc. and FTA Filtration, Inc. (together “Krystil Klear”), two privately held companies, for $15.5 million in cash. Krystil Klear expands our industrial filtration product offering to include a full range of steel and stainless steel tanks which house filtration solutions.

During 2006, we completed several other small acquisitions totaling $14.2 million in cash and notes payable, adding to both our Water and Technical Products Groups.

In January 2006, pursuant to the purchase agreement for the sale of our former Tools Group, we completed the repurchase of a manufacturing facility in Suzhou, China from BDK for approximately $5.7 million. We recorded no gain or loss on the repurchase. In March 2006, we completed an outstanding net asset value arbitration with BDK relating to the purchase price for the sale of our former Tools Group. The decision by the arbitrator constituted a final resolution of all disputes between BDK and us regarding the net asset value. We paid the final net asset value purchase price adjustment pursuant to the purchase agreement of $16.1 million plus interest of $1.1 million in March 2006, resulting in an incremental pre-tax loss on disposal of discontinued operations of $3.4 million or $1.6 million net of tax. In the third quarter of 2006, we resolved a prior year tax item that resulted in a $1.4 million income tax benefit related to our former Tools Group. Also in March 2006, we exited a leased facility from our former Service Equipment business resulting in a net cash outflow of $2.2 million and an immaterial gain from disposition.

During 2006, we made investments in and loans to certain joint ventures in the amount of $7.5 million.

Cash proceeds from the sale of property and equipment of $17.1 million in 2005 was primarily related to the sale of three facilities for our Water Group.

On December 1, 2005, we acquired, as part of our Technical Products Group, the Thermal businesses from APW for approximately $143.9 million, including a cash payment of $140.6 million and transaction costs of $3.3 million. These businesses provide thermal management solutions and integration services to the telecommunications, data communications, medical and security markets.

On February 23, 2005, we acquired, as part of our Water Group, certain assets of DEP, a privately held company, for $10.3 million, including a cash payment of $10.0 million, transaction costs of $0.2 million, plus debt assumed of $0.1 million. The DEP product line addresses the water and wastewater markets and is part of our Water Group.

In the third quarter 2005, we paid $10.4 million in post-closing purchase price adjustments related to the October 2004 sale of our former Tools Group to BDK.

In April 2005, we sold our interest in the stock of LN Holdings Corporation for cash consideration of $23.6 million, resulting in a pre-tax gain of $5.2 million and an after tax gain of $3.3 million. The terms of the sale agreement established two escrow accounts totaling $14 million to be used for payment of any potential adjustments to the purchase price, transaction expenses, and indemnification for certain losses such as environmental claims. In December 2005, we received $0.2 million from the escrow accounts which increased our gain from the sale. During 2006 we received $1.2 million from the escrow accounts which also increased our gain from the sale. Any remaining escrow balances are to be distributed by April 2008 to the former shareholders in accordance with their ownership percentages. Any funds received from settlement of escrows in future periods will be accounted for as additional gain on the sale of this interest.

Effective July 31, 2004, we completed the acquisition of all of the shares of capital stock of WICOR from Wisconsin Energy Corporation for $874.7 million, including a cash payment of $871.1 million, transaction costs of $11.2 million, and debt assumed of $21.6 million, less a favorable final purchase price adjustment of

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$14.0 million, and less cash acquired of $15.2 million. This includes an additional $0.4 million in transaction costs recorded in the first three quarters of 2005.

On April 5, 2004, we acquired all of the remaining stock of the Tools Group’s Asian joint venture for $21.8 million in cash, $6.4 million of which was paid following the sale of the Tools Group. The level of return on sales targets achieved in the second quarter of 2004 required a payment of $0.9 million, which was recorded as an increase to goodwill. The acquisition included cash acquired of $6.2 million and debt assumed of $9.0 million. The investment in the Tools Group’s Asian joint venture business was sold as part of the Tools Group to BDK.

During 2004, we paid $3.9 million in purchase price adjustments related to the December 31, 2003 acquisition of Everpure. The adjustment primarily related to the final determination of closing date net assets. We also paid $2.3 million for acquisition fees which were primarily related to the Everpure acquisition.

Effective after the close of business October 2, 2004, we completed the sale of our Tools Group to BDK for approximately $796.8 million in cash, including a $21.8 million interim net asset value increase, subject to post-closing adjustments.

Financing activities

Net cash used for financing activities was $117.8 million, $43.8 million and $137.8 million in 2006, 2005 and 2004, respectively. Financing activities consisted primarily of draw downs and repayments on our revolving credit facilities to fund our operations in the normal course of business, dividend payments, share repurchases, and cash received from stock option exercises.

We have a multi-currency revolving Credit Facility (the “Credit Facility”) of $800 million expiring on March 4, 2010. We are authorized to sell short-term commercial paper notes to the extent availability exists under the Credit Facility. We use the Credit Facility as back-up liquidity to support 100% of commercial paper outstanding. As of December 31, 2006, we had $208.9 million of commercial paper outstanding that matures within 49 days. All of the commercial paper was classified as long-term as we have the intent and the ability to refinance such obligations on a long-term basis under the Credit Facility.

In March 2005, we amended and restated our multi-currency revolving Credit Facility, increasing the size of the facility from $500 million to $800 million with a term of five years. The interest rate on the loans under the $800 million Credit Facility is LIBOR plus 0.625%. Interest rates and fees on the Credit Facility vary based on our credit ratings.

Effective following the close of business on July 31, 2004, we completed the acquisition of WICOR. We funded the payment of the purchase price and related fees and expenses of the WICOR acquisition with an $850 million committed line of credit (“the Bridge Facility”) and through additional borrowings available under our existing Credit Facility. The interest rate on the Bridge Facility and loans under the Credit Facility during the period of the Bridge Facility was LIBOR plus 1.375%.

On October 4, 2004, we received approximately $796.8 million of proceeds from the sale of our Tools Group to BDK. As required under the terms of the Bridge Facility, we used the proceeds from the Tools Group sale and additional borrowings under the Credit Facility to pay off the Bridge Facility. Following payment of the Bridge Facility and based on our existing credit ratings, the interest rate on loans under the Credit Facility decreased to LIBOR plus 1.125%.

We were in compliance with all debt covenants as of December 31, 2006.

In addition to the Credit Facility, we have $25 million of uncommitted credit facilities, under which we had drawn $14.0 million in borrowings as of December 31, 2006.

Our current credit ratings are as follows:

	Long-Term Debt		Current Rating
Rating Agency	Rating		Outlook
Standard & Poor’s		BBB		Stable
Moody’s		Baa3		Stable

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We believe the potential impact of a downgrade in our financial outlook is currently not significant to our liquidity exposure or cost of debt. A credit rating is a current opinion of the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial program. The credit rating takes into consideration the creditworthiness of guarantors, insurers, or other forms of credit enhancement on the obligation and takes into account the currency in which the obligation is denominated. The ratings outlook also highlights the potential direction of a short or long-term rating. It focuses on identifiable events and short-term trends that cause ratings to be placed under observation by the respective Rating Agencies. A change in rating outlook does not mean a rating change is inevitable. Prior changes in our ratings outlook have had no immediate impact on our liquidity exposure or on our cost of debt.

We issue short-term commercial paper notes that are currently not rated by Standard & Poor’s or Moody’s. Even though our short-term commercial paper is unrated, we believe a downgrade in our long-term debt rating could have a negative impact on our ability to continue to issue unrated commercial paper.

We do not expect that a one rating downgrade of our long-term debt by either Standard & Poor’s or Moody’s would substantially affect our ability to access the long term debt capital markets. However, depending upon market conditions, the amount, timing and pricing of new borrowings could be adversely affected. If both of our long-term debt ratings were downgraded to below BBB-/Baa3, our flexibility to access the term debt capital markets would be reduced. In the event of a downgrade of our long-term debt rating, the cost of borrowing and fees payable under our Credit Facility and $35 million private placement fixed rate note could increase. While the Credit Facility has a pricing grid based in part on credit ratings, we do not have any agreements under which the obligations are accelerated in the event of a ratings downgrade.

As of December 31, 2006, our capital structure consisted of $744.1 million in total indebtedness and $1,670.0 million in shareholders’ equity. The ratio of debt-to-total capital at December 31, 2006 was 30.8% , compared with 32.6% at December 31, 2005. Our targeted debt-to-total capital ratio is 40% or less.

We expect to continue to have cash requirements to support working capital needs and capital expenditures, to pay interest and service debt, and to pay dividends to shareholders. In order to meet these cash requirements, we intend to use available cash and internally generated funds, and to borrow under our committed and uncommitted credit facilities.

We paid dividends in 2006 of $56.6 million, compared with $53.1 million in 2005 and $43.1 million in 2004. We anticipate continuing the practice of paying dividends on a quarterly basis.

In December 2005, the Board of Directors authorized the repurchase of shares of our common stock up to a maximum dollar limit of $25 million of our common stock. On July 28, 2006, the Board of Directors increased our repurchase authorization to $50 million, and on September 28, 2006, the Board of Directors further increased our repurchase authorization to $100 million. As of December 31, 2006, we had purchased 1,986,026 shares for $59.4 million pursuant to these programs during 2006. The Board of Directors authorized the continuation of the repurchase program in 2007 with a maximum dollar limit of $40.6 million. This authorization expires on December 31, 2007. As of February 16, 2007, we had not repurchased any additional shares under this plan and, accordingly, we have the authority in 2007 to repurchase shares up to a maximum dollar limit of $40.6 million. In 2005 and 2004, respectively, we repurchased 755,663 shares and 105,500 shares of our common stock under similar authorizations.

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The following summarizes our significant contractual obligations that impact our liquidity:

	Payments Due by Period
											More than
In thousands	2007		2008		2009		2010		2011		5 Years		Total
Long-term debt obligations	$	22,188	$	1,546	$	251,150	$	269,066	$	75	$	200,036	$	744,061
Interest obligations on fixed-rate debt		26		25		25		5		5		10		96
Capital lease obligations		175		141		50		19		—		—		385
Operating lease obligations, net of sublease rentals		27,973		22,969		17,528		12,790		11,751		9,017		102,028
Other long-term liabilities		2,868		1,226		719		317		—		—		5,130
Total contractual cash obligations, net	$	53,230	$	25,907	$	269,472	$	282,197	$	11,831	$	209,063	$	851,700

In addition to the summary of significant contractual obligations, we will incur annual interest expense on outstanding variable rate debt. As of December 31, 2006, variable interest rate debt, including the effects of derivative financial instruments, was $247.9 million at a weighted average interest rate of 5.7%.

We expect to make contributions in the range of $15 million to $20 million to our pension plans in 2007. The 2007 expected contributions will equal or exceed our minimum funding requirements.

Other financial measures

In addition to measuring our cash flow generation or usage based upon operating, investing, and financing classifications included in the Consolidated Statements of Cash Flows, we also measure our free cash flow and our conversion of net income. We have a long-term goal to consistently generate free cash flow that equals or exceeds 100% conversion of net income. Free cash flow and conversion of net income are non-GAAP financial measures that we use to assess our cash flow performance. We believe free cash flow and conversion of net income are important measures of operating performance because they provide us and our investors a measurement of cash generated from operations that is available to pay dividends and repay debt. In addition, free cash flow and conversion of net income are used as a criterion to measure and pay compensation-based incentives. Our measure of free cash flow and conversion of net income may not be comparable to similarly titled measures reported by other companies. The following table is a reconciliation of free cash flow and a calculation of the conversion of net income with cash flows from continuing and discontinued operating activities:

	Twelve Months Ended December 31
In thousands	2006			2005			2004
Cash flow provided by operating activities	$	231,611		$	247,858		$	264,091
Capital expenditures		(51,078	)		(62,471	)		(48,867	)
Proceeds from sale of property and equipment		684			17,111			—
Free cash flow		181,217			202,498			215,224
Net income		183,731			185,049			171,225
Conversion of net income		99	%		109	%		126	%

In 2007, our objective is to generate free cash flow that equals or exceeds 100% of net income.

Off-balance sheet arrangements

At December 31, 2006, we had no off-balance sheet financing arrangements.

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COMMITMENTS AND CONTINGENCIES

Environmental

We have been named as defendants, targets, or potentially responsible parties (“PRP”) in a small number of environmental clean-ups, in which our current or former business units have generally been given de minimis status. To date, none of these claims have resulted in clean-up costs, fines, penalties, or damages in an amount material to our financial position or results of operations. We have disposed of a number of businesses in recent years and in certain cases, such as the disposition of the Cross Pointe Paper Corporation uncoated paper business in 1995, the disposition of the Federal Cartridge Company ammunition business in 1997, the disposition of Lincoln Industrial in 2001, and the disposition of the Tools Group in 2004, we have retained responsibility and potential liability for certain environmental obligations. We have received claims for indemnification from purchasers of these businesses and have established what we believe to be adequate accruals for potential liabilities arising out of retained responsibilities. We settled some of the claims in prior years; to date our recorded accruals have been adequate.

In addition, there are ongoing environmental issues at a limited number of sites, including one site acquired in the acquisition of Essef Corporation in 1999, which relate to operations no longer carried out at the sites. We have established what we believe to be adequate accruals for remediation costs at these sites. We do not believe that projected response costs will result in a material liability.

We may be named as a PRP at other sites in the future, for both divested and acquired businesses. When the outcome of the matter is probable and it is possible to provide reasonable estimates of our liability with respect to environmental sites, provisions have been made in accordance with generally accepted accounting principles in the United States. As of December 31, 2006 and 2005, our undiscounted reserves for such environmental liabilities were approximately $5.6 million and $6.4 million, respectively. We cannot ensure that environmental requirements will not change or become more stringent over time or that our eventual environmental clean-up costs and liabilities will not exceed the amount of our current reserves.

Stand-by letters of credit

In the ordinary course of business, predominantly for contracts and bids involving municipal pump products, we are required to commit to bonds that require payments to our customers for any non-performance. The outstanding face value of the bonds fluctuates with the value of our projects in process and in our backlog. In addition, we issue financial stand-by letters of credit to secure our performance to third parties under self-insurance programs and certain legal matters. As of December 31, 2006 and 2005, the outstanding value of these instruments totaled $59.6 million and $38.8 million, respectively.

NEW ACCOUNTING STANDARDS

See ITEM 8, Note 1 of the Notes to Consolidated Financial Statements for information pertaining to recently adopted accounting standards or accounting standards to be adopted in the future.

CRITICAL ACCOUNTING POLICIES

We have adopted various accounting policies to prepare the consolidated financial statements in accordance with accounting principles generally accepted in the United States. Our significant accounting policies are more fully described in ITEM 8, Note 1 of the Notes to Consolidated Financial Statements. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, terms of existing contracts, our observance of trends in the industry, and information available from other outside sources, as appropriate. We consider an accounting estimate to be critical if:

•  it requires us to make assumptions about matters that were uncertain at the time we were making the estimate; and

•  changes in the estimate or different estimates that we could have selected would have had a material impact on our financial condition or results of operations.

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Our critical accounting estimates include the following:

Impairment of Goodwill

The fair value of each of our reporting units was estimated using a discounted cash flow approach. The test for impairment requires us to make several estimates about projected future cash flows and appropriate discount rates. If these estimates change, we may incur charges for impairment of goodwill. During the fourth quarter of 2006, we completed our annual impairment test of goodwill and determined there was no impairment.

Impairment of Long-lived Assets

We review the recoverability of long-lived assets to be held and used, such as property, plant and equipment, when events or changes in circumstances occur that indicate the carrying value of the asset or asset group may not be recoverable. The assessment of possible impairment is based on our ability to recover the carrying value of the asset or asset group from the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value. Impairment losses on long-lived assets held for sale are determined in a similar manner, except that fair values are reduced for the cost to dispose of the assets. The measurement of impairment requires us to estimate future cash flows and the fair value of long-lived assets.

Pension

We sponsor domestic and foreign defined-benefit pension and other post-retirement plans. The amounts recognized in our consolidated financial statements related to our defined-benefit pension and other post-retirement plans are determined from actuarial valuations. Inherent in these valuations are assumptions including expected return on plan assets, discount rates, rate of increase in future compensation levels, and health care cost trend rates. These assumptions are updated annually and are disclosed in ITEM 8, Note 11 to the Notes to Consolidated Financial Statements. Changes to these assumptions will affect pension expense.

In December 2006, we adopted SFAS No. 158, Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R) (“SFAS 158”). SFAS 158 requires that we recognize the overfunded or underfunded status of our defined benefit and retiree medical plans as an asset or liability in our 2006 year-end balance sheet, with changes in the funded status recognized through comprehensive income in the year in which they occur.

Discount rate

The discount rate reflects the current rate at which the pension liabilities could be effectively settled at the end of the year based on our December 31 measurement date. The discount rate was determined by matching our expected benefit payments to payments from a stream of AA or higher bonds available in the marketplace, adjusted to eliminate the effects of call provisions. This produced a discount rate for our U.S. plans of 6.00% in 2006 and 5.75% in 2005 and 2004. The discount rates on our foreign plans ranged from 2.00% to 5.15% in 2006, 2.00% to 4.90% in 2005 and 2.00% to 5.25% in 2004. There are no other known or anticipated changes in our discount rate assumption that will impact our pension expense in 2007.

Expected rate of return

Our expected rate of return on plan assets in 2006 equaled 8.5%, which remained unchanged from 2005 and 2004. The expected rate of return is designed to be a long-term assumption that may be subject to considerable year-to-year variance from actual returns. In developing the expected long-term rate of return, we considered our historical returns, with consideration given to forecasted economic conditions, our asset allocations, input from external consultants and broader longer-term market indices. In 2006, the pension plan assets yielded a return of 12.3%, compared to returns of 4.2% in 2005 and 17.6% in 2004. In 2006, our expected return on plan assets was lower than our actual return on plan assets while in 2005 our expected return on plan assets was higher than our actual return on plans assets. The significant difference between our expected return on plan assets compared to our actual return on plan assets in 2005 was primarily attributable to the fluctuations

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of our common stock during 2005 which approximates 10% of the plan assets. There are no known or anticipated changes in our return assumption that will impact our pension expense in 2007.

We base our determination of pension expense or income on a market-related valuation of assets which reduces year-to-year volatility. This market-related valuation recognizes investment gains or losses over a five-year period from the year in which they occur. Investment gains or losses for this purpose are the difference between the expected return calculated using the market-related value of assets and the actual return based on the market-related value of assets. Since the market-related value of assets recognizes gains or losses over a five-year-period, the future value of assets will be impacted as previously deferred gains or losses are recorded.

See ITEM 8, Note 11 of the Notes to Consolidated Financial Statements for further information regarding pension plans.

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk

Market risk is the potential economic loss that may result from adverse changes in the fair value of financial instruments. We are exposed to various market risks, including changes in interest rates and foreign currency rates. We use derivative financial instruments to manage or reduce the impact of some of these risks. Counterparties to all derivative contracts are major financial institutions, thereby minimizing the risk of credit loss. All instruments are entered into for other than trading purposes. The major accounting policies and utilization of these instruments is described more fully in ITEM 8, Note 1 of the Notes to Consolidated Financial Statements.

Our derivatives and other financial instruments consist of long-term debt (including current portion), short-term borrowing, interest rate swaps, and foreign exchange-forward contracts. The net market value of these financial instruments combined is referred to below as the net financial instrument position. As of December 31, 2006 and December 31, 2005, the net financial instrument position was a liability of $753.6 million and $769.0 million, respectively.

Interest rate risk

Our debt portfolio, including swap agreements, as of December 31, 2006 was primarily comprised of debt predominantly denominated in U.S. dollars (97%). This debt portfolio is comprised of 53% fixed-rate debt and 47% variable-rate debt, not considering the effects of our interest rate swaps. Taking into account the variable to fixed rate swap agreement we entered with an effective date of April 2006, our debt portfolio is comprised of 67% fixed-rate debt and 33% variable-rate debt. Changes in interest rates have different impacts on the fixed and variable-rate portions of our debt portfolio. A change in interest rates on the fixed portion of the debt portfolio impacts the net financial instrument position but has no impact on interest incurred or cash flows. A change in interest rates on the variable portion of the debt portfolio impacts the interest incurred and cash flows but does not impact the net financial instrument position.

Based on the variable-rate debt included in our debt portfolio, including the interest rate swap agreements, as of December 31, 2006, a 100 basis point increase or decrease in interest rates would result in a $2.5 million increase or decrease in interest incurred.

Foreign currency risk

We are exposed to market risks related to fluctuations in foreign exchange rates because some sales transactions, and the assets and liabilities of our foreign subsidiaries, are denominated in foreign currencies, primarily the euro. We held immaterial positions in foreign exchange-forward contracts as of December 31, 2006. We do not expect the effect of foreign exchange rates to have a material impact on our operations.

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ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of Pentair, Inc. and its subsidiaries (“the Company”) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (1) pertain to maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006. In making this assessment, management used the criteria for effective internal control over financial reporting described in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that, as of December 31, 2006, the Company’s internal control over financial reporting was effective based on those criteria.

Our independent registered public accounting firm, Deloitte & Touche LLP, has issued an attestation report on management’s assessment of the Company’s internal control over financial reporting for December 31, 2006. That attestation report is set forth immediately following the report of Deloitte & Touche LLP on the financial statements included herein.

Randall J. Hogan	David D. Harrison
Chairman and Chief Executive Officer	Executive Vice President and Chief Financial Officer

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Pentair, Inc.:

We have audited management’s assessment, included in the accompanying management’s report on Internal Control Over Financial Reporting, that Pentair, Inc. and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Framework”). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

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

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

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the criteria established in the COSO Framework. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the criteria established in the COSO Framework.

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We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule listed in the Index at ITEM 15 as of and for the year ended December 31, 2006, of the Company, and our report dated February 26, 2007, expressed an unqualified opinion on those consolidated financial statements and financial statement schedule and included an explanatory paragraph relating to the Company’s changes in its method of accounting for defined benefit pension and postretirement benefit plans in 2006 and stock-based compensation in 2005.

Minneapolis, Minnesota

February 26, 2007

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Pentair, Inc.:

We have audited the accompanying consolidated balance sheets of Pentair, Inc. and subsidiaries (the “Company”) as of December 31, 2006 and 2005, and the related consolidated statements of income, cash flows, and changes in shareholders’ equity for each of the three years in the period ended December 31, 2006. Our audits also included the financial statement schedule listed in the Index at ITEM 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Notes 1 and 11 to the consolidated financial statements, in 2006, the Company changed its method of accounting for defined benefit pension and postretirement benefit plans and as discussed in Notes 1 and 13 to the consolidated financial statements, in 2005, the Company changed its method of accounting for stock-based compensation.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 26, 2007, expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Minneapolis, Minnesota

February 26, 2007

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Pentair, Inc. and Subsidiaries

Consolidated Statements of Income

	Years ended December 31
In thousands, except per-share data	2006			2005		2004
Net sales	$	3,154,469		$	2,946,579	$	2,278,129
Cost of goods sold		2,248,219			2,098,558		1,623,419
Gross profit		906,250			848,021		654,710
Selling, general and administrative		541,209			478,907		376,015
Research and development		58,055			46,042		31,453
Operating income		306,986			323,072		247,242
Gain on sale of assets, net		364			5,435		—
Interest income		745			576		721
Interest expense		52,626			45,565		37,931
Income from continuing operations before income taxes		255,469			283,518		210,032
Provision for income taxes		71,702			98,469		73,008
Income from continuing operations		183,767			185,049		137,024
Income from discontinued operations, net of tax		—			—		40,248
Loss on disposal of discontinued operations, net of tax		(36	)		—		(6,047	)
Net income	$	183,731		$	185,049	$	171,225
Earnings per common share
Basic
Continuing operations	$	1.84		$	1.84	$	1.38
Discontinued operations		—			—		0.34
Basic earnings per common share	$	1.84		$	1.84	$	1.72
Diluted
Continuing operations	$	1.81		$	1.80	$	1.35
Discontinued operations		—			—		0.33
Diluted earnings per common share	$	1.81		$	1.80	$	1.68
Weighted average common shares outstanding
Basic		99,784			100,665		99,316
Diluted		101,371			102,618		101,706

See accompanying notes to consolidated financial statements.

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Pentair, Inc. and Subsidiaries

Consolidated Balance Sheets

	December 31
In thousands, except share and per-share data	2006		2005
ASSETS
Current assets
Cash and cash equivalents	$	54,820	$	48,500
Accounts and notes receivable, net of allowance of $34,254 and $31,053, respectively		422,134		423,847
Inventories		398,857		349,312
Deferred tax assets		50,578		48,971
Prepaid expenses and other current assets		31,239		24,394
Total current assets		957,628		895,024
Property, plant and equipment, net		330,372		311,839
Other assets
Goodwill		1,718,771		1,718,207
Intangibles, net		287,011		266,533
Other		71,197		62,152
Total other assets		2,076,979		2,046,892
Total assets	$	3,364,979	$	3,253,755
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Short-term borrowings	$	14,563	$	—
Current maturities of long-term debt		7,625		4,137
Accounts payable		206,286		207,320
Employee compensation and benefits		88,882		95,552
Current pension and post-retirement benefits		7,918		—
Accrued product claims and warranties		44,093		43,551
Current liabilities of discontinued operations		—		192
Income taxes		22,493		17,518
Accrued rebates and sales incentives		39,419		45,374
Other current liabilities		90,003		111,026
Total current liabilities		521,282		524,670
Other liabilities
Long-term debt		721,873		748,477
Pension and other retirement compensation		207,676		152,780
Post-retirement medical and other benefits		47,842		73,949
Deferred tax liabilities		109,781		125,785
Other non-current liabilities		86,526		70,455
Non-current liabilities of discontinued operations		—		2,029
Total liabilities		1,694,980		1,698,145
Commitments and contingencies
Shareholders’ equity
Common shares par value $0.162/3; 99,777,165 and 101,202,237 shares issued and outstanding, respectively		16,629		16,867
Additional paid-in capital		488,540		518,751
Retained earnings		1,148,126		1,020,978
Accumulated other comprehensive income		16,704		(986	)
Total shareholders’ equity		1,669,999		1,555,610
Total liabilities and shareholders’ equity	$	3,364,979	$	3,253,755

See accompanying notes to consolidated financial statements.

45

Pentair, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

	Years ended December 31
In thousands	2006			2005			2004
Operating activities
Net income	$	183,731		$	185,049		$	171,225
Adjustments to reconcile net income to net cash provided by operating activities
Net income from discontinued operations		—			—			(40,248	)
Loss on disposal of discontinued operations		36			—			6,047
Depreciation		56,899			56,565			47,063
Amortization		18,197			15,995			7,501
Deferred income taxes		(11,085	)		5,898			16,736
Stock compensation		25,377			24,186			6,345
Excess tax benefits from stock-based compensation		(3,043	)		(8,676	)		—
Gain on sale of investment		(364	)		(5,435	)		—
Changes in assets and liabilities, net of effects of business acquisitions and dispositions
Accounts and notes receivable		15,873			(20,946	)		26,918
Inventories		(39,354	)		(19,201	)		(51,996	)
Prepaid expenses and other current assets		(5,052	)		(120	)		2,176
Accounts payable		(18,935	)		6,629			17,274
Employee compensation and benefits		(13,229	)		(21,394	)		4,596
Accrued product claims and warranties		456			(1,099	)		2,993
Income taxes		9,556			10,357			6,352
Other current liabilities		(13,784	)		4,609			8,879
Pension and post-retirement benefits		19,398			16,512			11,508
Other assets and liabilities		6,886			(439	)		6,794
Net cash provided by continuing operations		231,563			248,490			250,163
Net cash (used for) provided by operating activities of discontinued operations		48			(632	)		13,928
Net cash provided by operating activities		231,611			247,858			264,091
Investing activities
Capital expenditures		(51,078	)		(62,471	)		(48,867	)
Proceeds from sale of property and equipment		684			17,111			—
Acquisitions, net of cash acquired		(29,286	)		(150,534	)		(869,155	)
Divestitures		(24,007	)		(10,155	)		773,399
Proceeds from sale of investment		1,153			23,835			—
Other		(7,523	)		(2,071	)		60
Net cash used for investing activities		(110,057	)		(184,285	)		(144,563	)
Financing activities
Net short-term borrowings (repayments)		13,831			—			(4,162	)
Proceeds from the Bridge Facility		—			—			850,000
Repayment of the Bridge Facility		—			—			(850,000	)
Proceeds from long-term debt		608,975			413,279			343,316
Repayment of long-term debt		(631,755	)		(395,978	)		(440,518	)
Excess tax benefits from stock-based compensation		3,043			8,676			—
Proceeds from exercise of stock options		4,066			8,380			10,862
Repurchases of common stock		(59,359	)		(25,000	)		(4,200	)
Dividends paid		(56,583	)		(53,134	)		(43,128	)
Net cash used for financing activities		(117,782	)		(43,777	)		(137,830	)
Effect of exchange rate changes on cash		2,548			(2,791	)		1,808
Change in cash and cash equivalents		6,320			17,005			(16,494	)
Cash and cash equivalents, beginning of period		48,500			31,495			47,989
Cash and cash equivalents, end of period	$	54,820		$	48,500		$	31,495

See accompanying notes to consolidated financial statements.

46

Pentair, Inc. and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

													Unearned			Accumulated
							Additional						non-vested			other
In thousands, except share	Common shares						paid-in			Retained			stock			comprehensive						Comprehensive
and per-share data	Number			Amount			capital			earnings			compensation			income (loss)			Total			income
Balance — December 31, 2003		99,005,084		$	8,250		$	492,619		$	760,966		$	(6,189	)	$	5,832		$	1,261,478
Net income											171,225									171,225		$	171,225
Change in cumulative translation adjustment																	25,359			25,359			25,359
Adjustment in minimum pension liability, net of $279 tax benefit																	(437	)		(437	)		(437	)
Changes in market value of derivative financial instruments																	1,652			1,652			1,652
Comprehensive income																						$	197,799
Tax benefit of stock options								17,185												17,185
Cash dividends — $0.43 per common share											(43,128	)								(43,128	)
Stock dividend					8,276			(8,276	)											—
Share repurchases		(105,500	)		(17	)		(4,183	)											(4,200	)
Exercise of stock options, net of 1,150,623 shares tendered for payment		1,832,016			305			10,557												10,862
Issuance of restricted shares, net of cancellations		341,728			26			8,146						(7,675	)					497
Amortization of restricted shares														5,992						5,992
Shares surrendered by employees to pay taxes		(105,943	)		(12	)		(3,085	)											(3,097	)
Stock compensation								4,406												4,406
Balance — December 31, 2004		100,967,385		$	16,828		$	517,369		$	889,063		$	(7,872	)	$	32,406		$	1,447,794
Net income											185,049									185,049		$	185,049
Change in cumulative translation adjustment																	(28,406	)		(28,406	)		(28,406	)
Adjustment in minimum pension liability, net of $3,645 tax benefit																	(5,702	)		(5,702	)		(5,702	)
Changes in market value of derivative financial instruments																	716			716			716
Comprehensive income																						$	151,657
Effect of accounting change (SFAS 123R)								(7,872	)					7,872						—
Tax benefit of stock options								10,707												10,707
Cash dividends — $0.52 per common share											(53,134	)								(53,134	)
Share repurchases		(755,663	)		(126	)		(24,874	)											(25,000	)
Exercise of stock options, net of 549,150 shares tendered for payment		747,282			125			1,371												1,496
Issuance of restricted shares, net of cancellations		289,764			48			248												296
Shares surrendered by employees to pay taxes		(46,531	)		(8	)		(1,920	)											(1,928	)
Stock compensation								23,722												23,722
Balance — December 31, 2005		101,202,237		$	16,867		$	518,751		$	1,020,978		$	—		$	(986	)	$	1,555,610
Net income											183,731									183,731		$	183,731
Change in cumulative translation adjustment																	28,471			28,471			28,471
Adjustment in minimum pension liability, net of $1,685 tax expense																	1,513			1,513			1,513
Changes in market value of derivative financial instruments																	657			657			657
Comprehensive income																						$	214,372
Adjustment to initially apply SFAS 158, net of $8,280 tax benefit																	(12,951	)		(12,951	)
Tax benefit of stock options								3,338												3,338
Cash dividends — $0.56 per common share											(56,583	)								(56,583	)
Share repurchases		(1,986,026	)		(332	)		(59,027	)											(59,359	)
Exercise of stock options, net of 183,866 shares tendered for payment		310,963			52			2,846												2,898
Issuance of restricted shares, net of cancellations		324,219			54			304												358
Amortization of Restricted Shares								10,677												10,677
Shares surrendered by employees to pay taxes		(74,228	)		(12	)		(2,589	)											(2,601	)
Stock compensation								14,240												14,240
Balance — December 31, 2006		99,777,165		$	16,629		$	488,540		$	1,148,126		$	—		$	16,704		$	1,669,999

See accompanying notes to consolidated financial statements.

47

Pentair, Inc. and Subsidiaries

Notes to consolidated financial statements

1.  Summary of Significant Accounting Policies

Fiscal year

Our fiscal year ends on December 31. We report our interim quarterly periods on a 13-week basis ending on a Saturday.

Principles of consolidation

The accompanying consolidated financial statements include the accounts of Pentair and all subsidiaries, both U.S. and non-U.S., that we control. Intercompany accounts and transactions have been eliminated. Investments in companies of which we own 20% to 50% of the voting stock or have the ability to exercise significant influence over operating and financial policies of the investee are accounted for using the equity method of accounting and, as a result, our share of the earnings or losses of such equity affiliates is included in the statement of income. The cost method of accounting is used for investments in which Pentair has less than a 20% ownership interest and we do not have the ability to exercise significant influence. These investments are carried at cost and are adjusted only for other-than-temporary declines in fair value.

Use of estimates

The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires us to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts that could differ from those estimates. The critical accounting policies that require our most significant estimates and judgments include:

•  the assessment of recoverability of long-lived assets, including goodwill; and

•  accounting for pension benefits, because of the importance in making the estimates necessary to apply these policies.

Revenue recognition

We recognize revenue when it is realized or realizable and has been earned. Revenue is recognized when persuasive evidence of an arrangement exists; shipment or delivery has occurred (depending on the terms of the sale); the seller’s price to the buyer is fixed or determinable; and collectibility is reasonably assured.

Generally, there is no post-shipment obligation on product sold other than warranty obligations in the normal, ordinary course of business. In the event significant post-shipment obligations were to exist, revenue recognition would be deferred until substantially all obligations were satisfied.

Sales returns

The right of return may exist explicitly or implicitly with our customers. Revenue from a transaction is recognized only if our price is fixed and determinable at the date of sale; the customer has paid or is obligated to pay; the customer’s obligation would not be changed in the event of theft, physical destruction, or damage of the product; the customer has economic substance apart from our Company; we do not have significant obligations for future performance to directly bring about resale of the product by the customer; and the amount of returns can reasonably be estimated.

In general, our return policy allows for customer returns only upon our authorization. Goods returned must be product we continue to market and must be in salable condition. Returns of custom or modified goods are normally not allowed.

At the time of sale, we reduce revenue for the estimated effect of returns. Estimated sales returns include consideration of historical sales levels, the timing and magnitude of historical sales return levels as a percent of sales, type of product, type of customer, and a projection of this experience into the future.

48

Pentair, Inc. and Subsidiaries

Notes to consolidated financial statements — (continued)

Pricing and sales incentives

We record estimated reductions to revenue for customer programs and incentive offerings including pricing arrangements, promotions, and other volume-based incentives at the later of the date revenue is recognized or the incentive is offered. Sales incentives given to our customers are recorded as a reduction of revenue unless we (1) receive an identifiable benefit for the goods or services in exchange for the consideration and (2) we can reasonably estimate the fair value of the benefit received. The following represents a description of our pricing arrangements, promotions, and other volume-based incentives:

Pricing arrangements

Pricing is established up front with our customers, and we record sales at the agreed upon net selling price. However, one of our businesses allows customers to apply for a refund of a percentage of the original purchase price if they can demonstrate sales to a qualifying OEM customer. At the time of sale, we estimate the anticipated refund to be paid based on historical experience and reduce sales for the probable cost of the discount. The cost of these refunds is recorded as a reduction in gross sales.

Promotions

Our primary promotional activity is what we refer to as cooperative advertising. Under our cooperative advertising programs, we agree to pay the customer a fixed percentage of sales as an allowance that may be used to advertise and promote our products. The customer is not required to provide evidence of the advertisement or promotion. We recognize the cost of this cooperative advertising at the time of sale. The cost of this program is recorded as a reduction in gross sales.

Volume-based incentives

These incentives involve rebates that are negotiated up front with the customer and are redeemable only if the customer achieves a specified cumulative level of sales or sales increase. Under these incentive programs, at the time of sale, we reforecast the anticipated rebate to be paid based on forecasted sales levels. These forecasts are updated at least monthly, for each customer and sales are reduced for the anticipated cost of the rebate. If the forecasted sales for a customer changes, the accrual for rebates is adjusted to reflect the new amount of rebates expected to be earned by the customer.

There have been no material accounting revisions for revenue-recognition related estimates.

Shipping and handling costs

Amounts billed to customers for shipping and handling are recorded in Net sales in the accompanying Consolidated Statements of Income. Shipping and handling costs incurred by Pentair for the delivery of goods to customers are included in Cost of goods sold in the accompanying Consolidated Statements of Income.

Cash equivalents

We consider highly liquid investments with original maturities of three months or less to be cash equivalents.

Trade receivables and concentration of credit risk

We record an allowance for doubtful accounts, reducing our receivables balance to an amount we estimate is collectible from our customers. Estimates used in determining the allowance for doubtful accounts are based on historical collection experience, current trends, aging of accounts receivable, and periodic credit evaluations of our customers’ financial condition. We generally do not require collateral. No customer receivable balances exceeded 10% of total net receivable balances as of December 31, 2006 and 2005, respectively.

In December 2006, we entered into a one-year Accounts Receivable Purchase Agreement whereby designated customer accounts receivable may be sold without recourse to a third-party financial institution on a revolving basis. These receivables consisted of specific invoices that were assigned and subject to a filed security

49

Pentair, Inc. and Subsidiaries

Notes to consolidated financial statements — (continued)

interest. Providing collections and claims services, we act as the agent for the third-party. Following the initial settlement period, we are required to transfer payments and make adjustments to invoice amounts on the assigned receivables to the third-party on a monthly basis. We are also required to maintain trade credit insurance on the sold receivables. Receivable sales could occur on the settlement date or as the third-party permits, up to a maximum total outstanding amount of $30 million, with the ability to make additional sales as sold receivables are repaid.

As of December 31, 2006, we had sold approximately $30.0 million of accounts receivable to a third-party financial institution to mitigate accounts receivable concentration risk because the customer did not take advantage of the early pay discounts and to provide additional financing capacity. In compliance with Statement of Financial Accounting Standards (“SFAS”) No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, (“SFAS 140”) sales of accounts receivable are reflected as a reduction of accounts receivable in the Consolidated Balance Sheets and the proceeds are included in the cash flows from operating activities in the Consolidated Statements of Cash Flows. In 2006, a loss in the amount of $0.8 million related to the sale of accounts receivable is included in the line item Gain on sale of assets, net in our Consolidated Statements of Income.

In December 2004, we entered into a one-year Accounts Receivable Purchase Agreement whereby designated customer accounts receivable could be sold without recourse to a third-party financial institution on a revolving basis. These receivables consisted of specific invoices that were assigned and subject to a filed security interest. Providing collections and claims services, we acted as the agent for the third-party. Following the initial settlement period, we were required to transfer payments and make adjustments to invoice amounts on the assigned receivables to the third-party on a monthly basis. We were also required to maintain trade credit insurance on the sold receivables. Receivable sales could have occurred on the settlement date or as the third-party permitted, up to a maximum total outstanding amount of $30 million, with the ability to make additional sales as sold receivables were repaid. The Accounts Receivable Purchase Agreement was not renewed in 2005.

As of December 31, 2004, we had sold an approximate $22.0 million interest in our pool of accounts receivable to a third-party financial institution to mitigate the credit risk associated with the receivable balance of a large customer because we did not offer early pay discounts. In compliance with SFAS 140, sales of accounts receivable are reflected as a reduction of accounts receivable in our Consolidated Balance Sheets and the proceeds are included in the cash flows from operating activities in our Consolidated Statement of Cash Flows. As the estimated present value of the receivables sold approximated the carrying amount, no gain or loss was recorded in 2004.

Inventories

Beginning in the fourth quarter, inventories are stated at the lower of cost or market with substantially all costed using the first-in, first-out (FIFO) method and with an insignificant amount of inventories located outside the United States costed using a moving average method which approximates FIFO. Prior to the fourth quarter 2006, inventories located in the United States were costed using the last-in, first-out (LIFO) and FIFO methods, and inventories of foreign based subsidiaries were costed primarily using the FIFO method with a smaller amount of inventories costed using the LIFO and moving average methods.

Change in accounting principle

Prior to October 1, 2006, inventories in the United States were costed using both the LIFO and FIFO methods, and inventories outside the United States were costed primarily using the FIFO methods with smaller amounts of inventory using the LIFO and moving average methods. Effective that date, we elected to change our method of accounting to cost all inventories previously costed using the LIFO method using the FIFO method to better reflect the current value of inventory in the balance sheet and to provide a better matching of revenue and expense in the consolidated statements of income. In addition, this change results in a more unified

50

Pentair, Inc. and Subsidiaries

Notes to consolidated financial statements — (continued)

method of inventory costing. The result of the accounting change was immaterial to our consolidated financial statements for all periods presented. Accordingly, the cumulative effect of the accounting change was recorded in the consolidated statement of income in the fourth quarter of 2006, rather than retrospectively applied to the prior period consolidated financial statements.

Property, plant, and equipment

Property, plant, and equipment is stated at historical cost. We compute depreciation by the straight-line method based on the following estimated useful lives:

	Years
Land improvements		5 to 20
Buildings and leasehold improvements		5 to 50
Machinery and equipment		3 to 15

Significant improvements that add to productive capacity or extend the lives of properties are capitalized. Costs for repairs and maintenance are charged to expense as incurred. When property is retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any related gains or losses are included in income.

We review the recoverability of long-lived assets to be held and used, such as property, plant and equipment, when events or changes in circumstances occur that indicate the carrying value of the asset or asset group may not be recoverable. The assessment of possible impairment is based on our ability to recover the carrying value of the asset or asset group from the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value. Impairment losses on long-lived assets held for sale are determined in a similar manner, except that fair values are reduced for the cost to dispose of the assets. The measurement of impairment requires us to estimate future cash flows and the fair value of long-lived assets.

Goodwill and identifiable intangible assets

Goodwill represents the excess of the cost of acquired businesses over the fair value of identifiable tangible net assets and identifiable intangible assets purchased.

Goodwill is tested for impairment on an annual basis. During the fourth quarter of 2006, we completed our annual impairment test of goodwill and determined there was no impairment.

Our primary identifiable intangible assets include trade marks and trade names, brand names, patents, non-compete agreements, proprietary technology, and customer relationships. Under the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, identifiable intangibles with finite lives are amortized and those identifiable intangibles with indefinite lives are not amortized. Identifiable intangible assets that are subject to amortization are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Identifiable intangible assets not subject to amortization are tested for impairment annually, or more frequently if events warrant. The impairment test consists of a comparison of the fair value of the intangible asset with its carrying amount. During the fourth quarter of 2006, we completed our annual impairment test for those identifiable assets not subject to amortization and determined there was no impairment.

Cost and equity method investments

We have investments that are accounted for at historical cost or, if we have significant influence over the investee, using the equity method. Our proportionate share of income or losses from investments accounted for under the equity method is recorded in the Consolidated Statements of Income. We write down or write off an

51

Pentair, Inc. and Subsidiaries

Notes to consolidated financial statements — (continued)

investment and recognize a loss when events or circumstances indicate there is impairment in the investment that is other-than-temporary. This requires significant judgment, including assessment of the investees’ financial condition, and in certain cases the possibility of subsequent rounds of financing, as well as the investees’ historical and projected results of operations and cash flows. If the actual outcomes for the investees are significantly different from projections, we may incur future charges for the impairment of these investments.

Income taxes

We use the asset and liability approach to account for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax basis using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Changes in valuation allowances from period to period are included in our tax provision in the period of change.

Environmental

In accordance with SOP 96-1, Environmental Remediation Liabilities, we recognize environmental clean-up liabilities on an undiscounted basis when a loss is probable and can be reasonably estimated. Such liabilities generally are not subject to insurance coverage. The cost of each environmental clean-up is estimated by engineering, financial, and legal specialists based on current law. Such estimates are based primarily upon the estimated cost of investigation and remediation required and the likelihood that, where applicable, other potentially responsible parties (“PRPs”) will be able to fulfill their commitments at the sites where Pentair may be jointly and severally liable. The process of estimating environmental clean-up liabilities is complex and dependent primarily on the nature and extent of historical information and physical data relating to a contaminated site, the complexity of the site, the uncertainty as to what remedy and technology will be required, and the outcome of discussions with regulatory agencies and other PRPs at multi-party sites. In future periods, new laws or regulations, advances in clean-up technologies, and additional information about the ultimate clean-up remedy that is used could significantly change our estimates. Accruals for environmental liabilities are included in Other current liabilities and Other non-current liabilities in the Consolidated Balance Sheets.

Insurance subsidiary

We insure certain general and product liability, property, workers’ compensation, and automobile liability risks through our regulated wholly-owned captive insurance subsidiary, Penwald Insurance Company (“Penwald”). Reserves for policy claims are established based on actuarial projections of ultimate losses. As of December 31, 2006 and 2005, reserves for policy claims were $54.3 million ($10.0 million included in Accrued product claims and warranties and $44.3 million included in Other non-current liabilities) and $45.8 million ($10.0 million included in Accrued product claims and warranties and $35.8 million included in Other non-current liabilities), respectively.

Stock-based compensation

In the fourth quarter of 2005, we adopted the fair value recognition provisions of SFAS No. 123R (revised 2004), Share Based Payment,(“SFAS 123R”) which revised SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”) and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”) requiring us to recognize expense related to the fair value of our stock-based compensation awards. We adopted SFAS 123R effective January 1, 2005 using the modified retrospective transition method permitted by SFAS 123R. Under this transition method, restatement of only the

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Notes to consolidated financial statements — (continued)

interim financial statements in the year of adoption is permitted. We did not restate the financial information for 2004 as a result of the adoption. In connection with the adoption, the expense in the pro forma disclosures related to stock-based compensation was corrected for immaterial errors, resulting in no change to previously reported quarterly pro forma earnings per share. The adoption of SFAS 123R in 2005 resulted in the recognition of incremental pre-tax stock-based compensation expense of $16.4 million, a reduction in net income of $12.0 million, a reduction in basic and diluted earnings per share of $0.12, a reduction in cash flows from operating activities of $8.7 million and an increase in cash flows from financing activities of $8.7 million. We additionally reclassified our unearned compensation on non-vested share awards of $7.9 million to additional paid in capital. The cumulative effect adjustment for forfeitures related to non-vested share awards was immaterial.

In accordance with SFAS 123R, the estimated grant date fair value of each stock-based award is recognized in income on an accelerated basis over the requisite service period (generally the vesting period). The estimated fair value of each option is calculated using the Black-Scholes option-pricing model. From time to time, we have elected to modify the terms of the original grant. These modified grants are accounted for as a new award and measured using the fair value method under SFAS 123R, resulting in the inclusion of additional compensation expense in our Consolidated Statements of Income. Non-vested share awards are recorded as compensation cost over the requisite service periods based on the market value on the date of grant.

Prior to January 1, 2005 we applied the recognition and measurement principles of APB 25 to our stock options and other stock-based compensation plans as permitted pursuant to SFAS 123.

In accordance with APB 25, cost for stock-based compensation was recognized in income based on the excess, if any, of the quoted market price of the stock at the grant date of the award or other measurement date over the amount an employee must pay to acquire the stock. The exercise price for stock options granted to employees equals the fair market value of our common stock at the date of grant, thereby resulting in no recognition of compensation expense by us. However, from time to time, we have elected to modify the terms of the original grant. Those modified grants have been accounted for as a new award and measured using the intrinsic value method under APB 25, resulting in the inclusion of compensation expense in our Consolidated Statements of Income. Non-vested share awards are recorded as compensation cost over the requisite service periods based on the market value on the date of grant. Unearned compensation cost on non-vested share awards was shown as a reduction to shareholders’ equity.

Earnings per common share

Basic earnings per share are computed by dividing net income by the weighted-average number of common shares outstanding. Diluted earnings per share are computed by dividing net income by the weighted average number of common shares outstanding, including the dilutive effects of stock options and non-vested shares. Unless otherwise noted, references are to diluted earnings per share.

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Notes to consolidated financial statements — (continued)

Basic and diluted earnings per share were calculated using the following:

In thousands, except per-share data	2006			2005		2004
Earnings per common share — basic
Continuing operations	$	183,767		$	185,049	$	137,024
Discontinued operations		(36	)		—		34,201
Net income	$	183,731		$	185,049	$	171,225
Continuing operations	$	1.84		$	1.84	$	1.38
Discontinued operations		—			—		0.34
Basic earnings per common share	$	1.84		$	1.84	$	1.72
Earnings per common share — diluted
Continuing operations	$	183,767		$	185,049	$	137,024
Discontinued operations		(36	)		—		34,201
Net income	$	183,731		$	185,049	$	171,225
Continuing operations	$	1.81		$	1.80	$	1.35
Discontinued operations		—			—		0.33
Diluted earnings per common share	$	1.81		$	1.80	$	1.68
Weighted average common shares outstanding — basic		99,784			100,665		99,316
Dilutive impact of stock-based compensation		1,587			1,953		2,390
Weighted average common shares outstanding — diluted		101,371			102,618		101,706
Stock options excluded from the calculation of diluted earnings per share because the exercise price was greater than the average market price of the common shares		3,089			1,040		42

Derivative financial instruments

We recognize all derivatives, including those embedded in other contracts, as either assets or liabilities at fair value in our Consolidated Balance Sheets. If the derivative is designated as a fair-value hedge, the changes in the fair value of the derivative and the hedged item are recognized in earnings. If the derivative is designated and is effective as a cash-flow hedge, changes in the fair value of the derivative are recorded in other comprehensive income (OCI) and are recognized in the Consolidated Statements of Income when the hedged item affects earnings. If the underlying hedged transaction ceases to exist or if the hedge becomes ineffective, all changes in fair value of the related derivatives that have not been settled are recognized in current earnings. For a derivative that is not designated as or does not qualify as a hedge, changes in fair value are reported in earnings immediately.

We use derivative instruments for the purpose of hedging interest rate and currency exposures, which exist as part of ongoing business operations. All hedging instruments are designated and effective as hedges, in accordance with the provisions of SFAS 133, Accounting for Derivative Instruments and Hedge Activities, as amended. We do not hold or issue derivative financial instruments for trading or speculative purposes. All other contracts that contain provisions meeting the definition of a derivative also meet the requirements of, and have been designated as, normal purchases or sales. Our policy is not to enter into contracts with terms that cannot be designated as normal purchases or sales.

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Notes to consolidated financial statements — (continued)

Foreign currency translation

The financial statements of subsidiaries located outside of the United States are measured using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the rates of exchange at the balance sheet date.

The resultant translation adjustments are included in accumulated other comprehensive income, a separate component of shareholders’ equity. Income and expense items are translated at average monthly rates of exchange.

New accounting standards

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 153, Exchanges of Nonmonetary Assets — An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions (“SFAS 153”). SFAS 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, Accounting for Nonmonetary Transactions, and replaces it with an exception for exchanges that do not have commercial substance. SFAS 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for the fiscal periods beginning after June 15, 2005 and we adopted it on January 1, 2006. The adoption of SFAS 153 did not have a material impact on our consolidated results of operations, financial condition, or cash flow.

In November 2004, the FASB issued SFAS No. 151, Inventory Costs — An Amendment of ARB No. 43, Chapter 4 (“SFAS 151”). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight, and rehandling costs be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal” as stated in ARB No. 43. Additionally, SFAS 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for fiscal years beginning after June 15, 2005 and we adopted it on January 1, 2006. The adoption of SFAS 151 did not have a material impact on our consolidated results of operations or financial condition.

In March 2004, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (“EITF 03-1”). EITF 03-1 provides guidance on other-than-temporary impairment models for marketable debt and equity securities accounted for under SFAS 115 and non-marketable equity securities accounted for under the cost method. The EITF developed a basic three-step model to evaluate whether an investment is other-than-temporarily impaired. In November 2005, the FASB approved the issuance of FASB Staff Position FAS No. 115-1 and FAS No. 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.  The FASB Staff Position (“FSP”) addresses when an investment is considered impaired, whether the impairment is other-than-temporary, and the measurement of an impairment loss. The FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary. The FSP is effective for reporting periods beginning after December 15, 2005 and we adopted it on January 1, 2006. The adoption of EITF 03-1 did not have a material impact on our consolidated results of operations or financial condition.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (“SFAS 154”) which replaces Accounting Principles Board Opinion No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements — An Amendment of APB Opinion No. 28.  SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, or the latest practicable date, as the required method for reporting a

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Notes to consolidated financial statements — (continued)

change in accounting principle and the reporting of a correction of an error. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS 154 on January 1, 2006 did not have a material impact on our consolidated results of operations or financial condition.

In June 2005, the EITF reached a consensus on Issue No. 05-5, Accounting for Early Retirement or Postemployment Programs with Specific Features (such as Terms Specified in Altersteilzeit Early Retirement Arrangements) (“EITF 05-5”). EITF 05-5 addresses the accounting for the bonus feature in the German Altersteilzeit (“ATZ”) early retirement programs and requires recognition of the program expenses at the time the ATZ contracts are signed. The EITF offers two transition alternatives, either cumulative effect or retrospective application. EITF 05-5 is effective for fiscal years beginning after December 15, 2005 and we adopted it on January 1, 2006. The adoption of EITF 05-5 did not have a material impact on our consolidated results of operations or financial condition.

In July 2006, the FASB issued FASB Interpretation No. 48 Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement 109 (“FIN 48”). FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return, including a decision whether to file or not to file a tax return in a particular jurisdiction. FIN 48 is effective for fiscal years beginning after December 15, 2006. If there are changes in net assets as a result of the application of FIN 48, these will be accounted for as an adjustment to retained earnings. We are currently assessing the impact of FIN 48 on our consolidated results of operations and financial condition.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”). SAB 108 addresses diversity in practice in quantifying financial statement misstatements. SAB 108 requires that a company quantify misstatements based on their impact on each of its financial statements and related disclosures. SAB 108 is effective for fiscal years ending after November 15, 2006, allowing a one-time transitional cumulative effect adjustment to retained earnings as of January 1, 2006 for errors that were not previously deemed material, but are material under the guidance in SAB 108. The adoption of SAB 108 did not have a material impact on our consolidated results of operations, financial condition.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of adopting SFAS 157 on our consolidated results of operations or financial condition.

In September 2006, the FASB issued SFAS No. 158, Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R) (“SFAS 158”). SFAS 158 requires that we recognize the overfunded or underfunded status of our defined benefit and retiree medical plans as an asset or liability in our 2006 year-end balance sheet, with changes in the funded status recognized through other comprehensive income in the year in which they occur. The adoption of SFAS 158 increased total assets by $2.0 million, increased total liabilities by $14.9 million and decreased total shareholders’ equity by $12.9 million, net of tax, in our December 31, 2006 Consolidated Balance Sheet. The adoption of SFAS 158 had no impact on our consolidated results of operations.

2.   Acquisitions

On December 11, 2006 we entered into an agreement to acquire all of the share capital of Jung Pumpen GmbH, a German-based manufacturer of municipal and residential wastewater pumps and related products, subject to German Federal Cartel Office approval. The acquisition was completed on February 2, 2007 for

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Notes to consolidated financial statements — (continued)

approximately $227 million, net of cash acquired of $13 million, excluding transaction costs and subject to a post-closing net asset value adjustment.

On April 12, 2006, we acquired as part of our Water Group the assets of Geyer’s Manufacturing & Design Inc. and FTA Filtration, Inc. (together “Krystil Klear”), two privately-held companies, for $15.5 million in cash. Krystil Klear expands our industrial filtration product offering to include a full range of steel and stainless steel tanks which house filtration solutions. Goodwill recorded as part of the initial purchase price allocation was $9.2 million, all of which is tax deductible. We continue to evaluate the purchase price allocation for the Krystil Klear acquisition, including intangible assets, contingent liabilities, plant rationalization costs, and property, plant and equipment. We expect to revise the purchase price allocation as better information becomes available.

During 2006, we completed several other small acquisitions totaling $14.2 million in cash and notes payable, adding to both our Water and Technical Products Groups. Total goodwill recorded as part of the initial purchase price allocations was $7.9 million, of which $2.9 million is tax deductible. We continue to evaluate the purchase price allocations for these acquisitions and expect to revise the purchase price allocations as better information becomes available.

On December 1, 2005, we acquired, as part of our Technical Products Group, the McLean Thermal Management, Aspen Motion Technologies, and Electronic Solutions businesses from APW, Ltd. (collectively, “Thermal”) for $143.9 million, including a cash payment of $140.6 million and transaction costs of $3.3 million. These businesses provide thermal management solutions and integration services to the telecommunications, data communications, medical, and security markets. Final goodwill recorded as part of the purchase price allocation was $71.1 million, all of which is tax deductible. Final identifiable intangible assets acquired as part of the acquisition were $45.6 million, including definite-lived intangibles, such as proprietary technology and customer relationships, of $23.1 million with a weighted average amortization period of approximately 12 years.

On February 23, 2005, we acquired, as part of our Water Group, certain assets of Delta Environmental Products, Inc. and affiliates (collectively, “DEP”), a privately-held company, for $10.3 million, including a cash payment of $10.0 million, transaction costs of $0.2 million, and debt assumed of $0.1 million. The DEP product line addressees the water and wastewater markets. Final goodwill recorded as part of the purchase price allocation was $7.2 million, all of which is tax deductible.

Effective July 31, 2004, we completed the acquisition of all of the shares of capital stock of WICOR, Inc. (“WICOR”) from Wisconsin Energy Corporation (“WEC”) for $874.7 million, including a cash payment of $871.1 million, transaction costs of $11.2 million, and debt assumed of $21.6 million, less a favorable final purchase price adjustment of $14.0 million and less cash acquired of $15.2 million. This includes an additional $0.4 million in transaction costs recorded in the first three quarters of 2005. WICOR manufactured water system, filtration, and pool equipment products primarily under the STA-RITE^®, SHURflo^® and Hypro^®brands.

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Notes to consolidated financial statements — (continued)

The following pro forma consolidated condensed financial results of operations for the years ended December 31, 2006, and 2005 are presented as if the acquisitions had been completed at the beginning of each period presented:

	Years ended December 31
In thousands, except per-share data	2006		2005
Pro forma net sales from continuing operations	$	3,169,681	$	3,102,400
Pro forma net income from continuing operations		184,041		188,537
Pro forma net income		184,005		188,537
Pro forma earnings per common share — continuing operations
Basic	$	1.84	$	1.87
Diluted	$	1.82	$	1.84
Weighted average common shares outstanding
Basic		99,784		100,665
Diluted		101,371		102,618

These pro forma consolidated condensed financial results have been prepared for comparative purposes only and include certain adjustments, such as increased interest expense on acquisition debt. The adjustments do not reflect the effect of synergies that would have been expected to result from the integration of these acquisitions. The pro forma information does not purport to be indicative of the results of operations that actually would have resulted had the combination occurred on January 1 of each year presented, or of future results of the consolidated entities.

3.  Discontinued Operations/Divestitures

Effective after the close of business on October 2, 2004, we completed the sale of our former Tools Group to The Black & Decker Corporation (“BDK”). In January 2006, pursuant to the purchase agreement for the sale of our former Tools Group, we completed the repurchase of a manufacturing facility in Suzhou, China from BDK for approximately $5.7 million. We recorded no gain or loss on the repurchase. In March 2006, we completed an outstanding net asset value arbitration with BDK relating to the purchase price for the sale of our former Tools Group. The decision by the arbitrator constituted a final resolution of all disputes between BDK and us regarding the net asset value. We paid the final net asset value purchase price adjustment pursuant to the purchase agreement of $16.1 million plus interest of $1.1 million in March 2006, resulting in an incremental pre-tax loss on disposal of discontinued operations of $3.4 million or $1.6 million net of tax. In the third quarter of 2006, we resolved a prior year tax item that resulted in a $1.4 million income tax benefit related to our former Tools Group.

In 2001, we completed the sale of our former Service Equipment businesses (Century Mfg. Co./Lincoln Automotive Company) to Clore Automotive, LLC. In the fourth quarter of 2003, we reported an additional loss from discontinued operations of $2.9 million related to exiting the remaining two facilities. In March 2006, we exited a leased facility from our former Service Equipment business resulting in a net cash outflow of $2.2 million and an immaterial gain from disposition.

Operating results of the discontinued operations are summarized below. The amounts exclude general corporate overhead previously allocated to the Tools Group. The amounts include an allocation of interest based on a ratio of the net assets of the discontinued operations to the total net assets of Pentair.

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Notes to consolidated financial statements — (continued)

In thousands	2006			2005			2004*
Net sales	$	—		$	—		$	842,110
Income from discontinued operations before income taxes		—			—			65,232
Income tax expense		—			—			24,984
Income from discontinued operations, net of income taxes		—			—			40,248
Gain (loss) on disposal of discontinued operations before income taxes		(3,621	)		(4,197	)		2,990
Income tax (benefit) expense		(3,585	)		(4,197	)		9,037
Loss on disposal of discontinued operations, net of tax	$	(36	)	$	—		$	(6,047	)

*  Includes discontinued operations through the date of divestiture, October 2, 2004.

We recorded additional pre-tax losses on the disposal of discontinued operations of $3.6 million and $4.2 million as of December 31, 2006 and 2005 respectively. The 2006 loss was primarily due to an unfavorable arbitration ruling resulting in a purchase price adjustment associated with the sale of our former Tools Group. The additional 2005 loss relates to increased reserve requirements for product recalls and contingent purchase price adjustments associated with the sale of our former Tools Group. Income tax benefits of $3.6 million and $4.2 million were recorded for the years ended December 31, 2006 and 2005, respectively. The effective tax rate for discontinued operations in 2006 differs from the statutory rate primarily due to the reversal of prior years’ tax reserves and research and development tax credits. The effective tax rate in 2005 for discontinued operations differs from the statutory rate due primarily to research and development tax credits and permanent book/tax differences.

Liabilities of discontinued operations consist of the following:

In thousands	2006		2005
Current liabilities	$	—	$	192
Other noncurrent liabilities		—		2,029
Total liabilities of discontinued operations	$	—	$	2,221

At December 31, 2005, the liabilities of $2.2 million, represented the estimated future cash outflows associated with the exit from a leased facility.

4.  Goodwill and Other Identifiable Intangible Assets

The changes in the carrying amount of goodwill for the year ended December 31, 2006 by segment is as follows:

				Technical
In thousands	Water			Products			Consolidated
Balance at December 31, 2005	$	1,433,280		$	284,927		$	1,718,207
Acquired		14,804			979			15,783
Purchase accounting adjustments		(9,447	)		(23,232	)		(32,679	)
Foreign currency translation		10,823			6,637			17,460
Balance at December 31, 2006	$	1,449,460		$	269,311		$	1,718,771

The acquired goodwill in the Water Group is related to our acquisitions of Krystil Klear and several other small acquisitions during 2006. The acquired goodwill in the Technical Products Group is related to one small acquisition.

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Notes to consolidated financial statements — (continued)

Purchase accounting adjustments recorded during 2006 relate to the WICOR, Inc., DEP, Thermal, and Krystil Klear acquisitions. The purchase price adjustments during 2006 included adjustments for additional transaction and restructuring costs incurred, valuation of intangible assets related to Thermal, and reclassifications related to WICOR, Inc. purchase accounting.

The detail of acquired intangible assets consisted of the following:

	2006							2005
	Gross							Gross
	Carrying		Accumulated					Carrying		Accumulated
In thousands	Amount		Amortization			Net		Amount		Amortization			Net
Finite-life intangible assets Patents	$	15,433	$	(6,001	)	$	9,432	$	15,685	$	(4,135	)	$	11,550
Non-compete agreements		4,343		(3,091	)		1,252		3,937		(2,021	)		1,916
Proprietary technology		45,755		(8,240	)		37,515		51,386		(5,107	)		46,279
Customer relationships		110,616		(15,924	)		94,692		87,707		(8,647	)		79,060
aTotal finite-life intangible assets	$	176,147	$	(33,256	)	$	142,891	$	158,715	$	(19,910	)	$	138,805
Indefinite-life intangible assets
Brand names	$	144,120	$	—		$	144,120	$	127,728	$	—		$	127,728
Total intangibles, net						$	287,011						$	266,533

Intangible asset amortization expense in 2006, 2005, and 2004 was $13.2 million, $11.7 million, and $7.5 million, respectively. The increase in amortization expense between 2005 and 2004 was primarily the result of the WICOR acquisition.

The estimated future amortization expense for identifiable intangible assets during the next five years is as follows:

In thousands	2007		2008		2009		2010		2011
Estimated amortization expense	$	12,863	$	11,911	$	11,664	$	11,152	$	10,944

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Notes to consolidated financial statements — (continued)

5.   Supplemental Balance Sheet Information

In thousands	2006		2005
Inventories
Raw materials and supplies	$	186,508	$	146,389
Work-in-process		55,141		49,418
Finished goods		157,208		153,505
Total inventories	$	398,857	$	349,312
Property, plant and equipment
Land and land improvements	$	28,989	$	24,432
Buildings and leasehold improvements		181,335		168,776
Machinery and equipment		521,245		483,639
Construction in progress		38,312		21,326
Total property, plant and equipment		769,881		698,173
Less accumulated depreciation and amortization		439,509		386,334
Property, plant and equipment, net	$	330,372	$	311,839

Cost method investments

As part of the sale of Lincoln Industrial in 2001, we received 37,500 shares of 5% Series C Junior Convertible Redeemable Preferred Stock convertible into a 15% equity interest in the new organization — LN Holdings Corporation. During the second quarter of 2005 we sold our interest in the stock LN Holdings Corporation for cash consideration of $23.6 million, resulting in a pre-tax gain of $5.2 million or an after-tax gain of $3.5 million. The terms of the sale agreement established two escrow accounts totaling $14 million. We received payments from an escrow of $0.2 million during the fourth quarter of 2005, increasing our gain. During 2006 we received $1.2 million from the escrow accounts which also increased our gain from the sale. Any remaining escrow balances are to be distributed by April 2008 to former shareholders in accordance with their ownership percentages. Any funds received from settlement of escrows in future periods will be accounted for as additional gain on sale of this interest.

Equity method investments

We have a 50% investment in FARADYNE Motors LLC (“FARADYNE”), a joint venture with ITT Water Technologies, Inc. that began design, development, and manufacturing of submersible pump motors in 2005. We do not consolidate the investment in our financial statements as we do not have a controlling interest over the investment. The investment in and loans to FARADYNE balance was $5.4 million and $1.2 million at December 31, 2006 and December 31, 2005, respectively, which is net of our proportionate share of the results of their operations. Our proportionate share of the results of their operations is recorded on a one-month lag.

6.  Supplemental Cash Flow Information

The following table summarizes supplemental cash flow information:

In thousands	2006		2005		2004
Interest payments	$	52,957	$	44,403	$	49,339
Income tax payments		77,225		79,414		63,488

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Notes to consolidated financial statements — (continued)

7.  Accumulated Other Comprehensive Income (Loss)

Components of accumulated other comprehensive income (loss) consist of the following:

In thousands	2006			2005			2004
Minimum pension liability adjustments, net of tax	$	(28,972	)	$	(17,534	)	$	(11,832	)
Foreign currency translation adjustments		44,516			16,045			44,451
Market value of derivative financial instruments, net of tax		1,160			503			(213	)
Accumulated other comprehensive income (loss)	$	16,704		$	(986	)	$	32,406

In 2006, the minimum pension liability adjustment increased compared to 2005 primarily due to the adoption of SFAS 158, as noted in Note 11. In 2005, the minimum pension liability adjustment increased compared to the prior year despite no change in the discount rate for the U.S. plans. The increase was attributable to lower than expected pension plan performance as well as a reduction in the discount rates associated with our foreign defined benefit plans. The net foreign currency translation gain in 2006 of $28.5 million was the result of the weakening of the U.S. dollar against the euro. The net foreign currency translation loss in 2005 of $28.4 million was the result of the strengthening of the U.S. dollar against the euro. Changes in the market value of derivative financial instruments were impacted primarily by the maturities of derivatives and changing interest rates. Fluctuations in the value of hedging instruments are generally offset by changes in the cash flows of the underlying exposures being hedged.

8.  Debt

Debt and the average interest rates on debt outstanding as of December 31 are summarized as follows:

	Average
	interest rate
	December 31,			Maturity		December 31			December 31
In thousands	2006			(Year)		2006			2005
Commercial paper, maturing within 49 days		5.76	%			$	208,882		$	144,656
Revolving credit facilities		6.10	%		2010		25,000			112,300
Private placement — fixed rate		5.50	%		2007-2013		135,000			135,000
Private placement — floating rate		5.98	%		2013		100,000			100,000
Senior notes		7.85	%		2009		250,000			250,000
Other		3.14	%		2007-2016		21,972			6,285
Total contractual debt obligations							740,854			748,241
Interest rate swap monetization deferred income							3,207			4,373
Total debt, including current portion per balance sheet							744,061			752,614
Less: Current maturities							(7,625	)		(4,137	)
Short-term borrowings							(14,563	)		—
Long-term debt						$	721,873		$	748,477

We have a multi-currency revolving Credit Facility (the “Credit Facility”) of $800 million expiring on March 4, 2010. The interest rate on the loans under the Credit Facility is LIBOR plus 0.625%. Interest rates and fees on the Credit Facility vary based on our credit ratings.

We are authorized to sell short-term commercial paper notes to the extent availability exists under the Credit Facility. We use the Credit Facility as back-up liquidity to support 100% of commercial paper outstanding. As of December 31, 2006, we had $208.9 million of commercial paper outstanding that matures within 49 days.

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Notes to consolidated financial statements — (continued)

All of the commercial paper was classified as long-term as we have the intent and the ability to refinance such obligations on a long-term basis under the Credit Facility.

We have $35 million of outstanding private placement debt maturing in May 2007. We classified this debt as long-term as of December 31, 2006 as we have the intent and ability to refinance such obligation on a long-term basis under the Credit Facility.

We were in compliance with all debt covenants as of December 31, 2006.

In addition to the Credit Facility, we have $25 million of uncommitted credit facilities, under which we had $14.0 million in borrowings as of December 31, 2006.

Debt outstanding at December 31, 2006, matures on a calendar year basis as follows:

In thousands	2007		2008		2009		2010		2011		Thereafter		Total
Contractual debt obligation maturities	$	21,022	$	380	$	250,275	$	269,066	$	75	$	200,036	$	740,854
Other maturities		1,166		1,166		875		—		—		—		3,207
Total maturities	$	22,188	$	1,546	$	251,150	$	269,066	$	75	$	200,036	$	744,061

9.  Derivative and Financial Instruments

Cash-flow hedges

In September 2005, we entered into a $100 million interest rate swap agreement with several major financial institutions to exchange variable rate interest payment obligations for fixed rate obligations without the exchange of the underlying principle amounts in order to manage interest rate exposures. The effective date of the fixed rate swap was April 25, 2006. The swap agreement has a fixed interest rate of 4.68% and expires in July 2013. The fixed interest rate of 4.68% plus the .60% interest rate spread over LIBOR, results in an effective fixed interest rate of 5.28%. The fair value of the swap was an asset of $1.9 million and $0.8 million at December 31, 2006 and 2005, respectively and is recorded in Other assets.

The variable to fixed interest rate swap is designated as and is effective as a cash-flow hedge. The fair value of this swap is recorded on the Consolidated Balance Sheet, with changes in fair value included in other comprehensive income (OCI). Derivative gains and losses included in OCI are reclassified into earnings at the time the related interest expense is recognized or the settlement of the related commitment occurs. No hedging relationships were de-designated during 2006.

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Notes to consolidated financial statements — (continued)

Fair value of financial instruments

The recorded amounts and estimated fair values of long-term debt, excluding the effects of derivative financial instruments, and the recorded amounts and estimated fair value of those derivative financial instruments were as follows:

	2006				2005
	Recorded		Fair		Recorded		Fair
In thousands	amount		value		amount		value
Total debt, including current portion
Variable rate	$	347,920	$	347,920	$	356,956	$	356,956
Fixed rate		392,934		403,807		391,285		411,253
Total	$	740,854	$	751,727	$	748,241	$	768,209
Derivative financial instruments
Market value of variable to fixed interest rate swap asset	$	1,901	$	1,901	$	773	$	773

The following methods were used to estimate the fair values of each class of financial instrument:

•  short-term financial instruments (cash and cash equivalents, accounts and notes receivable, accounts and notes payable, and short-term borrowings) — recorded amount approximates fair value because of the short maturity period;

•  long-term debt, including current maturities — fair value is based on market quotes available for issuance of debt with similar terms; and

•  interest rate swap agreements — fair value is based on market or dealer quotes.

10.  Income Taxes

Income from continuing operations before income taxes consisted of the following:

In thousands	2006		2005		2004
United States	$	205,049	$	219,556	$	159,679
International		50,420		63,962		50,353
Income from continuing operations before taxes	$	255,469	$	283,518	$	210,032

The provision for income taxes for continuing operations consisted of the following:

In thousands	2006			2005		2004
Currently payable
Federal	$	51,834		$	59,355	$	42,730
State		9,998			7,369		5,051
International		14,273			23,796		14,513
Total current taxes		76,105			90,520		62,294
Deferred
Federal and state		(8,063	)		5,837		8,341
International		3,660			2,112		2,373
Total deferred taxes		(4,403	)		7,949		10,714
Total provision for income taxes	$	71,702		$	98,469	$	73,008

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Notes to consolidated financial statements — (continued)

Reconciliation of the U.S. statutory income tax rate to our effective tax rate for continuing operations follows:

Percentages	2006			2005			2004
U.S. statutory income tax rate		35.0			35.0			35.0
State income taxes, net of federal tax benefit		2.5			2.3			2.6
Tax effect of stock-based compensation		0.4			0.6			—
Tax effect of international operations		(8.2	)		(1.2	)		(1.4	)
Tax credits		(1.1	)		(1.5	)		(1.4	)
Domestic manufacturing deduction		(0.8	)		(0.5	)		—
ESOP dividend benefit		(0.3	)		(0.3	)		(0.3	)
All other, net		0.6			0.3			0.3
Effective tax rate on continuing operations		28.1			34.7			34.8

Deferred taxes arise because of different treatment between financial statement accounting and tax accounting, known as “temporary differences.” We record the tax effect of these temporary differences as “deferred tax assets” (generally items that can be used as a tax deduction or credit in future periods) and “deferred tax liabilities” (generally items for which we received a tax deduction but the tax impact has not yet been recorded in the Consolidated Statements of Income).

During 2006, our effective tax rate was impacted by favorable resolution of prior years’ federal tax returns and higher utilization of foreign tax credits.

During 2005, our effective tax rate was impacted by R&D tax credits, and favorable resolution of prior years’ federal tax returns. Our effective tax rate was also impacted favorably by tax deductions for profits associated with qualified domestic production activities. These favorable items were offset by an unfavorable settlement for a routine German tax examination related to prior years as well as the tax impact of the adoption of SFAS 123R.

During the fourth quarter of 2004, we repatriated approximately $75.0 million in extraordinary dividends, as defined in the American Jobs Creation Act of 2004 (the “Jobs Act”), consisting primarily of foreign proceeds resulting from the sale of the Tools Group. We elected to apply the provisions of Section 965 of the Internal Revenue Code, enacted as part of the Jobs Act, to the repatriated extraordinary dividends and therefore, were eligible to claim an eighty-five percent dividends received deduction for income tax purposes on the eligible amounts. The net tax cost of the repatriation of the extraordinary dividends, recorded in discontinued operations, was approximately $4.0 million.

United States income taxes have not been provided on undistributed earnings of international subsidiaries. It is our intention to reinvest these earnings permanently or to repatriate the earnings only when it is tax effective to do so. As of December 31, 2006, approximately $120 million of unremitted earnings attributable to international subsidiaries were considered to be indefinitely invested. We believe that any U.S. tax on repatriated earnings would be substantially offset by U.S. foreign tax credits.

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Notes to consolidated financial statements — (continued)

The tax effects of the major items recorded as deferred tax assets and liabilities are as follows:

	2006 Deferred tax					2005 Deferred tax
In thousands	Assets		Liabilities			Assets		Liabilities
Accounts receivable allowances	$	5,984	$	—		$	5,336	$	—
Inventory valuation		1,864		—			—		3,055
Accelerated depreciation/amortization		—		20,116			—		28,047
Accrued product claims and warranties		36,940		—			38,781		—
Employee benefit accruals		111,046		—			92,487		—
Goodwill and other intangibles		—		163,256			—		150,793
Other, net		—		31,665			—		31,524
Total deferred taxes	$	155,834	$	215,037		$	136,604	$	213,419
Net deferred tax liability			$	(59,203	)			$	(76,815	)

The determination of annual income tax expense takes into consideration amounts which may be needed to cover exposures for open tax years. The Internal Revenue Service (IRS) has examined our U.S. federal income tax returns through 2003 with no material adjustments. The IRS has also completed a survey of our 2004 U.S. federal income tax return with no material findings. In connection with the completion of the 2002 to 2003 federal income tax audit and the 2004 survey, we recognized benefits of $8.0 million and $1.8 million in our second and third quarter 2006 income statements, respectively. We do not expect any material impact on earnings to result from the resolution of matters related to open tax years; however, actual settlements may differ from amounts accrued.

Non-U.S. tax losses of $9.1 million and $5.7 million were available for carryforward at December 31, 2006 and 2005, respectively. A valuation allowance of $1.6 million and $1.5 million exists for deferred income tax benefits related to the non-U.S. loss carryforwards available that may not be realized as of December 31, 2006 and 2005, respectively. We believe that sufficient taxable income will be generated in the respective countries to allow us to fully recover the remainder of the tax losses. A majority of our non-U.S. tax losses can be carried forward indefinitely. The remaining non-U.S. tax losses will begin to expire in 2009. State tax losses of $56.1 million and $43.5 million were available for carryforward at December 31, 2006 and 2005, respectively. Valuation allowances exist for the entire balance of deferred tax benefits related to the state tax losses. Certain state tax losses will expire in 2007, while others are subject to carryforward periods of up to twenty years.

11.   Benefit Plans

Pension and post-retirement benefits

We sponsor domestic and foreign defined-benefit pension and other post-retirement plans. Pension benefits are based principally on an employee’s years of service and/or compensation levels near retirement. In addition, we also provide certain post-retirement health care and life insurance benefits. Generally, the post-retirement health care and life insurance plans require contributions from retirees. We use a December 31 measurement date each year.

On December 31, 2006, we adopted SFAS 158 which requires that we recognize the overfunded or underfunded status of our defined benefit and retiree medical plans as an asset or liability in our 2006 year-end Consolidated Balance Sheets, with changes in the funded status recognized through other comprehensive income, net of tax.

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Notes to consolidated financial statements — (continued)

In 2004, under the requirements of SFAS No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, we recognized a curtailment expense and special termination benefits totaling approximately $1.8 million due to the divestiture of the Tools Group.

Obligations and Funded Status

The following tables present reconciliations of the benefit obligation of the plans, the plan assets of the pension plans, and the funded status of the plans:

	Pension benefits						Post-retirement
In thousands	2006			2005			2006			2005
Change in benefit obligation
Benefit obligation beginning of year	$	542,104		$	545,118		$	57,566		$	68,085
Service cost		18,411			16,809			736			850
Interest cost		29,676			29,515			3,195			3,787
Amendments		—			158			—			—
Liability transfer		—			(22,432	)		—			—
Actuarial (gain) loss		(10,473	)		8,610			(6,345	)		(11,669	)
Translation (gain) loss		8,057			(7,876	)		—			—
Benefits paid		(23,880	)		(27,798	)		(3,575	)		(3,487	)
Benefit obligation end of year	$	563,895		$	542,104		$	51,577		$	57,566
Change in plan assets
Fair value of plan assets beginning of year	$	351,656		$	381,281		$	—		$	—
Actual return on plan assets		40,173			13,518			—			—
Asset transfer — divestiture		(99	)		(18,600	)		—			—
Company contributions		4,308			4,133			3,575			3,487
Translation (loss) gain		1,071			(878	)		—			—
Benefits paid		(23,880	)		(27,798	)		(3,575	)		(3,487	)
Fair value of plan assets end of year	$	373,229		$	351,656		$	—		$	—
Funded status
Plan assets less than benefit obligation	$	(190,666	)	$	(190,448	)	$	(51,577	)	$	(57,566	)
Unrecognized cost:
Net transition obligation		*			87			*			—
Net actuarial (gain) loss		*			93,398			*			(16,123	)
Prior service cost (benefit)		*			774			*			(260	)
Net amount recognized	$	(190,666	)	$	(96,189	)	$	(51,577	)	$	(73,949	)

* Not applicable due to adoption of new accounting standard.

Of the $190.7 million underfunding at December 31, 2006, $115.0 million relates to foreign pension plans and our supplemental executive retirement plans which are not commonly funded.

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Notes to consolidated financial statements — (continued)

Amounts recognized in the Consolidated Balance Sheets are as follows:

	Pension benefits						Post-retirement
In thousands	2006			2005			2006			2005
Noncurrent assets	$	2,458		$	*		$	—		$	*
Current liabilities		(4,183	)		*			(3,735	)		*
Noncurrent liabilities		(188,941	)		*			(47,842	)		*
Prepaid benefit cost		*			7,391			*			—
Accrued benefit liability		*			(133,041	)		*			(73,949	)
Intangible asset		*			716			*			—
Accumulated other comprehensive income — pre-tax		*			28,745			*			—
Net amount recognized	$	(190,666	)	$	(96,189	)	$	(51,577	)	$	(73,949	)

* Not applicable due to adoption of new accounting standard.

The accumulated benefit obligation for all defined benefit plans was $490.4 million and $463.1 million at December 31, 2006, and 2005, respectively.

Information for pension plans with an accumulated benefit obligation or projected benefit obligation in excess of plan assets are as follows:

In thousands	2006		2005
Pension plans with an accumulated benefit obligation in excess of plan assets:
Fair value of plan assets	$	365,615	$	344,811
Accumulated benefit obligation		485,204		457,932
Pension plans with a projected benefit obligation in excess of plan assets:
Fair value of plan assets	$	365,615	$	344,811
Projected benefit obligation		558,738		536,895

Components of net periodic benefit cost are as follows:

	Pension benefits									Post-retirement
In thousands	2006			2005			2004			2006			2005			2004
Service cost	$	18,411		$	16,809		$	15,998		$	735		$	850		$	696
Interest cost		29,676			29,515			27,513			3,195			3,787			3,012
Expected return on plan assets		(27,977	)		(29,443	)		(27,970	)
Amortization of transition obligation		20			20			22			—			—			—
Amortization of prior year service cost (benefit)		289			289			450			(236	)		(199	)		(581	)
Recognized net actuarial (gain) loss		4,119			2,764			1,446			(846	)		—			—
Special termination benefits		—			—			1,589			—			—			—
Curtailment expense		—			—			185			—			—			—
Net periodic benefit cost	$	24,538		$	19,954		$	19,233		$	2,848		$	4,438		$	3,127
Continuing operations	$	24,538		$	19,954		$	14,897		$	2,848		$	4,438		$	2,368
Discontinued operations		—			—			4,336			—			—			759
Net periodic benefit cost	$	24,538		$	19,954		$	19,233		$	2,848		$	4,438		$	3,127

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Notes to consolidated financial statements — (continued)

Amounts not yet recognized in net periodic benefit cost and included in accumulated other comprehensive income (pre-tax):

	Pension benefits				Post-retirement
In thousands	2006		2005		2006			2005
Net transition obligation	$	67	$	*	$	—		$	*
Prior service cost (benefit)		485		*		(23	)		*
Net actuarial (gain) loss		68,587		*		(21,622	)		*
Accumulated other comprehensive income (loss)	$	69,139	$	*	$	(21,645	)	$	*

* Not applicable due to adoption of new accounting standard.

The estimated amount that will be amortized from accumulated other comprehensive income into net periodic benefit cost in 2007 is as follows:

	Pension		Post-
In thousands	benefits		retirement
Net actuarial loss	$	3,250	$	(1,421	)
Prior service cost		160		(246	)
Transition obligation		20		—
Total estimated 2007 amortization	$	3,430	$	(1,667	)

Additional Information

	Pension benefits
In thousands	2006		2005
Decrease (increase) in minimum liability included in other comprehensive income, net of tax	$	1,513	$	(5,702	)

Assumptions

Weighted-average assumptions used to determine domestic benefit obligations at December 31 are as follows:

	Pension benefits						Post-retirement
Percentages	2006		2005		2004		2006		2005		2004
Discount rate		6.00		5.75		5.75		6.00		5.75		5.75
Rate of compensation increase		5.00		5.00		5.00

Weighted-average assumptions used to determine the domestic net periodic benefit cost for years ending December 31 are as follows:

	Pension benefits						Post-retirement
Percentages	2006		2005		2004		2006		2005		2004
Discount rate		5.75		5.75		6.25		5.75		5.75		6.25
Expected long-term return on plan assets		8.50		8.50		8.50
Rate of compensation increase		5.00		5.00		5.00

Discount rate

The discount rate reflects the current rate at which the pension liabilities could be effectively settled at the end of the year based on our December 31 measurement date. The discount rate was determined by matching our

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Notes to consolidated financial statements — (continued)

expected benefit payments to payments from a stream of AA or higher bonds available in the marketplace, adjusted to eliminate the effects of call provisions. This produced a discount rate for our U.S. plans of 6.00% in 2006 and 5.75% in 2005 and 2004. The discount rates on our foreign plans ranged from 2.00% to 5.15% in 2006, 2.00% to 4.90% in 2005 and 2.00% to 5.25% in 2004. There are no other known or anticipated changes in our discount rate assumption that will impact our pension expense in 2007.

Expected rate of return

Our expected rate of return on plan assets in 2006 equaled 8.5%, which remained unchanged from 2005 and 2004. The expected rate of return is designed to be a long-term assumption that may be subject to considerable year-to-year variance from actual returns. In developing the expected long-term rate of return, we considered our historical returns, with consideration given to forecasted economic conditions, our asset allocations, input from external consultants and broader longer-term market indices. In 2006, the pension plan assets yielded a return of 12.3%, compared to returns of 4.2% in 2005 and 17.6% in 2004. In 2006, our expected return on plan assets was lower than our actual return on plan assets while in 2005 our expected return on plan assets was higher than our actual return on plans assets. The significant difference between our expected return on plan assets compared to our actual return on plan assets in 2006 was primarily attributable to overall market performance being better than expected. The significant difference between our expected return on plan assets compared to our actual return on plan assets in 2005 was primarily attributable to the fluctuations of our common stock during 2005 which approximates 10% of the plan assets. There are no known or anticipated changes in our return assumption that will impact our pension expense in 2007.

We base our determination of pension expense or income on a market-related valuation of assets which reduces year-to-year volatility. This market-related valuation recognizes investment gains or losses over a five-year period from the year in which they occur. Investment gains or losses for this purpose are the difference between the expected return calculated using the market-related value of assets and the actual return based on the market-related value of assets. Since the market-related value of assets recognizes gains or losses over a five-year-period, the future value of assets will be impacted as previously deferred gains or losses are recorded.

Pension and post-retirement related adjustments to equity

In 2004, our discount rate was lowered from 6.25% to 5.75%. However, the change in the discount rate assumption was offset by higher than anticipated returns on assets and thus, did not significantly affect our shareholders’ equity. In 2005, our discount rate remained consistent with 2004; however, a lower return on plan assets as well as a decrease in the discount rates for our foreign plans resulted in an after-tax charge to equity of $5.7 million. In 2006, our discount rate increased from 5.75% to 6.00% and our return on plan assets was higher than anticipated. Before the effect of adopting SFAS 158, we had an after-tax increase in equity of $1.5 million. The effect of initially applying SFAS 158 resulted in an after-tax charge to equity of $12.9 million.

Net periodic benefit cost

Total net periodic pension benefit cost was $24.5 million in 2006, $20.0 million in 2005, and $19.2 million in 2004. Total net periodic pension benefit cost is expected to be approximately $25 million in 2007. The net periodic pension benefit cost for 2007 has been estimated assuming a discount rate of 6.0% and an expected return on plan assets of 8.5%.

Unrecognized pension and post-retirement losses

As of our December 31, 2006 measurement date, our plans have $47.0 million of cumulative unrecognized losses. To the extent the unrecognized loss, when adjusted for the difference between market and market related values of assets, exceeds 10% of the projected benefit obligation, it will be amortized into expense each year on a straight-line basis over the remaining expected future-working lifetime of active participants

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Notes to consolidated financial statements — (continued)

(currently approximating 12 years). The amount included in net periodic benefit cost for loss amortization was $3.3 million and $2.8 million in 2006 and 2005, respectively.

The assumed health care cost trend rates at December 31 are as follows:

	2006			2005
Health care cost trend rate assumed for next year		10.50	%		11.00	%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)		5.00	%		5.00	%
Year that the rate reaches the ultimate trend rate		2018			2018

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

	1-Percentage-Point		1-Percentage-Point
In thousands	Increase		Decrease
Effect on total annual service and interest cost	$	202	$	(173	)
Effect on post-retirement benefit obligation		1,331		(1,178	)

Plan Assets

Objective

The primary objective of our pension plans is to meet commitments to our employees at a reasonable cost to the company. This is primarily accomplished through growth of capital and safety of the funds invested. The plans will therefore be actively invested to achieve real growth of capital over inflation through appreciation of securities held and through the accumulation and reinvestment of dividend and interest income.

Asset allocation

Our actual overall asset allocation for the plans as compared to our investment policy goals is as follows:

					Investment Policy
Asset Class	2006(1)		2005(1)		Target		Minimum		Maximum
Large Capitalization U.S. Stocks		18.0%		19.5%		20.0%		15.0%		25.0%
Mid Capitalization, U.S. Stocks		12.4%		12.9%		12.5%		7.5%		17.5%
Small Capitalization, U.S. Stocks		7.5%		6.9%		7.5%		2.5%		12.5%
Pentair Stock		8.2%		9.5%		10.0%		5.0%		15.0%
International (Non-U.S.) Stocks		21.3%		21.2%		20.0%		15.0%		25.0%
Private Equity		0.2%		0.1%		0.0%		0.0%		5.0%
Fixed Income (Bonds)		9.5%		9.4%		10.0%		5.0%		15.0%
Fund of Hedged Funds		11.7%		20.5%		20.0%		15.0%		25.0%
Cash		11.2%		0.0%

⁽¹⁾ Actual asset allocation as of December 31, 2006 and 2005, respectively.

We regularly review our asset allocation and periodically rebalance our investments to our targeted allocation when considered appropriate. From time to time, we may be outside our targeted ranges by amounts we deem acceptable.

Equity securities include Pentair common stock in the amount of $29.6 million and $32.6 million at December 31, 2006 and 2005, respectively.

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Notes to consolidated financial statements — (continued)

Cash Flows

Contributions

In 2006, pension contributions totaled $4.3 million. There were no contributions required or made to domestic defined benefit pension plans in fiscal year 2006. In 2005, pension contributions totaled $4.1 million, including $0.3 million of contributions to domestic defined benefit pension plans. Our 2007 pension contributions are expected to be in the range of $15 million to $20 million. The 2007 expected contributions will equal or exceed our minimum funding requirements.

Estimated Future Benefit Payments

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid by the plans as follows:

In millions	Pension benefits		Post-retirement
2007	$	26.6	$	3.7
2008		26.7		3.7
2009		27.6		3.8
2010		28.6		3.8
2011		29.9		4.0
2012-2016		179.3		20.9

Savings plan

We have a 401(k) plan (the plan) with an employee stock ownership (ESOP) bonus component, which covers certain union and nearly all non-union U.S. employees who meet certain age requirements. Under the plan, eligible U.S. employees may voluntarily contribute a percentage of their eligible compensation. Matching contributions are made in cash to employees who meet certain eligibility and service requirements. Our matching contribution is fixed at 50% of eligible employee contributions, and is limited to 5% of employee compensation contributed by employees.

In addition to the matching contribution, all employees who meet certain service requirements receive a discretionary ESOP contribution equal to 1.5% of annual eligible compensation.

Our combined expense for the plan and ESOP was approximately $12.3 million, $8.8 million, and $10.7 million, in 2006, 2005, and 2004, respectively.

12.  Shareholders’ Equity

Authorized shares

We may issue up to 250 million shares of common stock. Our Board of Directors may designate up to 15 million of those shares as preferred stock. On December 10, 2004, the Board of Directors designated a new series of preferred stock of up to 2.5 million shares, Series A Junior Participating Preferred Stock, par value $0.10 per share. No shares of preferred stock were issued or outstanding as of December 31, 2006 or December 31, 2005.

Purchase rights

On December 10, 2004, our Board of Directors declared a dividend of one preferred share purchase right (a “Right”) for each outstanding share of common stock. The dividend was payable upon the close of business on January 28, 2005 to the shareholders of record upon the close of business on January 28, 2005. Each Right entitles the registered holder to purchase one one-hundredth of a share of Series A Junior Participating Preferred Stock, at a price of $240.00 per one one-hundredth of a share, subject to adjustment. However, the Rights are not exercisable unless certain change in control events occur, such as a person acquiring or obtaining the right to acquire beneficial ownership of 15% or more of our outstanding common stock. The

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Notes to consolidated financial statements — (continued)

description and terms of the Rights are set forth in a Rights Agreement, dated December 10, 2004. The Rights will expire on January 28, 2015, unless the Rights are earlier redeemed or exchanged in accordance with the terms of the Rights Agreement. On January 28, 2005, the common share purchase rights issued pursuant to the Rights Agreement dated July 31, 1995 were redeemed in their entirety for an amount equal to $0.0025 per right.

Share repurchases

In December 2005, the Board of Directors authorized the repurchase of shares of our common stock up to a maximum dollar limit of $25 million of our common stock. On July 28, 2006, the Board of Directors increased our repurchase authorization to $50 million, and on September 28, 2006, the Board of Directors further increased our repurchase authorization to $100 million. As of December 31, 2006, we had purchased 1,986,026 shares for $59.4 million pursuant to these programs during 2006. The Board of Directors authorized the continuation of the repurchase program in 2007 with a maximum dollar limit of $40.6 million. This authorization expires on December 31, 2007. As of February 16, 2007, we had not repurchased any additional shares under this plan and, accordingly, we have the authority in 2007 to repurchase shares up to a maximum dollar limit of $40.6 million. In 2005 and 2004, respectively, we repurchased 755,663 shares and 105,500 shares of our common stock under similar authorizations.

13.  Stock Plans

Total stock-based compensation expense from continuing operations in 2006, 2005, and 2004 was $25.3 million, $24.2 million, and $6.3 million, respectively. The increase in 2005 is attributable to the adoption of SFAS 123R in the fourth quarter of 2005 using the modified retrospective transition method and restating interim periods in 2005. The adoption of SFAS 123R in 2005 resulted in the recognition of incremental pre-tax stock-based compensation of $16.4 million, a reduction in net income of $12.0 million, a reduction in basic and diluted earnings per share of $0.12, a reduction in cash flows from operating activities of $8.7 million and an increase in cash flows from financing activities of $8.7 million. We additionally reclassified our unearned compensation on non-vested share awards of $7.9 million to additional paid in capital. The cumulative effect adjustment for forfeitures related to non-vested share awards was immaterial.

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Notes to consolidated financial statements — (continued)

Prior to 2005, we applied APB 25 and the disclosure-only provisions of SFAS No. 123. The following table illustrates the effect on income and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation during 2004. The estimated fair value of each Pentair option was calculated using the Black-Scholes option-pricing model.

In thousands, except per-share data	2004
Net income	$	171,225
Plus stock-based employee compensation included in net income, net of tax		6,558
Less estimated stock-based employee compensation determined under fair value based method, net of tax		(17,958	)
Net Income — pro forma	$	159,825
Earnings per common share
Basic — as reported	$	1.72
Plus stock-based employee compensation included in net income, net of tax		0.07
Less estimated stock-based employee compensation determined under fair value based method, net of tax		(0.18	)
Basic — pro forma	$	1.61
Diluted — as reported	$	1.68
Plus stock-based employee compensation included in net income, net of tax		0.07
Less estimated stock-based employee compensation determined under fair value based method, net of tax		(0.18	)
Diluted — pro forma	$	1.57
Weighted average common shares outstanding
Basic		99,316
Diluted		101,441

The amounts shown above are not indicative of the effect in future years since the estimated fair value of options and the number of options granted varies from year to year.

We estimated the fair values using the Black-Scholes option-pricing model, modified for dividends and using the following assumptions:

	2006		2005		2004
Risk-free interest rate		4.57%		3.97%		2.83%
Expected dividend yield		1.45%		1.29%		1.54%
Expected stock price volatility		31.50%		34.50%		39.70%
Expected lives		4.5 yrs		3.6 yrs		5.2 yrs

Omnibus stock incentive plan

In April 2004, the Omnibus Stock Incentive Plan as Amended and Restated (the “Plan”) was approved by shareholders. The Plan authorizes the issuance of additional shares of our common stock and extends through April 2014. The Plan allows for the granting of:

•  nonqualified stock options;

•  incentive stock options;

•  non-vested shares;

•  rights to non-vested shares;

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Notes to consolidated financial statements — (continued)

•  incentive compensation units (ICUs);

•  stock appreciation rights;

•  performance shares; and

•  performance units.

The Plan is administered by our Compensation Committee (the “Committee”), which is made up of independent members of our Board of Directors. Employees eligible to receive awards under the Plan are managerial, administrative, or other key employees who are in a position to make a material contribution to the continued profitable growth and long-term success of Pentair. The Committee has the authority to select the recipients of awards, determine the type and size of awards, establish certain terms and conditions of award grants, and take certain other actions as permitted under the Plan. The Plan provides that no more than 20% of the total shares available for issuance under the Plan may be used to make awards other than stock options and limits the Committee’s authority to reprice awards or to cancel and reissue awards at lower prices.

Non-qualified and incentive stock options

Under the Plan, we may grant stock options to any eligible employee with an exercise price equal to the market value of the shares on the dates the options were granted. Options generally vest over a three-year period commencing on the grant date and expire ten years after the grant date. Prior to 2006, option grants typically had a reload feature when shares are retired to pay the exercise price, allowing individuals to receive additional options upon exercise equal to the number of shares retired. Option awards granted after 2005 under the Plan do not have a reload feature attached to the option.

Non-vested shares and rights to non-vested shares

Under the Plan, eligible employees are awarded non-vested shares or rights to non-vested shares (awards) of our common stock. Share awards generally vest from two to five years after issuance, subject to continuous employment and certain other conditions. Non-vested share awards are valued at market value on the date of grant and are expensed over the vesting period. Annual expense for the value of non-vested shares and rights to non-vested shares was $11.1 million in 2006, $7.0 million in 2005, and $6.3 million in 2004.

Stock appreciation rights, performance shares, and performance units

Under the Plan, the compensation committee is permitted to issue these awards; however, there have been no issuances of these awards.

Outside directors nonqualified stock option plan

Nonqualified stock options are granted to outside directors under the Outside Directors Nonqualified Stock Option Plan (the “Directors Plan”) with an exercise price equal to the market value of the shares on the option grant dates. Options generally vest over a three-year period commencing on the grant date and expire ten years after the grant date. The Directors Plan extends to January 2008.

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Notes to consolidated financial statements — (continued)

Stock options

The following table summarizes stock option activity under all plans:

	2006
				Exercise		Remaining		Aggregate
Options Outstanding	Shares			Price(1)		Contractual Life(1)		Intrinsic Value
Balance January 1		5,872,382		$	27.18
Granted		1,311,766			36.89
Exercised		(494,829	)		19.59
Forfeited		(296,130	)		36.24
Expired		(57,553	)		38.52
Balance December 31		6,335,636		$	29.26		6.5 years	$	185,361,874
Options exercisable December 31		3,845,583		$	25.19		5.4 years	$	96,874,128
Shares available for grant December 31		8,739,681

⁽¹⁾ Weighted average

The weighted-average grant date fair value of options granted in 2006, 2005, and 2004 was estimated to be $10.90, $11.44, and $8.64 per share, respectively. The total intrinsic value of options that were exercised during 2006, 2005, and 2004 was $8.5 million, $29.5 million, and $47.5 million, respectively. At December 31, 2006, the total unrecognized compensation cost related to stock options was $6.4 million. This cost is expected to be recognized over a weighted average period of 1.8 years.

Cash received from option exercises for the years ended December 31, 2006, 2005, and 2004 was $4.1 million, $8.4 million, and $10.9 million, respectively. The actual tax benefit realized for the tax deductions from option exercises totaled $3.3 million, $10.7 million, and $17.2 million for the years ended December 31, 2006, 2005, and 2004, respectively.

The following table summarizes non-vested share activity under all plans:

	2006
				Grant Date
Non-vested Shares Outstanding	Shares			Fair Value(1)
Balance January 1		995,792		$	24.98
Granted		352,742			37.77
Vested		(237,886	)		34.33
Forfeited		(42,599	)		34.16
Balance December 31		1,068,049		$	31.52

⁽¹⁾ Weighted average

As of December 31, 2006, there was $15.6 million of unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted average period of 2.4 years. The total fair value of shares vested during the years ended December 31, 2006, 2005 and 2004, was $8.2 million, $6.6 million, and $12.4 million, respectively.

During 2005, we increased the contractual term of options for one individual resulting in additional compensation expense of $0.4 million under SFAS 123R. In 2004, we recorded $4.4 million of compensation expense under APB 25 related to the modification of option terms for employees terminated in association with our Tools Group divestiture.

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Notes to consolidated financial statements — (continued)

14.   Business Segments

We classify our continuing operations into the following business segments:

•  Water — manufactures and markets essential products and systems used in the movement, storage, treatment, and enjoyment of water. Water segment products include water and wastewater pumps; filtration and purification components and systems; storage tanks and pressure vessels; and pool and spa equipment and accessories.

•  Technical Products — designs, manufactures, and markets standard, modified and custom enclosures that house and protect sensitive electronics and electrical components; thermal management products; and accessories. Applications served include industrial machinery, data communications, networking, telecommunications, test and measurement, automotive, medical, security, defense, and general electronics. Products include metallic and composite enclosures, cabinets, cases, subracks, backplanes, and associated thermal management systems.

•  Other — is primarily composed of unallocated corporate expenses, our captive insurance subsidiary, intermediate finance companies, divested operations, and intercompany eliminations.

The accounting policies of our operating segments are the same as those described in the summary of significant accounting policies. We evaluate performance based on the sales and operating income of the segments and use a variety of ratios to measure performance. These results are not necessarily indicative of the results of operations that would have occurred had each segment been an independent, stand-alone entity during the periods presented.

Financial information by reportable business segment is included in the following summary:

In thousands	2006		2005		2004		2006			2005			2004
	Net sales to external customers						Operating income (loss)
Water	$	2,155,225	$	2,131,505	$	1,563,394	$	212,498		$	267,138		$	197,310
Technical Products		999,244		815,074		714,735		148,905			109,229			87,844
Other		—		—		—		(54,417	)		(53,295	)		(37,912	)
Consolidated	$	3,154,469	$	2,946,579	$	2,278,129	$	306,986		$	323,072		$	247,242

	Identifiable assets(1)						Depreciation
Water	$	2,605,103	$	2,501,297	$	2,497,980	$	35,978	$	35,842	$	26,751
Technical Products		681,257		640,729		503,322		19,617		19,318		19,408
Other(1)		78,619		111,729		119,273		1,304		1,405		904
Consolidated	$	3,364,979	$	3,253,755	$	3,120,575	$	56,899	$	56,565	$	47,063

	Amortization							Capital expenditures
Water	$	11,292	$	11,494	$	7,534		$	29,733	$	44,790	$	24,981
Technical Products		1,931		177		—			20,959		15,826		16,240
Other		4,974		4,324		(33	)		386		1,855		7,646
Consolidated	$	18,197	$	15,995	$	7,501		$	51,078	$	62,471	$	48,867

⁽¹⁾ All cash and cash equivalents are included in Other.

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Notes to consolidated financial statements — (continued)

The following table presents certain geographic information:

In thousands	2006		2005		2004		2006		2005		2004
	Net sales to external customers						Long-lived assets
U.S./Canada	$	2,567,744	$	2,423,934	$	1,858,224	$	219,847	$	235,021	$	249,299
Europe		405,751		378,418		319,285		77,291		53,701		62,025
Asia and other		180,974		144,227		100,620		33,234		23,117		24,978
Consolidated	$	3,154,469	$	2,946,579	$	2,278,129	$	330,372	$	311,839	$	336,302

Net sales are based on the location in which the sale originated. Long-lived assets represent property, plant, and equipment, net of related depreciation.

We offer a broad array of products and systems to multiple markets and customers for which we do not have the information systems to track revenues by primary product category. However, our net sales by segment is representative of our sales by major product category.

We sell our products through various distribution channels including wholesale and retail distributors, original equipment manufacturers, and home centers. In our Water segment, one customer accounted for just over 10% of segment sales in 2006, no single customer accounted for more than 10% of segment sales in 2005, and in 2004 one customer accounted for about 11% of segment sales. In our Technical Products segment, no single customer accounted for more than 10% of segment sales in 2006, 2005, or 2004.

15.   Commitments and Contingencies

Operating lease commitments

Net rental expense under operating leases follows:

In thousands	2006			2005			2004
Gross rental expense	$	39,497		$	33,651		$	27,712
Sublease rental income		(264	)		(214	)		(804	)
Net rental expense	$	39,233		$	33,437		$	26,908

Future minimum lease commitments under non-cancelable operating leases, principally related to facilities, vehicles, and machinery and equipment are as follows:

In thousands	2007			2008			2009			2010			2011			Thereafter		Total
Minimum lease payments	$	28,445		$	23,441		$	17,932		$	12,855		$	11,816		$	9,017	$	103,506
Minimum sublease rentals		(472	)		(472	)		(404	)		(65	)		(65	)		—		(1,478	)
Net future minimum lease commitments	$	27,973		$	22,969		$	17,528		$	12,790		$	11,751		$	9,017	$	102,028

Environmental

We have been named as defendants, targets, or potentially responsible parties (“PRP”) in a small number of environmental clean-ups, in which our current or former business units have generally been given de minimis status. To date, none of these claims have resulted in clean-up costs, fines, penalties, or damages in an amount material to our financial position or results of operations. We have disposed of a number of businesses in recent years and in certain cases, such as the disposition of the Cross Pointe Paper Corporation uncoated paper business in 1995, the disposition of the Federal Cartridge Company ammunition business in 1997, the disposition of Lincoln Industrial in 2001, and the disposition of the Tools Group in 2004, we have retained responsibility and potential liability for certain environmental obligations. We have received claims for

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Notes to consolidated financial statements — (continued)

indemnification from purchasers of these businesses and have established what we believe to be adequate accruals for potential liabilities arising out of retained responsibilities. We settled some of the claims in prior years; to date our recorded accruals have been adequate.

In addition, there are ongoing environmental issues at a limited number of sites, including one site acquired in the acquisition of Essef Corporation in 1999, which relate to operations no longer carried out at the sites. We have established what we believe to be adequate accruals for remediation costs at these sites. We do not believe that projected response costs will result in a material liability.

We may be named as a PRP at other sites in the future, for both divested and acquired businesses. When the outcome of the matter is probable and it is possible to provide reasonable estimates of our liability with respect to environmental sites, provisions have been made in accordance with generally accepted accounting principles in the United States. As of December 31, 2006 and 2005, our undiscounted reserves for such environmental liabilities were approximately $5.6 million and $6.4 million, respectively. We cannot ensure that environmental requirements will not change or become more stringent over time or that our eventual environmental clean-up costs and liabilities will not exceed the amount of our current reserves.

Litigation

We have been made parties to a number of actions filed or have been given notice of potential claims relating to the conduct of our business, including those pertaining to commercial disputes, product liability, environmental, safety and health, patent infringement, and employment matters.

We comply with the requirements of SFAS No. 5, Accounting for Contingencies, and related guidance, and record liabilities for an estimated loss from a loss contingency where the outcome of the matter is probable and can be reasonably estimated. Factors that are considered when determining whether the conditions for accrual have been met include the (a) nature of the litigation, claim, or assessment, (b) progress of the case, including progress after the date of the financial statements but before the issuance date of the financial statements, (c) opinions of legal counsel, and (d) management’s intended response to the litigation, claim, or assessment. Where the reasonable estimate of the probable loss is a range, we record the most likely estimate of the loss. When no amount within the range is a better estimate than any other amount, however, the minimum amount in the range is accrued. Gain contingencies are not recorded until realized.

While we believe that a material adverse impact on our consolidated financial position, results of operations, or cash flows from any such future charges is unlikely, given the inherent uncertainty of litigation, a remote possibility exists that a future adverse ruling or unfavorable development could result in future charges that could have a material adverse impact. We do and will continue to periodically reexamine our estimates of probable liabilities and any associated expenses and receivables and make appropriate adjustments to such estimates based on experience and developments in litigation. As a result, the current estimates of the potential impact on our consolidated financial position, results of operations, and cash flows for the proceedings and claims could change in the future.

Product liability claims

We are subject to various product liability lawsuits and personal injury claims. A substantial number of these lawsuits and claims are insured and accrued for by Penwald Insurance Company (“Penwald”) our captive insurance subsidiary. Penwald records a liability for these claims based on actuarial projections of ultimate losses. For all other claims, accruals covering the claims are recorded, on an undiscounted basis, when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on existing information. The accruals are adjusted periodically as additional information becomes available. We have not experienced significant unfavorable trends in either the severity or frequency of product liability lawsuits or personal injury claims.

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Notes to consolidated financial statements — (continued)

Horizon litigation

Twenty-eight separate lawsuits involving 29 primary plaintiffs, a class action, and claims for indemnity by Celebrity Cruise Lines, Inc. (“Celebrity”) were brought against Essef Corporation (“Essef”) and certain of its subsidiaries prior to our acquisition of Essef in August 1999. The claims against Essef and its involved subsidiaries were based upon the allegation that Essef designed, manufactured, and marketed two sand swimming pool filters that were installed as a part of the spa system on the Horizon cruise ship, and allegations that the spa and filters contained Legionnaire’s disease bacteria that infected certain passengers on cruises from April 1994 through July 1994.

The individual and class claims by passengers were tried and resulted in an adverse jury verdict finding liability on the part of the Essef defendants (70%) and Celebrity and its sister company, Fantasia (together 30%). After expiration of post-trial appeals, we paid all outstanding punitive damage awards of $7.0 million in the Horizon cases, plus interest of approximately $1.6 million, in January 2004. All of the personal injury cases have now been resolved through either settlement or judgment.

The only remaining unresolved claims in this case were those brought by Celebrity for damages resulting from the outbreak. Celebrity filed an amended complaint seeking attorney fees and costs for prior litigation as well as out-of-pocket losses, lost profits, and loss of business enterprise value. On June 28, 2006, a jury returned a verdict against the Essef defendants in the total amount of $193.0 million for its claims for out-of-pocket expenses ($10.4 million), lost profits ($47.6 million) and lost enterprise value ($135.0 million). The verdict was exclusive of pre-judgment interest and attorneys’ fees.

On January 17, 2007, the Court ruled on our post-trial motions, granting judgment in our favor as a matter of law with respect to Celebrity’s claim for lost enterprise value ($135.0 million). The Court also granted a new trial with respect to lost profits ($47.6 million). In addition, the Court denied without prejudice our claim for contribution to reduce Celebrity’s recovery by 30% to account for its contributory negligence, with leave to renew the motion following retrial.

Celebrity’s claim for lost profits at trial amounted to approximately $60.3 million. We believe that actual lost profits suffered, if any, are substantially less. In a new trial, there remain questions of causation, contribution and proof of damages to be determined. We intend to vigorously defend against Celebrity’s claims. We cannot predict whether Celebrity will appeal the ruling on lost enterprise value, nor whether and to what extent Essef may eventually be found liable on Celebrity’s claims.

Several issues have not been decided by the Court, including whether Celebrity is entitled to recovery of its attorneys’ fees and related costs in the passenger claims phase of the case ($4.1 million), and, with respect to pre-judgment interest, the length of the interest period and the rate of interest on any eventual judgment. We have assessed the impact of the ruling on our previously established reserves for this matter and, based on information available at this time, have not changed our reserves following this ruling, except to take into account quarterly interest accruals.

We believe that any judgment we pay in this matter would be tax-deductible in the year paid or in subsequent years. In addition to the impact of any loss on this matter on our earnings per share when recognized, we may need to borrow funds from our banks or other sources to pay any judgment finally determined after exhaustion of all appeals. We expect that we would have available adequate funds to allow us to do so, based on discussions with our lending sources and our estimates of the results of our business operations over the foreseeable future.

Warranties and guarantees

In connection with the disposition of our businesses or product lines, we may agree to indemnify purchasers for various potential liabilities relating to the sold business, such as pre-closing tax, product liability, warranty, environmental, or other obligations. The subject matter, amounts, and duration of any such indemnification

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Notes to consolidated financial statements — (continued)

obligations vary for each type of liability indemnified and may vary widely from transaction to transaction. Generally, the maximum obligation under such indemnifications is not explicitly stated and as a result, the overall amount of these obligations cannot be reasonably estimated. Historically, we have not made significant payments for these indemnifications. We believe that if we were to incur a loss in any of these matters, the loss would not have a material effect on our financial condition or results of operations.

In accordance with FASB Interpretation No. 45 (“FIN 45”), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Others, we recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee.

We provide service and warranty policies on our products. Liability under service and warranty policies is based upon a review of historical warranty and service claim experience. Adjustments are made to accruals as claim data and historical experience warrant.

The changes in the carrying amount of service and product warranties for the year ended December 31, 2006 and 2005 are as follows:

In thousands	2006			2005
Balance at beginning of the year	$	33,551		$	32,524
Service and product warranty provision		48,791			40,576
Payments		(49,190	)		(44,123	)
Acquired		484			2,231
Translation		457			2,343
Balance at end of the year	$	34,093		$	33,551

Stand-by letters of credit

In the ordinary course of business, predominantly for contracts and bids involving municipal pump products, we are required to commit to bonds that require payments to our customers for any non-performance. The outstanding face value of the bonds fluctuates with the value of our projects in process and in our backlog. In addition, we issue financial stand-by letters of credit to secure our performance to third parties under self-insurance programs and certain legal matters. As of December 31, 2006 and December 31, 2005, the outstanding value of these instruments totaled $59.6 million and $38.8 million, respectively.

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Notes to consolidated financial statements — (continued)

16.   Selected Quarterly Financial Data (Unaudited)

The following table represents the 2006 quarterly financial information:

	2006
In thousands, except per-share data	First			Second		Third		Fourth		Year
Net sales	$	771,389		$	862,022	$	778,020	$	743,038	$	3,154,469
Gross profit		222,508			262,689		212,487		208,566		906,250
Operating income		78,556			107,975		60,293		60,162		306,986
Income from continuing operations		43,071			68,633		33,441		38,622		183,767
Gain (loss) on disposal of discontinued operations, net of tax		(1,451	)		—		1,400		15		(36	)
Net income		41,620			68,633		34,841		38,637		183,731
Earnings per common share(1)
Basic
Continuing operations	$	0.43		$	0.68	$	0.34	$	0.39	$	1.84
Discontinued operations		(0.01	)		—		0.01		—		—
Basic earnings per common share	$	0.42		$	0.68	$	0.35	$	0.39	$	1.84
Diluted
Continuing operations	$	0.42		$	0.67	$	0.33	$	0.39	$	1.81
Discontinued operations		(0.01	)		—		0.01		—		—
Diluted earnings per common share	$	0.41		$	0.67	$	0.34	$	0.39	$	1.81

⁽¹⁾  Amounts may not total to annual earnings because each quarter and year are calculated separately based on basic and diluted weighted-average common shares outstanding during that period.

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Notes to consolidated financial statements — (continued)

The following table represents the 2005 quarterly financial information:

	2005
In thousands, except per-share data	First		Second		Third		Fourth		Year
Net sales	$	709,635	$	788,523	$	716,308	$	732,113	$	2,946,579
Gross profit		204,138		235,233		200,841		207,809		848,021
Operating income		72,086		107,234		76,880		66,872		323,072
Income from continuing operations		40,181		61,379		44,533		38,956		185,049
Net income		40,181		61,379		44,533		38,956		185,049
Earnings per common share(1)
Basic
Continuing operations	$	0.40	$	0.61	$	0.44	$	0.39	$	1.84
Discontinued operations		—		—		—		—		—
Basic earnings per common share	$	0.40	$	0.61	$	0.44	$	0.39	$	1.84
Diluted
Continuing operations	$	0.39	$	0.60	$	0.43	$	0.38	$	1.80
Discontinued operations		—		—		—		—		—
Diluted earnings per common share	$	0.39	$	0.60	$	0.43	$	0.38	$	1.80

⁽¹⁾  Amounts may not total to annual earnings because each quarter and year are calculated separately based on basic and diluted weighted-average common shares outstanding during that period.

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Notes to consolidated financial statements — (continued)

17.   Financial Statements of Subsidiary Guarantors

The $250 million Senior Notes due 2009 are jointly and severally guaranteed by domestic subsidiaries (the “Guarantor Subsidiaries”), each of which is directly or indirectly wholly-owned by Pentair (the “Parent Company”). The following supplemental financial information sets forth the condensed consolidated balance sheets as of December 31, 2006 and 2005, the related condensed consolidated statements of income and statements of cash flows for each of the three years in the period ended December 31, 2006, for the Parent Company, the Guarantor Subsidiaries, the Non-Guarantor Subsidiaries, and total consolidated Pentair and subsidiaries.

Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Income
For the year ended December 31, 2006

	Parent			Guarantor			Non-Guarantor
In thousands	Company			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Net sales	$	—		$	2,596,642		$	722,606		$	(164,779	)	$	3,154,469
Cost of goods sold		682			1,887,551			524,674			(164,688	)		2,248,219
Gross profit		(682	)		709,091			197,932			(91	)		906,250
Selling, general and administrative		24,366			385,209			131,725			(91	)		541,209
Research and development		—			45,600			12,455			—			58,055
Operating (loss) income		(25,048	)		278,282			53,752			—			306,986
Gain (loss) on sale of assets, net		1,152			(788	)		—			—			364
Net interest (income) expense		(63,991	)		119,461			(3,589	)		—			51,881
Income before income taxes		40,095			158,033			57,341			—			255,469
Provision for income taxes		13,774			37,549			20,379			—			71,702
Income from continuing operations		26,321			120,484			36,962			—			183,767
Loss on disposal of discontinued operations, net of tax		(36	)		—			—			—			(36	)
Net income	$	26,285		$	120,484		$	36,962		$	—		$	183,731

84

Pentair, Inc. and Subsidiaries

Notes to consolidated financial statements — (continued)

Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
December 31, 2006

	Parent			Guarantor		Non-Guarantor
In thousands	Company			Subsidiaries		Subsidiaries		Eliminations			Consolidated
ASSETS
Current assets
Cash and cash equivalents	$	8,810		$	6,550	$	39,460	$	—		$	54,820
Accounts and notes receivable, net		190			316,157		150,103		(44,316	)		422,134
Inventories		—			283,687		115,170		—			398,857
Deferred tax assets		96,566			66,255		5,359		(117,602	)		50,578
Prepaid expenses and other current assets		16,766			20,555		16,496		(22,578	)		31,239
Total current assets		122,332			693,204		326,588		(184,496	)		957,628
Property, plant and equipment, net		4,753			214,709		110,910		—			330,372
Other assets
Investments in subsidiaries		1,978,466			61,351		134,204		(2,174,021	)		—
Goodwill		—			1,466,536		252,235		—			1,718,771
Intangibles, net		—			261,050		25,961		—			287,011
Other		76,076			15,078		5,423		(25,380	)		71,197
Total other assets		2,054,542			1,804,015		417,823		(2,199,401	)		2,076,979
Total assets	$	2,181,627		$	2,711,928	$	855,321	$	(2,383,897	)	$	3,364,979
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Short-term borrowings	$	—		$	—	$	14,563	$	—		$	14,563
Current maturities of long-term debt		1,167			258		34,649		(28,449	)		7,625
Accounts payable		3,053			158,294		94,709		(49,770	)		206,286
Employee compensation and benefits		12,388			48,447		28,047		—			88,882
Current pension and post-retirement benefits		7,918			—		—		—			7,918
Accrued product claims and warranties		—			28,955		15,138		—			44,093
Income taxes		48,462			1,685		4,389		(32,043	)		22,493
Accrued rebates and sales incentives		—			35,185		4,234		—			39,419
Other current liabilities		16,408			51,858		38,132		(16,395	)		90,003
Total current liabilities		89,396			324,682		233,861		(126,657	)		521,282
Other liabilities
Long-term debt		695,924			1,786,914		40,987		(1,801,952	)		721,873
Pension and other retirement compensation		121,680			27,470		58,526		—			207,676
Post-retirement medical and other benefits		23,143			50,079		—		(25,380	)		47,842
Deferred tax liabilities		3,200			161,360		30,780		(85,559	)		109,781
Due to / (from) affiliates		(453,623	)		65,884		270,531		117,208			—
Other non-current liabilities		31,908			7,322		47,296		—			86,526
Total liabilities		511,628			2,423,711		681,981		(1,922,340	)		1,694,980
Shareholders’ equity		1,669,999			288,217		173,340		(461,557	)		1,669,999
Total liabilities and shareholders’ equity	$	2,181,627		$	2,711,928	$	855,321	$	(2,383,897	)	$	3,364,979

85

Pentair, Inc. and Subsidiaries

Notes to consolidated financial statements — (continued)

Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
For the Year Ended December 31, 2006

	Parent			Guarantor			Non-Guarantor
In thousands	Company			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Operating activities
Net income	$	26,285		$	120,484		$	36,962		$	—		$	183,731
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Loss on disposal of discontinued operations		36			—			—			—			36
Depreciation		1,304			42,874			12,721			—			56,899
Amortization		4,974			12,199			1,024			—			18,197
Deferred income taxes		(10,895	)		(5,359	)		5,169			—			(11,085	)
Stock compensation		25,377			—			—			—			25,377
Excess tax benefits from stock-based compensation		(3,043	)		—			—			—			(3,043	)
Gain on sale of assets, net		(1,152	)		788			—			—			(364	)
Intercompany dividends		(113,360	)		(30	)		113,390			—			—
Changes in assets and liabilities, net of effects of business acquisitions and dispositions
Accounts and notes receivable		(4,015	)		23,799			(14,196	)		10,285			15,873
Inventories		—			(16,681	)		(22,673	)		—			(39,354	)
Prepaid expenses and other current assets		(8,580	)		(11,241	)		3,434			11,335			(5,052	)
Accounts payable		(146	)		(13,118	)		4,614			(10,285	)		(18,935	)
Employee compensation and benefits		(4,760	)		(9,109	)		640			—			(13,229	)
Accrued product claims and warranties		—			573			(117	)		—			456
Income taxes		40,491			(21,921	)		(9,014	)		—			9,556
Other current liabilities		2,406			(10,185	)		5,330			(11,335	)		(13,784	)
Pension and post-retirement benefits		11,653			3,278			4,467			—			19,398
Other assets and liabilities		(6,079	)		507			12,458			—			6,886
Net cash provided by (used for) continuing operations		(39,504	)		116,858			154,209			—			231,563
Net cash used for discontinued operations		37			—			11			—			48
Net cash provided by (used for) operating activities		(39,467	)		116,858			154,220			—			231,611
Investing activities
Capital expenditures		(385	)		(24,623	)		(26,070	)		—			(51,078	)
Proceeds from sales of property and equipment		—			433			251			—			684
Acquisitions, net of cash acquired		(23,535	)		(217	)		(5,534	)		—			(29,286	)
Investment in subsidiaries		226,425			(85,854	)		(140,571	)		—			—
Divestitures		(18,246	)		—			(5,761	)		—			(24,007	)
Proceeds from sale of investments		1,153			—			—			—			1,153
Other		(2,899	)		(4,624	)		—			—			(7,523	)
Net cash provided by (used for) investing activities		182,513			(114,885	)		(177,685	)		—			(110,057	)
Financing activities
Net short-term borrowings (repayments)		—			—			13,831			—			13,831
Proceeds from long-term debt		609,205			(299	)		69			—			608,975
Repayment of long-term debt		(631,755	)		—			—			—			(631,755	)
Proceeds from exercise of stock options		4,066			—			—			—			4,066
Excess tax benefit from stock-based compensation		3,043			—			—			—			3,043
Repurchases of common stock		(59,359	)		—			—			—			(59,359	)
Dividends paid		(56,583	)		—			—			—			(56,583	)
Net cash provided by (used for) financing activities		(131,383	)		(299	)		13,900			—			(117,782	)
Effect of exchange rate changes on cash		(5,857	)		514			7,891			—			2,548
Change in cash and cash equivalents		5,806			2,188			(1,674	)		—			6,320
Cash and cash equivalents, beginning of period		3,004			4,362			41,134			—			48,500
Cash and cash equivalents, end of period	$	8,810		$	6,550		$	39,460		$	—		$	54,820

86

Pentair, Inc. and Subsidiaries

Notes to consolidated financial statements — (continued)

Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Income
For the Year Ended December 31, 2005

	Parent			Guarantor		Non-Guarantor
In thousands	Company			Subsidiaries		Subsidiaries			Eliminations			Consolidated
Net sales	$	—		$	2,430,598	$	640,918		$	(124,937	)	$	2,946,579
Cost of goods sold		381			1,755,604		461,091			(118,518	)		2,098,558
Gross profit		(381	)		674,994		179,827			(6,419	)		848,021
Selling, general and administrative		51,370			346,026		82,446			(935	)		478,907
Research and development		—			35,589		10,453			—			46,042
Operating (loss) income		(51,751	)		293,379		86,928			(5,484	)		323,072
Gain on sale of assets, net		5,435			—		—			—			5,435
Net interest (income) expense		(63,743	)		115,379		(1,163	)		(5,484	)		44,989
Income before income taxes		17,427			178,000		88,091			—			283,518
Provision for income taxes		6,057			60,823		31,589			—			98,469
Net income	$	11,370		$	117,177	$	56,502		$	—		$	185,049

87

Pentair, Inc. and Subsidiaries

Notes to consolidated financial statements — (continued)

Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
December 31, 2005

	Parent			Guarantor		Non-Guarantor
In thousands	Company			Subsidiaries		Subsidiaries		Eliminations			Consolidated
ASSETS
Current assets
Cash and cash equivalents	$	3,004		$	4,362	$	41,134	$	—		$	48,500
Accounts and notes receivable, net		543			338,439		118,896		(34,031	)		423,847
Inventories		—			267,007		82,305		—			349,312
Deferred tax assets		74,116			34,039		8,154		(67,338	)		48,971
Prepaid expenses and other current assets		7,658			8,798		12,999		(5,061	)		24,394
Total current assets		85,321			652,645		263,488		(106,430	)		895,024
Property, plant and equipment, net		5,681			228,858		77,300		—			311,839
Other assets
Investments in subsidiaries		1,983,857			42,174		84,804		(2,110,835	)		—
Goodwill		—			1,488,425		229,782		—			1,718,207
Intangibles, net		—			240,084		26,449		—			266,533
Other		49,100			7,157		5,895		—			62,152
Total other assets		2,032,957			1,777,840		346,930		(2,110,835	)		2,046,892
Total assets	$	2,123,959		$	2,659,343	$	687,718	$	(2,217,265	)	$	3,253,755
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Current maturities of long-term debt	$	1,166		$	76,269	$	19,862	$	(93,160	)	$	4,137
Accounts payable		836			167,256		72,531		(33,303	)		207,320
Employee compensation and benefits		13,869			57,006		24,677		—			95,552
Accrued product claims and warranties		—			28,664		14,887		—			43,551
Current liabilities of discontinued operations		—			—		192		—			192
Income taxes		886			7,195		9,437		—			17,518
Accrued rebates and sales incentives		—			42,262		3,112		—			45,374
Other current liabilities		31,547			61,318		23,223		(5,062	)		111,026
Total current liabilities		48,304			439,970		167,921		(131,525	)		524,670
Other liabilities
Long-term debt		745,162			1,710,648		12,344		(1,719,677	)		748,477
Pension and other retirement compensation		75,743			28,386		48,651		—			152,780
Post-retirement medical and other benefits		24,155			49,794		—		—			73,949
Deferred tax liabilities		—			167,544		25,579		(67,338	)		125,785
Due to / (from) affiliates		(356,365	)		64,324		246,212		45,829			—
Other non-current liabilities		31,350			881		38,224		—			70,455
Non-current liabilities of discontinued operations		—			—		2,029		—			2,029
Total liabilities		568,349			2,461,547		540,960		(1,872,711	)		1,698,145
Shareholders’ equity		1,555,610			197,796		146,758		(344,554	)		1,555,610
Total liabilities and shareholders’ equity	$	2,123,959		$	2,659,343	$	687,718	$	(2,217,265	)	$	3,253,755

88

Pentair, Inc. and Subsidiaries

Notes to consolidated financial statements — (continued)

Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
For the Year Ended December 31, 2005

	Parent			Guarantor			Non-Guarantor
In thousands	Company			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Operating activities
Net income	$	11,370		$	117,177		$	56,502		$	—		$	185,049
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		1,406			43,669			11,490			—			56,565
Amortization		4,324			10,652			1,019			—			15,995
Deferred income taxes		(12,161	)		14,745			3,314			—			5,898
Stock compensation		11,350			10,954			1,882			—			24,186
Excess tax benefits from stock-based compensation		(4,072	)		(3,929	)		(675	)		—			(8,676	)
Gain on sale of investment		(5,435	)		—			—			—			(5,435	)
Intercompany dividends		23,890			(1,050	)		(22,840	)		—			—
Changes in assets and liabilities, net of effects of business acquisitions and dispositions
Accounts and notes receivable		2,966			(13,346	)		(23,120	)		12,554			(20,946	)
Inventories		—			(16,365	)		(2,836	)		—			(19,201	)
Prepaid expenses and other current assets		1,524			(131	)		(538	)		(975	)		(120	)
Accounts payable		(6,876	)		8,132			17,958			(12,585	)		6,629
Employee compensation and benefits		(13,700	)		(5,882	)		(1,812	)		—			(21,394	)
Accrued product claims and warranties		—			(1,150	)		51			—			(1,099	)
Income taxes		14,252			(8,880	)		4,985			—			10,357
Other current liabilities		7,035			(10,497	)		7,065			1,006			4,609
Pension and post-retirement benefits		7,901			4,690			3,921			—			16,512
Other assets and liabilities		(8,794	)		1,603			6,752			—			(439	)
Net cash provided by continuing operations		34,980			150,392			63,118			—			248,490
Net cash used for discontinued operations		—			—			(632	)		—			(632	)
Net cash provided by operating activities		34,980			150,392			62,486			—			247,858
Investing activities
Capital expenditures		(1,854	)		(43,706	)		(16,911	)		—			(62,471	)
Proceeds from sales of property and equipment		—			16,532			579			—			17,111
Acquisitions, net of cash acquired		(150,534	)		—			—			—			(150,534	)
Investment in subsidiaries		139,641			(122,393	)		(17,248	)		—			—
Divestitures		(10,383	)		289			(61	)		—			(10,155	)
Proceeds from sale of investments		23,835			—			—			—			23,835
Other		(100	)		(2,275	)		304			—			(2,071	)
Net cash provided by (used for) investing activities		605			(151,553	)		(33,337	)		—			(184,285	)
Financing activities
Proceeds from long-term debt		413,279			—			—			—			413,279
Repayment of long-term debt		(395,978	)		—			—			—			(395,978	)
Proceeds from exercise of stock options		8,380			—			—			—			8,380
Excess tax benefit from stock-based compensation		8,676			—			—			—			8,676
Repurchases of common stock		(25,000	)		—			—			—			(25,000	)
Dividends paid		(53,134	)		—			—			—			(53,134	)
Net cash used for financing activities		(43,777	)		—			—			—			(43,777	)
Effect of exchange rate changes on cash		8,901			(47	)		(11,645	)		—			(2,791	)
Change in cash and cash equivalents		709			(1,208	)		17,504			—			17,005
Cash and cash equivalents, beginning of period		2,295			5,570			23,630						31,495
Cash and cash equivalents, end of period	$	3,004		$	4,362		$	41,134		$	—		$	48,500

89

Pentair, Inc. and Subsidiaries

Notes to consolidated financial statements — (continued)

Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Income
For the Year Ended December 31, 2004

	Parent			Guarantor		Non-Guarantor
In thousands	Company			Subsidiaries		Subsidiaries			Eliminations			Consolidated
Net sales	$	—		$	1,868,579	$	491,260		$	(81,710	)	$	2,278,129
Cost of goods sold		186			1,358,877		344,845			(80,489	)		1,623,419
Gross profit		(186	)		509,702		146,415			(1,221	)		654,710
Selling, general and administrative		64,951			253,173		59,112			(1,221	)		376,015
Research and development		—			23,673		7,780			—			31,453
Operating (loss) income		(65,137	)		232,856		79,523			—			247,242
Net interest (income) expense		(25,713	)		55,410		7,513			—			37,210
Income (loss) before income taxes		(39,424	)		177,446		72,010			—			210,032
Provision (benefit) for income taxes		(15,162	)		63,791		24,379			—			73,008
Income (loss) from continuing operations		(24,262	)		113,655		47,631			—			137,024
Income from discontinued operations, net of tax		—			—		40,248			—			40,248
Loss on disposal of discontinued operations, net of tax		—			—		(6,047	)		—			(6,047	)
Net (loss) income	$	(24,262	)	$	113,655	$	81,832		$	—		$	171,225

90

Pentair, Inc. and Subsidiaries

Notes to consolidated financial statements — (continued)

Pentair, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
For the Year Ended December 31, 2004

	Parent			Guarantor			Non-Guarantor
In thousands	Company			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Operating activities
Net income	$	(24,262	)	$	113,655		$	81,832		$	—		$	171,225
Adjustments to reconcile net income to net cash provided by operating activities:
Net income from discontinued operations		—			—			(40,248	)		—			(40,248	)
Loss on disposal of discontinued operations		—			—			6,047			—			6,047
Depreciation		904			36,763			9,396			—			47,063
Amortization		4,569			2,726			206			—			7,501
Deferred income taxes		(1,122	)		15,759			2,099			—			16,736
Stock-based compensation		1,743			4,249			353			—			6,345
Intercompany dividends		28,475			(9,475	)		(19,000	)		—			—
Changes in assets and liabilities, net of effects of business acquisitions and dispositions
Accounts and notes receivable		1,167			9,858			7,778			8,115			26,918
Inventories		—			(43,865	)		(8,131	)		—			(51,996	)
Prepaid expenses and other current assets		(3,527	)		2,869			4,728			(1,894	)		2,176
Accounts payable		3,823			20,412			394			(7,355	)		17,274
Employee compensation and benefits		(2,709	)		4,384			2,921			—			4,596
Accrued product claims and warranties		—			1,942			1,051			—			2,993
Income taxes		(11,633	)		(5,778	)		23,763			—			6,352
Other current liabilities		(242	)		7,299			(42	)		1,864			8,879
Pension and post-retirement benefits		4,980			3,168			3,360			—			11,508
Other assets and liabilities		6,371			1,379			(956	)		—			6,794
Net cash provided by continuing operations		8,537			165,345			75,551			730			250,163
Net cash provided by discontinued operations		—			—			13,928			—			13,928
Net cash provided by operating activities		8,537			165,345			89,479			730			264,091
Investing activities
Capital expenditures		(1,886	)		(32,254	)		(14,727	)		—			(48,867	)
Acquisitions, net of cash acquired		(858,774	)		—			(10,381	)		—			(869,155	)
Investment in subsidiaries		230,841			(131,066	)		(133,246	)		33,471			—
Divestitures		773,099			300			—			—			773,399
Equity investments		—			28			32			—			60
Net cash provided by (used for) investing activities		143,280			(162,992	)		(158,322	)		33,471			(144,563	)
Financing activities
Net short-term borrowings (repayments)		(4,162	)		—			—			—			(4,162	)
Proceeds from the Bridge Facility		850,000			—			—			—			850,000
Repayment of the Bridge Facility		(850,000	)		—			—			—			(850,000	)
Proceeds from long-term debt		343,316			—			—			—			343,316
Repayment of long-term debt		(440,518	)		—			—			—			(440,518	)
Proceeds from exercise of stock options		10,862			—			—			—			10,862
Repurchases of common stock		(4,200	)		—			—			—			(4,200	)
Dividends paid		(43,128	)		—			—			—			(43,128	)
Net cash used for financing activities		(137,830	)		—			—			—			(137,830	)
Effect of exchange rate changes on cash		(15,065	)		62			51,012			(34,201	)		1,808
Change in cash and cash equivalents		(1,078	)		2,415			(17,831	)		—			(16,494	)
Cash and cash equivalents, beginning of period		3,373			3,155			41,461			—			47,989
Cash and cash equivalents, end of period	$	2,295		$	5,570		$	23,630		$	—		$	31,495

91

Pentair, Inc. and Subsidiaries

Notes to consolidated financial statements — (continued)

18.   Subsequent Events

On February 2, 2007, we acquired, as part of our Water Group, all the outstanding shares of capital stock of Jung Pumpen GmbH (“Jung”) for approximately $227 million, net of cash acquired of $13 million, excluding transaction costs and subject to a post-closing net asset value adjustment. Jung is a leading German manufacturer of wastewater products for municipal and residential markets. Jung brings to Pentair its strong application engineering expertise and a complementary product offering, including a new line of water re-use products, submersible wastewater and drainage pumps, wastewater disposal units and tanks. Jung also brings to Pentair its well-known European presence, a state-of-the-art training facility in Germany, and sales offices in Germany, Austria, France, Hungary, Poland and Slovakia.

92

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.   CONTROLS AND PROCEDURES

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the year ended December 31, 2006, pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (“the Exchange Act”). Based upon their evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the year ended December 31, 2006 to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, and to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosures.

Management’s Annual Report on Internal Control Over Financial Reporting

The report of management required under this ITEM 9A is contained in ITEM 8 of this Annual Report on Form 10-K under the caption “Management’s Report on Internal Control Over Financial Reporting.”

Attestation Report of Independent Registered Public Accounting Firm

The attestation report required under this ITEM 9A is contained in ITEM 8 of this Annual Report on Form 10-K under the caption “Report of Independent Registered Public Accounting Firm.”

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B.   OTHER INFORMATION

None.

93

PART III

ITEM 10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information required under this item with respect to directors is contained in our Proxy Statement for our 2007 annual meeting of shareholders under the captions “Corporate Governance Matters”, “Election of Certain Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” and is incorporated herein by reference.

Information required under this item with respect to executive officers is contained in Part I of this Form 10-K under the caption “Executive Officers of the Registrant.”

Our Board of Directors has adopted Pentair’s Code of Business Conduct and Ethics and designated it as the code of ethics for the Company’s Chief Executive Officer and senior financial officers. The Code of Business Conduct and Ethics also applies to all employees and directors in accordance with New York Stock Exchange Listing Standards. We have posted a copy of Pentair’s Code of Business Conduct and Ethics on our website at www.pentair.com/code.html. Pentair’s Code of Business Conduct and Ethics is also available in print to any shareholder who requests it in writing from our Corporate Secretary. We intend to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding amendments to, or waivers from, Pentair’s Code of Business Conduct and Ethics by posting such information on our website at www.pentair.com/code.html.

We are not including the information contained on our website as part of, or incorporating it by reference into, this report.

ITEM 11.   EXECUTIVE COMPENSATION

Information required under this item is contained in our Proxy Statement for our 2007 annual meeting of shareholders under the captions “Corporate Governance Matters — Compensation Committee,” “Compensation Discussion and Analysis,” “Compensation Committee Report,” “Executive Compensation” and “Director Compensation” and is incorporated herein by reference.

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information on security ownership required under this item is contained in our Proxy Statement for our 2007 annual meeting of shareholders under the caption “Security Ownership” and is incorporated herein by reference.

94

The following table summarizes, as of December 31, 2006, information about compensation plans under which equity securities of Pentair are authorized for issuance:

Equity Compensation Plan Information

						Number of Securities
						Remaining Available for
	Number of Securities to be			Weighted-average		Future Issuance Under
	Issued Upon Exercise of			Exercise Price of		Equity Compensation Plans
	Outstanding Options,			Outstanding Options,		(Excluding Securities Reflected
	Warrants and Rights			Warrants and Rights		in Column (a))
Plan Category	(a)			(b)		(c)
Equity compensation plans approved by security holders		6,287,636	(1)	$	29.394		8,739,681	(2)
Equity compensation plans not approved by security holders		48,000	(3)	$	11.375		—
Total		6,335,636		$	29.257		8,739,681

(1)	Represents options to purchase shares of common stock granted under the Omnibus Stock Incentive Plan and the Outside Directors Nonqualified Stock Option Plan.
(2)	Represents securities remaining available for issuance under the Omnibus Stock Incentive Plan and Outside Directors Nonqualified Stock Option Plan. No more than 20% of the shares available for issuance under the Omnibus Stock Incentive Plan (1,616,979 under the current plan) may be used to make awards other than stock options.
(3)	Represents options to purchase common stock granted pursuant to an individual stock option agreement described below.

Individual Stock Option Agreement.  On January 2, 2001, the Company awarded Randall J. Hogan (currently the Company’s Chairman and Chief Executive Officer) an option to purchase 48,000 shares of common stock pursuant to an individual stock option agreement. These options have an exercise price of $11.375 per share and vested in three equal annual installments, commencing one year after the date of grant. The options expire 10 years after the date of grant and the exercise price of the options was the closing price of common stock on the date of grant. If a “Change in Control” (as defined in the Company’s Key Executive Employment and Severance Agreements) of the Company occurs, then all the options not yet exercised become immediately exercisable. All share numbers and per share amounts described in this section have been changed to reflect the Company’s 2-for-1 stock split in 2004.

Burn Rate.  Our three-year average burn rate is approximately 2.60% when calculated using the guidelines published by Institutional Shareholder Services (ISS). Under ISS guidelines, the “burn-rate” is the total number of equity awards granted in any given year divided by the number of common shares outstanding, with a premium applied to grants of restricted stock. The number of equity awards used in the burn rate calculation is not discounted by cancelled or forfeited options or shares acquired or retained by the Company.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information required under this item is contained in our Proxy Statement for our 2007 annual meeting of shareholders under the captions “Corporate Governance Matters — Independent Directors,” “Corporate Governance Matters — Related Party Transactions” and is incorporated herein by reference.

ITEM 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information required under this item is contained in our Proxy Statement for our 2007 annual meeting of shareholders under the caption “Audit Committee Disclosure” and is incorporated herein by reference.

95

PART IV

ITEM 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)  List of documents filed as part of this report:

(1)  Financial Statements

Consolidated Statements of Income for the Years Ended December 31, 2006, 2005, and 2004

Consolidated Balance Sheets as of December 31, 2006 and December 31, 2005

Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005, and 2004

Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2006, 2005, and 2004

Notes to Consolidated Financial Statements

(2)   Financial Statement Schedules

Schedule II — Valuation and Qualifying Accounts

All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.

(3)  Exhibits

The exhibits of this Annual Report on Form 10-K included herein are set forth on the attached Exhibit Index beginning on page 80.

96

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 26, 2007.

PENTAIR, INC.

By  /s/  David D. Harrison

David D. Harrison

Executive Vice President and
Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated, on February 26, 2007.

Signature		Title
/s/  Randall J. Hogan Randall J. Hogan		Chairman and Chief Executive Officer
/s/  David D. Harrison David D. Harrison		Executive Vice President and Chief Financial Officer
* Glynis A. Bryan		Director
* Richard J. Cathcart		Director
* Barbara B. Grogan		Director
* Charles A. Haggerty		Director
* David A. Jones		Director
* Augusto Meozzi		Director
* Ronald L. Merriman		Director
* William T. Monahan		Director
* Karen E. Welke		Director
*By	/s/  Louis L. Ainsworth Louis L. Ainsworth Attorney-in-fact

97

Schedule II — Valuation and Qualifying Accounts

Pentair, Inc. and subsidiaries

			Additions
	Balance		Charged to					Other			Balance
	Beginning		Costs and					Changes			End of
In thousands	of Period		Expenses		Deductions			Add (deduct)			Period
Allowances for doubtful accounts
Year ended December 31, 2006	$	14,017	$	3,034	$	2,918	(1)	$	515	(2)	$	14,648
Year ended December 31, 2005	$	18,775	$	1,388	$	5,931	(1)	$	(215	)(2)	$	14,017
Year ended December 31, 2004	$	12,564	$	2,663	$	2,333	(1)	$	5,881	(2)	$	18,775

(1)	Uncollectible accounts written off, net of recoveries.
(2)	Result of acquisitions and foreign currency effects.

98

Exhibit Index

Exhibit
Number			Exhibit
	3	.1	Second Restated Articles of Incorporation as amended through May 1, 2002 (Incorporated by reference to Exhibit 3.1 contained in Pentair’s Quarterly Report on Form 10-Q for the quarterly period ended March 30, 2002).
	3	.2	Third Amended and Superceding By-Laws as amended through May 1, 2002 (Incorporated by reference to Exhibit 3.2 contained in Pentair’s Quarterly Report on Form 10-Q for the quarterly period ended March 30, 2002).
	3	.3	Statement of Resolution of the Board of Directors Establishing the Series and Fixing the Relative Rights and Preferences of Series A Junior Participating Preferred Stock (Incorporated by reference to Exhibit 3.1 contained in Pentair’s Current Report on Form 8-K dated December 10, 2004).
	4	.1	Rights Agreement dated as of December 10, 2004 between Pentair, Inc. and Wells Fargo Bank, N.A. (Incorporated by reference to Exhibit 4.1 contained in Pentair’s Registration Statement on Form 8-A, dated as of December 31, 2004).
	4	.2	Form of Indenture, dated June 1, 1999, between Pentair, Inc. and U.S. Bank National Association, as Trustee Agent (Incorporated by reference to Exhibit 4.2 contained in Pentair’s Annual Report on Form 10-K for the year ended December 31, 2000).
	4	.3	Note Purchase Agreement dated as of July 25, 2003 for $50,000,000 4.93% Senior Notes, Series A, due July 25, 2013, $100,000,000 Floating Rate Senior Notes, Series B, due July 25, 2013, and $50,000,000 5.03% Senior Notes, Series C, due October 15, 2013 (Incorporated by reference to Exhibit 10.22 contained in Pentair’s Current Report on Form 8-K dated July 25, 2003).
	4	.4	Supplemental Indenture between Pentair, Inc. and U.S. Bank National Association, as Trustee, dated as of August 2, 2004 (Incorporated by reference to Exhibit 4.1 contained in Pentair’s Quarterly Report on Form 10-Q for the quarterly period ended October 2, 2004).
	4	.5	Second Amended and Restated Credit Agreement dated as of March 4, 2005 among Pentair, Inc., various subsidiaries of Pentair, Inc. and various financial institutions therein and Bank of America, N.A., as Administrative Agent and Issuing Bank. (Incorporated by reference to Exhibit 99.1 contained in Pentair’s Current Report on Form 8-K dated March 4, 2005).
	4	.6	First Amendment to Note Purchase agreement dated July 19, 2005 by and among Pentair, Inc. and the undersigned holders (Incorporated by reference to Exhibit 4 contained in Pentair’s Quarterly Report on Form 10-Q for the quarterly period ended July 2, 2005).
	10	.1	Pentair’s Supplemental Employee Retirement Plan as Amended and Restated effective August 23, 2000 (Incorporated by reference to Exhibit 10.1 contained in Pentair’s Current Report on Form 8-K filed September 21, 2000).*
	10	.2	Pentair’s 1999 Supplemental Executive Retirement Plan as Amended and Restated effective August 23, 2000 (Incorporated by reference to Exhibit 10.2 contained in Pentair’s Current Report on Form 8-K filed September 21, 2000).*
	10	.3	Pentair’s Restoration Plan as Amended and Restated effective August 23, 2000 (Incorporated by reference to Exhibit 10.3 contained in Pentair’s Current Report on Form 8-K filed September 21, 2000).*
	10	.4	Amended and Restated Pentair, Inc. Outside Directors Nonqualified Stock Option Plan as amended through February 27, 2002 (Incorporated by reference to Exhibit 10.7 contained in Pentair’s Annual Report on Form 10-K for the year ended December 31, 2001).*
	10	.5	Pentair, Inc. Non-Qualified Deferred Compensation Plan effective January 1, 1996 (Incorporated by reference to Exhibit 10.17 contained in Pentair’s Annual Report on Form 10-K for the year ended December 31, 1995).*
	10	.6	Trust Agreement for Pentair, Inc. Non-Qualified Deferred Compensation Plan between Pentair, Inc. and State Street Bank and Trust Company (Incorporated by reference to Exhibit 10.18 contained in Pentair’s Annual Report on Form 10-K for the year ended December 31, 1995).*
	10	.7	Amendment effective August 23, 2000 to Pentair’s Non-Qualified Deferred Compensation Plan effective January 1, 1996 (Incorporated by reference to Exhibit 10.8 contained in Pentair’s Current Report on Form 8-K filed September 21, 2000).*

99

Exhibit
Number			Exhibit
	10	.8	Pentair, Inc. Executive Officer Performance Plan as Amended and Restated, effective January 1, 2003 (Incorporated by reference to Appendix 1 contained in Pentair’s Proxy Statement for its 2003 annual meeting of shareholders).*
	10	.9	Pentair’s Management Incentive Plan as amended and restated January 1, 2002 (Incorporated by reference to Exhibit 10.16 contained in Pentair’s Annual Report on Form 10-K for the year ended December 31, 2001).*
	10	.10	Amendment effective January 1, 2003 to Pentair’s Management Incentive Plan (Incorporated by reference to Exhibit 10.15 contained in Pentair’s Annual Report on Form 10-K for the year ended December 31, 2003).*
	10	.11	Pentair’s Flexible Perquisite Program as amended effective January 1, 1989 (Incorporated by reference to Exhibit 10.20 contained in Pentair’s Annual Report on Form 10-K for the year ended December 31, 1989).*
	10	.12	Form of Key Executive Employment and Severance Agreement effective August 23, 2000 for Randall J. Hogan (Incorporated by reference to Exhibit 10.11 contained in Pentair’s Current Report on Form 8-K filed September 21, 2000).*
	10	.13	Form of Key Executive Employment and Severance Agreement effective August 23, 2000 for Louis Ainsworth, Richard J. Cathcart, Michael V. Schrock, Karen A. Durant, David D. Harrison, Frederick S. Koury, Michael G. Meyer, and Jack J. Dempsey (Incorporated by reference to Exhibit 10.13 contained in Pentair’s Current Report on Form 8-K filed September 21, 2000).*
	10	.14	Form of Key Executive Employment and Severance Agreement effective as of February 12, 2007 for John L. Stauch.*
	10	.15	Employment Agreement dated October 17, 2001, between Pentair, Inc. and Richard J. Cathcart. (Incorporated by reference to Exhibit 10.31 contained in Pentair’s Quarterly Report on Form 10-Q for the quarterly period ended September 29, 2001).*
	10	.16	Pentair, Inc. International Stock Purchase and Bonus Plan, as Amend and Restated, effective May 1, 2004 (Incorporated by reference to Appendix I contained in Pentair’s Proxy Statement for its 2004 annual meeting of shareholders).*
	10	.17	Pentair, Inc. Compensation Plan for Non-Employee Directors, as Amended and Restated, effective May 1, 2004 (Incorporated by reference to Appendix F contained in Pentair’s Proxy Statement for its 2004 annual meeting of shareholders).*
	10	.18	Pentair, Inc. Omnibus Stock Incentive Plan, as Amended and Restated, effective May 1, 2004 (Incorporated by reference to Appendix G contained in Pentair’s Proxy Statement for its 2004 annual meeting of shareholders).*
	10	.19	Pentair, Inc. Employee Stock Purchase and Bonus Plan, as Amended and Restated, effective May 1, 2004 (Incorporated by reference to Appendix H contained in Pentair’s Proxy Statement for its 2004 annual meeting of shareholders).*
	10	.20	Amendment effective December 10, 2004 to the Pentair, Inc. Outside Director’s Nonqualified Stock Option Plan for Non-Employee Directors (Incorporated by reference to Exhibit 10.1 contained in Pentair’s Current Report on Form 8-K dated December 10, 2004).*
	10	.21	Summary of Board of Director Compensation, approved December 10, 2004 (Incorporated by reference to Exhibit 10.2 contained in Pentair’s Current Report on Form 8-K dated December 10, 2004).*
	10	.22	Letter Agreement, dated January 6, 2005, between Pentair, Inc. and Michael Schrock (Incorporated by reference to Exhibit 10.1 contained in Pentair’s Current Report on Form 8-K dated January 6, 2005).*
	10	.23	Confidentiality and Non-Competition Agreement, dated January 6, 2005, between Pentair, Inc. and Michael Schrock (Incorporated by reference to Exhibit 10.2 contained in Pentair’s Current Report on Form 8-K dated January 6, 2005).*
	10	.24	Letter Agreement, dated March 31, 2006, between Pentair, Inc. and Karen Durant (Incorporated by reference to Exhibit 10.1 in Pentair’s Current Report on Form 8-K dated April 5, 2006).*
	10	.25	Confidentiality and Non-Competition Agreement, dated April 1, 2006, between Pentair and Karen Durant (Incorporated by reference to Exhibit 10.2 to Pentair’s Current Report on Form 8-K dated April 5, 2006).*

100

Exhibit
Number			Exhibit
	10	.26	Amendment effective December 14, 2006 to the Pentair, Inc. Outside Director’s Nonqualified Stock Option Plan for Non-Employee Directors.*
	18		Letter dated February 26, 2007 from Deloitte & Touche LLP related to a change in accounting principle for valuing inventory.
	21		List of Pentair subsidiaries.
	23		Consent of Independent Registered Public Accounting Firm — Deloitte & Touche LLP.
	24		Power of Attorney.
	31	.1	Certification of Chief Executive Officer required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
	31	.2	Certification of Chief Financial Officer required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
	32	.1	Certification of Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32	.2	Certification of Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* A management contract or compensatory contract.

101

EX-10.14

Exhibit 10.14

KEY EXECUTIVE EMPLOYMENT AND SEVERANCE AGREEMENT

     THIS AGREEMENT, made and entered into as of the ___th day of ___, 2007, by and between Pentair, Inc., a Minnesota corporation (hereinafter referred to as the “Company”), and ___ (hereinafter referred to as the “Executive”).

W I T N E S S E T H

     WHEREAS, the Executive is employed by the Company and/or a subsidiary of the Company (hereinafter referred to collectively as the “Employer”) in a key executive capacity and the Executive’s services are valuable to the conduct of the business of the Company;

     WHEREAS, the Company desires to continue to attract and retain dedicated and skilled management employees in a period of industry consolidation, consistent with achieving the best possible value for its shareholders in any change in control of the Company;

     WHEREAS, the Company recognizes that circumstances may arise in which a change in control of the Company occurs, through acquisition or otherwise, thereby causing a potential conflict of interest between the Company’s needs for the Executive to remain focused on the Company’s business and for the necessary continuity in management prior to and following a change in control, and the Executive’s reasonable personal concerns regarding future employment with the Employer and economic protection in the event of loss of employment as a consequence of a change in control;

     WHEREAS, the Company and the Executive are desirous that any proposal for a change in control or acquisition of the Company will be considered by the Executive objectively and with reference only to the best interests of the Company and its shareholders;

     WHEREAS, the Executive will be in a better position to consider the Company’s best interests if the Executive is afforded reasonable economic security, as provided in this Agreement, against altered conditions of employment which could result from any such change in control or acquisition;

     WHEREAS, the Executive possesses intimate knowledge of the business and affairs of the Company and has acquired certain confidential information and data with respect to the Company; and

     WHEREAS, the Company desires to insure, insofar as possible, that it will continue to have the benefit of the Executive’s services and to protect its confidential information and goodwill.

     NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements hereinafter set forth, the parties hereto mutually covenant and agree as follows:

1.	Definitions.
(a)	Accrued Benefits. The Executive’s “Accrued Benefits” shall include the following amounts, payable as described herein: (i) all base salary for the time period ending with the Termination Date; (ii) reimbursement for any and all monies advanced in connection with the

	Executive’s employment for reasonable and necessary expenses incurred by the Executive on behalf of the Employer for the time period ending with the Termination Date; (iii) any and all other cash earned through the Termination Date and deferred at the election of the Executive or pursuant to any deferred compensation plan then in effect; (iv) notwithstanding any provision of any bonus or incentive compensation plan applicable to the Executive, a lump sum amount, in cash, equal to the sum of (A) any bonus or incentive compensation that has been allocated or awarded to the Executive for a fiscal year or other measuring period under the plan that ends prior to the Termination Date but has not yet been paid (pursuant to Section 5(f) or otherwise) and (B) a pro rata portion to the Termination Date of the aggregate value of all contingent bonus or incentive compensation awards to the Executive for all uncompleted periods under the plan calculated as to each such award as if the Goals with respect to such bonus or incentive compensation award had been attained reduced by any amounts paid to the Executive pursuant to Section(b)(iii) and Section 3(b)(iv) under the plan for the fiscal year in which the Termination Date occurs; and (v) all other payments and benefits to which the Executive (or in the event of the Executive’s death, the Executive’s surviving spouse or other beneficiary) may be entitled on the Termination Date as compensatory fringe benefits or under the terms of any benefit plan of the Employer, excluding severance payments under any Employer severance policy, practice or agreement in effect on the Termination Date. Payment of Accrued Benefits shall be made promptly in accordance with the Company’s prevailing practice with respect to clauses (i) and (ii) or, with respect to clauses (iii), (iv) and (v), pursuant to the terms of the benefit plan or practice establishing such benefits.
(b)	Act. The term “Act” means the Securities Exchange Act of 1934, as amended.
(c)	Affiliate and Associate. The terms “Affiliate” and “Associate” shall have the respective meanings ascribed to such terms in Rule l2b-2 of the General Rules and Regulations under the Act.
(d)	Annual Cash Compensation. The term “Annual Cash Compensation” shall mean the sum of (i) the Executive’s Annual Base Salary (determined as of the time of the Change in Control of the Company or, if higher, immediately prior to the date the Notice of Termination is given) plus (ii) an amount equal to the greater of the Executive’s annual incentive target bonus for the fiscal year in which the Termination Date occurs or the annual incentive bonus the Executive received for the fiscal year prior to the Change in Control of the Company (the aggregate amount set forth in clause (i) and clause (ii) shall hereafter be referred to as the “Annual Cash Compensation”),
(e)	Beneficial Owner. A Person shall be deemed to be the “Beneficial Owner” of any securities:

(i) which such Person or any of such Person’s Affiliates or Associates has the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding, or upon the exercise of conversion rights, exchange rights, rights, warrants or options, or otherwise; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, (A) securities tendered pursuant to a tender or exchange offer made by or on behalf of such Person or any of such Person’s Affiliates or Associates until such tendered securities are accepted for purchase, or (B) securities issuable upon exercise of Rights issued pursuant to the

	terms of the Company’s Rights Agreement, dated as of December 10, 2004, between the Company and Wells Fargo Bank, N.A., as amended from time to time (or any successor to such Rights Agreement), at any time before the issuance of such securities;
(ii)	which such Person or any of such Person’s Affiliates or Associates, directly or indirectly, has the right to vote or dispose of or has “beneficial ownership” of (as determined pursuant to Rule l3d-3 of the General Rules and Regulations under the Act), including pursuant to any agreement, arrangement or understanding; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, any security under this clause (ii) as a result of an agreement, arrangement or understanding to vote such security if the agreement, arrangement or understanding: (A) arises solely from a revocable proxy or consent given to such Person in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations under the Act and (B) is not also then reportable on a Schedule l3D under the Act (or any comparable or successor report); or
(iii)	which are beneficially owned, directly or indirectly, by any other Person with which such Person or any of such Person’s Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting (except pursuant to a revocable proxy as described in clause (ii) above) or disposing of any voting securities of the Company.

(f)

Cause. “Cause” for termination by the Employer of the Executive’s employment in connection with a Change in Control of the Company shall be limited to (i) the engaging by the Executive in intentional conduct that the Company establishes, by clear and convincing evidence, has caused demonstrable and serious financial injury to the Employer, as evidenced by a determination in a binding and final judgment, order or decree of a court or administrative agency of competent jurisdiction, in effect after exhaustion or lapse of all rights of appeal, in an action, suit or proceeding, whether civil, criminal, administrative or investigative; (ii) conviction of a felony (as evidenced by binding and final judgment, order or decree of a court of competent jurisdiction, in effect after exhaustion of all rights of appeal); or (iii) continuing willful and unreasonable refusal by the Executive to perform the Executive’s duties or responsibilities (unless significantly changed without the Executive’s consent).

(g)

Change in Control of the Company. A “Change in Control of the Company” shall be deemed to have occurred if an event set forth in any one of the following paragraphs shall have occurred:

(i) any Person (other than (A) the Company or any of its subsidiaries, (B) a trustee or other fiduciary holding securities under any employee benefit plan of the Company or any of its subsidiaries, (C) an underwriter temporarily holding securities pursuant to an offering of such securities or (D) a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock in the Company (“Excluded Persons”)) is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any

	securities acquired directly from the Company or its Affiliates after February 12, 2007, pursuant to express authorization by the Board that refers to this exception) representing 30% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company’s then outstanding voting securities; or
(ii)	the following individuals cease for any reason to constitute a majority of the number of directors of the Company then serving: (A) individuals who, on February 12, 2007 constituted the Board and (B) any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A under the Act) whose appointment or election by the Board or nomination for election by the Company’s shareholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on February 12, 2007, or whose appointment, election or nomination for election was previously so approved (collectively the “Continuing Directors”); provided, however, that individuals who are appointed to the Board pursuant to or in accordance with the terms of an agreement relating to a merger, consolidation, or share exchange involving the Company (or any direct or indirect subsidiary of the Company) shall not be Continuing Directors for purposes of this Agreement until after such individuals are first nominated for election by a vote of at least two-thirds (2/3) of the then Continuing Directors and are thereafter elected as directors by the shareholders of the Company at a meeting of shareholders held following consummation of such merger, consolidation, or share exchange; and, provided further, that in the event the failure of any such persons appointed to the Board to be Continuing Directors results in a Change in Control of the Company, the subsequent qualification of such persons as Continuing Directors shall not alter the fact that a Change in Control of the Company occurred; or
(iii)	the consummation of a merger, consolidation or share exchange of the Company with any other corporation or the issuance of voting securities of the Company in connection with a merger, consolidation or share exchange of the Company (or any direct or indirect subsidiary of the Company), in each case, which requires approval of the shareholders of the Company, other than (A) a merger, consolidation or share exchange which would result in the voting securities of the Company outstanding immediately prior to such merger, consolidation or share exchange continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 50% of the combined voting power of the voting securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger, consolidation or share exchange, or (B) a merger, consolidation or share exchange effected to implement a recapitalization of the Company (or similar transaction) in which no Person (other than an Excluded Person) is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates after February 12, 2007, pursuant to express authorization by the Board that refers to this exception) representing 30% or more of

either the then outstanding shares of common stock of the Company or the combined voting power of the Company’s then outstanding voting securities; or

(iv)

the consummation of a plan of complete liquidation or dissolution of the Company or a sale or disposition by the Company of all or substantially all of the Company’s assets (in one transaction or a series of related transactions within any period of 24 consecutive months), in each case, which requires approval of the shareholders of the Company, other than a sale or disposition by the Company of all or substantially all of the Company’s assets to an entity at least 75% of the combined voting power of the voting securities of which are owned by Persons in substantially the same proportions as their ownership of the Company immediately prior to such sale.

Notwithstanding the foregoing, no “Change in Control of the Company” shall be deemed to have occurred if there is consummated any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to own, directly or indirectly, in the same proportions as their ownership in the Company, an entity that owns all or substantially all of the assets or voting securities of the Company immediately following such transaction or series of transactions.

(h)	Code. The term “Code” means the Internal Revenue Code of 1986, including any amendments thereto or successor tax codes thereof.
(i)	Covered Termination. Subject to Section 2(b), the term “Covered Termination” means any termination of the Executive’s employment during the Employment Period where the Termination Date or the date Notice of Termination is delivered is any date prior to the end of the Employment Period.
(j)	Employment Period. Subject to Section 2(b), the term “Employment Period” means a period commencing on the date of a Change in Control of the Company, and ending at 11:59 p.m. Central Time on the earlier of the second anniversary of such date or the Executive’s Normal Retirement Date.
(k)	Good Reason. The Executive shall have “Good Reason” for termination of employment in connection with a Change in Control of the Company in the event of:

(i)

any breach of this Agreement by the Employer, including specifically any breach by the Employer of the agreements contained in Section 3, Section 4, Section 5, or Section 6, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith that the Employer remedies promptly after receipt of notice thereof given by the Executive;

(ii)

any reduction in the Executive’s base salary, percentage of base salary available as incentive compensation or bonus opportunity or benefits, in each case relative to those most favorable to the Executive in effect at any time during the 180-day period prior to the Change in Control of the Company or, to the extent more favorable to the Executive, those in effect at any time during the Employment Period;

(iii)	the removal of the Executive from, or any failure to reelect or reappoint the Executive to, any of the positions held with the Employer on the date of the Change in Control of the Company or any other positions with the Employer to which the Executive shall thereafter be elected, appointed or assigned, except in the event that such removal or failure to reelect or reappoint relates to the termination by the Employer of the Executive’s employment for Cause or by reason of disability pursuant to Section 12;
(iv)	a good faith determination by the Executive that there has been a material adverse change, without the Executive’s written consent, in the Executive’s working conditions or status with the Employer relative to the most favorable working conditions or status in effect during the 180-day period prior to the Change in Control of the Company, or, to the extent more favorable to the Executive, those in effect at any time during the Employment Period, including but not limited to (A) a significant change in the nature or scope of the Executive’s authority, powers, functions, duties or responsibilities, or (B) a significant reduction in the level of support services, staff, secretarial and other assistance, office space and accoutrements, but in each case excluding for this purpose an isolated, insubstantial and inadvertent event not occurring in bad faith that the Employer remedies within ten (10) days after receipt of notice thereof given by the Executive;
(v)	the relocation of the Executive’s principal place of employment to a location more than 50 miles from the Executive’s principal place of employment on the date 180 days prior to the Change in Control of the Company;
(vi)	the Employer requires the Executive to travel on Employer business 20% in excess of the average number of days per month the Executive was required to travel during the 180-day period prior to the Change in Control of the Company;
(vii)	failure by the Company to obtain the Agreement referred to in Section 17(a) as provided therein.

(l)	Normal Retirement Date. The term “Normal Retirement Date” means “Normal Retirement Date” as defined in the primary qualified defined benefit pension plan applicable to the Executive, or any successor plan, as in effect on the date of the Change in Control of the Company.
(m)	Person. The term “Person” shall mean any individual, firm, partnership, corporation or other entity, including any successor (by merger or otherwise) of such entity, or a group of any of the foregoing acting in concert.
(n)	Termination Date. Except as otherwise provided in Section 2(b), Section 10(b), and Section 17(a), the term “Termination Date” means (i) if the Executive’s employment is terminated by the Executive’s death, the date of death; (ii) if the Executive’s employment is terminated by reason of voluntary early retirement, as agreed in writing by the Employer and the Executive, the date of such early retirement which is set forth in such written agreement; (iii) if the Executive’s employment is terminated for purposes of this Agreement by reason of disability pursuant to Section 12, the earlier of thirty days after the Notice of Termination is given or one day

prior to the end of the Employment Period; (iv) if the Executive’s employment is terminated by the Executive voluntarily (other than for Good Reason), the date the Notice of Termination is given; and (v) if the Executive’s employment is terminated by the Employer (other than by reason of disability pursuant to Section 12) or by the Executive for Good Reason, the earlier of thirty days after the Notice of Termination is given or one day prior to the end of the Employment Period. Notwithstanding the foregoing,

(A)	If termination is for Cause pursuant to Section 1(f)(iii) and if the Executive has cured the conduct constituting such Cause as described by the Employer in its Notice of Termination within such thirty-day or shorter period, then the Executive’s employment hereunder shall continue as if the Employer had not delivered its Notice of Termination.
(B)	If the Executive shall in good faith give a Notice of Termination for Good Reason and the Employer notifies the Executive that a dispute exists concerning the termination within the fifteen-day period following receipt thereof, then the Executive may elect to continue his or her employment during such dispute and the Termination Date shall be determined under this paragraph. If the Executive so elects and it is thereafter determined that Good Reason did exist, the Termination Date shall be the earliest of (1) the date on which the dispute is finally determined, either (x) by mutual written agreement of the parties or (y) in accordance with Section 22, (2) the date of the Executive’s death or (3) one day prior to the end of the Employment Period. If the Executive so elects and it is thereafter determined that Good Reason did not exist, then the employment of the Executive hereunder shall continue after such determination as if the Executive had not delivered the Notice of Termination asserting Good Reason and there shall be no Termination Date arising out of such Notice. In either case, this Agreement continues, until the Termination Date, if any, as if the Executive had not delivered the Notice of Termination except that, if it is finally determined that Good Reason did exist, the Executive shall in no case be denied the benefits described in Section 9 (including a Termination Payment) based on events occurring after the Executive delivered his Notice of Termination.
(C)	Except as provided in Section 1(n)(B), if the party receiving the Notice of Termination notifies the other party that a dispute exists concerning the termination within the appropriate period following receipt thereof and it is finally determined that the reason asserted in such Notice of Termination did not exist, then (1) if such Notice was delivered by the Executive, the Executive will be deemed to have voluntarily terminated his employment and the Termination Date shall be the earlier of the date fifteen days after the Notice of Termination is given or one day prior to the end of the Employment Period and (2) if delivered by the Company, the Company will be deemed to have terminated the Executive other than by reason of death, disability or Cause.

2.	Termination or Cancellation Prior to Change in Control.
(a)	Subject to Section 2(b), the Employer and the Executive shall each retain the right to terminate the employment of the Executive at any time prior to a Change in Control of the

	Company. Subject to Section 2(b), in the event that prior to a Change in Control of the Company (i) the Executive’s employment is terminated or (ii) as determined in writing by the Compensation Committee of the Board of Directors of the Company in its sole discretion, the Executive’s authority, powers, functions, duties, responsibilities or pay grade are materially reduced, this Agreement shall be terminated and cancelled and of no further force and effect, and any and all rights and obligations of the parties hereunder shall cease.
(b)	Anything in this Agreement to the contrary notwithstanding, if a Change in Control of the Company occurs and if the Executive’s employment with the Employer is terminated (other than a termination due to the Executive’s death or as a result of the Executive’s disability) during the period of 180 days prior to the date on which the Change in Control of the Company occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change in Control of the Company or (ii) otherwise arose in connection with or in anticipation of a Change in Control of the Company, then for all purposes of this Agreement such termination of employment shall be deemed a “Covered Termination,” “Notice of Termination” shall be deemed to have been given, and the “Employment Period” shall be deemed to have begun on the date of such termination which shall be deemed to be the “Termination Date” and the date of the Change of Control of the Company for purposes of this Agreement. Anything in this Agreement to the contrary notwithstanding, if a Change in Control of the Company occurs and if the Executive’s authority, powers, functions, duties, responsibilities or pay grade were reduced pursuant to Section 2(a)(ii) during the period of 180 days prior to the date on which the Change in Control of the Company occurs, and if it is reasonably demonstrated by the Executive that such reduction in authority, powers, functions, duties, responsibilities or pay grade (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change in Control of the Company or (ii) otherwise arose in connection with or in anticipation of a Change in Control of the Company, then the termination and cancellation of this Agreement pursuant to Section 2(a) shall be deemed null and void, this Agreement shall be deemed to remain in full force and effect with any and all rights and obligations of the parties hereunder continuing and such reduction in authority, powers, functions, duties, responsibilities or pay grade shall be considered “Good Reason” for the Executive to terminate employment in connection with a Change in Control of the Company.
3.	Employment Period; Vesting and Payment of Certain Benefits.
(a)	If a Change in Control of the Company occurs when the Executive is employed by the Employer, the Employer will continue thereafter to employ the Executive during the Employment Period, and the Executive will remain in the employ of the Employer in accordance with and subject to the terms and provisions of this Agreement. Any termination of the Executive’s employment during the Employment Period, whether by the Company or the Employer, shall be deemed a termination by the Company for purposes of this Agreement.
(b)	If a Change in Control of the Company occurs when the Executive is employed by the Employer, (i) the Company shall cause all restrictions on restricted stock awards made to the Executive prior to the Change in Control of the Company to lapse such that the Executive is fully and immediately vested in the Executive’s restricted stock upon such a Change in Control of the Company; (ii) the Company shall cause all stock options granted to the Executive prior to the Change in Control of the Company pursuant to the Company’s stock option plan(s) to be fully and immediately vested upon such a Change in Control of the Company; (iii) the Company

	shall cause all incentive compensation units and performance awards granted to the Executive pursuant to any long-term incentive plan maintained by the Company to be paid to the Executive within ten (10) business days after the Change in Control of the Company (A) at one-third (1/3) of target, if the award cycle has been in effect less than twelve (12) months, (B) at two thirds (2/3) of the then current value pursuant to such plan, if the award cycle has been in effect twelve (12) or more months but less than twenty-four (24) months, and (C) at the then current value pursuant to such plan, if the award cycle has been in effect twenty-four (24) or more months, in each case as if all performance or incentive requirements and periods had been satisfied; and (iv) the Company shall pay to the Executive within ten (10) business days after the Change in Control of the Company an amount equal to the Executive’s annual incentive target bonus for the fiscal year in which the Change in Control of the Company occurs.
4.	Duties. During the Employment Period, the Executive shall, in the same capacities and positions held by the Executive at the time of the Change in Control of the Company or in such other capacities and positions as may be agreed to by the Employer and the Executive in writing, devote the Executive’s best efforts and all of the Executive’s business time, attention and skill to the business and affairs of the Employer, as such business and affairs now exist and as they may hereafter be conducted.
5.	Compensation. During the Employment Period, the Executive shall be compensated as follows:
(a)	The Executive shall receive, at reasonable intervals (but not less often than monthly) and in accordance with such standard policies as may be in effect immediately prior to the Change in Control of the Company, an annual base salary in cash equivalent of not less than twelve times the Executive’s highest monthly base salary for the twelve-month period immediately preceding the month in which the Change in Control of the Company occurs or, if higher, annual base salary at the rate in effect immediately prior to the Change in Control of the Company (which base salary shall, unless otherwise agreed in writing by the Executive, include the current receipt by the Executive of any amounts which, prior to the Change in Control of the Company, the Executive had elected to defer, whether such compensation is deferred under Section 401(k) of the Code or otherwise), subject to adjustment as hereinafter provided in Section 6 (such salary amount as adjusted upward from time to time is hereafter referred to as the “Annual Base Salary”).
(b)	The Executive shall receive fringe benefits at least equal in value to the highest value of such benefits provided for the Executive at any time during the 180-day period immediately prior to the Change in Control of the Company or, if more favorable to the Executive, those provided generally at any time during the Employment Period to any executives of the Employer of comparable status and position to the Executive; and shall be reimbursed, at such intervals and in accordance with such standard policies that are most favorable to the Executive that were in effect at any time during the 180-day period immediately prior to the Change in Control of the Company, for any and all monies advanced in connection with the Executive’s employment for reasonable and necessary expenses incurred by the Executive on behalf of the Employer, including travel expenses.
(c)	The Executive and/or the Executive’s family, as the case may be, shall be included, to the extent eligible thereunder (which eligibility shall not be conditioned on the Executive’s salary grade or on any other requirement which excludes persons of comparable status to

	the Executive unless such exclusion was in effect for such plan or an equivalent plan at any time during the 180-day period immediately prior to the Change in Control of the Company), in any and all plans providing benefits for the Employer’s salaried employees in general, including but not limited to group life insurance, hospitalization, medical, dental, profit sharing and stock bonus plans; provided, that, (i) in no event shall the aggregate level of benefits under such plans in which the Executive is included be less than the aggregate level of benefits under plans of the Employer of the type referred to in this Section 5(c) in which the Executive was participating at any time during the 180-day period immediately prior to the Change in Control of the Company and (ii) in no event shall the aggregate level of benefits under such plans be less than the aggregate level of benefits under plans of the type referred to in this Section 5(c) provided at any time after the Change in Control of the Company to any executive of the Employer of comparable status and position to the Executive.
(d)	The Executive shall annually be entitled to not less than the amount of paid vacation and not fewer than the highest number of paid holidays to which the Executive was entitled annually at any time during the 180-day period immediately prior to the Change in Control of the Company or such greater amount of paid vacation and number of paid holidays as may be made available annually to other executives of the Employer of comparable status and position to the Executive at any time during the Employment Period.
(e)	The Executive shall be included in all plans providing additional benefits to executives of the Employer of comparable status and position to the Executive, including but not limited to deferred compensation, split-dollar life insurance, supplemental retirement, stock option, stock appreciation, stock bonus and similar or comparable plans; provided, that, (i) in no event shall the aggregate level of benefits under such plans be less than the highest aggregate level of benefits under plans of the Employer of the type referred to in this Section 5(e) in which the Executive was participating at any time during the 180-day period immediately prior to the Change in Control of the Company; (ii) in no event shall the aggregate level of benefits under such plans be less than the aggregate levels of benefits under plans of the type referred to in this Section 5(e) provided at any time after the Change in Control of the Company to any executive of the Employer comparable in status and position to the Executive; and (iii) the Employer’s obligation to include the Executive in bonus or incentive compensation plans shall be determined by Section 5(f).
(f)	To assure that the Executive will have an opportunity to earn incentive compensation after a Change in Control of the Company, the Executive shall be included in a bonus plan of the Employer which shall satisfy the standards described below (such plan, the “Bonus Plan”). Bonuses under the Bonus Plan shall be payable with respect to achieving such financial or other goals reasonably related to the business of the Employer as the Employer shall establish (the “Goals”), all of which Goals shall be attainable, prior to the end of the Employment Period, with approximately the same degree of probability as the most attainable goals under the Employer’s bonus plan or plans as in effect at any time during the 180-day period immediately prior to the Change in Control of the Company (whether one or more, the “Company Bonus Plan”) and in view of the Employer’s existing and projected financial and business circumstances applicable at the time. The amount of the bonus (the “Bonus Amount”) that the Executive is eligible to earn under the Bonus Plan shall be no less than 200% of the Executive’s target award provided in such Company Bonus Plan (such bonus amount herein referred to as the “Targeted Bonus”), and in the event the Goals are not achieved such that the entire Targeted Bonus is not payable, the Bonus Plan shall provide for a payment of a Bonus Amount equal to a portion of the Targeted Bonus reasonably related to that portion of the Goals which were achieved. Payment of the Bonus Amount shall not be

	affected by any circumstance occurring subsequent to the end of the Employment Period, including termination of the Executive’s employment.
6.	Annual Compensation Adjustments. During the Employment Period, the Board of Directors of the Company (or an appropriate committee thereof) will consider and appraise, at least annually, the contributions of the Executive to the Company, and in accordance with the Company’s practice prior to the Change in Control of the Company, due consideration shall be given to the upward adjustment of the Executive’s Annual Base Salary, at least annually, (a) commensurate with increases generally given to other executives of the Company of comparable status and position to the Executive, and (b) as the scope of the Company’s operations or the Executive’s duties expand.
7.	Termination For Cause or Without Good Reason. If there is a Covered Termination for Cause or due to the Executive’s voluntarily terminating his or her employment other than for Good Reason (any such terminations to be subject to the procedures set forth in Section 13), then the Executive shall be entitled to receive only Accrued Benefits.
8.	Termination Giving Rise to a Termination Payment. If there is a Covered Termination by the Executive for Good Reason, or by the Company other than by reason of (i) death, (ii) disability pursuant to Section 12, or (iii) Cause (any such terminations to be subject to the procedures set forth in Section 13), then the Executive shall be entitled to receive, and the Company shall promptly pay, Accrued Benefits and, in lieu of further base salary for periods following the Termination Date, as liquidated damages and additional severance pay and in consideration of the covenant of the Executive set forth in Section 14(a), the Termination Payment pursuant to Section 9(a).
9.	Payments Upon Termination.
(a)	Termination Payment. The “Termination Payment” shall be an amount equal to the Annual Cash Compensation times two and one-half (2 1/2 ). The Termination Payment shall be paid to the Executive in cash equivalent ten (10) business days after the Termination Date. Such lump sum payment shall not be reduced by any present value or similar factor, and the Executive shall not be required to mitigate the amount of the Termination Payment by securing other employment or otherwise, nor will such Termination Payment be reduced by reason of the Executive securing other employment or for any other reason. The Termination Payment shall be in lieu of, and acceptance by the Executive of the Termination Payment shall constitute the Executive’s release of any rights of the Executive to, any other cash severance payments under any Company severance policy, practice or agreement.
(b)	Certain Additional Payments by the Company.

(i) Notwithstanding any other provision of this Agreement, if any portion of the Termination Payment or any other payment under this Agreement, or under any other agreement with or plan of the Employer (in the aggregate, “Total Payments”), would constitute an “excess parachute payment” as defined in Section 280G of the Code (or any successor provision), then the Company shall pay the Executive an additional amount (the “Gross-Up Payment”) such that the net amount retained by the Executive after deduction of any excise tax imposed under Section 4999 of the Code (or any successor provision) and any interest charges or penalties in respect of the imposition of such excise tax (collectively, the “Excise Tax”) (but not

any federal, state or local income tax, or employment tax) on the Total Payments, and any federal, state and local income tax, employment tax, and excise tax upon the payment provided for by this Section 9(b)(i), shall be equal to the Total Payments. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income tax and employment taxes at the highest marginal rate of federal income and employment taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive’s domicile for income tax purposes on the date the Gross-Up Payment is made, net of the maximum reduction in federal income taxes that may be obtained from the deduction of such state and local taxes. Notwithstanding the foregoing, if it shall be determined that the Executive is entitled to a Gross-Up Payment, but that the Total Payments would not be subject to the Excise Tax if the Total Payments were reduced by an amount that is less than 10% of the Total Payments that would be treated as “parachute payments” under Section 280G of the Code (or any successor provision), then the amounts payable to the Executive under this Agreement shall be reduced (but not below zero) to the maximum amount that could be paid to the Executive without giving rise to the Excise Tax (the “Safe Harbor Cap”), and no Gross-Up Payment shall be made to the Executive. For purposes of reducing the Total Payments to the Safe Harbor Cap, only amounts payable under this Agreement (and no other Total Payments) shall be reduced. If the reduction of the amounts payable hereunder would not result in a reduction of the Total Payments to the Safe Harbor Cap, no amounts payable under this Agreement shall be reduced pursuant to this provision.

(ii)

For purposes of this Agreement, the terms “excess parachute payment” and “parachute payments” shall have the meanings assigned to them in Section 280G of the Code (or any successor provision) and such “parachute payments” shall be valued as provided therein. Present value for purposes of this Agreement shall be calculated in accordance with Section 1274(b)(2) of the Code (or any successor provision). Promptly following a Covered Termination or notice by the Company to the Executive of its belief that there is a payment or benefit due the Executive which will result in an “excess parachute payment” as defined in Section 280G of the Code (or any successor provision), the Executive and the Company, at the Company’s expense, shall obtain the opinion (which need not be unqualified) of nationally recognized tax counsel (“National Tax Counsel”) selected by the Company’s independent auditors and reasonably acceptable to the Executive (which may be regular outside counsel to the Company), which opinion sets forth (A) the amount of the Base Period Income, (B) the amount and present value of Total Payments, (C) the amount and present value of any excess parachute payments, and (D) the amount of any Gross-Up Payment or the reduction of any Total Payments to the Safe Harbor Cap, as the case may be. As used in this Agreement, the term “Base Period Income” means an amount equal to the Executive’s “annualized includable compensation for the base period” as defined in Section 280G(d)(1) of the Code. For purposes of such opinion, the value of any noncash benefits or any deferred payment or benefit shall be determined by the Company’s independent auditors in accordance with the principles of Section 280G(d)(3) and (4) of the Code (or any successor provisions), which determination shall be evidenced in a certificate of such auditors

	addressed to the Company and the Executive. The opinion of National Tax Counsel shall be addressed to the Company and the Executive and shall be binding upon the Company and the Executive. If such National Tax Counsel so requests in connection with the opinion required by this Section 9(b), the Executive and the Company shall obtain, at the Company’s expense, and the National Tax Counsel may rely on, the advice of a firm of recognized executive compensation consultants as to the reasonableness of any item of compensation to be received by the Executive solely with respect to its status under Section 280G of the Code and the regulations thereunder. Within five (5) days after the National Tax Counsel’s opinion is received by the Company and the Executive, the Company shall pay (or cause to be paid) or distribute (or cause to be distributed) to or for the benefit of the Executive such amounts as are then due to the Executive under this Agreement.
(iii)	In the event that upon any audit by the Internal Revenue Service, or by a state or local taxing authority, of the Total Payments or Gross-Up Payment, a change is finally determined to be required in the amount of taxes paid by the Executive, appropriate adjustments shall be made under this Agreement such that the net amount which is payable to the Executive after taking into account the provisions of Section 4999 of the Code (or any successor provision) shall reflect the intent of the parties as expressed in this Section 9, in the manner determined by the National Tax Counsel.
(iv)	The Company agrees to bear all costs associated with, and to indemnify and hold harmless, the National Tax Counsel of and from any and all claims, damages, and expenses resulting from or relating to its determinations pursuant to this Section 9(b), except for claims, damages or expenses resulting from the gross negligence or willful misconduct of such firm.

(b) Additional Benefits. If there is a Covered Termination and the Executive is entitled to Accrued Benefits and the Termination Payment, then the Company shall provide to the Executive the following additional benefits:

(i)

The Executive shall receive, at the expense of the Company, outplacement services, on an individualized basis at a level of service commensurate with the Executive’s status with the Company immediately prior to the date of the Change in Control of the Company (or, if higher, immediately prior to the termination of the Executive’s employment), provided by a nationally recognized executive placement firm selected by the Company; provided that the cost to the Company of such services shall not exceed 10% of the Executive’s Annual Base Salary.

(ii)

Until the earlier of the end of the Employment Period or such time as the Executive has obtained new employment and is covered by benefits which in the aggregate are at least equal in value to the following benefits, the Executive shall continue to be covered, at the expense of the Company, by the same or equivalent life insurance, hospitalization, medical and dental coverage as was required hereunder with respect to the Executive immediately prior to the date the Notice of Termination is given.

(iii)

The Company shall bear up to $15,000 in the aggregate of fees and expenses of consultants and/or legal or accounting advisors engaged by the Executive to advise the Executive as to matters relating to the computation of benefits due and payable under this Section 9.

(iv)

The Company shall cause the Executive to be fully and immediately vested in his accrued benefit under the Pentair, Inc. 1999 Supplemental Executive Retirement Plan (“SERP”) and the Pentair, Inc. Restoration Plan (“Restoration Plan”) or any successor plans thereto (the “Plans”) (to the extent the Executive participates in the Plans) and in any defined contribution retirement plan of the Employer. The amount of Plan benefits shall be determined as if the Executive had completed additional years of Benefit Service (as such term is defined in the Plans) equal to the lesser of (A) three years or (B) the greater of (x) seven minus the years of Benefit Service credited to such Executive under the Plans, determined without regard to the terms of this Agreement, as of the end of the calendar year which includes the date of the Change in Control of the Company, or (y) zero. In addition, if the Executive is described in Appendix A to the SERP, the additional benefit therein provided for the Executive shall be fully vested and the amount of such additional benefit shall be no less than if the Executive had continued in qualified employment through the end of the calendar year in which he would attain age sixty-two. In addition, the Executive’s accrued benefit under the Restoration Plan shall be appropriately increased by the value of the Executive’s accrued benefit, if any, under the Company’s tax-qualified defined benefit plan which is forfeited due to the Executive’s failure to become fully vested thereunder.

10.	Death.
(a)	Except as provided in Section 10(b), in the event of a Covered Termination due to the Executive’s death, the Executive’s estate, heirs and beneficiaries shall receive all the Executive’s Accrued Benefits through the Termination Date.
(b)	In the event the Executive dies after a Notice of Termination is given (i) by the Company or (ii) by the Executive for Good Reason, the Executive’s estate, heirs and beneficiaries shall be entitled to the benefits described in Section 10(a) and, subject to the provisions of this Agreement, to such Termination Payment as the Executive would have been entitled to had the Executive lived. For purposes of this Section 10(b), the Termination Date shall be the earlier of thirty days following the giving of the Notice of Termination, subject to extension pursuant to Section 1(n), or one day prior to the end of the Employment Period.
11.	Retirement. If, during the Employment Period, the Executive and the Employer shall execute an agreement providing for the early retirement of the Executive from the Employer, or the Executive shall otherwise give notice that he is voluntarily choosing to retire early from the Employer, the Executive shall receive Accrued Benefits through the Termination Date; provided, that if the Executive’s employment is terminated by the Executive for Good Reason or by the Company other than by reason of death, disability or Cause and the Executive also, in connection with such termination, elects voluntary early retirement, the Executive shall also be entitled to receive a Termination Payment pursuant to Section 8.

12.	Termination for Disability. If, during the Employment Period, as a result of the Executive’s disability due to physical or mental illness or injury (regardless of whether such illness or injury is job-related), the Executive shall have been absent from the Executive’s duties hereunder on a full-time basis for a period of six consecutive months and, within thirty days after the Company notifies the Executive in writing that it intends to terminate the Executive’s employment (which notice shall not constitute the Notice of Termination contemplated below), the Executive shall not have returned to the performance of the Executive’s duties hereunder on a full-time basis, the Company may terminate the Executive’s employment for purposes of this Agreement pursuant to a Notice of Termination given in accordance with Section 13. If the Executive’s employment is terminated on account of the Executive’s disability in accordance with this Section, the Executive shall receive Accrued Benefits through the Termination Date and shall remain eligible for all benefits provided by any long term disability programs of the Company in effect at the time of such termination.
13.	Termination Notice and Procedure. Any Covered Termination by the Company or the Executive (other than a termination of the Executive’s employment that is a Covered Termination by virtue of Section 2(b)) shall be communicated by a written notice of termination (“Notice of Termination”) to the Executive, if such Notice is given by the Company, and to the Company, if such Notice is given by the Executive, all in accordance with the following procedures and those set forth in Section 23:
(a)	If such termination is for disability, Cause or Good Reason, the Notice of Termination shall indicate in reasonable detail the facts and circumstances alleged to provide a basis for such termination.
(b)	Any Notice of Termination by the Company shall have been approved, prior to the giving thereof to the Executive, by a resolution duly adopted by a majority of the directors of the Company (or any successor corporation) then in office.
(c)	If the Notice is given by the Executive for Good Reason, the Executive may cease performing his duties hereunder on or after the date fifteen days after the delivery of Notice of Termination and shall in any event cease employment on the Termination Date. If the Notice is given by the Company, then the Executive may cease performing his duties hereunder on the date of receipt of the Notice of Termination, subject to the Executive’s rights hereunder.
(d)	The Executive shall have thirty days, or such longer period as the Company may determine to be appropriate, to cure any conduct or act, if curable, alleged to provide grounds for termination of the Executive’s employment for Cause under this Agreement pursuant to Section 1(f)(iii).
(e)	The recipient of any Notice of Termination shall personally deliver or mail in accordance with Section 23 written notice of any dispute relating to such Notice of Termination to the party giving such Notice within fifteen days after receipt thereof; provided, however, that if the Executive’s conduct or act alleged to provide grounds for termination by the Company for Cause is curable, then such period shall be thirty days. After the expiration of such period, the contents of the Notice of Termination shall become final and not subject to dispute.

14.	Further Obligations of the Executive.
(a)	Competition. The Executive agrees that, in the event of any Covered Termination where the Executive is entitled to Accrued Benefits and the Termination Payment, the Executive shall not, for a period expiring one year after the Termination Date, without the prior written approval of the Company’s Board of Directors, (i) solicit for employment an employee of the Company or its subsidiaries or (ii) participate in the management of, be employed by or own any business enterprise at a location within the United States that engages in substantial competition with the Company or its subsidiaries, where such enterprise’s revenues from any competitive activities amount to 10% or more of such enterprise’s net revenues and sales for its most recently completed fiscal year; provided, however, that nothing in this Section 14(a) shall prohibit the Executive from owning stock or other securities of a competitor amounting to less than five percent of the outstanding capital stock of such competitor.
(b)	Confidentiality. During and following the Executive’s employment by the Company, the Executive shall hold in confidence and not directly or indirectly disclose or use or copy or make lists of any confidential information or proprietary data of the Company (including that of the Employer), except to the extent authorized in writing by the Board of Directors of the Company or required by any court or administrative agency, other than to an employee of the Company or a person to whom disclosure is reasonably necessary or appropriate in connection with the performance by the Executive of duties as an executive of the Company. Confidential information shall not include any information known generally to the public or any information of a type not otherwise considered confidential by persons engaged in the same business or a business similar to that of the Company. All records, files, documents and materials, or copies thereof, relating to the business of the Company which the Executive shall prepare, or use, or come into contact with, shall be and remain the sole property of the Company and shall be promptly returned to the Company upon termination of employment with the Company.
15.	Expenses and Interest. If, after a Change in Control of the Company, (a) a dispute arises with respect to the enforcement of the Executive’s rights under this Agreement or (b) any legal or arbitration proceeding shall be brought to enforce or interpret any provision contained herein or to recover damages for breach hereof, in either case so long as the Executive is not acting in bad faith, then the Company shall reimburse the Executive for any reasonable attorneys’ fees and necessary costs and disbursements incurred as a result of the dispute, legal or arbitration proceeding (“Expenses”), and prejudgment interest on any money judgment or arbitration award obtained by the Executive calculated at the rate of interest announced by U.S. Bank National Association, Minneapolis, Minnesota, from time to time at its prime or base lending rate from the date that payments to him or her should have been made under this Agreement. Within ten days after the Executive’s written request therefor, the Company shall pay to the Executive, or such other person or entity as the Executive may designate in writing to the Company, the Executive’s reasonable Expenses in advance of the final disposition or conclusion of any such dispute, legal or arbitration proceeding.
16.	Payment Obligations Absolute. The Company’s obligation during and after the Employment Period to pay the Executive the amounts and to make the benefit and other arrangements provided herein shall be absolute and unconditional and shall not be affected by any circumstances, including, without limitation, any setoff, counterclaim, recoupment, defense or other right which the Company may have against him or anyone else. Except as provided in Section 15, all

	amounts payable by the Company hereunder shall be paid without notice or demand. Each and every payment made hereunder by the Company shall be final, and the Company will not seek to recover all or any part of such payment from the Executive, or from whomsoever may be entitled thereto, for any reason whatsoever.
17.	Successors.
(a)	If the Company sells, assigns or transfers all or substantially all of its business and assets to any Person or if the Company merges into or consolidates or otherwise combines (where the Company does not survive such combination) with any Person (any such event, a “Sale of Business”), then the Company shall assign all of its right, title and interest in this Agreement as of the date of such event to such Person, and the Company shall cause such Person, by written agreement in form and substance reasonably satisfactory to the Executive, to expressly assume and agree to perform from and after the date of such assignment all of the terms, conditions and provisions imposed by this Agreement upon the Company. Failure of the Company to obtain such agreement prior to the effective date of such Sale of Business shall be a breach of this Agreement constituting “Good Reason” hereunder, except that for purposes of implementing the foregoing the date upon which such Sale of Business becomes effective shall be deemed the Termination Date. In case of such assignment by the Company and of assumption and agreement by such Person, as used in this Agreement, “Company” shall thereafter mean such Person which executes and delivers the agreement provided for in this Section 17 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law, and this Agreement shall inure to the benefit of, and be enforceable by, such Person. The Executive shall, in his or her discretion, be entitled to proceed against any or all of such Persons, any Person which theretofore was such a successor to the Company and the Company (as so defined) in any action to enforce any rights of the Executive hereunder. Except as provided in this Section 17(a), this Agreement shall not be assignable by the Company. This Agreement shall not be terminated by the voluntary or involuntary dissolution of the Company.
(b)	This Agreement and all rights of the Executive shall inure to the benefit of and be enforceable by the Executive’s personal or legal representatives, executors, administrators, heirs and beneficiaries. All amounts payable to the Executive under Sections 3, 7, 8, 9, 10, 11, 12 and 15 if the Executive had lived shall be paid, in the event of the Executive’s death, to the Executive’s estate, heirs and representatives; provided, however, that the foregoing shall not be construed to modify any terms of any benefit plan of the Employer, as such terms are in effect on the date of the Change in Control of the Company, that expressly govern benefits under such plan in the event of the Executive’s death.
18.	Severability. The provisions of this Agreement shall be regarded as divisible, and if any of said provisions or any part hereof are declared invalid or unenforceable by a court of competent jurisdiction, the validity and enforceability of the remainder of such provisions or parts hereof and the applicability thereof shall not be affected thereby.
19.	Contents of Agreement; Waiver of Rights; Amendment. This Agreement sets forth the entire understanding between the parties hereto with respect to the subject matter hereof and shall supersede in all respects, and the Executive hereby waives all rights under, any prior or other agreement or understanding between the parties with respect to such subject matter, including, but not limited to the Management Assurance Agreement between the Company and the Executive. This

	Agreement may not be amended or modified at any time except by written instrument executed by the Company and the Executive.
20.	Withholding. The Company shall be entitled to withhold from amounts to be paid to the Executive hereunder any federal, state or local withholding or other taxes or charges which it is from time to time required to withhold; provided, that the amount so withheld shall not exceed the minimum amount required to be withheld by law. The Company shall be entitled to rely on an opinion of the National Tax Counsel if any question as to the amount or requirement of any such withholding shall arise.
21.	Certain Rules of Construction. No party shall be considered as being responsible for the drafting of this Agreement for the purpose of applying any rule construing ambiguities against the drafter or otherwise. No draft of this Agreement shall be taken into account in construing this Agreement. Any provision of this Agreement which requires an agreement in writing shall be deemed to require that the writing in question be signed by the Executive and an authorized representative of the Company.
22.	Governing Law; Resolution of Disputes. This Agreement and the rights and obligations hereunder shall be governed by and construed in accordance with the laws of the State of Minnesota. Any dispute arising out of this Agreement shall, at the Executive’s election, be determined by arbitration under the rules of the American Arbitration Association then in effect (in which case both parties shall be bound by the arbitration award) or by litigation. Whether the dispute is to be settled by arbitration or litigation, the venue for the arbitration or litigation shall be Minneapolis, Minnesota or, at the Executive’s election, if the Executive is not then residing or working in the Minneapolis, Minnesota metropolitan area, in the judicial district encompassing the city in which the Executive resides; provided, that, if the Executive is not then residing in the United States, the election of the Executive with respect to such venue shall be either Minneapolis, Minnesota or in the judicial district encompassing that city in the United States among the thirty cities having the largest population (as determined by the most recent United States Census data available at the Termination Date) which is closest to the Executive’s residence. The parties consent to personal jurisdiction in each trial court in the selected venue having subject matter jurisdiction notwithstanding their residence or situs, and each party irrevocably consents to service of process in the manner provided hereunder for the giving of notices.
23.	Notice. Notices given pursuant to this Agreement shall be in writing and, except as otherwise provided by Section 13(d), shall be deemed given when actually received by the Executive or actually received by the Company’s Secretary or any officer of the Company other than the Executive. If mailed, such notices shall be mailed by United States registered or certified mail, return receipt requested, addressee only, postage prepaid, if to the Company, to Pentair, Inc., Attention: Secretary (or President, if the Executive is then Secretary), 5500 Wayzata Blvd., Suite 800, Golden Valley, Minnesota 55416, or if to the Executive, at the address set forth below the Executive’s signature to this Agreement, or to such other address as the party to be notified shall have theretofore given to the other party in writing.
24.	No Waiver. No waiver by either party at any time of any breach by the other party of, or compliance with, any condition or provision of this Agreement to be performed by the other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same time or any prior or subsequent time.

25. Headings. The headings herein contained are for reference only and shall not affect the meaning or interpretation of any provision of this Agreement.

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written.

PENTAIR, INC.
By:
	Its:
Attest:
	Its:

EXECUTIVE:  

Address: 

EX-10.26

Exhibit 10.26

AMENDMENT TO THE PENTAIR, INC.
OUTSIDE DIRECTORS NONQUALIFIED
STOCK OPTION PLAN

1.	Background. The Board of Directors of Pentair, Inc. has authorized, effective December 14, 2006, an amendment of the Pentair, Inc. Outside Director’s Nonqualified Stock Option Plan to eliminate prospectively the feature which previously allowed, under certain circumstances, for the automatic issuance of reload options when options are exercised by means of a stock swap.
2.	Effective December 14, 2006, the title of Section 5(d) is amended to read “Omitted” and the provisions of Section 5(d) are deleted in their entirety and eliminated from the NQSO Plan.
3.	The foregoing amendments shall apply to options issued under the NQSO Plan after the effective date of this amendment but the reload provisions hereby eliminated shall remain in effect for earlier grants as otherwise applicable.
	The undersigned, by the authority of the Board of Directors of Pentair, Inc., does hereby execute the foregoing document for and on behalf of Pentair, Inc.

	PENTAIR, INC.
Dated: December 14, 2006	By:	/s/ Louis L. Ainsworth
	Its:	Secretary

EX-18

Exhibit 18

February 26, 2007

Pentair, Inc.
5500 Wayzata Boulevard, Suite 800
Golden Valley, MN 55416

Dear Sirs/Madams:

We have audited the financial statements of Pentair, Inc. and Subsidiaries (the “Company”) as of December 31, 2006 and 2005, and for each of the three years in the period ended December 31, 2006, included in your Annual Report on Form 10-K to the Securities and Exchange Commission and have issued our report thereon dated February 26, 2007, which expresses an unqualified opinion and includes an explanatory paragraph relating to the Company’s changes in its method of accounting for defined benefit pension and postretirement benefit plans in 2006 and stock-based compensation in 2005. Note 1 to such financial statements contains a description of your change in accounting principle during the year ended December 31, 2006 to the First-In, First-Out (FIFO) basis of inventory costing. In our judgment, such change is to an alternative accounting principle that is preferable under the circumstances.

Yours truly,

Deloitte & Touche, LLP

EX-21

Exhibit 21

Pentair, Inc. and subsidiaries as of December 31, 2006.

Name of Company	Jurisdiction of Incorporation	Segment
Alberta Electronic Company Limited	Hong Kong	Technical Products
Aplex Industries, Inc.	United States	Water
Apno S.A. de C.V.	Mexico	Other
Aspen Motion Technologies, Inc.	United States	Technical Products
Axholme Resources Limited	United Kingdom	Water
Beijing Pentair Water Jieming Co., Ltd.(1)	P.R.C.	Water
Century Mfg. Co.	United States	Other
Chansuba Pumps Private Ltd.(2)	India	Water
Compool Inc.	United States	Water
Davies Pumps & Co. Limited	New Zealand	Water
Dongguan Jieming Tianyuan Water Purifying Equipment Co., Ltd.(1)	P.R.C.	Water
Epps Limited	Mauritius	Water
EuroPentair GmbH	Germany	Other
Everpure (Europe) B.V.B.A	Belgium	Water
Everpure (UK) Limited	United Kingdom	Water
Everpure Japan, Inc.	Japan	Water
Everpure, LLC	United States	Water
FARADYNE Motors (Suzhou) Co., Ltd(3)	P.R.C.	Water
FARADYNE Motors LLC(3)	United States	Water
Fibredyne, LLC	United States	Water
Fleck Controls, Inc.	United States	Water
Hoffman Enclosures (Mex), LLC	United States	Technical Products
Hoffman Enclosures Inc.	United States	Technical Products
Hoffman Engineering S. de R.L. de C.V.	Mexico	Technical Products
Hoffman Schroff Pte. Ltd.	Singapore	Technical Products
Hypro, EU Limited	United Kingdom	Water
Hypro, LLC	United States	Water
Inversiones Sta-Rite Chile Limitada	Chile	Water
Jieming Shine Trading Co., Ltd.(1)	P.R.C.	Water
Jinan Pentair Jieming Environmental Protection Equipment Co., Ltd.(1)	P.R.C.	Water
Lincoln Automotive Company	United States	Other
McLean Midwest Corporation	United States	Technical Products
McNeil (Ohio) Corporation	United States	Other
Moraine Properties, LLC	United States	Other
National Pool Tile Group, Inc.	United States	Water
Nocchi Pompes Europe S.a.r.l.	France	Water
Onga (NZ) Limited	New Zealand	Water
Onga Pump Shop Pty. Ltd.	Australia	Water
Optima Enclosures Limited	United Kingdom	Technical Products
Pentair Acu-Trol, LLC	United States	Water
Pentair Asia Holdings SARL	Luxembourg	Other
Pentair Asia PTE Ltd.	Singapore	Other
Pentair Canada, Inc.	Canada	Water
Pentair DMP Corp.	United States	Other
Pentair Electronic Packaging Company	United States	Technical Products
Pentair Electronic Packaging de Mexico, S. de R.L de C.V	Mexico	Technical Products
Pentair Enclosures de Chile S.r.L.	Chile	Technical Products
Pentair Enclosures Group, Inc.	United States	Technical Products

Name of Company	Jurisdiction of Incorporation	Segment
Pentair Enclosures Limited	United Kingdom	Technical Products
Pentair Enclosures, Inc.	United States	Technical Products
Pentair Enclosures, S. de R.L. de C.V.	Mexico	Technical Products
Pentair Filtration, Inc.	United States	Water
Pentair Financial Services Ireland	Ireland	Other
Pentair France SARL	France	Water
Pentair Global Sarl	Luxembourg	Other
Pentair Halifax, Co.	Canada	Other
Pentair Holdings S.a.r.l.	Luxembourg	Other
Pentair Housing LP	United States	Other
Pentair Housing, Inc.	United States	Other
Pentair International Sarl	Luxembourg	Other
Pentair Manufacturing France S.A.S.	France	Water
Pentair Nova Scotia Co.	Canada	Other
Pentair Pacific Rim (Water) Limited	Hong Kong	Water
Pentair Pacific Rim, Ltd.	Hong Kong	Technical Products
Pentair Poland	Poland	Water
Pentair Pump Group Inc.	United States	Water
Pentair Pumps S.p.A.	Italy	Water
Pentair Qingdao Enclosure Company Ltd.	P.R.C.	Technical Products
Pentair Taunus Electrometalurgica Ltda	Brazil	Technical Products
Pentair Thailand, Inc.	Thailand	Water
Pentair Transport, Inc.	United States	Other
Pentair U.K. Ltd.	United Kingdom	Technical Products
Pentair UK Group Limited	United Kingdom	Water
Pentair Water (Suzhou) Company Ltd.	P.R.C.	Water
Pentair Water Australia Pty Ltd	Australia	Water
Pentair Water Belgium B.V.B.A.	Belgium	Water
Pentair Water Europe s.r.l.	Italy	Water
Pentair Water Filtration France SAS	France	Water
Pentair Water Filtration Indiana, LLC	United States	Water
Pentair Water Filtration UK Limited	United Kingdom	Water
Pentair Water France SAS	France	Water
Pentair Water Germany GmbH	Germany	Water
Pentair Water Group, Inc.	United States	Water
Pentair Water India Private Limited	India	Water
Pentair Water Italy S.r.l.	Italy	Water
Pentair Water New Zealand Limited	New Zealand	Water
Pentair Water Pool and Spa, Inc.	United States	Water
Pentair Water South Africa (Proprietary) Limited	South Africa	Water
Pentair Water Spain, SL	Spain	Water
Pentair Water Taiwan Co., Ltd.	Taiwan	Water
Pentair Water Treatment (OH) Company	United States	Water
Pentair Water Treatment Company	United States	Water
Pentair Water Treatment India Private Limited	India	Water
Pentair Water, LLC	United States	Water
Pentair Water-Mexico S. de R.L. de C.V.	Mexico	Water
Penwald Insurance Company	United States	Other
PEP Central, Inc.	United States	Technical Products
PEP West, Inc.	United States	Technical Products
PFAM, Inc.	United States	Other
Porter-Cable de Mexico S.A. de C.V.	Mexico	Other
PTG Accessories Group	United States	Other
Schroff GmbH	Germany	Technical Products

Name of Company	Jurisdiction of Incorporation	Segment
Schroff, Inc.	United States	Technical Products
Schroff K.K.	Japan	Technical Products
Schroff S.R.L.	Italy	Technical Products
Schroff SAS	France	Technical Products
Schroff Scandinavia AB	Sweden	Technical Products
Schroff S.P.z.o.o.	Poland	Technical Products
Schroff U.K. Ltd.	United Kingdom	Technical Products
Seneca Enterprises Co.	United States	Water
Shaanxi Jieming Environmental Protection Equipment Co., Ltd.(1)	P.R.C.	Water
Shanghai Alberta Electronics Co., Ltd.	P.R.C.	Technical Products
Shanghai Shangjie Environment Equipment Co., Ltd.(1)	P.R.C.	Water
SHURflo International Limited	United Kingdom	Water
SHURflo Limited	United Kingdom	Water
SHURflo, LLC	United States	Water
Sta-Rite de Argentina, S.A.	Argentina	Water
Sta-Rite de Mexico S.A. de C.V.(4)	Mexico	Water
Sta-Rite de Puerto Rico, Inc.	Puerto Rico	Water
Sta-Rite Industries, LLC	United States	Water
Surewood Acquisition Corporation	United States	Other
Tupelo Real Estate, LLC	United States	Other
Webster Electric Company, LLC	United States	Water
WICOR Canada Company	Nova Scotia	Water
WICOR Global Corp.	United States	Water
WICOR Industries (Australia) Pty. Ltd.	Australia	Water
Yabaida Electronic (Shenzhen) Co., Ltd.	P.R.C.	Technical Products
Yixing Jieming Shirun Environmental Protection Equipment Co., Ltd.(1)	P.R.C.	Water

(1)	—   70% owned
(2)	—   47% owned
(3)	—   50% owned
(4)	—   80% owned

EX-23

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement Nos. 33-38534, 33-45012, 333-12561, 333-62475, 333-75166,
333-115429, 333-115430, 333-115432, and 333-126693 of Pentair, Inc. of our reports dated February 26, 2007, with respect to the consolidated financial statements and financial statement schedule of Pentair, Inc. and subsidiaries (which report expressed an unqualified opinion and included an explanatory paragraph relating to the Company’s changes in its method of accounting for defined benefit pension and postretirement benefit plans in 2006 and stock-based compensation in 2005), and management’s report on the effectiveness of internal control over financial reporting, appearing in this Annual Report on Form 10-K for the year ended December 31, 2006.

Minneapolis, Minnesota
February 26, 2007

EX-24

Exhibit 24

Power of Attorney

KNOW ALL MEN BY THESE PRESENTS that the undersigned directors of Pentair, Inc., a Minnesota corporation, hereby constitute and appoint David D. Harrison and Louis L. Ainsworth, or either of them, his/her attorney-in-fact and agent, with full power of substitution, for the purpose of signing on his/her behalf as a director of Pentair, Inc. the Annual Report on Form 10-K, to be filed with the Securities and Exchange Commission within the next sixty days, and to file the same, with all exhibits thereto and other supporting documents, with the Commission, granting unto such attorney-in-fact, full power and authority to do and perform any and all acts necessary or incidental to the performance and execution of the powers herein expressly granted.

Date: February 26, 2007

Signature	Title
/s/ Glynis A. Bryan Glynis A. Bryan	Director
/s/ Richard J. Cathcart Richard J. Cathcart	Director
/s/ Barbara B. Grogan Barbara B. Grogan	Director
/s/ Charles A. Haggerty Charles A. Haggerty	Director
/s/ David A. Jones David A. Jones	Director
/s/ Augusto Meozzi Augusto Meozzi	Director
/s/ Ronald L. Merriman Ronald L. Merriman	Director
/s/ William T. Monahan William T. Monahan	Director
/s/ Karen E. Welke Karen E. Welke	Director

EX-31.1

Exhibit 31.1

Certifications

I, Randall J. Hogan, certify that:

1. I have reviewed this annual report on Form 10-K of Pentair, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

     a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting that are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/   Randall J. Hogan  

Randall J. Hogan 

Chairman and Chief Executive Officer 

Date: February 26, 2007

EX-31.2

Exhibit 31.2

Certifications

I, David D. Harrison, certify that:

1. I have reviewed this annual report on Form 10-K of Pentair, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

     a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting that are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/   David D. Harrison  

David D. Harrison 

Executive Vice President and Chief Financial Officer 

Date: February 26, 2007

EX-32.1

Exhibit 32.1

Certification of CEO Pursuant To
18 U.S.C. Section 1350,
As Adopted Pursuant To
Section 906 Of The Sarbanes-Oxley Act Of 2002

In connection with the Annual Report of Pentair, Inc. (the Company) on Form 10-K for the period ending December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Randall J. Hogan, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that based on my knowledge:

     (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

     (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/   Randall J. Hogan  

Randall J. Hogan 

Chairman and Chief Executive Officer 

Date: February 26, 2007

EX-32.2

Exhibit 32.2

Certification of CFO Pursuant To
18 U.S.C. Section 1350,
As Adopted Pursuant To
Section 906 Of The Sarbanes-Oxley Act Of 2002

In connection with the Annual Report of Pentair, Inc. (the Company) on Form 10-K for the period ending December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, David D. Harrison, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that based on my knowledge:

     (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

     (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/   David D. Harrison  

David D. Harrison 

Executive Vice President and Chief Financial Officer 

Date: February 26, 2007