PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

FLOWSERVE CORPORATION
(Unaudited)

CONDENSED CONSOLIDATED STATEMENTS OF INCOME ~~(LOSS)~~

Three Months Ended September 30,
(Amounts in thousands, except per share data) 2006 2005

Sales $ 770,757 $ 649,485
Cost of sales 522,427 438,269

Gross profit 248,330 211,216
Selling, general and administrative expense 187,926 156,405

Operating income 60,404 54,811
Interest expense (16,385 ) (18,972 )
Interest income 1,634 1,335
Loss on early extinguishment of debt (25 ) (27,856 )
Other (expense) income, net (1,810 ) 365

Earnings before income taxes 43,818 9,683
Provision for income taxes 16,440 4,500

Income from continuing operations 27,378 5,183
Discontinued operations, net of tax 805 (15,133 )

Net earnings (loss) $ 28,183 $ (9,950 )

Earnings (loss) per share:
Basic:
Continuing operations $ 0.49 $ 0.09
Discontinued operations 0.02 (0.27 )

Net earnings (loss) $ 0.51 $ (0.18 )

Diluted:
Continuing operations $ 0.48 $ 0.08
Discontinued operations 0.02 (0.27 )

Net earnings (loss) $ 0.50 $ (0.19 )


(Amounts in thousands, except per share data)	Three Months Ended March 31,
	2007			2006
Sales	$	803,400		$	653,857
Cost of sales		(537,926	)		(435,863	)

Gross profit		265,474			217,994
Selling, general and administrative expense		(203,582	)		(180,657	)
Net earnings from affiliates		5,530			3,786

Operating income		67,422			41,123
Interest expense		(14,072	)		(15,682	)
Interest income		1,086			1,083
Other (expense) income, net		(1,402	)		1,133

Earnings before income taxes		53,034			27,657
Provision for income taxes		(19,420	)		(9,057	)

Net earnings	$	33,614		$	18,600


Earnings per share:
Basic	$	0.60		$	0.34
Diluted		0.59			0.32

Dividends per share	$	0.15		$	—

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ~~(LOSS)~~

Three Months Ended September 30,
(Amounts in thousands) 2006 2005

Net earnings (loss) $ 28,183 $ (9,950 )

Other comprehensive (expense) income:
Foreign currency translation adjustments, net of tax (1,611 ) 690
Cash flow hedging activity, net of tax (1,814 ) 1,178

Other comprehensive (loss) income (3,425 ) 1,868

Comprehensive income (loss) $ 24,758 $ (8,082 )


(Amounts in thousands)	Three Months Ended March 31,
	2007			2006
Net earnings	$	33,614		$	18,600

Other comprehensive income (expense):
Foreign currency translation adjustments, net of tax		4,763			5,393
Pension and other postretirement effects, net of tax		322			—
Cash flow hedging activity, net of tax		(729	)		1,417

Other comprehensive income		4,356			6,810

Comprehensive income	$	37,970		$	25,410

See accompanying notes to condensed consolidated financial statements.

FLOWSERVE CORPORATION
(Unaudited)

CONDENSED CONSOLIDATED ~~STATEMENTS OF INCOME~~BALANCE SHEETS

Nine Months Ended September 30,
(Amounts in thousands, except per share data) 2006 2005

Sales $ 2,177,473 $ 1,956,767
Cost of sales 1,463,033 1,331,708

Gross profit 714,440 625,059
Selling, general and administrative expense 544,040 488,120

Operating income 170,400 136,939
Interest expense (48,327 ) (58,867 )
Interest income 3,786 2,797
Loss on early extinguishment of debt (205 ) (27,744 )
Other income (expense), net 3,899 (8,326 )

Earnings before income taxes 129,553 44,799
Provision for income taxes 55,212 18,158

Income from continuing operations 74,341 26,641
Discontinued operations, net of tax 805 (22,655 )

Net earnings $ 75,146 $ 3,986

Earnings (loss) per share:
Basic:
Continuing operations $ 1.33 $ 0.48
Discontinued operations 0.02 (0.41 )

Net earnings $ 1.35 $ 0.07

Diluted:
Continuing operations $ 1.29 $ 0.47
Discontinued operations 0.02 (0.40 )

Net earnings $ 1.31 $ 0.07

~~CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)~~

Nine Months Ended September 30,
(Amounts in thousands) 2006 2005

Net earnings $ 75,146 $ 3,986

Other comprehensive income (expense):
Foreign currency translation adjustments, net of tax 21,351 (24,457 )
Cash flow hedging activity, net of tax 546 1,996

Other comprehensive income (loss) 21,897 (22,461 )

Comprehensive income (loss) $ 97,043 $ (18,475 )


	March 31,			December 31,
(Amounts in thousands, except per share data)	2007			2006
ASSETS
Current assets:
Cash and cash equivalents	$	37,994		$	67,000
Restricted cash		2,469			3,457
Accounts receivable, net of allowance for doubtful accounts of $12,872 and $13,135, respectively		579,506			551,815
Inventories, net		627,427			547,373
Deferred taxes		95,918			95,027
Prepaid expenses and other		57,449			38,209

Total current assets		1,400,763			1,302,881
Property, plant and equipment, net of accumulated depreciation of $522,831 and $509,033, respectively		450,815			442,892
Goodwill		850,379			851,123
Deferred taxes		3,197			25,731
Other intangible assets, net		140,898			143,358
Other assets, net		114,076			103,250

Total assets	$	2,960,128		$	2,869,235


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	384,083		$	412,869
Accrued liabilities		477,556			458,230
Debt due within one year		95,708			8,050
Deferred taxes		5,053			4,887

Total current liabilities		962,400			884,036
Long-term debt due after one year		555,074			556,519
Retirement obligations and other liabilities		429,440			408,094
Shareholders’ equity:
Common shares, $1.25 par value		73,390			73,289
Shares authorized – 120,000
Shares issued – 58,712 and 58,631, respectively
Capital in excess of par value		549,729			543,159
Retained earnings		577,974			582,767

		1,201,093			1,199,215
Treasury shares, at cost – 2,772 and 2,609 shares, respectively		(108,919	)		(95,262	)
Deferred compensation obligation		7,024			6,973
Accumulated other comprehensive loss		(85,984	)		(90,340	)

Total shareholders’ equity		1,013,214			1,020,586

Total liabilities and shareholders’ equity	$	2,960,128		$	2,869,235

See accompanying notes to condensed consolidated financial statements.

FLOWSERVE CORPORATION
(Unaudited)

CONDENSED CONSOLIDATED ~~BALANCE SHEETS~~STATEMENTS OF CASH FLOWS

September 30, December 31,
(Amounts in thousands, except per share data) 2006 2005

ASSETS

Current assets:
Cash and cash equivalents $ 48,737 $ 92,864
Restricted cash 3,680 3,628
Accounts receivable, net of allowance for doubtful accounts of $14,848 and $14,271, respectively 519,063 472,946
Inventories, net 489,735 378,324
Deferred taxes 113,088 113,957
Prepaid expenses and other 36,274 26,034

Total current assets 1,210,577 1,087,753
Property, plant and equipment, net of accumulated depreciation of $496,331 and $444,701, respectively 418,969 397,622
Goodwill 845,777 834,863
Deferred taxes 34,069 34,261
Other intangible assets, net 143,988 146,251
Other assets, net 93,940 91,342

Total assets $ 2,747,320 $ 2,592,092

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Accounts payable $ 339,106 $ 316,713
Accrued liabilities 393,518 377,352
Debt due within one year 11,039 12,367
Deferred taxes 5,488 5,044

Total current liabilities 749,151 711,476
Long-term debt due after one year 643,525 652,769
Retirement obligations and other liabilities 406,489 396,013
Shareholders’ equity:
Series A preferred stock, none at September 30, 2006; $1.00 par value, 1,000 shares authorized, no shares issued at December 31, 2005 — —
Common shares, $1.25 par value 72,018 72,018
Shares authorized — 120,000
Shares issued — 57,614
Capital in excess of par value 490,053 477,201
Retained earnings 521,309 446,163

1,083,380 995,382
Treasury shares, at cost — 1,355 and 1,640 shares, respectively (33,125 ) (37,547 )
Deferred compensation obligation 6,660 4,656
Accumulated other comprehensive loss (108,760 ) (130,657 )

Total shareholders’ equity 948,155 831,834

Total liabilities and shareholders’ equity $ 2,747,320 $ 2,592,092


(Amounts in thousands)	Three Months Ended March 31,
	2007			2006
Cash flows – Operating activities:
Net earnings	$	33,614		$	18,600
Adjustments to reconcile net earnings to net cash used by operating activities:
Depreciation		16,237			14,613
Amortization of intangible and other assets		2,464			2,552
Amortization of deferred loan costs		424			528
Excess tax benefits from stock-based payment arrangements		(3,017	)		—
Stock-based compensation		5,282			3,882
Net earnings from affiliates, net of dividends received		(4,152	)		(3,494	)
Change in assets and liabilities:
Accounts receivable, net		(24,270	)		(3,824	)
Inventories, net		(75,992	)		(13,252	)
Prepaid expenses and other		(18,458	)		(4,086	)
Other assets, net		185			(1,432	)
Accounts payable		(40,051	)		(11,968	)
Accrued liabilities		24,403			(52,481	)
Retirement obligations and other liabilities		9,163			6,477
Net deferred taxes		355			(1,796	)

Net cash flows used by operating activities		(73,813	)		(45,681	)


Cash flows – Investing activities:
Capital expenditures		(22,446	)		(12,482	)
Change in restricted cash		988			708

Net cash flows used by investing activities		(21,458	)		(11,774	)


Cash flows – Financing activities:
Net borrowings under lines of credit		85,000			20,072
Excess tax benefits from stock-based payment arrangements		3,017			—
Payments on long-term debt		—			(10,856	)
Borrowings under other financing arrangements		1,213			—
Repurchase of common shares		(30,579	)		—
Proceeds from stock option activity		7,142			—

Net cash flows provided by financing activities		65,793			9,216
Effect of exchange rate changes on cash		472			1,159

Net change in cash and cash equivalents		(29,006	)		(47,080	)
Cash and cash equivalents at beginning of year		67,000			92,864

Cash and cash equivalents at end of period	$	37,994		$	45,784

See accompanying notes to condensed consolidated financial statements.

~~FLOWSERVE CORPORATION~~
~~(Unaudited)~~

~~CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS~~

Nine Months Ended September 30,
(Amounts in thousands) 2006 2005

Cash flows — Operating activities:

Net earnings $ 75,146 $ 3,986
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation 44,598 45,694
Amortization 8,041 7,651
Amortization of deferred loan costs and discount 1,445 3,006
Write-off of unamortized deferred loan costs and discount — 11,307
Loss on early extinguishment of debt — 16,437
Net (gain) loss on the disposition of assets (122 ) 801
Excess tax benefits from stock-based payment arrangements (1,177 ) —
Equity based compensation expense 19,941 11,405
Equity income in unconsolidated subsidiaries, net of dividends received (3,868 ) (5,143 )
Impairment of long-lived assets — 23,602
Change in assets and liabilities:
Accounts receivable, net (28,489 ) 12,844
Inventories, net (95,138 ) (38,815 )
Prepaid expenses and other (7,268 ) (13,578 )
Other assets, net (6,602 ) 2,582
Accounts payable 6,399 2,976
Accrued liabilities and income taxes payable 2,601 3,658
Retirement obligations and other liabilities (2,489 ) (34,711 )
Net deferred taxes 1,402 (33,780 )

Net cash flows provided by operating activities 14,420 19,922

Cash flows — Investing activities:

Capital expenditures (43,520 ) (25,522 )
Change in restricted cash (52 ) (2,159 )

Net cash flows used by investing activities (43,572 ) (27,681 )

Cash flows — Financing activities:

Net repayments under other financing arrangements — (3,989 )
Payments on long-term debt (16,897 ) —
Proceeds from issuance of long-term debt — 600,000
Payment of deferred loan costs — (9,322 )
Proceeds from stock option activity — 1,111
Excess tax benefits from stock-based payment arrangements 1,177 —
Repurchase of term loans and senior subordinated notes (includes premiums paid of $16.5 million) — (607,043 )

Net cash flows used by financing activities (15,720 ) (19,243 )
Effect of exchange rate changes on cash 745 (1,523 )

Net change in cash and cash equivalents (44,127 ) (28,525 )
Cash and cash equivalents at beginning of year 92,864 63,759

Cash and cash equivalents at end of period $ 48,737 $ 35,234

~~See accompanying notes to condensed consolidated financial statements.~~

FLOWSERVE CORPORATION
(Unaudited)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation and Accounting Policies

Basis of Presentation

The accompanying condensed consolidated balance sheet as of ~~September 30, 2006,~~March 31, 2007, and the related condensed consolidated statements of income and comprehensive income ~~(loss)~~ for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2007 and 2006, ~~and 2005,~~ and the condensed consolidated statements of cash flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2007 and 2006, ~~and 2005,~~ are unaudited. In management’s opinion, all adjustments comprising normal recurring adjustments necessary for a fair presentation of such condensed consolidated financial statements have been made.

The accompanying condensed consolidated financial statements and notes in this Quarterly Report on Form 10-Q for the quarterly period ended ~~September 30, 2006~~March 31, 2007 (“Quarterly Report”) are presented as permitted by Regulation S-X and do not contain certain information included in our annual financial statements and notes thereto. Accordingly, the accompanying condensed consolidated financial information should be read in conjunction with the consolidated financial statements for the year ended December 31, ~~2005~~2006 presented in our Annual Report on Form 10-K for the year ended December 31, ~~2005~~2006 (“~~2005~~2006 Annual Report”)~~, which was filed on June 30, 2006.~~.

Certain reclassifications have been made to prior period amounts to conform with the current period presentation.

~~Stock-Based Compensation~~Income Taxes, Deferred Taxes, Tax Valuation Allowances and Tax Reserves

~~Effective~~As of January 1, ~~2006,~~2007, we adopted ~~the fair value recognition provisions of Statement of~~ Financial ~~Accounting Standards~~Interpretation (“~~SFAS”~~FIN”) No. 123(R), “Share—Based Payment,” using the modified prospective application method, and therefore, have not restated results for prior periods. Under this method, stock-based compensation expense for the periods presented include compensation expense for all stock-based compensation awards granted prior to, but not yet vested at the date of adoption, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123,48, “Accounting for ~~Stock-Based Compensation.~~Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109.” ~~Stock-based compensation expense for all stock-based compensation awards granted after~~FIN No. 48 addresses the ~~date~~determination of ~~adoption~~whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN No. 48, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. The determination is based on the ~~grant-date fair value estimated in accordance with~~technical merits of the ~~provisions~~position and presumes that each uncertain tax position will be examined by the relevant taxing authority that has full knowledge of ~~SFAS No. 123(R).~~

In conjunction with the adoption of SFAS No. 123(R), we selected the alternative transition method to determine the net excess tax benefits that would have qualified as such as of January 1, 2006. See Note 3 for further discussion on stock-based compensation.all relevant information.

Other Accounting Policies

Other significant accounting policies, for which no significant changes have occurred in the ~~quarter~~three months ended ~~September 30, 2006,~~March 31, 2007, are detailed in Note 1 of our ~~2005~~2006 Annual Report.

Accounting Developments

Pronouncements Implemented

In ~~December 2004,~~February 2006, the Financial Accounting Standards Board (“FASB”) issued ~~SFAS No. 123(R). We adopted SFAS No. 123(R) on January 1, 2006 utilizing the modified prospective application method. See Note 3 for additional information regarding the adoption~~Statement of ~~SFAS No. 123(R).~~

~~In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of~~Financial Accounting Research Bulletin No. 43, Chapter 4.” SFAS No. 151 amends Accounting Research Bulletin No. 43, Chapter 4 and seeks to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted materials by requiring those items to be recognized as current period charges. Additionally, SFAS No. 151 requires that fixed production overheads be allocated to conversion costs based on the normal capacity of the production facilities. Our adoption of SFAS No. 151 in the first quarter of 2006 did not have a material impact on our consolidated financial condition or results of operation.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.” SFAS No. 154 establishes new standards on accounting for changes in accounting principles. All such changes must be accounted for by retrospective application to the financial statements of prior periods unless it is impracticable to do so. SFAS No. 154 replaces Accounting Principles Board OpinionStandards (“~~APB”~~SFAS”) No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Periods.” However, it carries forward the guidance in those pronouncements with respect to accounting for changes in estimates, changes in the reporting entity and the correction of errors. Our adoption of SFAS No. 154 in the first quarter of 2006 had no impact on our consolidated financial condition or results of operations.

~~Pronouncements Not Yet Implemented~~

~~In February 2006, the FASB issued SFAS~~ No. 155, “Accounting for Certain Hybrid Financial Instruments,” which amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 155 improves the financial reporting of certain hybrid financial instruments and simplifies the accounting for these instruments. In particular, SFAS No. 155:

	•		permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation;

	•		clarifies which interest-only and principal-only strips are not subject to the requirements of SFAS No. 133;

	•		establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation;

	•		clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and

	•		amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument.

SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s fiscal year that begins after September 15, 2006. ~~We do not expect the~~Our adoption of SFAS No. 155 ~~to have a material~~in the first three months of 2007 had no impact on our consolidated financial condition ~~and~~or results of operations.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets —– an amendment of Statement No. 140.” SFAS No. 156 clarifies when an obligation to service financial assets should be separately recognized as a servicing asset or a servicing liability, requires that a separately recognized servicing asset or servicing liability be initially measured at fair value and permits an entity with a separately recognized servicing asset or servicing liability to choose either the amortization method or fair value method for subsequent measurement. SFAS No. 156 is effective for all separately recognized servicing assets and liabilities acquired or issued after the beginning of an entity’s fiscal year that begins after September 15, 2006. ~~We do not expect the~~Our adoption of SFAS No. 156 ~~to have a material~~in the first three months of 2007 had no impact on our consolidated financial condition ~~and~~or results of operations.

In March 2006, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 06-03, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation).” EITF No. 06-03 requires that the presentation of taxes assessed by a governmental authority that are directly imposed on a revenue-producing transaction between a seller and a customer on either a gross (included in revenues and costs) or a net (excluded from revenues) basis is an accounting policy decision that should be disclosed pursuant to APB No. 22, “Disclosure of Accounting Policies.” In addition, if any of such taxes are reported on a gross basis, a company should disclose, on an aggregated basis, the amounts of those taxes in interim and annual financial statements for each period for which an income statement is presented if those amounts are significant. EITF Issue No. 06-03 is effective for interim and annual reporting periods beginning after December 31, 2006. ~~We are still evaluating the impact~~As we have historically presented such taxes on a net basis within our results of operations, our adoption of EITF Issue No. 06-03 in the first three months of 2007 did not have a material impact on our consolidated financial ~~condition and~~position or results of operations.

In July 2006, the FASB issued Financial Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109.” FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN No. 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, as well as guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The evaluation of a tax position in accordance with FIN No. 48 is a two-step process. The first step is a recognition process whereby the enterprise determines whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The

second step is a measurement process whereby a tax position that meets the more-likely-than-not recognition threshold is calculated to determine the amount of benefit to recognize in the financial statements. The provisions of FIN No. 48 are effective for fiscal years beginning after December 15, 2006. ~~We are still evaluating the~~The impact ~~of FIN No. 48~~ on our consolidated financial condition and results of ~~operations.~~operations of adopting FIN No. 48 in the first three months of 2007 is presented in Note 11.

Pronouncements Not Yet Implemented

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 establishes a single definition of fair value and a framework for measuring fair value under accounting principles generally accepted in the United States (“GAAP”), and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements; however, it does not require any new fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, ~~2007, and interim periods within those fiscal years.~~2007. We are still evaluating the impact of SFAS No. 157 on our consolidated financial condition and results of operations.

In ~~September 2006,~~February 2007, the FASB issued SFAS No. ~~158, “Employers’ Accounting~~159, “The Fair Value Option for ~~Defined Benefit Pension~~Financial Assets and ~~Other Postretirement Plans—~~Financial Liabilities – Including an amendment of FASB ~~Statements~~Statement No. ~~87, 88, 106, and 132(R).~~115.” SFAS No. ~~158 requires an employer~~159 permits entities to ~~recognize~~choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. It provides entities with the ~~overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability~~opportunity to mitigate volatility in ~~its statement of financial position~~reported earnings caused by measuring related assets and liabilities differently without having to ~~recognize changes in that funded status in the year in which the changes occur through comprehensive income.~~apply complex hedge accounting provisions. SFAS No. ~~158 also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position. SFAS No. 158 amends SFAS No. 87, “Employers’ Accounting~~159 is effective for Pensions,” SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” SFAS No. 106, “Employer’s Accounting for Postretirement Benefits other than Pensions,” SFAS No. 132(R), “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” and other related accounting literature. SFAS No. 158 requires expanded disclosures about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits and transition asset or obligation. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year endingyears beginning after ~~December~~November 15, ~~2006.~~2007. We are still evaluating the impact of SFAS No. ~~158~~159 on our consolidated financial condition and results of operations.

Although there are no other final pronouncements recently issued that we have not adopted and that we expect to impact reported financial information or disclosures, accounting promulgating bodies have a number of pending projects that may directly impact us. We continue to evaluate the status of these projects and as these projects become final, we will provide disclosures regarding the likelihood and magnitude of their impact, if any.

~~2. Discontinued Operations~~

~~General Services Group~~— During the first quarter of 2005 we made a definitive decision to divest certain non-core service operations, collectively called the General Services Group (“GSG”), and accordingly, evaluated impairment pursuant to a held for sale concept as opposed to the previously held and used concept. As part of our decision to sell, we allocated $12.3 million of goodwill to GSG based on its relative fair value to the total reporting unit’s estimated fair value. We recognized impairment charges aggregating $30.1 million during 2005 relating to GSG as the number of potential buyers diminished to one purchaser during the bidding process, and the business underperformed during the year due in part to the pending sale. Of the $30.1 million impairment, $17.6 million and $23.5 million were recorded during the three and nine months ended September 30, 2005, respectively.

Effective December 31, 2005, we sold GSG to Furmanite, a unit of Dallas-based Xanser Corporation for a contingent sales price of approximately $16 million in gross cash proceeds, including $2 million held in escrow pending final settlement. The ultimate purchase price will be based upon the agreed-upon value between Furmanite and us. In determining the working capital value, the parties may jointly seek independent arbitration. Utilizing the approximate $16 million contingent sales price, the sale resulted in a pre-tax loss of $3.8 million, which we recognized in the fourth quarter of 2005. On November 3, 2006 an independent arbitrator issued a binding decision with respect to the valuation of inventory reserves that resolved one element of the contingent sales price. Accordingly, Flowserve decreased the overall loss on sale by recording additional income from discontinued operations amounting to $0.8 million ($1.1 million pre-tax) in the third quarter of 2006. The ultimate purchase price of GSG remains under negotiation, and is expected to be resolved and paid in the fourth quarter of 2006. The outcome of working capital values under negotiation, to the extent that the agreed upon price differs from the contingent sales price, will result in a change to the previously recognized loss on sale, and will be recorded in the period of resolution.

We used approximately $11 million of the net cash proceeds to reduce our indebtedness in January 2006. We expect to repay debt with a portion of the additional proceeds collected pursuant to this sale transaction upon receipt of the final settlement. We have

allocated estimated interest expense related to this repayment to each period presented based upon then prevailing interest rates. As a result of this sale, we have presented the results of operations of GSG as discontinued operations for all periods presented.

~~GSG generated the following results of operations for the three months ended September 30, 2005 (in millions):~~

Sales $ 21.6
Cost of sales 20.0
Selling, general and administrative expense 22.3
Interest expense 0.2

Earnings before income taxes (20.9 )
Income tax benefit (5.8 )

Results for discontinued operations, net of tax $ (15.1 )

~~GSG generated the following results of operations for the nine months ended September 30, 2005 (in millions):~~

Sales $ 76.3
Cost of sales 63.6
Selling, general and administrative expense 42.4
Interest expense 0.6
Other income, net (0.1 )

Earnings before income taxes (30.4 )
Income tax benefit (7.7 )

Results for discontinued operations, net of tax $ (22.7 )

3.2. Stock-Based Compensation Plans

We adopted SFAS No. 123(R) on January 1, 2006. Prior to January 1, 2006, we accounted for stock-based compensation using the intrinsic value method as set forth in APB No. 25, “Accounting for Stock Issued to Employees,” and related interpretations as permitted by SFAS No. 123. Accordingly, we recognized compensation expense for restricted stock and other equity awards over the applicable vesting period; however, we did not recognize compensation expense for stock options for the three or nine months ended September 30, 2005, because the options were granted at market value on the date of grant.

The following tables illustrate the effect of stock-based compensation on net earnings and earnings per share for the three and nine months ended September 30, 2005 if we had applied the fair value recognition provisions of SFAS No. 123 to all stock-based employee compensation, calculated using the Black-Scholes option-pricing model.

Three Months Ended
(Amounts in thousands, except per share data) September 30, 2005

Net loss, as reported $ (9,950 )
Restricted stock compensation expense included in net loss, net of tax 4,644
Less: Stock-based employee compensation expense determined under fair value method for all awards, net of tax (5,297 )

Pro forma net loss $ (10,603 )

Net loss per share — basic:
As reported $ (0.18 )
Pro forma (0.19 )
Net loss per share — diluted:
As reported $ (0.19 )
Pro forma (0.19 )

Nine Months Ended
(Amounts in thousands, except per share amounts) September 30, 2005

Net earnings, as reported $ 3,986
Restricted stock compensation expense included in net earnings, net of tax 7,069
Less: Stock-based employee compensation expense determined under fair value method for all awards, net of tax (9,017 )

Pro forma net earnings $ 2,038

Net earnings per share — basic:
As reported $ 0.07
Pro forma 0.04
Net earnings per share — diluted:
As reported $ 0.07
Pro forma 0.04

We adopted SFAS No. 123(R) under the modified prospective application method. Under this method, we recorded stock-based compensation expense of $7.7 million ($10.6 million pre-tax) and $14.4 million ($19.9 million pre-tax) for the three and nine months ended September 30, 2006, respectively, for all awards granted on or after the date of adoption and for the unvested portion of previously granted awards at January 1, 2006, and includes the $5.6 million charge discussed in “Modifications” below. Accordingly, prior period amounts have not been retrospectively adjusted. In accordance with SFAS No. 123(R), we adjust share-based compensation at least annually for changes to the estimate of expected equity award forfeitures based on actual forfeiture experience. Currently, ourOur stock-based compensation relates to stock options, restricted stock and other equity-based ~~awards. It~~awards, and is ~~our policy to set the exercise price~~accounted for under SFAS No. 123(R), “Share-Based Payment”. Under this method, we recorded stock-based compensation expense of stock options at the closing price of our common stock on the New York Stock Exchange on the date of grant, which is the date such grants are authorized by our Board of Directors. Options granted to officers, other employees$3.6 million ($5.3 million pre-tax) and ~~directors allow~~$2.8 million ($3.9 million pre-tax) for the purchase of common shares at or above the fair market value of our stock on the date the options are granted, although no options have been granted above fair market value. Options are expensed using the grading vesting model, whereby we recognize compensation cost over the requisite service period for each separately vesting tranche of the award. Generally, options become exercisable over a staggered period ranging from one to five years (most typically from one to three years). Options generally expire ten years from the date of the grant or within a short period of time following the termination of employment or cessation of services by an option holder; however, as described in greater detail under “Modifications” below, the expiration provisions relating to certain outstanding option awards have been modified.months ended March 31, 2007 and 2006, respectively.

Stock Options —Information related to stock options issued to officers, other employees and directors under all plans described in Note 7 to our consolidated financial statements included in our 2006 Annual Report is presented in the following table:

Nine Months Ended September 30, 2006
Remaining
Weighted Average Contractual Life (in Aggregate Intrinsic
Shares Exercise Price years) Value (in millions)

Number of shares under option:
Outstanding — beginning of year 2,966,326 $ 23.00
Granted 286,850 49.54
Exercised — —
Cancelled (6,923 ) 33.73
Modified (1) 89,404 24.55

Outstanding — end of period 3,335,657 $ 25.31 3.8 $ 84.4

Exercisable — end of period 2,644,383 $ 22.25 2.5 $ 58.8


	Three Months Ended March 31, 2007
						Remaining
				Weighted Average		Contractual Life		Aggregate Intrinsic
	Shares			Exercise Price		(in years)		Value (in millions)
Number of shares under option:
Outstanding — January 1, 2007		1,462,032		$	30.27
Exercised		(296,463	)		24.09
Cancelled		(33,644	)		35.31

Outstanding — March 31, 2007		1,131,925		$	31.74		7.1	$	28.8

Exercisable — March 31, 2007		586,634		$	26.84		5.9	$	17.8


~~(1)~~		~~Options expiring in 2005 that had their expiration dates extended contingent upon shareholder approval, which was obtained on August 24, 2006, as discussed below in “Modifications.”~~

No options were granted during the three months ended March 31, 2007. The weighted average fair value per share of options granted was ~~$26.71 and $15.66~~$24.23 for the three months ended ~~September 30, 2006 and 2005, respectively, and $24.90 and $14.30 for the nine months ended September 30, 2006 and 2005, respectively. For purposes of pro forma disclosure, the estimated~~March 31, 2006. The total fair value of stock options vested during the ~~options is amortized to expense over the options’ vesting periods. The “fair value” for these options at the date of grant~~three months ended March 31, 2007 and 2006 was ~~estimated using the Black-Scholes option pricing model.~~

$2.3 million and $0.5 million, respectively. The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model using the assumptions noted in the following table. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Our dividend yield is zero because we have not historically declared dividends. Stock volatility is determined based on historical price fluctuations of our stock. The expected life of the stock options granted is based on a 10-year history of the timing of stock option exercises. The forfeiture rate is based on unvested options forfeited compared to original total options granted over a rolling 10-year period, excluding significant forfeiture events that are not expected to recur.

Nine Months Ended September 30,
2006 2005
Risk-free interest rate 4.6 % 4.6 %
Dividend yield — —
Stock volatility 41.8 % 43.5 %
Average expected life (years) 6.6 6.7
Forfeiture rate 10.0 % 9.5 %
model.

As of ~~September 30, 2006,~~March 31, 2007, we have ~~$6.9~~$4.4 million of unrecognized compensation cost related to outstanding unvested stock option awards, which is expected to be recognized over a weighted-average period of approximately ~~1.8~~1.4 years. The total intrinsic value of stock options exercised during the three months ended ~~both September 30, 2006 and 2005~~March 31, 2007 was ~~$0. The total intrinsic value of stock~~$8.8 million. No options were exercised during the ~~nine~~three months ended ~~September 30,~~March 31, 2006 as we were in a black-out period due to our then non-current status of filings with the Securities and ~~2005 was $0 and $0.3 million, respectively.~~Exchange Commission (“SEC”).

~~Incremental stock-based~~Stock-based compensation expense related solely to stock options recognized for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2007 and 2006, ~~as a result of adoption of SFAS No. 123(R)~~ was ~~as follows:~~$0.7 million ($1.1 million pre-tax) and $1.2 million ($1.6 million pre-tax), respectively.

Three Months Ended
(Amounts in thousands, except per share data) September 30, 2006

Stock-based compensation expense, before taxes (1) $ 1,680
Related income tax benefit (105 )

Stock-based compensation expense, net of tax $ 1,575


~~(1)~~		Excludes the $5.6 million modification charge recorded in August 2006 as discussed below in “Modifications” since the charge we would have recognized in accordance with FIN No. 44, “Accounting for Certain Transactions involving Stock Compensation—an interpretation of APB Opinion No. 25,” would have approximated the charge recognized in accordance with SFAS No. 123(R).


~~Earnings per share — basic:~~			~~$0.03~~
~~Earnings per share — diluted:~~			~~0.02~~

Nine Months Ended
(Amounts in thousands, except per share data) September 30, 2006

Stock-based compensation expense, before taxes (1) $ 5,227
Related income tax benefit (971 )

Stock-based compensation expense, net of tax $ 4,256

Earnings per share — basic: $ 0.08
Earnings per share — diluted: 0.07


~~(1)~~		Excludes the $5.6 million modification charge recorded in August 2006 as discussed below in “Modifications” since the charge we would have recognized in accordance with FIN No. 44, “Accounting for Certain Transactions involving Stock Compensation—an interpretation of APB Opinion No. 25,” would have approximated the charge recognized in accordance with SFAS No. 123(R).

Restricted Stock —Awards of restricted stock are valued at the closing market price of our common stock on the date of grant. The unearned compensation is amortized to compensation expense over the vesting period of the restricted stock. We have unearned compensation of ~~$17.8~~$30.6 million and ~~$9.1~~$15.0 million at ~~September 30, 2006~~March 31, 2007 and December 31, ~~2005,~~2006, respectively, which is expected to be recognized over a weighted-average period of approximately ~~1.8~~2.0 years. These amounts will be recognized into net earnings in prospective periods as the awards vest. The total fair value of restricted shares and units vested during the three months ended March 31, 2007 and 2006 was $6.3 million and $1.8 million, respectively.

Stock-based compensation expense related to restricted stock recognized was ~~$2.4~~$2.9 million ($~~3.3~~4.2 million pre-tax) and ~~$6.4~~$1.6 million ($~~9.1~~2.3 million pre-tax) for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2007 and 2006, respectively. Stock-based compensation expense related to restricted stock recognized was $1.3 million ($1.9 million pre-tax) and $3.6 million ($5.2 million pre-tax) for the three and nine months ended September 30, 2005, respectively.

The following ~~tables summarize~~table summarizes information regarding ~~the~~ restricted stock ~~plans:~~activity:

Nine Months Ended September 30, 2006
Weighted Average
Grant-Date Fair
Shares Value
Number of unvested shares:
Outstanding — beginning of year 583,455 $ 25.65
Granted 371,370 48.51
Vested (149,312 ) 24.09
Cancelled (21,241 ) 31.34

Unvested restricted stock 784,272 $ 36.62

~~Modifications~~— During 2005, we made a number of modifications to our stock plans, including the acceleration of vesting of certain restricted stock grants and outstanding options, as well as the extension of the exercise period associated with certain outstanding options. These modifications resulted from severance agreements with former executives and from our decision to temporarily suspend option exercises. As a result of the modifications primarily associated with the severance agreements with former executives, we recorded additional stock-based compensation expense in 2005 of $7.2 million based upon the intrinsic values of the awards on the dates the modifications were made, of which $0 and $6.2 million was recorded during the three and nine months ended September 30, 2005, respectively.

On June 1, 2005, we took action to extend to December 31, 2006, the regular term of certain options granted to employees, including executive officers, qualified retirees and directors, which were scheduled to expire in 2005. Subsequently, we took action on November 4, 2005, to further extend the exercise date of these options, and options expiring in 2006, to January 1, 2009. We thereafter concluded, however, that recent regulatory guidance issued under Section 409A of the Internal Revenue Code might cause the recipients of these extended options to become subject to unintended adverse tax consequences under Section 409A. Accordingly, effective December 14, 2005, the Organization and Compensation Committee of the Board of Directors partially rescinded, in accordance with the regulations,


	Three Months Ended March 31, 2007
				Weighted Average
				Grant-Date Fair
	Shares			Value
Number of unvested shares:
Outstanding — January 1, 2007		800,523		$	37.91
Granted		398,220			52.21
Vested		(163,681	)		38.67
Cancelled		(20,042	)		36.75

Unvested restricted stock — March 31, 2007		1,015,020		$	43.42

116

Restricted stock granted during the ~~extensions~~three months ended March 31, 2007, includes approximately 186,000 shares with performance-based vesting provisions, and vesting ranges from 0% to 200% based on pre-defined performance targets. Performance-based restricted stock is earned upon the achievement of performance targets, and is payable in common shares. Compensation expense is recognized over a 37-month cliff vesting period based on the fair market value of our common stock on the date of grant, as adjusted for anticipated forfeitures. During the performance period, compensation expense may be adjusted based on changes in the expected achievement of the ~~regular term of these options, to provide as follows:~~

~~(i)~~

the regular term of options otherwise expiring in 2005 will expire 30 days after the options first become exercisable when our Securities and Exchange Commission (“SEC”) filings have become current and an effective SEC Form S-8 Registration Statement has been filed with the SEC, and

~~(ii)~~

~~the regular term of options otherwise expiring in 2006 will expire on the later of:~~

~~(1)~~

~~75 days after the regular term of the option as originally granted expires, or~~

~~(2)~~

~~December 31, 2006 (assuming the options become exercisable in 2006 for the reasons included in (i) above).~~

These extensions were subject to shareholder approval of applicable plan amendments, which was obtained at our annual shareholders’ meeting held on August 24, 2006. The approval of such plan amendments is considered a stock modification for financial reporting purposes subject to the recognition of a non-cash compensation charge in accordance with SFAS No. 123(R), and we recorded a charge of $5.6 million in the third quarter of 2006.

The earlier extension actions also extended the option exercise period available following separation from employment for reasons of death, disability and termination not for cause or certain voluntary separations. These separate extensions were partially rescinded at the December 14, 2005, meeting of the Organization and Compensation Committee of the Board of Directors, and as so revised are currently effective and not subject to shareholder approval. The exercise period available following such employment separations has been extended to the later of (i) 30 days after the options first became exercisable when our SEC filings have become current and an effective SEC Form S-8 Registration Statement has been filed with the SEC, or (ii) the period available for exercise following separation from employment under the terms of the option as originally granted. This extension was considered for financial reporting purposes as a stock modification subject to the recognition of a non-cash compensation charge in accordance with APB No. 25, of $1.0 million in 2005, none of which was recorded in the nine months ended September 30, 2005. The extension of the exercise period following separation from employment does not apply to option exercise periods governed by an individual separation contract or agreement.performance targets.

4.3. Derivative Instruments and Hedges

We enter into forward exchange contracts to hedge our ~~risk~~risks associated with transactions denominated in currencies other than the local currency of the operation engaging in the transaction. Our risk management and derivatives policy specifies the conditions inunder which we may enter into derivative contracts. ~~As of September 30,~~At March 31, 2007 and December 31, 2006, we had ~~$326.5~~$337.6 million and $433.7 million, respectively, of notional amount in outstanding forward contracts with third parties. ~~As of September 30, 2006,~~At March 31, 2007, the ~~maximum~~ length of ~~any~~ forward ~~contract~~contracts currently in place was two days to 20 months.

The fair market value adjustments of ~~certain of~~ our forward exchange contracts are recognized directly in our results of operations. The fair value of these outstanding forward contracts at ~~September 30,~~March 31, 2007 and December 31, 2006 was a net asset of ~~$0.5~~$4.3 million and a$3.4 million, respectively. Unrealized net ~~liability of $2.3 million at December 31, 2005. Unrealized~~ gains ~~(losses)~~ from the changes in the fair value of these forward contracts of ~~$(3.5)~~$0.3 million and $0.2 million, for the three months ended ~~September 30,~~March 31, 2007 and 2006, ~~and 2005, respectively, and $2.9 million and $(5.8) million for the nine months ended September 30, 2006 and 2005,~~ respectively, are included in other (expense) income, ~~(expense),~~ net in the condensed consolidated statements of income. The fair value of certain outstanding forward contracts that qualify for hedge accounting at September 30, 2006 was a net asset of $0.1 million and a net liability of $7,000 at December 31, 2005. Unrealized gains (losses) from the changes in the fair value of qualifying forward contracts and the associated underlying exposures of $(27,000) and $0.3 million, net of tax, for the three months ended September 30, 2006 and 2005, respectively, and $0.2 million, net of tax, for the nine months ended both September 30, 2006 and 2005, are included in other comprehensive income (loss).

Also as part of our risk management program, we enter into interest rate swap agreements to hedge exposure to floating interest rates on certain portions of our debt. ~~As of September 30,~~At both March 31, 2007 and December 31, 2006, we had ~~$385.0~~$435.0 million of notional amount in outstanding interest rate swaps with third parties. ~~As of September 30, 2006,~~At March 31, 2007, the maximum remaining length of any interest rate contract in place was approximately 2733 months. The fair value of the interest rate swap agreements was a net asset of ~~$1.5~~$0.8 million and ~~$0.9~~$1.9 million at ~~September 30, 2006~~March 31, 2007 and December 31, ~~2005,~~2006, respectively. Unrealized net (losses) gains ~~(losses)~~ from the changes in fair value of our interest rate swap agreements, net of reclassifications, of ~~$(1.8)~~$(0.7) million and ~~$1.3~~$1.4 million, net of tax, for the three months ended ~~September 30,~~March 31, 2007 and 2006, ~~and 2005, respectively, and $0.4 million and $2.2 million, net of tax, for the nine months ended September 30, 2006 and 2005,~~ respectively, are included in other comprehensive ~~income (loss).~~income.

During ~~the third quarter of~~ 2004, we entered into a compound derivative contract to hedge exposure to both currency translation and interest rate risks associated with our European Investment Bank ~~(“EIB”) loan.~~credit facility. The notional amount of the derivative was $85.0 million, and it served to convert floating rate interest rate risk to a fixed rate, as well as ~~United States (“~~U.S.”) dollar currency risk to Euros. ~~The derivative matures~~As described more fully in ~~2011. At September 30,~~our 2006 Annual Report, we repaid all amounts outstanding under this facility on December 15, 2006 and ~~December 31, 2005,~~settled the ~~fair value of this derivative was a net liability of $6.3 million and $2.8 million, respectively. This derivative did not qualify for hedge accounting.~~derivative. The unrealized gain ~~(loss)~~ on the derivative ~~offset with~~and the foreign ~~currency translation effect~~transaction gain on the underlying loan ~~aggregates~~aggregated to ~~$(0.8) million and $1.0~~$2.2 million for the three months ended ~~September 30,~~March 31, 2006, ~~and 2005, respectively, and $2.8 million and $(1.7) million for the nine months ended September 30, 2006 and 2005, respectively,~~ and is included in other (expense) income, ~~(expense),~~ net in the condensed consolidated ~~statements~~statement of income.

We are exposed to risk from credit-related losses resulting from nonperformance by counterparties to our financial instruments. We perform credit evaluations of our counterparties under forward contracts and interest rate swap agreements and expect all counterparties to meet their obligations. We have not experienced credit losses from our counterparties.

5.4. Debt

Debt, including capital lease obligations, consisted of:


	September 30,		December 31,		March 31,		December 31,
(Amounts in thousands)	2006		2005		2007		2006

Term Loan, interest rate of 7.13% in 2006 and 6.36% in 2005	$	561,765	$	578,500
EIB loan, interest rate of 5.32% in 2006 and 4.42% in 2005		85,000		85,000
Term Loan, interest rate of 6.88% in 2007 and 2006					$	558,220	$	558,220
Revolving Line of Credit, interest rate of 7.08%						85,000		—
Capital lease obligations and other		7,799		1,636		7,562		6,349


Debt and capital lease obligations		654,564		665,136		650,782		564,569
Less amounts due within one year		11,039		12,367		95,708		8,050

Total debt due after one year	$	643,525	$	652,769	$	555,074	$	556,519

~~New~~

Credit Facilities

On August 12, 2005, we entered into credit facilities comprised of a $600.0 million term loan expiring on August 10, 2012 and a $400.0 million revolving line of credit, which can be utilized to provide up to $300.0 million in letters of credit, expiring on August 12, 2010. We refer to these credit facilities collectively as our ~~New~~ Credit Facilities. ~~We also replaced the letter of credit agreement guaranteeing our obligations under the EIB credit facility (described below) with a letter of credit issued under the new revolving line of credit.~~ At ~~September 30, 2006~~March 31, 2007 and December 31, ~~2005,~~2006, we had ~~no amounts~~$85.0 million and $0 outstanding under the revolving line of ~~credit.~~credit, respectively. We had outstanding letters of credit of ~~$165.8~~$90.5 million and $83.9 million at ~~both September 30, 2006~~March 31, 2007 and December 31, ~~2005,~~2006, respectively, which reduced borrowing capacity to ~~$234.2~~$224.5 million ~~at both periods.~~and $316.1 million, respectively.

Borrowings under our ~~New~~ Credit Facilities bear interest at a rate equal to, at our option, either (1) the base rate (which is based on the greater of the prime rate most recently announced by the administrative agent under our ~~New~~ Credit Facilities or the Federal Funds rate plus 0.50%) or (2) LIBOR plus an applicable margin determined by reference to the ratio of our total debt to consolidated ~~EBITDA,~~Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”), which as of ~~September 30, 2006~~March 31, 2007 was ~~1.75%~~1.5% for LIBOR borrowings.

The loans under our ~~New~~ Credit Facilities are subject to mandatory repayment with, in general:

	•		100% of the net cash proceeds of asset sales; and

	•		Unless we attain and maintain investment grade credit ratings:

	•		~~75% of our excess cash flow, subject to a reduction based on the ratio of our total debt to consolidated EBITDA;~~

	•o		50% of the proceeds of any equity offerings; and

	•o		100% of the proceeds of any debt issuances (subject to certain exceptions).

We may prepay loans under our ~~New~~ Credit Facilities in whole or in part, without premium or penalty. During the three ~~and nine~~ months ended ~~September 30, 2006,~~March 31, 2007, we made ~~mandatory~~no payments under our Credit Facilities. We have scheduled repayments of ~~$0.9~~$1.4 million ~~and $11.7 million, respectively, using excess cash flows and the net proceeds from the sale of GSG, and optional prepayments of $0 and $5.0 million, respectively. We have no scheduled repayments~~ due in ~~2006, under our New Credit Facilities.~~both the third and fourth quarters of 2007.

~~EIB Credit Facility~~

~~On April 14, 2004, we and one of our European subsidiaries, Flowserve B.V., entered into an agreement with EIB, pursuant to which EIB agreed to loan us up to~~€70.0 million, with the ability to draw funds in multiple currencies, to finance in part specified research and development projects undertaken by us in Europe. Borrowings under the EIB credit facility bear interest at a fixed or floating rate of interest agreed to by us and EIB with respect to each borrowing under the facility. Loans under the EIB credit facility are subject to mandatory repayment, at EIB’s discretion, upon the occurrence of certain events, including a change of control or prepayment of certain other indebtedness. In addition, the EIB credit facility contains covenants that, among other things, limit our ability to dispose of assets related to the financed project and require us to deliver to EIB our audited annual financial statements within 30 days of publication. In August 2004, we borrowed $85.0 million at a floating interest rate based on 3-month U.S. LIBOR that resets quarterly. As of September 30, 2006, the interest rate was 5.32%. The maturity of the amount drawn is June 15, 2011, but may be repaid at any time without penalty. Our obligations under the EIB credit facility are guaranteed by a letter of credit outstanding under our New Credit Facilities, which costs 1.75% per annum.

~~Accounts Receivable Factoring~~

Through our European subsidiaries, we engage in non-recourse factoring of certain accounts receivable. The various agreements have different terms, including options for renewal and mutual termination clauses. Under our New Credit Facilities, such factoring is generally limited to $75.0 million, based on due date of the factored receivables.

6.5. Inventories

Inventories are stated at lower of cost or market. Cost is determined ~~for principally all U.S. inventories by the last-in, first-out method and for non-U.S. inventories~~ by the first-in, first-out method. Inventories, net consisted of the following:


	September 30,			December 31,			March 31,			December 31,
(Amounts in thousands)	2006			2005			2007			2006

Raw materials	$	139,543		$	114,636		$	194,797		$	167,224
Work in process		313,843			195,585			390,840			354,808
Finished goods		255,773			219,610			251,551			225,157
Less: Progress billings		(112,939	)		(54,511	)		(147,594	)		(140,056	)
Less: Excess and obsolete reserve		(60,357	)		(57,106	)		(62,167	)		(59,760	)

		535,863			418,214
LIFO reserve		(46,128	)		(39,890	)

Inventories, net	$	489,735		$	378,324		$	627,427		$	547,373


Percent of inventory accounted for by:
LIFO		42	%		47	%
FIFO		58	%		53	%

September 30, 2003 and the full years 2002, 2001 and 2000. On June 2, 2004, we were advised that the SEC had issued a formal order of private investigation into issues regarding this restatement and any other issues that arise from the investigation. On May 31, 2006, we were informed by the staff of the SEC that it had concluded this investigation without recommending any enforcement action against us.

~~During the quarter ended September 30,~~In 2003, related lawsuits were filed in federal court in the Northern District of Texas (the “Court”), alleging that we violated federal securities laws. Since the filing of these cases, which have been consolidated, the lead plaintiff has amended its complaint several times. The lead plaintiff’s current pleading is the fifth consolidated amended complaint (the “Complaint”). The Complaint alleges that federal securities violations occurred between February 6, 2001 and September 27, 2002 and names as defendants our company, C. Scott Greer, our former Chairman, President and Chief Executive Officer, ~~Renée~~Renee J. Hornbaker, our former Vice President and Chief Financial Officer, PricewaterhouseCoopers LLP, our independent registered public accounting firm, and Banc of America Securities LLC and Credit Suisse First Boston LLC, which served as underwriters for our two public stock offerings during the relevant period. The Complaint asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder, and Sections 11 and 15 of the Securities Act of 1933. The lead plaintiff seeks unspecified compensatory damages, forfeiture by Mr. Greer and Ms. Hornbaker of unspecified incentive-based or equity-based compensation and profits from any stock sales, and recovery of costs. On November 22, 2005, the Court entered an order denying the defendants’ motions to dismiss the Complaint. The case is currently set for trial on October 1, 2007. We continue to believe that the lawsuit is without merit and are vigorously defending the case.

~~On October 6,~~In 2005, a shareholder derivative lawsuit was filed purportedly on our behalf in the 193rd Judicial District of Dallas County, Texas. The lawsuit names as defendants Mr. Greer, Ms. Hornbaker, and current board members Hugh K. Coble, George T. Haymaker, Jr., William C. Rusnack, Michael F. Johnston, Charles M. Rampacek, Kevin E. Sheehan, Diane C. Harris, James O. Rollans and Christopher A. Bartlett. We are named as a nominal defendant. Based primarily on the purported misstatements alleged in the above-described federal securities case, the plaintiff asserts claims against the defendants for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment. The plaintiff alleges that these purported violations of state law occurred between April 2000 and the date of suit. The plaintiff seeks on our behalf an unspecified amount of damages, injunctive relief and/or the imposition of a constructive trust on defendants’ assets, disgorgement of compensation, profits or other benefits received by the defendants from us, and recovery of attorneys’ fees and costs. We strongly believe that the suit was improperly filed and have filed a motion seeking dismissal of the case. The Court has since ordered the plaintiffs to replead. The trial is currently set for December 2007.

fiduciary duty occurred between 2000 and 2004. The plaintiff ~~seeks~~sought on our behalf an unspecified amount of damages, disgorgement by Mr. Greer and Ms. Hornbaker of salaries, bonuses, restricted stock and stock options, and recovery of attorneys’ fees and costs. Pursuant to a motion filed by us, the federal court dismissed that case on March 14, 2007, primarily on the basis that the case was not properly filed in federal court. On or about March 27, 2007, the same plaintiff re-filed essentially the same lawsuit naming the same defendants in the Supreme Court of the State of New York. We strongly believe that ~~the suit~~this new lawsuit was improperly filed in the Supreme Court of the State of New York as well and have filed a motion seeking dismissal of the case.

As of May 1, 2005, due to the non-current status of our filings with the SEC in accordance with the Securities Exchange Act of 1934, our Registration Statements on Form S-8 were no longer available to cover offers and sales of securities to our employees and other persons. Since that date, the acquisition of interests in our common stock fund under our Flowserve Corporation Retirement Savings Plan (“401(k) Plan”) by plan participants did not comply with the registration requirements of the Securities Act of 1933 or applicable state securities laws and may not have qualified for an available exemption from such requirements. Federal securities laws generally provide for a one-year rescission right for an investor who acquires unregistered securities in a transaction that is subject to registration and for which no exemption was available. As such, an investor successfully asserting a rescission right during the one-year time period has the right to require an issuer to repurchase the securities acquired by the investor at the price paid by the investor for the securities (or if such security has been disposed of, to receive damages with respect to any loss on such disposition), plus interest from the date of acquisition. The remedies and statute of limitations under state securities laws vary and depend upon the state in which the shares were purchased. These rights may apply to affected participants who acquired an interest in our common stock fund in our 401(k) Plan during this period. Based on our current stock price, we believe that our current potential liability for rescission claims is not material to our consolidated financial condition, results of operations or cash flows; however, our potential liability could become material in the future if our stock price were to fall significantly below prices at which participants acquired their interest in our common stock fund during the one-year period following such unregistered acquisitions.

On February 7, 2006, we received a subpoena from the SEC ~~regarding goods~~seeking documents and ~~services~~information relating primarily to products that ~~certain~~two of our foreign subsidiaries delivered to Iraq from 1996 through 2003 ~~during~~under the United Nations Oil-for-Food ~~program. This~~Program. We believe that the SEC’s investigation ~~includes a review of~~is focused primarily on whether any inappropriate payments were made to Iraqi officials in violation of the ~~Foreign Corrupt Practices Act. The investigation includes~~federal securities laws. We subsequently learned that the United States Department of Justice is investigating the same allegations. In addition, two foreign subsidiaries have been contacted by governmental authorities in their respective countries concerning their involvement in the United Nations Oil-for-Food Program. These investigations include periods prior to, as well as subsequent to, our acquisition of certain of the foreign operations involved in the ~~investigation.~~investigations. We may be subject to certain liabilities if violations are found regardless of whether they relate to periods before or subsequent to our acquisition. ~~In addition, one~~

We believe that both the domestic and foreign governmental authorities are investigating other companies connection with the United Nations Oil-for-Food Program.

We engaged outside counsel in February 2006 to conduct an investigation of our foreign ~~subsidiary’s operations is cooperating with a foreign governmental investigation of that site’s involvement~~subsidiaries’ participation in the United Nations Oil-for-Food program. This cooperation has included responding to an investigative trip by foreign authorities to the foreign subsidiary’s site, providing relevant documentation to these authorities and answering their questions. We are unable to predict how or if the foreign authorities will pursue this matter in the future. We believe that both the SEC and foreign authorities are investigating other companies from their actions arising from the United Nations Oil-for-Food program. We also understand that the U.S. Department of Justice is conducting its own investigationThe Audit Committee of the ~~same events underlying~~Board of Directors has been regularly monitoring this situation since the ~~SEC inquiry. We are in the process~~receipt of ~~reviewing and responding to~~ the SEC subpoena and ~~assessing the implications~~assumed direct oversight of the ~~foreign~~ investigation ~~including~~in January 2007. We currently expect this internal investigation will be completed during the ~~continuation~~second quarter of ~~a thorough~~2007.

Our internal ~~investigation. Our investigation remains ongoing. The~~ investigation has included, ~~and will include~~among other things, a detailed review of contracts with the Iraqi government under the United Nations Oil-for-Food Program during 1996 through 2003, a forensic review of the ~~period in question~~accounting records associated with these contracts, and ~~certain payments associated therewith, as well as other documents and information that might relate to Oil-for-Food transactions. Additionally, we have and will continue to conduct~~ interviews ~~with employees~~of persons with knowledge of the ~~contracts and~~events in question. Our investigation has found evidence to date that, during the years 2001 through 2003, certain non-U.S. personnel at the two foreign subsidiaries authorized payments in ~~question. While we have made substantial progress in~~connection with certain of our ~~internal investigation, we are still unable to make any definitive determination whether any inappropriate~~product sales under the United Nations Oil-for-Food Program totaling approximately€0.6 million, which were subsequently deposited by third parties into Iraqi-controlled bank accounts. These payments were ~~made~~not authorized under the United Nations Oil-for-Food Program and ~~accordingly~~were not properly documented in the subsidiaries’ accounting records, but were expensed as paid. During the course of the investigation, certain other potential issues involving non-U.S. personnel were identified at one of the foreign subsidiaries, which are ~~unable~~currently under review.

We have taken certain disciplinary actions against persons who engaged in misconduct, violated our ethics policies or failed to ~~predict~~cooperate fully in the ~~ultimate outcome~~investigation, including terminating the employment of ~~this matter.~~certain non-U.S. senior management personnel at one of the foreign subsidiaries. Certain other non-U.S. senior management personnel at that facility involved in the above conduct had been previously separated from our company for other reasons. Additional disciplinary actions may be taken as our investigation continues.

We will continue to fully cooperate in ~~both~~ the ~~SEC~~domestic and ~~the~~ foreign governmental investigations. ~~Both~~These investigations are in progress but, at this point, are incomplete. Accordingly, ifwe cannot predict the ~~SEC and/~~outcome of these investigations at this time. If the domestic or ~~the~~ foreign authorities take enforcement action with regard to these investigations, we may be required to pay fines, ~~take remedial compliance measures, further improve our existing compliance program,~~disgorge profits, consent to injunctions against future conduct or suffer other penalties, which could ~~potentially~~ materially ~~impact~~affect our business, financial ~~statements~~condition, results of operations and cash flows.

In March 2006, we initiated a process to determine our compliance posture with respect to U.S. export control laws and regulations. Upon initial investigation, it ~~appears~~appeared that some product transactions and technology transfers ~~may~~were not ~~technically have been~~re-exported in full compliance with U.S. export control laws and ~~regulations and require further review. With assistance from~~regulations. As a result, in conjunction with outside counsel, we are currently involved in a systematic process to conduct further review, ~~which we~~validation, and voluntary disclosure of export violations discovered as part of this review process. We currently believe this process will ~~take about 12 months to~~not be substantially complete until the end of 2008, given the complexity of the export laws and the ~~comprehensive~~current scope of ~~our~~the investigation. ~~We recently completed detailed audits with outside counsel of our compliance status over a five-year period at three U.S. plant sites.~~ Any ~~potential~~ violations of U.S. export control laws and regulations that are identified and disclosed to the U.S. government may result in civil or criminal penalties, including fines and/or other penalties. Because our review into this issue is ongoing, we are currently unable to determine the full extent of ~~potential~~any confirmed violations or determine the nature or total amount of potential penalties to which we might be subject to in the future. Given that the resolution of this matter is uncertain at this time, we are not able to reasonably estimate the maximum amount of liability that could result from final resolution of this matter. We cannot currently predict whether the ultimate resolution of this matter will have a material adverse effect on our business, including our ability to do business outside the U.S., or on our ~~consolidated~~ financial condition.

We have been involved as a potentially responsible party ~~(“PRP”)~~ at former public waste disposal sites that may be subject to remediation under pending government procedures. The sites are in various stages of evaluation by federal and state environmental authorities. The projected cost of remediation at these sites, as well as our alleged “fair share” allocation, is uncertain and speculative until all studies have been completed and the parties have either negotiated an amicable resolution or the matter has been judicially resolved. At each site, there are many other parties who have similarly been identified, and the identification and location of additional parties is continuing under applicable federal or state law. ~~We believe that many~~Many of the other parties identified are financially strong and solvent companies that appear able to pay their share of the remediation costs. Based on our information about the waste disposal practices at these sites and the environmental regulatory process in general, we believe that it is likely that ultimate remediation liability costs for each site will be apportioned among all liable parties, including site owners and waste transporters, according to the volumes and/or toxicity of the wastes shown to have been disposed of at the sites. We believe that our exposure for existing disposal sites will be less than $100,000.

We are also a defendant in several other lawsuits, including product liability claims, that are insured, subject to the applicable deductibles, arising in the ordinary course of business. Based on currently available information, we believe that we have adequately accrued estimated probable losses for such lawsuits.

Although none of the aforementioned potential liabilities can be quantified with absolute certainty except as otherwise indicated above, we have established reserves covering exposures relating to contingencies, to the extent believed to be reasonably estimable and probable, which we believe to be reasonable based on past experience and available facts. While additional exposures beyond these reserves could exist, they currently cannot be estimated. We ~~are also involved in a substantial number of labor claims.~~will continue to evaluate these potential contingent loss exposures and, if they develop, recognize expense as soon as such losses become probable and can be reasonably estimated.

We are also involved in ordinary routine litigation incidental to our business, none of which we believe to be material to our business, operations or overall financial condition. However, resolutions or dispositions of claims or lawsuits by settlement or otherwise could have a significant impact on our operating results for the reporting period in which any such resolution or disposition occurs.

~~taxes and provided for income taxes of $18.2 million, resulting in an effective tax rate of 40.5%~~32.7%. The effective tax rate varied from the U.S. federal statutory rate for the three ~~and nine~~ months ended ~~September 30, 2005~~March 31, 2006 primarily due to the net impact of foreign operations.

In July 2006, the FASB issued FIN No. 48, which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN No. 48, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. The determination is based on the technical merits of the position and presumes that each uncertain tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information.

The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. We adopted the provisions of FIN No. 48 on January 1, 2007.

The cumulative effect of adopting FIN No. 48 was an increase in tax reserves and a decrease of $29.8 million to opening retained earnings at January 1, 2007. Upon adoption, the amount of gross unrecognized tax benefits at January 1, 2007 was approximately $129 million. There are offsetting tax benefits of approximately $43 million associated with the correlative effects of transfer pricing adjustments, net operating losses and timing adjustments. The net liability for uncertain tax positions is $86.0 million. Of this amount $84.9 million, if recognized, would favorably impact our effective tax rate.

Interest and penalties related to income tax liabilities are included in income tax expense. The balance of accrued interest and penalties recorded on the balance sheet at January 1, 2007 was approximately $14 million.

The amount of unrecognized tax benefits did not materially change as of March 31, 2007. With limited exception, we are no longer subject to U.S. federal, state and local income tax audits for years through 2001 or non-U.S. income tax audits for years through 2000. Our U.S. income tax returns for 2002 through 2004 are currently under examination by the Internal Revenue Service (“IRS”) ~~substantially concluded its audit of our U.S. federal income tax returns for~~. It is reasonably possible that within the ~~years 1999 through 2001 during December 2005. Based on its audit work, the IRS has issued proposed adjustments to increase taxable income during 1999 through 2001 by $12.8 million,~~next 12 months we and to deny foreign tax credits of $2.4 million in the aggregate. The tax liability resulting from these proposed adjustments will be offset with foreign tax credit carryovers and other refund claims, which was approved by the Joint Committee on Taxation on July 24, 2006, and therefore should not result in a material future cash payment. We anticipate the final cash settlement of this examination will be completed by December 31, 2006. The effect of the adjustments to current and deferred taxes has been reflected in previously filed consolidated financial statements for the applicable periods.

During the third quarter of 2006, the IRS commenced an audit of our U.S. federal income tax returns for the years 2002 through 2004. While we expect that the upcoming IRS audit will be similar in scope to the recently completed examination, the upcoming audit may be broader. Furthermore, the preliminary results from the audit of 1999 through 2001 are not indicative of the future result of the audit of 2002 through 2004. The audit of 2002 through 2004 may result in additional tax payments by us, the amount of which may be material, but will not be known until that IRS audit is finalized.

In the course of the tax audit for the years 1999 through 2001, we identified record keeping issues that existed during the periods, which caused us to incur significant expense to substantiate our tax return items and address information and document requests made by the IRS. We expect to incur similar expenses in future periods with respect to the upcoming IRS audit of the years 2002 through 2004.

Due to the record keeping issues referred to above, the IRS has issued a Notice of Inadequate Records for the years 1999 through 2001 and may issue a similar notice for the years 2002 through 2004. While the IRS has agreed not to assess penalties for inadequacy of records with respect to the years 1999 through 2001, we have no assurance that the IRS will ~~not seek to assess such penalties~~resolve some or ~~other types~~all of ~~penalties with respect to~~ the ~~years 2002 through 2004. Such penalties could result in a material impact to~~matters presently under examination; however, an estimate of the ~~consolidated results~~range of ~~operations. Additionally, the record keeping issues noted above~~possible changes that may result from the examination cannot be made at this time. Additionally, we are currently under examination for various years in ~~future U.S. state~~Germany, Italy, Canada, the Netherlands and ~~local, as well as non-U.S., tax assessments of tax, penalties and interest which could~~Argentina. We do not expect any changes from these examinations to have a ~~material~~significant impact ~~to the consolidated~~on our financial condition or results of operations.

12. Segment Information

We are principally engaged in the worldwide design, manufacture, distribution and service of industrial flow management equipment. We provide pumps, valves and mechanical seals primarily for the petroleum industry, chemical-processing industry, power-generation industry, water industry, general industry and other industries requiring flow management products.

We have the following three divisions, each of which constitutes a business segment:

	•		Flowserve Pump ~~Division;~~Division (“FPD”);

	•		Flow Control ~~Division;~~Division (“FCD”); and

	•		Flow Solutions ~~Division.~~Division (“FSD”).

Each division manufactures different products and is defined by the type of products and services provided. Each division has a President, who reports directly to our Chief Executive Officer, and a Division ~~V.P.~~Vice President — Finance, who reports directly to our Chief Accounting Officer. For decision-making purposes, our Chief Executive Officer and other members of senior executive management use financial information generated and reported at the division level. Our corporate headquarters does not constitute a separate division or business segment.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our consolidated financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements, and notes thereto, and the other financial data included elsewhere in this Quarterly Report. The following discussion should also be read in conjunction with our audited consolidated financial statements, and notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our ~~2005~~2006 Annual Report.

EXECUTIVE OVERVIEW

We are an established leader in the fluid motion and control business, with a strong portfolio of pumping systems, valves, sealing solutions, automation and services in support of the ~~power,~~ oil and gas, chemical, power generation, water ~~mining~~treatment and ~~other~~ general industrial markets. These products are ~~critical in~~integral to the movement, control and protection of fluids in ~~our~~ customers’ critical processes, ~~regardless of the particular industry.~~whether it is a refinery, a power generation facility or a transportation pipeline. Our business model is heavily influenced by the capital spending of these industries for the placement of new products into service and for maintenance on existing facilities. ~~This original equipment business has been especially strong this year with the number of new exploration and refining projects that have been announced.~~ The worldwide installed base of our products is ananother important source of revenue, where ~~our~~ products are expected to ensure the maximum operating time of ~~the~~ many key industrial processes. The aftermarket business includes parts, service solutions, product life cycle solutions and other value added services, and is generally a higher margin business and a key component to our profitable growth.

We ~~have~~ experienced ~~steadily improving~~favorable conditions in ~~2005 and~~ 2006 in several of our core markets, ~~including~~specifically oil and gas, ~~chemical, power and general industries.~~which has continued through the first three months of 2007. The ~~rise of~~sustained increase in the price of crude oil and natural gas, in particular, has spurred capital investment ~~in the~~by oil and gas ~~market,~~companies, resulting in many new projects and expansion ~~opportunities. Although feedstock costs~~opportunities for us. Favorable market conditions have resulted in corresponding growth, much of which is in non-traditional areas of the world where new oil and gas reserves have been ~~rising~~discovered. We believe the outlook for our business remains favorable; however, we believe that oil and gas prices will fluctuate in the ~~chemical market, greater global demand is allowing companies to pass through pricing~~future and ~~strengthen~~such volatility could have a negative impact on our business in some or all of the ~~global market.~~geographical areas in which we conduct business. We ~~have also seen a resurgence of nuclear power, particularly~~and our customers are seeing rapid growth in the ~~Asian market~~Middle East and anAsia, with China providing a significant source of project growth as that country continues to develop. We continue to execute on our strategy to increase our presence in ~~coal-fired power plants across the globe.~~these regions to capture aftermarket business through our current installed base, as well as new projects and process plant expansions. The opportunity to increase our installed base of new products and drive recurring aftermarket business in future years is a critical by-product of these favorable market conditions.

We currently have approximately 14,000 employees in more than 56 countries. We continue to implement new Quick Response Centers (“QRCs”) to be better positioned as near to our customers as possible for service and support, as a means to capture the important aftermarket business. Our markets have improved and we see corresponding growth in our business, much of which is in non-traditional areas of the world where new oil and gas reserves have been discovered. While Although we have experienced ~~increased~~strong demand for our products and services in recent periods, we face challenges affecting many companies in our industry and/or with significant international operations.

We currently employ approximately 14,000 employees in more than 55 countries who are focused on six key strategies that reach across the business. See “Our Strategies” section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2006 Annual Report for a discussion of our six key strategies. We continue to ~~monitor~~build on our ~~core industries for changes and track global issues that could impact our performance. We and~~geographic breadth with the implementation of additional Quick Response Centers (“QRCs”) with the goal to be positioned as near to our customers ~~are seeing rapid growth~~as practicable for service and support in ~~Asia and the Middle East, with China providing a source of significant project growth. We have a strategy in place to increase our presence in China~~order to capture ~~the~~this important aftermarket business with our current installed base as well as to support new plant construction and expansions. In 2006, we expanded our presence in China through two new QRCs in Shenzhen and Shanghai, as well as a new greenfield manufacturing operation in Suzhou, which is expected to be operational in the first quarter of 2007, to support local service and low cost sourcing.

business. Along with ensuring that we have the local capability to sell, install and service our equipment in remote regions, it becomes ~~more~~equally imperative to continuously improve our global operations. Our global supply chain capability is being expanded to meet ~~the~~ global customer demands and ensure the quality and timely delivery of our ~~products while minimizing our input costs.~~products. Significant efforts are underway to reduce the supply base and drive processes across the ~~business~~divisions to find areas of synergy and cost reduction. In addition, we are improving our supply chain management capability to ensure weit can meet global customer demands. We continue to focus on improving on-time delivery and quality, while reducing warranty costs across our global operations through a focused Continuous Improvement Process (“CIP”) initiative. The goal of the CIP initiative is to maximize service fulfillment to ~~our~~ customers ~~(such~~such as on-time delivery, reduced cycle time and ~~quality)~~quality at the highest internal productivity. This program is a key factor in our margin expansion plans.

RECENT DEVELOPMENTS

On February 7, 2006, we received a subpoena from the SEC seeking documents and information relating primarily to products that two of our foreign subsidiaries delivered to Iraq from 1996 through 2003 under the United Nations Oil-for-Food Program. We ~~had a substantial number~~believe that the SEC’s investigation is focused primarily on whether any inappropriate payments were made to Iraqi officials in violation of ~~outstanding stock options granted in past years to employees and directors under our stock option plans which~~the federal securities laws. We subsequently learned that the United States Department of Justice is investigating the same allegations. In addition, two foreign subsidiaries have been ~~unexercisable for an extended period due~~contacted by governmental authorities in their respective countries concerning their involvement in the United Nations Oil-for-Food Program. These investigations include periods prior to, as well as subsequent to, our acquisition of certain of the ~~non-current status~~foreign operations involved in the investigations. We may be subject to certain liabilities if violations are found regardless of whether they relate to periods before or subsequent to our filings with the SEC. We reopened our stock option exercise program on September 29, 2006. As of October 31, 2006, optionees have exercised 1.6 million of these outstanding options. Approximately 1 million outstanding options remain to be exercised as of October 31, 2006, a small portion ofacquisition.

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~~which must be exercised by December 31, 2006. If~~ We believe that both the ~~holders of a large number of these options exercise, there may be some dilutive impact on our earnings per share~~domestic and ~~a positive impact~~foreign governmental authorities are investigating other companies connection with the United Nations Oil-for-Food Program.

We engaged outside counsel in February 2006 to ~~our cash flow; however, the impacts on our cash flow and earnings per share are dependent upon share price, the number of shares exercised and strike price of shares exercised.~~

~~The IRS substantially concluded its audit~~conduct an investigation of our U.S. federal income tax returns for the years 1999 through 2001 during December 2005. Based on its audit work, the IRS issued proposed adjustments to increase taxable income during 1999 through 2001 by $12.8 million, and to deny foreign ~~tax credits of $2.4 million~~subsidiaries’ participation in the ~~aggregate.~~United Nations Oil-for-Food program. The ~~tax liability resulting from these proposed adjustments will be offset with foreign tax credit carryovers~~Audit Committee of the Board of Directors has been regularly monitoring this situation since the receipt of the SEC subpoena and ~~other refund claims, which were approved by~~assumed direct oversight of the ~~Joint Committee on Taxation on July 24, 2006, and therefore should not result~~investigation in ~~a material future cash payment.~~January 2007. We ~~anticipate the final cash settlement of~~currently expect this ~~examination~~internal investigation will be completed ~~by December 31, 2006. The effect~~during the second quarter of 2007.

Our internal investigation has included, among other things, a detailed review of contracts with the Iraqi government under the United Nations Oil-for-Food Program during 1996 through 2003, a forensic review of the ~~adjustments~~accounting records associated with these contracts, and interviews of persons with knowledge of the events in question. Our investigation has found evidence to ~~current and deferred taxes has been reflected~~date that, during the years 2001 through 2003, certain non-U.S. personnel at the two foreign subsidiaries authorized payments in ~~previously filed consolidated financial statements for the applicable periods.~~

~~During the third quarter of 2006, the IRS commenced an audit~~connection with certain of our ~~U.S. federal income tax returns for~~product sales under the ~~years 2002 through 2004. While we expect that~~United Nations Oil-for-Food Program totaling approximately€0.6 million, which were subsequently deposited by third parties into Iraqi-controlled bank accounts. These payments were not authorized under the ~~upcoming IRS audit will be similar~~United Nations Oil-for-Food Program and were not properly documented in ~~scope to~~ the recently completed examination, the upcoming audit may be broader. Furthermore, the preliminary results from the audit of 1999 through 2001 are not indicative of the future result of the audit of 2002 through 2004. The audit of 2002 through 2004 may result in additional tax payments by us, the amount of which may be material,subsidiaries’ accounting records, but ~~will not be known until that IRS audit is finalized.~~

Inwere expensed as paid. During the course of the ~~tax audit~~investigation, certain other potential issues involving non-U.S. personnel were identified at one of the foreign subsidiaries, which are currently under review.

We have taken certain disciplinary actions against persons who engaged in misconduct, violated our ethics policies or failed to cooperate fully in the investigation, including terminating the employment of certain non-U.S. senior management personnel at one of the foreign subsidiaries. Certain other non-U.S. senior management personnel at that facility involved in the above conduct had been previously separated from our company for other reasons. Additional disciplinary actions may be taken as our investigation continues.

We will continue to fully cooperate in the ~~years 1999 through 2001,~~domestic and foreign governmental investigations. These investigations are in progress but, at this-point, are incomplete. Accordingly, we ~~identified record keeping issues that existed during~~cannot predict the ~~periods,~~outcome of these investigations at this time. If the domestic or foreign authorities take enforcement action with regard to these investigations, we may be required to pay fines, disgorge profits, consent to injunctions against future conduct or suffer other penalties, which ~~caused us~~could materially affect our business, financial condition, results of operations and cash flows.

In March 2006, we initiated a process to ~~incur significant expense to substantiate~~determine our ~~tax return items and address information and document requests made by the IRS. We expect to incur similar expenses in future periods~~compliance posture with respect to U.S. export control laws and regulations. Upon initial investigation, it appeared that some product transactions and technology transfers were not re-exported in full compliance with U.S. export control laws and regulations. As a result, in conjunction with outside counsel, we are currently involved in a systematic process to conduct further review, validation, and voluntary disclosure of export violations discovered as part of this review process. We currently believe this process will not be substantially complete until the ~~upcoming IRS audit~~end of 2008, given the complexity of the ~~years 2002 through 2004.~~

~~Due~~export laws and the current scope of the investigation. Any violations of U.S. export control laws and regulations that are identified and disclosed to the record keeping issues referred to above, the IRS has issued a Notice of Inadequate Records for the years 1999 through 2001 and may issue a similar notice for the years 2002 through 2004. While the IRS has agreed not to assess penalties for inadequacy of records with respect to the years 1999 through 2001, we have no assurance that the IRS will not seek to assess such penalties or other types of penalties with respect to the years 2002 through 2004. Such penalties could result in a material impact to the consolidated results of operations. Additionally, the record keeping issues noted aboveU.S. government may result in ~~future U.S. state and local, as well as non-U.S., tax assessments~~civil or criminal penalties, including fines and/or other penalties. Because our review into this issue is ongoing, we are currently unable to determine the full extent of ~~tax,~~any confirmed violations or determine the nature or total amount of potential penalties ~~and interest~~to which we might be subject to in the future. Given that the resolution of this matter is uncertain at this time, we are not able to reasonably estimate the maximum amount of liability that could result from final resolution of this matter. We cannot currently predict whether the ultimate resolution of this matter will have a material ~~impact~~adverse effect on our business, including our ability to do business outside the ~~consolidated results of operations.~~U.S. or on our financial condition.

RESULTS OF OPERATIONS — Three ~~and Nine~~ Months ended ~~September 30,~~March 31, 2007 and 2006 ~~and 2005~~

Consolidated Results

Bookings, Sales and Backlog

Three Months Ended September 30,

(Amounts in millions) 2006 2005

Bookings — continuing operations $ 892.0 $ 773.8
Bookings — discontinued operations — 20.4

Total bookings 892.0 794.2
Sales 770.8 649.5

Nine Months Ended September 30,

(Amounts in millions) 2006 2005

Bookings — continuing operations $ 2,682.6 $ 2,155.6
Bookings — discontinued operations — 74.5

Total bookings 2,682.6 2,230.1
Sales 2,177.5 1,956.8


	Three Months Ended March 31,
(Amounts in millions)	2007		2006

Bookings	$	1,088.8	$	878.6
Sales		803.4		653.9

We define a booking as the receipt of a customer order that contractually engages us to perform activities on behalf of our customer with regard to manufacture, service or support. ~~Total bookings~~Bookings for the three months ended ~~September 30, 2006~~March 31, 2007 increased by ~~$97.8~~$210.2 million, or ~~12.3%~~23.9%, as compared with the same period in ~~2005.~~2006. The increase includes currency benefits of approximately ~~$20~~

equipment bookings accounted for approximately three-quarters of the increase, most notably in FPD. Bookings for both FCD and ~~Flow Control Divisions.~~FSD also increased in North America and Asia Pacific.

Sales for the three months ended ~~September 30, 2006~~March 31, 2007 increased by ~~$121.3~~$149.5 million, or ~~18.7%~~22.9%, as compared with the same period in ~~2005.~~2006. The increase includes currency benefits of approximately ~~$19~~$35 million. Sales for the nine months ended September 30, 2006 increased by $220.7 million, or 11.3%, as compared with the same period in 2005. Currency had a negligible impact on sales for the nine-month period. The ~~increases are primarily~~increase is attributable to the strength in the oil and gas market, particularly in ~~the Middle East and~~ North America, ~~and~~ expansion ~~into~~in the Asia Pacific ~~region.~~region and significant increases in original equipment sales in both FPD and FCD. Strength in all valve markets also contributed to the sales increase.

Net sales to international customers, including export sales from the U.S., were approximately ~~66% and 65%~~64% of consolidated sales for the three ~~and nine~~ months ended ~~September 30, 2006, respectively,~~March 31, 2007, compared with approximately ~~64%~~62% for ~~each of~~ the same ~~periods~~period in ~~2005.~~2006. The ~~decrease~~increase in ~~2006~~2007 is due primarily to a ~~decline~~weakening of the U.S. dollar exchange rate against the Euro and the British pound during the three months ended March 31, 2007 as compared with the same period in ~~sales to Europe.~~2006.

Backlog represents the ~~accumulation~~value of aggregate uncompleted customer orders. Backlog of ~~$1.5~~$1.9 billion at ~~September 30, 2006~~March 31, 2007 increased by ~~$552.5~~$300.0 million, or ~~55.6%~~18.4%, as compared with December 31, ~~2005.~~2006. Currency effects provided an increase of approximately ~~$56~~$13 million. The increase resulted primarily from increased bookings during the ~~nine~~three months ended ~~September 30, 2006~~March 31, 2007, as discussed above. The increase in total bookings also reflects an increase in orders for large engineered products, which naturally have longer lead times, as well as expanded lead times at the request of certain customers.

Gross Profit and ~~Operating~~Gross Profit Margin

Three Months Ended September 30,

(Amounts in millions) 2006 2005

Gross profit $ 248.3 $ 211.2
Gross profit margin 32.2 % 32.5 %


	Nine Months Ended September 30,
							Three Months Ended March 31,
(Amounts in millions)	2006			2005			2007			2006

Gross profit	$	714.4		$	625.1		$	265.5		$	218.0
Gross profit margin		32.8	%		31.9	%		33.0	%		33.3	%

Our effective tax rate of 42.6% for the nine months ended September 30, 2006 increased from 40.5% for the same period in 2005. The increase is due primarily to the tax impact of operating activities in certain non-U.S. jurisdictions, including higher losses incurred through the third quarter of 2006 as compared with the same period in 2005, for which a tax benefit has not been recognized.

~~Net Earnings and Earnings Per Share~~

Three Months Ended September 30,

(Amounts in millions, except per share data) 2006 2005

Income from continuing operations $ 27.4 $ 5.2
Net earnings (loss) 28.2 (10.0 )
Net earnings per share from continuing operations — diluted 0.48 0.08
Net earnings (loss) per share — diluted 0.50 (0.19 )
Average diluted shares 57.1 56.5

Nine Months Ended September 30,

(Amounts in millions, except per share data) 2006 2005

Income from continuing operations $ 74.3 $ 26.6
Net earnings 75.1 4.0
Net earnings per share from continuing operations — diluted 1.29 0.47
Net earnings per share — diluted 1.31 0.07
Average diluted shares 57.0 56.6

Income from continuing operations for the three months ended September 30, 2006 increased by $22.2 million, as compared with the same period in 2005. The increase is primarily attributable to the $5.6 million increase in operating income and the $27.9 million decrease in loss on extinguishment of debt, partially offset by the $11.9 million increase in tax expense, as discussed above.

Income from continuing operations for the nine months ended September 30, 2006 increased by $47.7 million, as compared with the same period in 2005. The increase is attributable to the $33.5 million increase in operating income, the $10.6 million decrease in interest expense and the $27.5 million decrease in loss on extinguishment of debt, partially offset by the $37.0 million increase in tax expense, as discussed above.

Net income for the three and nine months ended September 30, 2005 was lower than income from continuing operations due to the loss from discontinued operations. This is primarily attributable to impairments of $17.6 million and $23.5 million recorded during the three and nine months ended September 30, 2005, respectively, for assets held for sale, which is included in discontinued operations.

~~Other Comprehensive Income (Loss)~~

Three Months Ended September 30,

(Amounts in millions) 2006 2005

Other comprehensive (loss) income $ (3.4 ) $ 1.9

Nine Months Ended September 30,

(Amounts in millions) 2006 2005

Other comprehensive income (loss) $ 21.9 $ (22.5 )

~~Other comprehensive income (loss) for the three months ended September 30, 2006 decreased by $5.3 million to expense of $3.4 million as compared with the same period in 2005, primarily reflecting~~reflects a decline in interest rate hedging ~~results due to movements in interest rates.~~

Other comprehensive income (loss) for the nine months ended September 30, 2006 increased by $44.4 million to income of $21.9 million as compared with the same period in 2005. The increase primarily reflects a strengthening of the Euro and British pound during the nine months ended September 30, 2006, as compared with a weakening during the same period in 2005.results.

2617

Business Segments

We conduct our business through three business segments that represent our major product ~~areas:~~types:

	•		~~Flowserve Pump Division (“FPD”)~~FPD for engineered pumps, industrial pumps and related services;

	•		~~Flow Control Division (“FCD”)~~FCD for industrial valves, manual valves, control valves, nuclear valves, valve actuators and related services; and

	•		~~Flow Solutions Division (“FSD”)~~FSD for precision mechanical seals and related services.

We evaluate segment performance and allocate resources based on each segment’s operating income. See Note 12 to our condensed consolidated financial statements included in this Quarterly Report for further discussion of our segments. The key operating results for our three business segments, FPD, FCD and FSD are discussed below.

Flowserve Pump Division

Through FPD, we design, manufacture and distribute highly engineered pumps, industrial pumps and pump systems (collectively referred to as “original equipment”). FPD also manufactures replacement parts and related equipment, and provides a full array of support services (collectively referred to as “aftermarket”). FPD has 27 manufacturing facilities worldwide, of which nine are located in North America, 11 in Europe, ~~four~~five in South America and ~~three~~two in Asia. FPD also has more than 5060 service centers, ~~which are either free standing or co-located~~including those located in a manufacturing facility. We believe that we are the largest pump manufacturer serving the oil and gas, chemical and power generation industries, and the third largest pump manufacturer overall.

Three Months Ended September 30,

(Amounts in millions) 2006 2005

Bookings $ 521.0 $ 436.5
Sales 401.3 322.0
Gross profit 107.9 90.0
Gross profit margin 26.9 % 27.9 %
Operating income 39.1 29.0
Operating income as a percentage of sales 9.7 % 9.0 %


	Nine Months Ended September 30,
							Three Months Ended March 31,
(Amounts in millions)	2006			2005			2007			2006

Bookings	$	1,546.2		$	1,138.6		$	658.2		$	495.6
Sales		1,116.3			995.1			418.7			328.1
Gross profit		309.1			268.2			117.0			94.3
Gross profit margin		27.7	%		27.0	%		27.9	%		28.7	%
Operating income		110.5			84.4			41.7			27.0
Operating income as a percentage of sales		9.9	%		8.5	%
Operating margin								10.0	%		8.2	%

~~industry. The Middle East regional market has contributed the most significant growth to EMA sales. Original equipment increased to approximately 60% of sales~~2006. Gross profit margin for the three months ended ~~September 30, 2006, as compared with approximately 52%~~March 31, 2007 of ~~sales in the same period in 2005.~~

Sales for the nine months ended September 30, 2006 increased by $121.2 million, or 12.2%, as compared with the same period in 2005. The increase includes currency benefits of less than $1 million. The increase is primarily attributable to EMA, which increased by $82.2 million, including negative currency effects of approximately $2 million and North America, which increased $34.2 million. Oil and gas sales to the Middle East region have contributed the most significant growth in EMA, while domestic oil and gas sales have contributed the most significant growth in North America. Original equipment increased to approximately 56% of sales for the nine months ended September 30, 2006, as compared with approximately 53% of sales in the same period in 2005.

~~Gross profit margin of 26.9% for the three months ended September 30, 2006~~27.9% decreased from ~~27.9%~~28.7% for the same period in ~~2005. The decrease is primarily attributable to a 45% increase in sales of~~2006. While both original equipment ~~which carries a lower margin, while~~and aftermarket sales ~~remained relatively constant. Increased costs were partially offset by process improvement and supply chain initiatives, which are driving more efficient processes and material costs savings.~~

~~Gross profit margin~~increased, original equipment sales growth exceeded the growth in aftermarket. As a result, original equipment sales increased to 58% of ~~27.7% for the nine months ended September 30, 2006 increased from 27.0%~~total sales as compared with 51% of total sales for the same period in ~~2005. The improvement is attributable to ongoing productivity and supply chain initiatives and increased sales, which favorably impacts our absorption of fixed costs.~~2006. Original equipment generally carries a lower margin than aftermarket.

Operating income for the three months ended ~~September 30, 2006~~March 31, 2007 increased by ~~$10.1~~$14.7 million, or ~~34.8%~~54.4%, as compared with the same period in ~~2005.~~2006. The increase includes currency benefits of approximately $1$2 million. The increase was due primarily to increased gross profit of ~~$17.9~~$22.7 million, partially offset by a $9.1 million increase in SG&A primarily related to increased ~~commission expenses on~~salaries, commissions, and travel in support of increased bookings and ~~sales, expenses related to stock options and increased information technology costs.~~sales.

~~2005.~~2006. The ~~increases are attributable~~improvement is due to increased sales in all regions, which ~~favorably~~positively impacts our absorption of fixed costs, and a ~~favorable~~sales mix shift in EMA toward more profitable aftermarket business. Gross margin was negatively impacted by implementation of ~~aftermarket sales and supply chain initiatives.~~a new enterprise resource planning system in EMA.

Operating income for the three months ended ~~September 30, 2006~~March 31, 2007 increased by ~~$2.6~~$1.5 million, or ~~11.3%~~6.4%, as compared with the same period in ~~2005.~~2006. This increase includes currency benefits of less than $1 million. The increase is due to a ~~$5.8~~$5.4 million increase in gross profit, partially offset by ~~increased SG&A due primarily to growth in our global engineering and sales teams.~~

~~Operating income for the nine months ended September 30, 2006 increased by $10.3 million, or 15.6%, as compared with the same period in 2005. Currency had~~ a ~~negligible impact on operating income for the period. The increase is primarily due to the $19.7~~$4.1 million increase in ~~gross profit, partially offset by increased~~ SG&A due primarily to growth in our global engineering and sales teams ~~and increases~~that occurred in ~~research and development costs.~~the latter part of 2006.

Backlog of ~~$74.4~~$84.9 million at ~~September 30, 2006~~March 31, 2007 increased by ~~$13.2~~$10.5 million, or ~~21.6%~~14.1%, as compared with December 31, ~~2005.~~2006. Currency ~~effects provided an increase~~had a negligible impact on backlog for the period. Backlog at March 31, 2007 and December 31, 2006 includes $19.3 million and $14.7 million, respectively, of ~~approximately $2 million.~~interdivision backlog (which is eliminated and not included in consolidated backlog). Backlog growth is primarily a result of ~~the~~ growth in original equipment bookings ~~discussed above.~~with longer lead times. Capacity expansions that were completed ~~during the quarter helped~~in 2006 continue to ~~significantly increase~~support increased shipments, primarily in North America and EMA, ~~and have helped to~~ limit the increase in ~~backlog. Capacity expansions were initiated during 2006 in order to support sales growth.~~backlog and reduce the percentage of past due backlog from prior year levels.

competition, fluctuations in foreign exchange rates and fluctuations in interest rates, among other factors. See “Cautionary Note Regarding Forward-Looking Statements.”

We had a substantial number of outstanding stock options granted in past years to employees and directors under our stock option plans which have been unexercisable for an extended period due to the non-current status of our filings with the SEC. We reopened our stock option exercise program on September 29, 2006. As of October 31, 2006, optionees have exercised 1.6 million of these outstanding options. Approximately 1 million outstanding options remain to be exercised as of October 31, 2006, a small portion of which must be exercised by December 31, 2006. If the holders of a large number of these options exercise, there may be some dilutive impact on our earnings per share and a positive impactmade no contributions to our ~~cash flow; however,~~U.S. pension plans during the ~~impacts on our cash flow and earnings per share are dependent upon share price,~~three months ended March 31, 2007. However, we expect to contribute approximately $20 million during the ~~number~~third quarter of ~~shares exercised and strike price of shares exercised.~~2007.

On September 29, 2006, ~~our~~the Board of Directors authorized a program to repurchase up to two million shares of our outstanding common stock. Shares may be repurchased to offset potentially dilutive effects of stock options issued under our ~~stock-based~~equity-based compensation programs. We ~~expect to commence~~repurchased 0.5 million shares for $25.3 million during the ~~program~~three months ended March 31, 2007, and settled 0.1 million shares purchased in ~~the fourth quarter~~late 2006 for $5.2 million. To date, we have repurchased a total of ~~2006.~~1.8 million shares. We expect to ~~fund~~conclude the program ~~using existing~~by the end of the second quarter of 2007.

On February 28, 2007, our Board of Directors authorized the payment of a quarterly cash dividend of $0.15 per share, which was paid on April 11, 2007 to shareholders of record as of March 28, 2007. While we currently intend to pay regular quarterly dividends in the foreseeable future, any future dividends will be reviewed individually and ~~cash provided~~declared by ~~operations, borrowings~~our Board of Directors at its discretion, dependent on its assessment of our financial condition and ~~stock option exercises.~~business outlook at the applicable time.

Acquisitions

We regularly evaluate acquisition opportunities of various sizes. The cost and terms of any financing to be raised in conjunction with any acquisition, including our ability to raise economical capital, is a critical consideration in any such evaluation.

Capital Expenditures

Capital expenditures were ~~$43.5~~$22.4 million for the ~~nine~~three months ended ~~September 30, 2006~~March 31, 2007 compared with ~~$25.5~~$12.5 million for the same period in ~~2005.~~2006. Capital expenditures ~~were funded primarily by operating cash flows.~~in 2007 are focused on capacity expansion, enterprise resource planning, information technology infrastructure and cost reduction opportunities. Capital expenditures in 2006 ~~are~~were focused on capacity expansion, enterprise resource planning application upgrades, information technology infrastructure and cost reduction opportunities. ~~Capital expenditures in 2005 were focused on new product development, information technology infrastructure and cost reduction opportunities.~~ For the full year ~~2006,~~2007, our capital expenditures are expected to be between approximately ~~$75~~$85 million and $90 million. Certain of our facilities may face capacity constraints in the foreseeable future, which may lead to higher capital expenditure levels.

Financing

~~New~~ Credit Facilities

On August 12, 2005, we entered into ~~New~~ Credit Facilities comprised of a $600.0 million term loan maturing on August 10, 2012 and a $400.0 million revolving line of credit, which can be utilized to provide up to $300.0 million in letters of credit, expiring on August 12, 2010. ~~Further,~~At March 31, 2007 and December 31, 2006, we ~~replaced~~had $85.0 million and $0 outstanding under the ~~letter~~revolving line of credit, ~~agreement that guaranteed our EIB credit facility (described below) with a letter~~respectively. We had outstanding letters of credit ~~issued as part~~ of ~~the New Credit Facilities.~~$90.5 million and $83.9 million at March 31, 2007 and December 31, 2006, respectively, which reduced borrowing capacity to $224.5 million and $316.1 million, respectively.

Borrowings under our ~~New~~ Credit Facilities bear interest at a rate equal to, at our option, either (1) the base rate (which is based on the greater of the prime rate most recently announced by the administrative agent under our ~~New~~ Credit Facilities or the Federal Funds rate plus 0.50%) or (2) LIBOR plus an applicable margin determined by reference to the ratio of our total debt to consolidated EBITDA, which as of ~~September 30, 2006~~March 31, 2007 was ~~1.75%~~1.5% for LIBOR borrowings.

The loans under our ~~New~~ Credit Facilities are subject to mandatory repayment with, in general:

	•		100% of the net cash proceeds of asset sales; and

	•		Unless we attain and maintain investment grade credit ratings:

	•		~~75% of our excess cash flow, subject to a reduction based on the ratio of our total debt to consolidated EBITDA;~~

	•o		50% of the proceeds of any equity offerings; and

	•o		100% of the proceeds of any debt issuances (subject to certain exceptions).

~~flows and the net proceeds from the sale of GSG, and optional prepayments of $0 and $5.0 million, respectively. We have no scheduled repayments~~ due in ~~2006, under our New Credit Facilities.~~both the third and fourth quarters of 2007.

~~EIB Credit Facility~~

~~On April 14, 2004, we and one of our European subsidiaries, Flowserve B.V., entered into an agreement with EIB, pursuant to which EIB agreed to loan us up to~~€70.0 million, with the ability to draw funds in multiple currencies, to finance, in part, specified research and development projects undertaken by us in Europe. Borrowings under the EIB credit facility bear interest at a fixed or floating rate of interest agreed to by us and EIB with respect to each borrowing under the facility. Loans under the EIB credit facility are subject to mandatory repayment, at EIB’s discretion, upon the occurrence of certain events, including a change of control or prepayment of certain other indebtedness. In addition, the EIB credit facility contains covenants that, among other things, limit our ability to dispose of assets related to the financed project and require us to deliver to EIB our audited annual financial statements within 30 days of publication. Our obligations under the ~~EIB credit facility are guaranteed by a letter of credit outstanding under our New~~ Credit Facilities ~~which costs 1.75% per annum.~~

~~In August 2004, we borrowed $85.0 million at a floating interest rate based on 3-month U.S. LIBOR that resets quarterly. As~~are unconditionally guaranteed, jointly and severally, by substantially all of ~~September 30, 2006, the interest rate was 5.32%. The maturity~~our existing and subsequently acquired or organized domestic subsidiaries and 65% of the amount drawn is June 15, 2011, but may be repaid at any time without penalty. Concurrent with borrowing the $85.0 million we entered into a derivative contract with a third party financial institution, swapped this principal amount to€~~70.6 million and fixed the LIBOR portion~~capital stock of ~~the interest rate to a fixed interest rate of 4.19% through the scheduled repayment date. Additional discussion of the derivative is included in Note 4~~certain foreign subsidiaries. In addition, prior to our ~~condensed consolidated financial statements, included in this Quarterly Report.~~obtaining and maintaining investment grade credit ratings, our and the guarantors’ obligations under the Credit Facilities are collateralized by substantially all of our and the guarantors’ assets.

Additional discussion of our ~~New~~ Credit Facilities, ~~EIB credit facility,~~ including amounts outstanding and applicable interest rates, is included in Note 54 to our condensed consolidated financial statements, included in this Quarterly Report.

We have entered into interest rate and currency swap agreements to hedge our exposure to cash flows related to ~~the credit facilities discussed above.~~our Credit Facilities. These agreements are more fully described in Note 43 to our condensed consolidated financial statements, included in this Quarterly Report, and in “Item 3. Quantitative and Qualitative Disclosures about Market Risk.”

Accounts Receivable Factoring

Through our European subsidiaries, we engage in non-recourse factoring of certain accounts receivable. The various agreements have different terms, including options for renewal and mutual termination clauses. Our Credit Facilities, which are fully described in

Note 11 to our consolidated financial statements, included in our 2006 Annual Report, limit factoring volume to $75.0 million at any given point in time as defined by our Credit Facilities.

Debt Covenants and Other Matters

Our ~~New~~ Credit Facilities contain ~~covenants requiring us to deliver to lenders~~ leverage and interest coverage financial ~~covenants and our audited annual and unaudited quarterly financial statements.~~covenants. Under the leverage covenant, the maximum permitted leverage ratio ~~steps~~stepped down ~~beginning with~~in the fourth quarter of 2006, with a further step-down beginning ~~with~~in the fourth quarter of 2007. Under the interest coverage covenant, the minimum required interest coverage ratio ~~steps~~stepped up ~~beginning with~~in the fourth quarter of 2006, with a further step-up beginning ~~with~~in the fourth quarter of 2007. Compliance with these financial covenants under our ~~New~~ Credit Facilities is tested ~~quarterly,~~quarterly.

Our Credit Facilities include events of default usual for these types of credit facilities, including nonpayment of principal or interest, violation of covenants, incorrectness of representations and ~~we were~~warranties, cross defaults and cross acceleration, bankruptcy, material judgments, ERISA events, actual or asserted invalidity of the guarantees or the security documents, and certain changes of control of our company. The occurrence of any event of default could result in ~~compliance~~the acceleration of our and the guarantors’ obligations under the Credit Facilities. We complied with the ~~financial~~ covenants ~~as of September 30, 2006.~~

We are required to furnish to our lenders within 50 days of the end of each of the first three quarters of each year our consolidated balance sheet, and related consolidated statements of operations, shareholders’ equity and cash flows. Our New Credit Facilities also contain covenants restricting our and our subsidiaries’ ability to dispose of assets, merge, pay dividends, repurchase or redeem capital stock and indebtedness, incur indebtedness and guarantees, create liens, enter into agreements with negative pledge clauses, make certain investments or acquisitions, enter into sale and leaseback transactions, enter into transactions with affiliates, make capital expenditures, engage in any business activity other than our existing business or any business activities reasonably incidental thereto. We were in compliance with all debt covenants under the New Credit Facilities as of September 30, 2006.through March 31, 2007.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s discussion and analysis of financial condition and results of operations are based on our condensed consolidated financial statements and related footnotes contained within this Quarterly Report. Our more critical accounting policies used in the preparation of the consolidated financial statements were discussed in our ~~2005~~2006 Annual Report. These critical policies, for which no significant changes have occurred in the first ~~nine~~three months of ~~2006,~~2007, include:

	•		Revenue Recognition;

	•		~~Allowance for Doubtful Accounts;~~

	•		~~Inventories and Related Reserves;~~

	•		Deferred Taxes, ~~and~~ Tax Valuation ~~Allowances;~~

	•		Allowances and Tax Reserves;

	•		~~Legal and Environmental Accruals;~~

	•		~~Warranty Accruals;~~Reserves for Contingent Loss;

	•		Retirement and Postretirement Benefits; and

	•		Valuation of Goodwill, Indefinite-Lived Intangible Assets and Other Long-Lived Assets.

The process of preparing financial statements in conformity with GAAP requires the use of estimates and assumptions to determine certain of the assets, liabilities, revenues and expenses. These estimates and assumptions are based upon what we believe is the best information available at the time of the estimates or assumptions. The estimates and assumptions could change materially as conditions within and beyond our control change. Accordingly, actual results could differ materially from those estimates. The significant estimates are reviewed quarterly with the Audit Committee of our Board of Directors.

Based on an assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, we believe that our condensed consolidated financial statements provide a meaningful and fair perspective of our consolidated financial condition and results of operations. This is not to suggest that other general risk factors, such as changes in worldwide demand, changes in material costs, performance of acquired businesses and others, could not adversely impact our consolidated financial condition, results of operations and cash flows in future periods. See “Cautionary Note Regarding Forward-Looking Statements” below.

ACCOUNTING DEVELOPMENTS

We have presented the information about accounting pronouncements not yet implemented in Note 1 to our condensed consolidated financial statements included in this Quarterly Report.

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements include statements concerning future financial performance, future debt and financing levels, investment objectives, implications of litigation and regulatory investigations, and other plans and objectives of management for future operations or economic performance, or assumptions or forecasts related thereto. These statements are only predictions. We caution that forward-looking statements are not guarantees. Actual events or our results of operations could differ materially from those expressed or implied, but not limited to, in forward-looking statements. Forward-looking statements are typically identified by the use of terms such as, “may,” “should,” “expect,” ~~“could,~~

	•		potential adverse consequences resulting from securities class action litigation and other litigation to which we are a party, such as litigation involving asbestos-containing material claims;

	•		~~SEC~~the domestic and foreign government investigations regarding our participation in the United Nations Oil-for-Food Program;

	•		our potential non-compliance with U.S. ~~export~~export/re-export control, economic sanctions and import laws and regulations;

	•		our risk associated with certain of our foreign subsidiaries conducting business operations and sales in certain countries that have been identified by the U.S. State Department as state sponsors of terrorism;

	•		increased tax liabilities resulting from a recent audit of our tax returns by the U.S. Internal Revenue Service, as well as potential costs and liabilities that may be associated with likely future audits;

	•		a portion of our bookings may not lead to completed sales, and we may not be able to convert bookings into revenues at acceptable profit margins, since such profit margins cannot be assured nor can they be necessarily assumed to follow historical trends;

	•		the recording of increased deferred tax asset valuation allowances in the future;

	•		an impairment in the carrying value of goodwill or other intangibles could adversely impact our consolidated financial condition and results of operations;

	•		economic, political and other risks associated with our international operations, including military actions or trade embargoes that could affect customer markets, including the continuing conflict in Iraq and its potential impact on Middle Eastern markets and global petroleum producers;

	•		our sales are substantially dependent upon the petroleum, chemical, power and water industries and any significant down turn in any one of these industries could adversely impact such sales;

	•		our operations are dependent upon third-party suppliers whose failure to perform timely could adversely affect our business operations;

	•		our dependence on our customers’ ability to make required capital investment and maintenance expenditures;

	•		risks associated with cost overruns on fixed-fee projects;

	•		the highly competitive markets in which we operate;

	•		environmental compliance costs and liabilities;

	•		work stoppages and other labor matters;

	•		our inability to protect our intellectual property in the U.S., as well as in foreign countries;

	•		difficulties in obtaining raw materials at favorable prices;

	•		the impact of a significant number of stock option exercises following the removal of the current suspension on the exercise of outstanding stock options that is somewhat mitigated by the stock repurchase program that was approved by the Board of Directors, which will be implemented during the fourth quarter of 2006;

	•		liabilities that result from product liability and warranty claims;

	•		our outstanding indebtedness and the restrictive covenants in the agreements governing our indebtedness limit our operating and financial flexibility; and

	•		our inability to continue to expand our market presence through acquisitions, and unforeseen integration difficulties or costs resulting from acquisitions we do complete.

These risks are more fully discussed in, and all forward-looking statements should be read in light of, all of the factors discussed in Part I. “Item 1A. Risk Factors” included in this Quarterly Report and in our ~~2005~~2006 Annual Report. The updated risk factors included in this Quarterly Report are presented in addition to the risk factors disclosed in the ~~2005~~2006 Annual Report, except to the extent modified in this Quarterly Report.

You are cautioned not to place undue reliance on any forward-looking statements included in this Quarterly Report. All forward-looking statements are made as of the date of this Quarterly Report and the risk that actual results will differ materially from the expectations expressed in this Quarterly Report may increase with the passage of time. In light of the significant uncertainties inherent in the forward-looking statements included in this Quarterly Report, the inclusion of such forward-looking statements should not be regarded as a representation by us or any other person that the objectives and plans set forth in this Quarterly Report will be achieved. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by reference to these risks and uncertainties. Each forward-looking statement speaks only as of the date of the particular statement, and we do not undertake to update any forward-looking statement.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

We have market risk exposure arising from changes in interest rates and foreign currency exchange rate movements.

Our earnings are impacted by changes in short-term interest rates as a result of borrowings under our ~~New~~ Credit Facilities, which bear interest based on floating rates. At ~~September 30, 2006,~~March 31, 2007, after the effect of interest rate swaps, we had ~~approximately $176.8~~$208.2 million of variable rate debt obligations outstanding under our Credit Facilities with a weighted average interest rate of ~~7.13%~~6.91%. A hypothetical change of ~~100- basis~~100-basis points in the interest rate for these borrowings, assuming constant variable rate debt levels, would have changed interest expense by ~~approximately $1.3~~$0.5 million for the ~~nine~~three months ended ~~September 30, 2006.~~March 31, 2007.

We are exposed to credit-related losses in the event of non-performance by counterparties to financial instruments including interest rate swaps, but we currently expect all counterparties will continue to meet their obligations given their creditworthiness. As of ~~September 30,~~both March 31, 2007 and December 31, 2006, we had ~~$470.0~~$435.0 million of notional amount in outstanding interest rate swaps with third parties with maturities through ~~June 2011 compared with $325.0 million as of~~ December ~~31, 2005.~~2009.

We employ a foreign currency hedging strategy to minimize potential losses in earnings or cash flows from unfavorable foreign currency exchange rate movements. These strategies also minimize potential gains from favorable exchange rate movements. Foreign currency exposures arise from transactions, including firm commitments and anticipated transactions, denominated in a currency other than an entity’s functional currency and from translation of foreign-denominated ~~revenues~~assets and ~~profits translated back~~liabilities into U.S. dollars.

dollar equivalent of ~~$326.5~~$337.6 million in outstanding forward contracts with third parties, compared with ~~$236.0~~$433.7 million at December 31, ~~2005.~~2006.

Generally, we view our investments in foreign subsidiaries from a long-term perspective, and therefore, do not hedge these investments. We use capital structuring techniques to manage our investment in foreign subsidiaries as deemed necessary.

We realized gains (losses) associated with foreign currency translation of ~~$(1.6)~~$4.8 million and ~~$0.7~~$5.4 million for the three months ended ~~September 30,~~March 31, 2007 and 2006, ~~and 2005, respectively, and $21.4 million and $(24.5) million for the nine months ended September 30, 2006 and 2005,~~ respectively, which are included in other comprehensive ~~income (loss).~~income. Transactional currency gains and losses arising from transactions outside of our sites’ functional currencies and changes in fair value of certain forward contracts are included in our consolidated results of operations. We realized foreign currency (losses) gains ~~(losses)~~ of ~~$(2.8)~~$(0.7) million and ~~$1.0~~$2.0 million for the three months ended ~~September 30,~~March 31, 2007 and 2006, ~~and 2005, respectively, and $4.0 million and $(8.2) million for the nine months ended September 30, 2006 and 2005,~~ respectively, which is included in other (expense) income, ~~(expense),~~ net in the accompanying condensed consolidated statements of income.

Item 4. Controls and Procedures.

~~Evaluation of~~ Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in ~~Rule~~Rules 13a-15(e) ~~under~~and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are controls and other procedures that are designed to ~~provide reasonable assurance~~ensure that the information that we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

In connection with the preparation of this Quarterly Report, our management, under the supervision of and with the participation of our Chief Executive Officer and our Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of ~~September 30, 2006. In making this evaluation, our management considered the material weaknesses described in our 2005 Annual Report, which was filed with the SEC on June 30, 2006.~~March 31, 2007. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were ~~not~~ effective at the reasonable assurance level as of ~~September 30, 2006.~~

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. As more fully described in “Management’s Report on Internal Control Over Financial Reporting” in Item 9A of our 2005 Annual Report, management identified the following material weaknesses in our internal control over financial reporting as of DecemberMarch 31, ~~2005, which also existed as of September 30, 2006:~~

We did not maintain: (1) effective controls over our period-end financial reporting processes, including controls over journal entries, account reconciliations, spreadsheets and accrued liabilities; (2) effective segregation of duties over automated and manual transaction processes; (3) effective controls over the completeness, accuracy and validity of revenue; (4) effective controls over the completeness, accuracy, validity and valuation of our inventory and related cost of sales transactions; (5) effective controls over the completeness, accuracy and validity of our accounts payable and related disbursements; and (6) effective controls over accounting for certain derivative transactions, based on criteria established in~~Internal Control — Integrated Framework~~ ~~issued by the Committee of Sponsoring Organizations of the Treadway Commission.~~

In light of the material weaknesses described above, we performed additional analyses and other procedures to ensure that our unaudited condensed consolidated financial statements included in this Quarterly Report were prepared in accordance with GAAP. As a result of these procedures, we believe that the unaudited condensed consolidated financial statements included in this Quarterly Report present fairly, in all material respects, our financial condition, results of operations and cash flows for the periods presented in conformity with GAAP.2007.

Changes in Internal Control Over Financial Reporting

Management identified changes in controls that have materially affected or are reasonably likely to materially affect internal control over financial reporting. The material weaknesses related to ineffective controls over the completeness, accuracy and valuation of stock-based employee compensation expense and ineffective controls over the accuracy and disclosure of our debt obligations as disclosed in our 2005 Annual ReportThere have been ~~adequately remediated as of September 30, 2006 by the following corrective measures:~~

(1) Expanded and strengthened the complement of finance organization professionals by creating and filling new positions through job rotations and external hires in the areas of financial reporting and accounting policies. Our expanded and strengthened finance organization helps ensure proper interpretation and application of complex accounting standards, such as those related to non-routine transactions arising from the modification of a stock option plan, as well as the timely and thorough independent review of complex non-routine transactions by senior finance professionals.

(2) Enhanced our controls over the classification of debt obligations maturing within one year and the related disclosures reflecting the timing of our future mandatory debt repayments. We improved our reconciliation procedures, which are designed to ensure that debt repayments maturing within one year are properly classified as current liabilities and implemented an additional checklist for debt disclosures to ensure that the related disclosures appropriately reflect the timing of future mandatory debt repayments.

We have evaluated the design of the improved controls described above, which have been placed into operation for a sufficient period of time, and tested their operating effectiveness. We have concluded that they are both designed and operating effectively as of September 30, 2006.

~~As noted above, there were~~no material changes in our internal control over financial reporting during the ~~three months~~quarter ended ~~September 30, 2006~~March 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

We are party to the legal proceedings that are described in Note 8 to our condensed consolidated financial statements included in “Item 1. Financial Statements.” In addition to the foregoing, we and our subsidiaries are named defendants in certain other lawsuits incidental to our business and are involved from time to time as parties to governmental proceedings all arising in the ordinary course of business. Although the outcome of lawsuits or other proceedings involving us and our subsidiaries cannot be predicted with certainty and the amount of any liability that could arise with respect to such lawsuits or other proceedings cannot be predicted accurately, management does not expect these matters to have a material effect on our financial position, operating results or cash flows.

We are a defendant in a large number of pending lawsuits (which include, in many cases, multiple ~~claimants and multiple defendants)~~claimants) that seek to recover damages for personal injury allegedly caused by exposure to asbestos-containing products manufactured and/or distributed by us in the past. ~~The asbestos-containing parts we used~~Any such products were encapsulated and used only as components of process equipment, and we do not believe that any emission of respirable asbestos fibers occurred during the use of this equipment. We believe that a high percentage of the applicable claims are covered by ~~available~~applicable insurance or indemnities from other companies.

On February 4, 2004, we received an informal inquiry from the SEC requesting the voluntary production of documents and information related to our February 3, 2004 announcement that we would restate our financial results for the nine months ended September 30, 2003 and the full years 2002, 2001 and 2000. On June 2, 2004, we were advised that the SEC had issued a formal order of private investigation into issues regarding this restatement and any other issues that arise from the investigation. On May 31, 2006, we were informed by the staff of the SEC that it had concluded this investigation without recommending any enforcement action against us.

~~During the quarter ended September 30,~~In 2003, related lawsuits were filed in federal court in the Northern District of Texas (the “Court”), alleging that we violated federal securities laws. Since the filing of these cases, which have been consolidated, the lead plaintiff has amended its complaint several times. The lead plaintiff’s current pleading is the fifth consolidated amended complaint (the “Complaint”). The Complaint alleges that federal securities violations occurred between February 6, 2001 and September 27, 2002 and names as defendants our company, C. Scott Greer, our former Chairman, President and Chief Executive Officer, Renee J. Hornbaker, our former Vice President and Chief Financial Officer, PricewaterhouseCoopers LLP, our independent registered public accounting firm, and Banc of America Securities LLC and Credit Suisse First Boston LLC, which served as underwriters for our two public stock offerings during the relevant period. The Complaint asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder, and Sections 11 and 15 of the Securities Act of 1933. The lead plaintiff seeks unspecified compensatory damages, forfeiture by Mr. Greer and Ms. Hornbaker of unspecified incentive-based or equity-based compensation and profits from any stock sales, and recovery of costs. On November 22, 2005, the Court entered an order denying the defendants’ motions to dismiss the Complaint. The case is currently set for trial on October 1, 2007. We continue to believe that the lawsuit is without merit and are vigorously defending the case.

On March 14, 2006, a shareholder derivative lawsuit was filed purportedly on our behalf in federal court in the Northern District of Texas. The lawsuit ~~names~~named as defendants Mr. Greer, Ms. Hornbaker, and ~~current~~the following board members Mr. Coble, Mr. Haymaker, ~~Jr., Lewis M.~~Mr. Kling, Mr. Rusnack, Mr. Johnston, Mr. Rampacek, Mr. Sheehan, Ms. Harris, Mr. Rollans and Mr. Bartlett. We ~~are~~were named as a nominal defendant. Based primarily on certain of the purported misstatements alleged in the above-described federal securities case, the plaintiff ~~asserts~~asserted claims against the defendants for breaches of fiduciary duty. The plaintiff ~~alleges~~alleged that the purported breaches of fiduciary duty occurred between 2000 and 2004. The plaintiff ~~seeks~~sought on our behalf an unspecified amount of damages, disgorgement by Mr. Greer and Ms. Hornbaker of salaries, bonuses, restricted stock and stock options, and recovery of attorneys’ fees and costs. Pursuant to a motion filed by us, the federal court dismissed that case on March 14, 2007, primarily on the basis that the case was not properly filed in federal court. On or about March 27, 2007, the same plaintiff re-filed essentially the same lawsuit naming the same defendants in the Supreme Court of the State of New York. We strongly believe that ~~the suit~~this new lawsuit was improperly filed in the Supreme Court of the State of New York as well and have filed a motion seeking dismissal of the case.

violation of the ~~Foreign Corrupt Practices Act. The investigation includes~~federal securities laws. We subsequently learned that the United States Department of Justice is investigating the same allegations. In addition, two foreign subsidiaries have been contacted by governmental authorities in their respective countries concerning their involvement in the United Nations Oil-for-Food Program. These investigations include periods prior to, as well as subsequent to, our acquisition of certain of the foreign operations involved in the ~~investigation.~~investigations. We may be subject to certain liabilities if violations are found regardless of whether they relate to periods before or subsequent to our acquisition. ~~In addition, one~~

We believe that both the domestic and foreign governmental authorities are investigating other companies connection with the United Nations Oil-for-Food Program.

We will continue to fully cooperate in ~~both~~ the ~~SEC~~domestic and ~~the~~ foreign governmental investigations. ~~Both~~These investigations are in progress but, at ~~this point,~~this-point, are incomplete. Accordingly, ifwe cannot predict the ~~SEC and/~~outcome of these investigations at this time. If the domestic or ~~the~~ foreign authorities take enforcement action with regard to these investigations, we may be required to pay fines, ~~take remedial compliance measures, further improve our existing compliance program,~~disgorge profits, consent to injunctions against future conduct or suffer other penalties, which could ~~potentially~~ materially ~~impact~~affect our business, financial ~~statements~~condition, results of operations and cash flows.

In March 2006, we initiated a process to determine our compliance posture with respect to U.S. export control laws and regulations. Upon initial investigation, it ~~appears~~appeared that some product transactions and technology transfers ~~may~~were not ~~technically have been~~re-exported in full compliance with U.S. export control laws and ~~regulations and require further review. With assistance from~~regulations. As a result, in conjunction with outside counsel, we are currently involved in a systematic process to conduct further review, ~~which we~~validation, and voluntary disclosure of export violations discovered as part of this review process. We currently believe this process will ~~take about 12 months to~~not be substantially complete until the end of 2008, given the complexity of the export laws and the ~~comprehensive~~current scope of the investigation. ~~We recently completed detailed audits with outside counsel of our compliance status over a five-year period at three U.S. plant sites.~~ Any ~~potential~~ violations of U.S. export control laws and regulations that are identified and disclosed to the U.S. government may result in civil or criminal penalties, including fines and/or other penalties. Because our review into this issue is ongoing, we are currently unable to determine the full extent of ~~potential~~any confirmed violations or determine the nature or total amount of potential penalties to which we might be subject to in the future. Given that the resolution of this matter is uncertain at this time, we are not able to reasonably estimate the maximum amount of liability that could result from final resolution of this matter. We cannot currently predict whether the ultimate resolution of this matter will have a material adverse effect on our business, including our ability to do business outside the ~~United States,~~U.S. or on our ~~consolidated~~ financial condition.

We have been involved as a ~~PRP~~potentially responsible party at former public waste disposal sites that may be subject to remediation under pending government procedures. The sites are in various stages of evaluation by federal and state environmental authorities. The projected cost of remediation at these sites, as well as our alleged “fair share” allocation, is uncertain and speculative until all studies have been completed and the parties have either negotiated an amicable resolution or the matter has been judicially resolved. At each site, there are many other parties who have similarly been identified, and the identification and location of additional parties is continuing under applicable federal or state law. ~~We believe that many~~Many of the other parties identified are financially strong and solvent companies that appear able to pay their share of the remediation costs. Based on our information about the waste disposal practices at these sites and the environmental regulatory process in general, we believe that it is likely that ultimate remediation liability costs for each site will be

4028

apportioned among all liable parties, including site owners and waste transporters, according to the volumes and/or toxicity of the wastes shown to have been disposed of at the sites. We believe that our exposure for existing disposal sites will be less than $100,000.

Although none of the aforementioned potential liabilities can be quantified with absolute certainty except as otherwise indicated above, we have established reserves covering exposures relating to contingencies, to the extent believed to be reasonably estimable and which we believe to be probable of loss based on past experience and available facts. While additional exposures beyond these reserves could exist, they currently cannot be estimated. We will continue to evaluate these potential contingent loss exposures and, if they develop, recognize expense as soon as such losses become probable and can be reasonably estimated.

Item 1A. Risk Factors.

~~This~~There are numerous factors that affect our business and results of operations, many of which are beyond our control. In addition to other information set forth in this Quarterly Report, ~~provides updates on five previously disclosed~~you should carefully read and consider “Item 1A. Risk Factors” in Part I, and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II of our 2006 Annual Report, which contain a description of significant factors that might cause the actual results of operations in future periods to differ materially from those currently expected or desired. Set forth below are two risk factors that ~~were presented~~have been modified or have materially changed from the risk factors discussed in our ~~2005~~2006 Annual Report. The updated risk factors noted below are presented in addition to the other risk factors disclosed in the 2005 Annual Report. All of our disclosed risk factors could materially affect our business, consolidated financial condition or future results. The risks described in ~~our~~this Quarterly Report and ~~2005~~in our 2006 Annual Report are not the only risks facing ~~us.~~our Company. Additional risks and uncertainties ~~not~~are currently ~~known~~deemed immaterial based on management’s assessment of currently available information, which remains subject to change, however, new risks that are currently unknown to us ~~or that we currently deem to be immaterial also~~ may surface in the future which materially adversely affect our business, ~~consolidated~~ financial condition, ~~and/~~operating results or ~~operating results.~~cash flow in the future.

We are currently subject to securities class action litigation, the unfavorable outcome of which might have a material adverse effect on our consolidated financial condition, results of operations and cash flows.

A number of putative class action lawsuits have been filed against us, certain of our former officers, our independent auditors and the lead underwriters of our most recent public stock offerings, alleging securities laws violations. We believe that these lawsuits, which have been consolidated, are without merit and are vigorously defending them and have notified our applicable insurers. We cannot, however, determine with certainty the outcome or resolution of these claims or the timing for their resolution. The consolidated securities case is currently set for trial on October 1, 2007. In addition to the expense and burden incurred in defending this litigation and any damages that we may suffer, our management’s efforts and attention may be diverted from the ordinary business operations in order to address these claims. If the final resolution of this litigation is unfavorable to us, our consolidated financial condition, results of operations and cash flows might be materially adversely affected if our existing insurance coverage is unavailable or inadequate to resolve the matter.

The ongoing ~~SEC~~domestic and foreign government ~~investigation~~investigations regarding our participation in the United Nations Oil-for-Food Program could materially adversely affect our Company.

On February 7, 2006, we received a subpoena from the SEC ~~regarding goods~~seeking documents and ~~services~~information relating primarily to products that ~~certain~~two of our foreign subsidiaries delivered to Iraq from 1996 through 2003 ~~during~~under the United Nations Oil-for-Food Program. ~~This~~We believe that the SEC’s investigation ~~includes a review of~~is focused primarily on whether any inappropriate payments were made to Iraqi officials in violation of the ~~Foreign Corrupt Practices Act. The investigation includes~~federal securities laws. We subsequently learned that the United States Department of Justice is investigating the same allegations. In addition, two foreign subsidiaries have been contacted by governmental authorities in their respective countries concerning their involvement in the United Nations Oil-for-Food Program. These investigations include periods prior to, as well as subsequent to, our acquisition of certain of the foreign operations involved in the ~~investigation.~~investigations. We may be subject to certain liabilities if violations are found regardless of whether they relate to periods before or subsequent to our acquisition.

~~In addition, one~~We believe that both the domestic and foreign governmental authorities are investigating other companies connection with the United Nations Oil-for-Food Program.

~~We believe that both the SEC and this foreign authority are investigating other companies from their actions arising from the “Oil-for-Food” program.~~

Nations Oil-for-Food Program and were not properly documented in the ~~early phases~~subsidiaries’ accounting records, but were expensed as paid. During the course of the investigation, certain other potential issues involving non-U.S. personnel were identified at one of the foreign subsidiaries, which are currently under review.

We have taken certain disciplinary actions against persons who engaged in misconduct, violated our ~~internal~~ethics policies or failed to cooperate fully in the investigation, ~~and~~including terminating the employment of certain non-U.S. senior management personnel at one of the foreign subsidiaries. Certain other non-U.S. senior management personnel at that facility involved in the above conduct had been previously separated from our company for other reasons. Additional disciplinary actions may be taken as ~~a result are unable to make any definitive determination whether any inappropriate payments were made and accordingly are unable to predict the ultimate outcome of this matter.~~our investigation continues.

We will continue to fully cooperate in ~~both~~ the ~~SEC~~domestic and ~~the~~ foreign governmental investigations. ~~Both~~These investigations are in progress but, at ~~this point,~~this-point, are incomplete. Accordingly, ifwe cannot predict the ~~SEC and/~~outcome of these investigations at this time. If the domestic or ~~the~~ foreign authorities take enforcement action with regard to these investigations, we may be required to pay fines, disgorge profits, consent to injunctions against future conduct or suffer other penalties which could have a material ~~adverse impact~~affect our ~~consolidated~~business, financial condition, results orof operations and cash flows.

Potential noncompliance with U.S. export control laws could materially adversely affect our ~~business.~~business

~~We have notified applicable U.S. governmental authorities of~~In March 2006, we initiated a process to determine our ~~plans~~compliance posture with respect to ~~investigate, analyze and, if applicable, disclose past potential violations of the~~ U.S. export control laws ~~through,~~and regulations. Upon initial investigation, it appeared that some product transactions and technology transfers were not re-exported in ~~general,~~full compliance with U.S. export control laws and regulations. As a result, in conjunction with outside counsel, we are currently involved in a systematic process to conduct further review, validation, and voluntary disclosure of export violations discovered as part of this review process. We currently believe this process will not be substantially complete until the end of 2008, given the complexity of the export laws and the current scope of ~~products, services~~the investigation. Any violations of U.S. export control laws and ~~technologies without the licenses possibly required by such authorities. If~~regulations that are identified and disclosed to the U.S. government may result in civil or criminal penalties, including fines and/or other penalties. Because our review into this issue is ongoing, we are currently unable to determine the full extent of any confirmed violations ~~are identified, confirmed and so disclosed,~~or determine the nature or total amount of potential penalties to which we ~~could~~might be subject to ~~substantial fines and other penalties affecting~~in the future. Given that the resolution of this matter is uncertain at this time, we are not able to reasonably estimate the maximum amount of liability that could result from final resolution of this matter. We cannot currently predict whether the ultimate resolution of this matter will have a material adverse effect on our business, including our ability to do business outside the ~~United States.~~

Our risks involved in conducting our international business operations include, without limitation, the risks associated with certain of our foreign subsidiaries autonomously conducting, under their own local authority and consistent with U.S. export laws, business operations and sales, which constitute approximately 1-2% of our consolidated global revenue, in Iran, Syria and Sudan, which have each been designated by the U.S. State Department as state sponsors of terrorism. Due to the growing political uncertainties associated with these countries, we have been planning to voluntarily withdraw, on a phased basis, from conducting new business in these countries since early in 2006. However, these subsidiaries will continue to honor existing contracts, commitments and warranty obligations that are in compliance with U.S. laws and regulations.

~~The Internal Revenue Service (“IRS”) is auditing our tax returns, and a negative outcome of the audit would require us to make additional tax payments that may be material.~~

We have recently concluded an IRS audit of our U.S. federal income tax returns for the years 1999 through 2001. Based on its audit work, the IRS has issued proposed adjustments to increase taxable income during 1999 through 2001 by $12.8 million, and to deny foreign tax credits of $2.4 million in the aggregate. The tax liability resulting from these proposed adjustments will be offset with foreign tax credit carryovers and other refund claims, and therefore should not result in a material future cash payment, pending final review by the Joint Committee on Taxation. We anticipate this review will be completed by December 31, 2006. The effect of the adjustments to current and deferred taxes has been reflected in previously filed financial statements.

During 2006, the IRS will commence an audit of our U.S. federal income tax returns for the years 2002 through 2004. While we expect that the upcoming IRS audit will be similar in scope to the recently completed examination, the upcoming audit may be broader. Furthermore, the preliminary results from the audit of 1999 through 2001 are not indicative of the future result of the audit of 2002 through 2004. The audit of 2002 through 2004 may result in additional tax payments by us, the amount of which may be material, but will not be known until that IRS audit is finalized.

In the course of the tax audit for the years 1999 through 2001, we have identified record keeping and other material internal control weaknesses, which caused us to incur significant expense to substantiate our tax return items and address information and document requests made by the IRS. We expect to incur similar expenses in future periods with respect to the upcoming IRS audit of the years 2002 through 2004.

~~A significant number of stock option exercises following the removal of the current suspension on stock option exercises would have a dilutive effect~~ on our ~~earnings per share.~~

We had a substantial number of outstanding stock options granted in past years to employees and directors under our stock option plans which have been unexercisable for an extended period due to the non-current status of our filings with the SEC. We reopened our stock option exercise program on September 29, 2006. As of October 31, 2006, optionees have exercised 1.6 million of these outstanding options. Approximately 1 million outstanding options remain to be exercised as of October 31, 2006, a small portion of which must be exercised by December 31, 2006. If the holders of a large number of these options exercise, there may be some dilutive impact on our earnings per share and a positive impact to our cash flow; however, the impacts on our cash flow and earnings per share are dependent upon share price, the number of shares exercised and strike price of shares exercised.

~~Furthermore, now that we are current with our SEC~~ financial reporting, officers, directors and holders of restricted shares may sell shares of our common stock into the public market pursuant to Rule 144 of the Securities Act of 1933. An increase in the number of shares of our common stock in the public market could adversely affect prevailing market prices. We expect that a number of our officers and directors may sell a portion of their shares of our common stock for various reasons, a key reason being to cover certain tax liabilities arising from various tranches of restricted stock that vested during periods when officers and directors were not able to sell their common stock to cover their applicable tax liability due to either our insider trading policy or our previous non-current filer status with the SEC. A few officers and directors with long service tenure are also selling stock following asset diversification advice as part of their pre-retirement planning. Based upon their current holdings and expressed intentions to us, if these sales occur, then such officers and directors would still hold a substantial portion of their pre-sale aggregate holdings of our common stock. Provided, however, sales of a substantial number of shares of our common stock in the public market by our officers and directors, or the perception that such sales may occur, could cause the market price of our common stock to decline.condition.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

As of May 1, 2005, due to the non-current status of our filings with the SEC in accordance with the Securities Exchange Act of 1934, our Registration Statements on Form S-8 were no longer available to cover offers and sales of securities to our employees and other persons. Since that date, the acquisition of interests in our common stock fund under our 401(k) Plan by plan participants may have been subject to the registration requirements of the Securities Act of 1933 or applicable state securities laws and may not have qualified for an available exemption from such requirements. Federal securities laws generally provide for a one-year rescission right for an investor who acquires unregistered securities in a transaction that is subject to registration and for which no exemption was available. As such, an investor successfully asserting a rescission right during the one-year time period has the right to require an issuer to repurchase the securities acquired by the investor at the price paid by the investor for the securities (or if such security has been disposed of, to receive damages with respect to any loss on such disposition), plus interest from the date of acquisition. The remedies and statute of limitations under state securities laws vary and depend upon the state in which the shares were purchased. These rights may apply to affected participants who acquired an interest in our common stock fund in our 401(k) Plan and their affected interest in this plan may involve up to 270,000 shares of our common stock acquired pursuant to the 401(k) Plan during 2005 and an additional 40,000 shares acquired during the three months ended September 30, 2006. Based on our current stock price, we believe that our current potential liability for rescission claims is not material to our consolidated financial condition or results of operations or cash flows; however, our potential liability could become material in the future if our stock price were to fall below participants’ acquisition prices for their interest in our common stock fund during the one-year period following the unregistered acquisitions. We are currently exploring various options to limit this potential liability.None.

During the third quarter of 2006, we issued an aggregate of 38,380 shares of restricted stock to directors pursuant to the 2004 Stock Compensation Plan. We believe these securities are not subject to registration under the “no sale” principle or were otherwise issued pursuant to exemptions from registration under Section 4(2) of the Securities Act of 1933 as transactions by an issuer not involving a public offering.

~~Issuer Purchases of Equity Securities~~

Total Number of Maximum Number of
Total Number Weighted Shares Purchased Shares That May Yet Be
of Shares Average Price as Part of Publicly Purchased Under the
Period Purchased (1) Paid per Share Announced Plan (2) Plan (2)
July 1-31, 2006 12,530 $ 53.19 N/A N/A
August 1-31, 2006 45 51.50 N/A N/A
September 1-30, 2006 66 51.25 N/A N/A

Total 12,641 $ 53.17 N/A N/A


~~(1)~~		~~Represents 12,641 shares that were tendered by employees to satisfy minimum tax withholding amounts for restricted stock.~~

~~(2)~~		On September 29, 2006, our Board of Directors approved a program to repurchase up to two million shares of our outstanding common stock; however, such plan will not be implemented until after the filing of this Quarterly Report.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Submission of Matters to a Vote of Security Holders.

At our 2005 annual meeting of shareholders held on August 24, 2006, Roger L. Fix and Mr. Kling were elected to serve until the 2006 annual meeting of shareholders. Mr. Johnston, Mr. Rampacek and Mr. Sheehan were elected to serve for three-year terms expiring in 2008. The following table sets forth the vote tabulation for the shares represented at the meeting.

Nominee Votes For Withhold Broker Non-votes
Term Expiring in 2006

Roger L. Fix 53,870,971 152,539 —
Lewis M. Kling 53,608,107 415,403 —
Term Expiring in 2008

Michael F. Johnston 53,830,840 192,670 —
Charles M. Rampacek 53,422,707 600,803 —
Kevin E. Sheehan 53,606,607 416,930 —

~~Additional directors whose terms of office as directors continued after the meeting are as follows:~~


~~Term Expiring in 2006~~		~~Term Expiring in 2007~~
~~Diane C. Harris~~		~~Christopher A. Bartlett~~
~~James O. Rollans~~		~~Hugh K. Coble~~
		~~George T. Haymaker, Jr.~~
		~~William C. Rusnack~~

The shareholders also voted on the approval of the amendments to three existing stock option and incentive plans. The following table sets forth the vote tabulation for the shares represented at the meeting.

Proposal Votes For Votes Against Abstain Broker Non-votes
Approval of Amendments to Three Existing Stock Option and Incentive Plans 51,581,533 2,361,785 80,192 —

At our 2006 annual meeting of shareholders held on August 24, 2006, Mr. Fix, Ms. Harris, Mr. Kling and Mr. Rollans were elected to serve for three-year terms expiring in 2009. The following table sets forth the vote tabulation for the shares represented at the meeting.

Nominee Votes For Withhold Broker Non-votes
Roger L. Fix 54,233,533 134,318 —
Diane C. Harris 53,968,531 399,320 —
Lewis M. Kling 54,234,494 133,357 —
James O. Rollans 52,739,465 1,628,386 —

~~Additional directors whose terms of office as directors continued after the meeting are as follows:~~


~~Term Expiring in 2008~~		~~Term Expiring in 2007~~
~~Michael F. Johnston~~		~~Christopher A. Bartlett~~
~~Charles M. Rampacek~~		~~Hugh K. Coble~~
~~Kevin E. Sheehan~~		~~George T. Haymaker, Jr.~~
		~~William C. Rusnack~~

None.

Item 5. Other Information.

~~None.~~Flowserve Corporation Officer Severance Plan

As previously disclosed, on December 14, 2006 our Board of Directors and its Organization and Compensation Committee approved a revised severance plan for our senior executive officers and other corporate officers (“Officers”). In May 2007, we finalized and executed the Flowserve Corporation Officer Severance Plan (the “Plan”) that, among other things, provides for certain benefits to our Officers if their employment is terminated as a result of a reduction in force or without cause. The Officers covered under the Plan will receive the following benefits, where eligible: (i) two years of then base salary, not including any other financial perquisites, payable bi-weekly in accordance with the Company’s regular payroll schedule; and (ii) an amount equivalent to one year annual incentive payment (“AIP”) at target payable when the next AIP bonus is payable to continuing Officers. In addition, in order to receive such payments, the Officers covered under the Plan must comply with one year “non-competition” agreements and must execute a release agreement that contains certain cooperation clauses. The Plan will automatically expire in five years from the adoption date unless renewed by the Organization and Compensation Committee. The Plan may be earlier modified or terminated by the Organization and Compensation Committee, subject to certain restrictions.

4430

Employment Agreement with Mark A. Blinn

As previously disclosed, in December 2006 we reached an agreement in principle with Mark A. Blinn, our Senior Vice President and Chief Financial Officer, subject to the finalization of a mutually agreeable written contract. On May 7, 2007, we entered into an Employment Agreement with Mr. Blinn (the “Agreement”). The Agreement, among other things, provides that if Mr. Blinn is not promoted to Chief Executive Officer upon the departure of Lewis M. Kling, our current President and Chief Executive Officer, or if another person is appointed Chief Operations Officer prior to Mr. Kling’s departure, then he may elect, within 30 days of receiving notification from us that he will not be so promoted, to resign and (i) Mr. Blinn’s then unvested stock options and restricted stock grants will immediately vest and (ii) Mr. Blinn will be eligible for severance benefits as if he was terminated without cause under the Plan. However, Mr. Blinn is obligated, if he elects to so resign, to continue to furnish up to an additional 120 days of transitional support to us, in his then current job function and at his then current salary, if requested by us. Additionally, the Agreement provides that, if Mr. Blinn dies or becomes “disabled,” as that term is defined in the Employment Agreement, and we terminate his employment, Mr. Blinn’s unvested stock options and restricted stock will immediately vest and Mr. Blinn (or his estate) would become eligible for severance benefits under the Plan.

Retirement of Messrs. Hugh K. Coble and George T. Haymaker, Jr.

As previously disclosed, Messrs. Hugh K. Coble and George T. Haymaker, Jr., current members of our board of directors whose terms expire at the upcoming annual shareholder meeting, having reached the ages of 72 and 69, respectively, will not stand for re-election at the meeting. Mr. Coble has served as a director since 1994 and Mr. Haymaker has served as a director since 1997. They will retire from the board upon expiration of their terms at the upcoming annual shareholder meeting, pursuant to the board of directors’ corporate governance guidelines regarding term limits.

Item 6. Exhibits.

Set forth below is a list of exhibits included as part of this Quarterly Report:


Exhibit No.		Description
3.1		Restated Certificate of Incorporation of Flowserve Corporation, filed as Exhibit 3(i) to ~~the Company’s~~Flowserve Corporation’s Current Report on Form 8-K/A, dated August 16, 2006.

3.6		Amended and Restated By-Laws of Flowserve Corporation, as amended, filed as Exhibit 3.9 to Flowserve Corporation’s Annual Report on Form 10-K for the year ended December 31, 2003.

10.1		Flowserve Corporation Officer Severance Plan, effective January 1, 2007, dated as of May 7, 2007.

10.2		Employment Agreement between Flowserve Corporation and Mark A. Blinn, dated as of May 7, 2007.

31.1		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

4531


New York		31-0267900

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

5215 N. O’Connor Blvd., Suite 2300, Irving, Texas		75039

(Address of principal executive offices)		(Zip Code)


	Three Months Ended March 31,
(Amounts in thousands)	2007			2006
Revenues	$	99,687		$	78,300
Gross profit		28,858			23,111
Income before provision for income taxes		19,451			14,084
Provision for income taxes		(6,467	)		(4,629	)

Net income	$	12,984		$	9,455


							Subtotal —													Subtotal -
	Flowserve		Flow		Flow		Reportable					Consolidated		Flowserve		Flow		Flow		Reportable					Consolidated
(Amounts in thousands)	Pump		Control		Solutions		Segments		All Other			Total		Pump		Control		Solutions		Segments		All Other			Total
Sales to external customers	$	400,226	$	257,317	$	111,877	$	769,420	$	1,337		$	770,757	$	418,229	$	267,573	$	116,516	$	802,318	$	1,082		$	803,400
Intersegment sales		1,037		554		11,014		12,605		(12,605	)		—		441		1,057		12,663		14,161		(14,161	)		—
Segment operating income		39,103		33,895		25,567		98,565		(38,161	)		60,404		41,736		36,391		25,128		103,255		(35,833	)		67,422


							Subtotal —
	Flowserve		Flow		Flow		Reportable					Consolidated
(Amounts in thousands)	Pump		Control		Solutions		Segments		All Other			Total
Sales to external customers	$	321,156	$	223,613	$	103,338	$	648,107	$	1,378		$	649,485
Intersegment sales		810		1,076		9,852		11,738		(11,738	)		—
Segment operating income		28,971		25,280		23,006		77,257		(22,446	)		54,811


							Subtotal —
	Flowserve		Flow		Flow		Reportable					Consolidated
(Amounts in thousands)	Pump		Control		Solutions		Segments		All Other			Total
Sales to external customers	$	1,113,178	$	726,075	$	334,250	$	2,173,503	$	3,970		$	2,177,473
Intersegment sales		3,102		1,944		31,828		36,874		(36,874	)		—
Segment operating income		110,487		87,284		76,209		273,980		(103,580	)		170,400


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ~~FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006~~


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ~~FOR THE TRANSITION PERIOD FROM~~to.


	Page			~~Page~~
	No.			~~No.~~
PART I —– FINANCIAL INFORMATION
Item 1. Financial Statements.	~~Financial Statements.~~
	Condensed Consolidated Statements of Income ~~(Loss) —~~– Three Months Ended ~~September 30,~~March 31, 2007 and 2006 ~~and 2005~~ (unaudited)			1
	Condensed Consolidated Statements of Comprehensive Income ~~(Loss) —~~– Three Months Ended ~~September 30,~~March 31, 2007 and 2006 ~~and 2005~~ (unaudited)			1
	~~Condensed Consolidated Statements of Income — Nine Months Ended September 30, 2006 and 2005 (unaudited)~~		2
	~~Condensed Consolidated Statements of Comprehensive Income (Loss) — Nine Months Ended September 30, 2006 and 2005 (unaudited)~~		2
	Condensed Consolidated Balance Sheets ~~— September 30, 2006~~– March 31, 2007 and December 31, ~~2005~~2006 (unaudited)		3
	2
Condensed Consolidated Statements of Cash Flows ~~— Nine~~– Three Months Ended ~~September 30,~~March 31, 2007 and 2006 ~~and 2005~~ (unaudited)	4
	3
Notes to Condensed Consolidated Financial Statements	5	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.		21	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.		36	25
Item 4. Controls and Procedures.	~~Controls and Procedures.~~	26		37
PART II —– OTHER INFORMATION
Item 1. Legal Proceedings.	~~Legal Proceedings.~~	27		39
Item 1A. Risk Factors.	~~Risk Factors.~~	29		41
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.		43	30
Item 3.	Defaults Upon Senior Securities.		43	30
Item 4.	Submission of Matters to a Vote of Security Holders.		44	30
Item 5. Other Information.	~~Other Information.~~	30		44
Item 6. Exhibits.		31
~~Exhibits.~~SIGNATURES	45
~~SIGNATURES~~			46
Officer Severance Plan
Employment Agreement - Mark A. Blinn
Certification Pursuant to Section 302
Certification Pursuant to Section 302
Certification Pursuant to Section 906
Certification Pursuant to Section 906


	Three Months Ended September 30,
(Amounts in thousands, except per share data)	2006			2005

Sales	$	770,757		$	649,485
Cost of sales		522,427			438,269

Gross profit		248,330			211,216
Selling, general and administrative expense		187,926			156,405

Operating income		60,404			54,811
Interest expense		(16,385	)		(18,972	)
Interest income		1,634			1,335
Loss on early extinguishment of debt		(25	)		(27,856	)
Other (expense) income, net		(1,810	)		365

Earnings before income taxes		43,818			9,683
Provision for income taxes		16,440			4,500

Income from continuing operations		27,378			5,183
Discontinued operations, net of tax		805			(15,133	)

Net earnings (loss)	$	28,183		$	(9,950	)


Earnings (loss) per share:
Basic:
Continuing operations	$	0.49		$	0.09
Discontinued operations		0.02			(0.27	)

Net earnings (loss)	$	0.51		$	(0.18	)

Diluted:
Continuing operations	$	0.48		$	0.08
Discontinued operations		0.02			(0.27	)

Net earnings (loss)	$	0.50		$	(0.19	)


Sales	$	21.6
Cost of sales		20.0
Selling, general and administrative expense		22.3
Interest expense		0.2

Earnings before income taxes		(20.9	)
Income tax benefit		(5.8	)

Results for discontinued operations, net of tax	$	(15.1	)


Sales	$	76.3
Cost of sales		63.6
Selling, general and administrative expense		42.4
Interest expense		0.6
Other income, net		(0.1	)

Earnings before income taxes		(30.4	)
Income tax benefit		(7.7	)

Results for discontinued operations, net of tax	$	(22.7	)


	Three Months Ended
(Amounts in thousands, except per share data)	September 30, 2005

Net loss, as reported	$	(9,950	)
Restricted stock compensation expense included in net loss, net of tax		4,644
Less: Stock-based employee compensation expense determined under fair value method for all awards, net of tax		(5,297	)

Pro forma net loss	$	(10,603	)


Net loss per share — basic:
As reported	$	(0.18	)
Pro forma		(0.19	)
Net loss per share — diluted:
As reported	$	(0.19	)
Pro forma		(0.19	)


	Nine Months Ended
(Amounts in thousands, except per share amounts)	September 30, 2005

Net earnings, as reported	$	3,986
Restricted stock compensation expense included in net earnings, net of tax		7,069
Less: Stock-based employee compensation expense determined under fair value method for all awards, net of tax		(9,017	)

Pro forma net earnings	$	2,038


Net earnings per share — basic:
As reported	$	0.07
Pro forma		0.04
Net earnings per share — diluted:
As reported	$	0.07
Pro forma		0.04


	Nine Months Ended September 30, 2006
						Remaining
				Weighted Average		Contractual Life (in		Aggregate Intrinsic
	Shares			Exercise Price		years)		Value (in millions)

Number of shares under option:
Outstanding — beginning of year		2,966,326		$	23.00
Granted		286,850			49.54
Exercised		—			—
Cancelled		(6,923	)		33.73
Modified (1)		89,404			24.55

Outstanding — end of period		3,335,657		$	25.31		3.8	$	84.4

Exercisable — end of period		2,644,383		$	22.25		2.5	$	58.8


	Three Months Ended
(Amounts in thousands, except per share data)	September 30, 2006

Stock-based compensation expense, before taxes (1)	$	1,680
Related income tax benefit		(105	)

Stock-based compensation expense, net of tax	$	1,575


	U.S.						Non-U.S.						Postretirement
	Defined Benefit Plans						Defined Benefit Plans						Medical Benefits						U.S.						Non-U.S.						Postretirement
(Amounts in millions)	2006			2005			2006			2005			2006			2005			Defined Benefit Plans						Defined Benefit Plans						Medical Benefits
																			2007			2006			2007			2006			2007			2006
Net periodic cost
Service cost	$	3.7		$	3.7		$	0.9		$	0.8		$	—		$	—		$	3.7		$	3.7		$	1.0		$	0.9		$	—		$	—
Interest cost		3.8			3.9			2.5			2.6			1.0			1.0			4.1			3.8			2.9			2.5			1.0			1.0
Expected return on plan assets		(3.9	)		(4.1	)		(1.4	)		(1.4	)		—			—			(4.3	)		(3.9	)		(1.8	)		(1.4	)		—			—
Curtailments/settlements		—			(0.1	)		—			—			—			—
Amortization of unrecognized net loss		1.6			1.3			0.6			0.3			0.3			0.2			1.4			1.6			0.4			0.6			0.3			0.3
Amortization of prior service cost (benefit)		(0.3	)		(0.4	)		—			—			(1.1	)		(1.0	)
Amortization of prior service benefit																				(0.3	)		(0.3	)		—			—			(1.1	)		(1.1	)

Net cost recognized	$	4.9		$	4.3		$	2.6		$	2.3		$	0.2		$	0.2		$	4.6		$	4.9		$	2.5		$	2.6		$	0.2		$	0.2


	Three Months Ended September 30,

(Amounts in millions, except per share data)	2006		2005

Income from continuing operations	$	27.4	$	5.2
Net earnings (loss)		28.2		(10.0	)
Net earnings per share from continuing operations — diluted		0.48		0.08
Net earnings (loss) per share — diluted		0.50		(0.19	)
Average diluted shares		57.1		56.5

	•		obligations under our defined benefit pension plans;

	•		~~liabilities, including rescission rights, potentially resulting from issuances of interests in our Flowserve Corporation Retirement Savings Plan;~~


(Amounts in millions)
Euro	$	3.5
Swiss franc		2.4
British pound		1.0
Indian rupee		0.9
Singapore dollar		0.7
Australian dollar		0.5
Canadian dollar		0.5
Mexican peso		0.5
Argentina peso		0.2
Brazil real		0.2
Venezuelan bolivar		0.2
Saudi Arabian riyal		0.1
All other		0.5

Total	$	11.2


Nominee	Votes For	Withhold	Broker Non-votes
Term Expiring in 2006
Roger L. Fix	53,870,971	152,539	—
Lewis M. Kling	53,608,107	415,403	—
Term Expiring in 2008
Michael F. Johnston	53,830,840	192,670	—
Charles M. Rampacek	53,422,707	600,803	—
Kevin E. Sheehan	53,606,607	416,930	—


Proposal	Votes For		Votes Against		Abstain		Broker Non-votes
Approval of Amendments to Three Existing Stock Option and Incentive Plans		51,581,533		2,361,785		80,192		—


	FLOWSERVE CORPORATION (Registrant)
Date: ~~November~~May 9, ~~2006~~2007	/s/ Lewis M. Kling
	Lewis M. Kling
	President, ~~and~~ Chief Executive Officer and Director


Date: ~~November~~May 9, ~~2006~~2007	/s/ Mark A. Blinn
	Mark A. Blinn
	Senior Vice President and Chief Financial Officer