10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x     Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended January 31, 2006

or

o     Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from     to

Commission File Number 1- 4311

PALL CORPORATION

(Exact name of registrant as specified in its charter)

New York	11-1541330
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
2200 Northern Boulevard, East Hills, NY	11548
(Address of principal executive offices)	(Zip Code)

(516) 484-5400

(Registrant’s telephone number, including area code)

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

          Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer Accelerated filer Non-accelerated filer

          Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes      No

          The number of shares of the registrant’s common stock outstanding as of March 7, 2006 was 124,922,454.

Table of Contents

		Page No.
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets at January 31, 2006 and July 31, 2005.	3
	Condensed Consolidated Statements of Earnings for the three and six months ended January 31, 2006 and January 31, 2005.	4
	Condensed Consolidated Statements of Cash Flows for the six months ended January 31, 2006 and January 31, 2005.	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	28
Item 4.	Controls And Procedures.	28
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings.	29
Item 4.	Submission of Matters to a Vote of Security Holders.	31
Item 6.	Exhibits.	31
SIGNATURES		32

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PALL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)

		Jan. 31, 2006			July 31, 2005
ASSETS
Current assets:
Cash and cash equivalents	$	227,998		$	164,928
Accounts receivable		431,169			493,650
Inventories		417,035			365,929
Prepaid expenses		27,535			21,858
Other current assets		115,656			114,027
Total current assets		1,219,393			1,160,392
Property, plant and equipment		615,391			608,758
Goodwill		245,908			252,904
Intangible assets		54,018			50,004
Other non-current assets		199,844			193,243
Total assets	$	2,334,554		$	2,265,301
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and other current liabilities	$	361,311		$	372,553
Income taxes		52,609			58,928
Current portion of long-term debt		1,520			1,359
Notes payable		26,937			24,299
Total current liabilities		442,377			457,139
Long-term debt, net of current portion		518,109			510,161
Deferred taxes and other non-current liabilities		180,148			158,024
Total liabilities		1,140,634			1,125,324
Stockholders’ equity:
Common stock, par value $.10 per share		12,796			12,796
Capital in excess of par value		130,534			121,934
Retained earnings		1,093,996			1,066,848
Treasury stock, at cost		(80,823	)		(90,878	)
Stock option loans		(1,551	)		(1,808	)
Accumulated other comprehensive income:
Foreign currency translation		86,447			80,412
Minimum pension liability		(49,353	)		(49,353	)
Unrealized investment gains		2,099			33
Unrealized loss on derivatives		(225	)		(7	)
		38,968			31,085
Total stockholders’ equity		1,193,920			1,139,977
Total liabilities and stockholders’ equity	$	2,334,554		$	2,265,301

See accompanying notes to condensed consolidated financial statements.

3

PALL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended				Six Months Ended
		Jan. 31, 2006		Jan. 31, 2005		Jan. 31, 2006		Jan. 31, 2005
Net sales	$	478,436	$	469,473	$	909,598	$	884,205
Cost of sales		252,618		244,541		482,103		459,401
Gross profit		225,818		224,932		427,495		424,804
Selling, general and administrative expenses		159,136		157,765		308,843		303,445
Research and development		14,398		13,907		27,464		27,620
Restructuring and other charges, net		3,736		5,438		3,686		10,961
Interest expense, net		5,642		6,146		11,381		11,853
Earnings before income taxes		42,906		41,676		76,121		70,925
Income taxes		10,470		9,631		18,575		17,181
Net earnings	$	32,436	$	32,045	$	57,546	$	53,744
Earnings per share:
Basic	$	0.26	$	0.26	$	0.46	$	0.43
Diluted	$	0.26	$	0.26	$	0.46	$	0.43
Dividends declared per share	$	0.11	$	0.10	$	0.21	$	0.19
Average shares outstanding:
Basic		125,225		124,482		125,045		124,400
Diluted		126,090		125,457		125,879		125,330

See accompanying notes to condensed consolidated financial statements.

4

PALL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Six Months Ended
		Jan. 31, 2006			Jan. 31, 2005
Operating activities:
Net earnings	$	57,546		$	53,744
Adjustments to reconcile net earnings to net cash provided by operating activities:
Restructuring and other charges, net		3,686			10,961
Depreciation and amortization of long lived assets		47,298			45,030
Non-cash stock compensation		5,717			357
Excess tax benefits from stock based compensation arrangements		(308	)		—
Other		993			1,672
Changes in operating assets and liabilities, net of effects of acquisitions and dispositions		10,088			(45,990	)
Net cash provided by operating activities		125,020			65,774
Investing activities:
Acquisitions of businesses, net of disposals and cash acquired		(75	)		(31,905	)
Proceeds from sale of strategic investments		7,387			915
Capital expenditures		(52,021	)		(39,983	)
Proceeds from sale of fixed assets		3,227			2,185
Proceeds from sale of retirement benefit assets		22,494			14,920
Purchases of retirement benefit assets		(39,351	)		(14,911	)
Other		(1,273	)		(1,860	)
Net cash used by investing activities		(59,612	)		(70,639	)
Financing activities:
Notes payable		2,500			(260	)
Long-term borrowings		10,055			145,365
Repayments of long-term debt		(904	)		(104,483	)
Net proceeds from stock plans		14,553			34,374
Excess tax benefits from stock based compensation arrangements		308			—
Purchase of treasury stock		(5,750	)		(29,998	)
Payment to terminate interest rate swaps		—			(10,044	)
Dividends paid		(24,885	)		(22,233	)
Net cash (used)/provided by financing activities		(4,123	)		12,721
Cash flow for period		61,285			7,856
Cash and cash equivalents at beginning of year		164,928			207,277
Effect of exchange rate changes on cash		1,785			12,003
Cash and cash equivalents at end of period	$	227,998		$	227,136
Supplemental disclosures:
Interest paid	$	14,097		$	12,564
Income taxes paid (net of refunds)		25,487			37,965
Non-cash investing and financing activities:
Capital lease entered into for building		—			6,439
Note receivable (Note 4)		2,560			—

See accompanying notes to condensed consolidated financial statements.

5

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(Unaudited)

NOTE 1 - BASIS OF PRESENTATION

          The condensed consolidated financial information included herein is unaudited. Such information reflects all adjustments of a normal recurring nature, which are, in the opinion of management, necessary to present fairly the Company’s consolidated financial position, results of operations and cash flows as of the dates and for the periods presented herein. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2005 (“2005 Form 10-K”).

          Certain prior year amounts have been reclassified to conform to the current year presentation.

NOTE 2 – STOCK-BASED PAYMENT

          The Company currently has four stock-based employee compensation plans (collectively, the “Stock Plans”), which are described more fully below under the captions Stock Purchase Plans and Stock Option Plans.  Prior to August 1, 2005, the Company accounted for stock-based compensation related to those Stock Plans under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”), and related Interpretations, as permitted by Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”).  As such, there was no stock-based employee compensation cost recognized in net earnings relating to any shares under the Employee Stock Purchase Plan (“ESPP”) or stock options granted under any of the existing or terminated stock option plans prior to August 1, 2005 whereby stock options were granted with an exercise price equal to the fair market value on the date of grant.  There was, however, stock-based employee compensation cost recognized in net earnings for periods prior to August 1, 2005 resulting from the issuance of restricted stock units under the 2005 Stock Compensation Plan (“2005 Plan”) and the Management Stock Purchase Plan (“MSPP”).

          Effective August 1, 2005, the Company adopted the fair value recognition provisions of SFAS No. 123(R), Share-Based Payment (“SFAS No. 123(R)”), using the modified-prospective-transition method.  Under that transition method, compensation cost recognized for the three and six months ended January 31, 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of, August 1, 2005, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for the vested portion of share-based payments granted subsequent to August 1, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R).  Results for prior periods have not been restated.

          The Company adopted the 2005 Plan (described in more detail below) in contemplation of the change in the accounting for share-based payments required by SFAS No. 123(R).  Specifically, the 2005 Plan provides the Company with the ability to award stock units with various restrictions and vesting requirements. The detailed components of stock based compensation expense recorded in the statement of earnings for the three and six months ended January 31, 2006 and January 31, 2005 are illustrated in the table below.

	Three Months Ended				Six Months Ended
	Jan. 31, 2006		Jan. 31, 2005		Jan. 31, 2006		Jan. 31, 2005
Stock options	$	1,526	$	—	$	3,021	$	—
Restricted stock units		541		—		1,053		—
ESPP		590		—		973		—
MSPP		362		179		670		357
Total	$	3,019	$	179	$	5,717	$	357

           Stock based compensation expense related to stock options and the ESPP for the three and six months ended January 31, 2005 was not recorded in the statement of earnings, but had been disclosed in the pro forma disclosures as required by SFAS No. 123 and SFAS No. 148. The following table illustrates the impact of adopting SFAS No. 123(R) on August 1, 2005 on the Company’s earnings before income taxes, net earnings and earnings per share (which excludes the effect of certain changes to the Company’s stock plans under the 2005 plan such as the restricted stock units granted in contemplation of the change in accounting):

6

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands, except per share data)

(Unaudited)

	Three Months Ended Jan. 31, 2006		Six Months Ended Jan. 31, 2006
Impact on earnings before income taxes	$	2,116	$	3,994
Impact on net earnings		1,881		3,541
Impact on basic earnings per share	$	0.02	$	0.03
Impact on diluted earnings per share	$	0.01	$	0.03

          SFAS No. 123(R) also requires that excess tax benefits related to stock option exercises be reflected as financing cash inflows.  For the six months ended January 31, 2006, this treatment resulted in cash flows from financing activities of $308. The tax benefit recognized related to the total compensation cost for share-based payment arrangements totaled $533 and $1,020 for the three and six months ended January 31, 2006, respectively, and totaled $43 and $86 for the three and six months ended January 31, 2005, respectively. The actual tax benefit realized for the tax deductions from option exercise of the share-based payment arrangements totaled $3,293 and $4,905 for the three and six months ended January 31, 2006, respectively.

          The following table illustrates the effect on net earnings and earnings per share for the three and six months ended January 31, 2005 as if the Company had applied the fair value recognition provisions of SFAS No. 123 to options granted under the Company’s stock plans prior to adoption of SFAS No. 123(R) on August 1, 2005.  No pro forma disclosure has been made for periods subsequent to August 1, 2005 as all stock-based compensation has been recognized in net earnings.  For purposes of this pro forma disclosure and compensation cost recorded in the Company’s condensed consolidated financial statements, the value of the options is estimated using a Black-Scholes-Merton option-pricing formula and amortized to expense over the options’ service periods.

	Three Months Ended Jan. 31, 2005		Six Months Ended Jan. 31, 2005
Net earnings, as reported	$	32,045	$	53,744
Pro forma stock compensation expense, net of tax benefit		2,886		5,734
Pro forma net earnings	$	29,159	$	48,010
Earnings per share:
Basic- as reported	$	0.26	$	0.43
Basic- pro forma	$	0.23	$	0.39
Diluted- as reported	$	0.26	$	0.43
Diluted- pro forma	$	0.23	$	0.38

          The following weighted average assumptions were used in estimating the fair value of stock options granted during the three and six months ended January 31, 2006 and January 31, 2005:

	Three Months Ended						Six Months Ended
	Jan. 31, 2006			Jan. 31, 2005			Jan. 31, 2006			Jan. 31, 2005
Average fair value of stock-based compensation awards granted	$	7.41		$	7.68		$	7.43		$	7.68
Valuation assumptions:
Expected dividend yield		1.9	%		1.8	%		1.9	%		1.8	%
Expected volatility		27.0	%		31.1	%		27.0	%		31.1	%
Expected life (years)		5.0			5.0			5.0			5.0
Risk-free interest rate		4.3	%		3.7	%		4.3	%		3.7	%

          The Company has placed exclusive reliance on historical volatility in its estimate of expected volatility.  The Company used a sequential period of historical data equal to the expected term (or expected life) of the options using a simple average calculation based upon the daily closing prices of the aforementioned period. 

          The expected life (years) represents the period of time for which the options granted are expected to be outstanding.  This estimate was derived from historical share option exercise experience, which management believes provides the best estimate of the expected term.

7

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands, except per share data)

(Unaudited)

          As noted above, the following paragraphs describe each of the aforementioned stock-based compensation plans in detail:

Stock Purchase Plans

          During fiscal year 2000, the Company’s shareholders approved two stock purchase plans, the MSPP and the ESPP. Participation in the MSPP is limited to certain executives as designated by the Compensation Committee of the Board of Directors, which also established common stock ownership targets for participants. Participation in the ESPP is available to all employees except those that are included in the MSPP. 

          The purpose of the MSPP is to encourage key employees of the Company to increase their ownership of shares of the Company’s common stock by providing such employees with an opportunity to elect to have portions of their total annual compensation paid in the form of restricted units, to make cash purchases of restricted units and to earn additional matching restricted units which vest over a three year period for matches prior to August 1, 2003 and vest over four years for matches made thereafter. Such restricted units aggregated 780 and 619 as of January 31, 2006 and January 31, 2005, respectively. For the three months ended January 31, 2006 and January 31, 2005, approximately 32 and 28 vested restricted units, respectively, were distributed. For the six months ended January 31, 2006 and January 31, 2005, approximately 58 and 65 vested restricted units, respectively, were distributed. For the three months ended January 31, 2006 and January 31, 2005, participants’ deferred compensation and cash payments amounted to $439 and $696, respectively. For the six months ended January 31, 2006 and January 31, 2005, participants’ deferred compensation and cash payments amounted to $3,165 and $2,260, respectively.  Dividends are paid on unvested restricted units (in the form of additional restricted units) and vest over the remaining service period of the restricted units for which the dividends were recorded.  Dividends are paid on vested restricted units (in the form of additional restricted units) and are vested upon grant.

          The ESPP enables participants to purchase shares of the Company’s common stock through payroll deductions at a price equal to 85% of the lower of the market price at the beginning or end of each semi-annual stock purchase period. The semi-annual offering periods end in April and October.  A total of 207 shares were purchased under the ESPP for the semi-annual stock purchase period ended October 31, 2005.  Shares for the current semi-annual stock purchase period will be purchased on April 28, 2006, the end of the aforementioned current stock purchase period.

          Both plans provide for accelerated vesting if there is a change in control (as defined in the plans).  All of the above shares were issued from treasury stock.

Stock Option Plans

          The Company has adopted several plans that provide for the granting of stock options to employees and non-employee directors at option prices equal to the market price of the common stock at the date of grant.  On November 17, 2004, the Company’s shareholders approved the 2005 Plan, which had been developed in contemplation of adopting the provisions of SFAS No. 123(R).  As a result of such approval, the Compensation Committee (a) amended the 2001 Stock Option Plan for non-employee directors to reduce the total number of shares remaining available for grants from 261 to 150, and (b) terminated all other stock plans, except that options then outstanding thereunder remained in effect in accordance with their terms.  Up to 5,000 shares are issuable under the 2005 Plan.  Both plans provide for accelerated vesting if there is a change in control (as defined in the plans).   The 2005 Plan permits the Company to grant to its employees and non-employee directors other forms of equity compensation in addition to stock options (that is, restricted shares, restricted units, performance shares and performance units).

          The fair value of the restricted unit awards are determined by reference to the closing price of the stock on the date of the award, and are charged to earnings over the service periods during which the awards are deemed to be earned; one year, in the case of the annual award units to non-employee directors, and four years, in the case of units awarded to employees.  The annual award units granted to non-employee directors of the Company (and any related dividends paid in the form of additional units) are converted to shares once the director ceases to be a member of the Board.  A total of 14 annual award units were granted during the six months ended January 31, 2006, with a weighted-average fair market value of $27.89 per share. Restricted stock units granted to employees cliff-vest after the fourth anniversary of the date of grant.  Dividends paid on unvested restricted stock units vest at the same time as the restricted units for which the dividends were recorded.

8

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands, except per share data)

(Unaudited)

          The forms of options adopted provide that the options may not be exercised within one year from the date of grant, and expire if not completely exercised within 7 years from the date of grant. Generally, in any year after the first year, the options can be exercised with respect to only up to 25% of the shares subject to the option, computed cumulatively. The Company’s shareholders have approved all of the Company’s stock option plans.

          A summary of option activity for all stock option plans during the six months ended January 31, 2006 is presented below:

Options	Shares			Weighted-Average Exercise Price	Weighted-Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at August 1, 2005	4,302		$	20.27
Granted	16			28.41
Exercised	(120	)		18.86
Forfeited or Expired	(26	)		20.77
Outstanding at October 31, 2005	4,172			20.34
Granted	225			28.53
Exercised	(252	)		18.40
Forfeited or Expired	(56	)		20.77
Outstanding at January 31, 2006	4,089		$	20.91	6.2	$	27,227
Exercisable at January 31, 2006	2,544		$	19.99	5.9	$	19,276

          The total intrinsic value of options exercised during the three and six months ended January 31, 2006 was $2,308 and $3,419, respectively.  The total intrinsic value of options exercised during the three and six months ended January 31, 2005 was $8,773 and $8,185, respectively.

          A summary of restricted stock unit activity, excluding annual award units, for the 2005 Stock Plan during the six months ended January 31, 2006, is presented below:

	Shares			Weighted- Average Grant-Date Fair Value
Nonvested at August 1, 2005		261		$	30.07
Granted		4			28.71
Exercised		—			—
Forfeited		(4	)		30.83
Nonvested at October 31, 2005		261			30.04
Granted		55			28.66
Exercised		—			—
Forfeited		(3	)		30.83
Nonvested at January 31, 2006		313		$	29.79

As of January 31, 2006, there was $8,159 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the 2005 Stock Plan.  That cost is expected to be recognized over a weighted-average period of 3.5 years.  None of the restricted stock units vested during the six months ended January 31, 2006.

          As of January 31, 2006, 5,204 shares of common stock of the Company were reserved for the exercise of stock options and stock units. To the extent treasury shares are used to satisfy option exercises, these reserved shares will not be issued.

9

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands, except per share data)

(Unaudited)

NOTE 3 – ACQUISITIONS

          On November 30, 2004, the Company acquired the BioSepra Process Division (“Biosepra”) from Ciphergen Biosystems, Inc.  The purchase price was approximately $32,000, net of cash and debt assumed, subject to a post closing adjustment of the purchase price based upon certain quantitative thresholds as defined in the purchase agreement.  The adjustment to the purchase price was finalized on April 11, 2005, resulting in a reduction in the purchase price of approximately $1,100.  Biosepra develops, manufactures and markets chromatography sorbents for use in the purification of protein in drug development and production. 

          On January 21, 2005, the Company acquired the remaining interest in Euroflow (UK) of Stroud, England (“Euroflow”) which it did not already own. The purchase price was $1,466, net of cash. Euroflow manufactures pilot and production scale chromatography columns for the biotechnology industry. The Company has held exclusive global marketing and distribution rights to Euroflow chromatography columns and associated technologies since 2002. In addition, the Company had loans and advances totaling $9,255 outstanding from Euroflow at the date of acquisition.

          The acquisitions were accounted for using the purchase method of accounting in accordance with SFAS No. 141. SFAS No. 141 requires that the total cost of the acquisition be allocated to the tangible and intangible assets acquired and liabilities assumed based upon their respective fair values at the date of acquisition. The January 31, 2006 condensed consolidated balance sheet reflects the final allocation of the purchase prices and non-deductible goodwill of $9,900 related to these acquisitions. The following table summarizes the final allocation of the purchase prices to the assets acquired and liabilities assumed at the dates of the acquisitions:

Purchase price	$	38,349
Transaction costs		638
Total purchase price		38,987
Cash acquired		7,470
Total purchase price, net of cash acquired		31,517
Accounts receivable, net		1,710
Inventories		9,886
Other current assets		1,658
Property plant and equipment, net		6,771
Intangible assets		18,393
Other non-current assets		211
Total assets acquired		38,629
Accounts payable and other current liabilities		4,564
Long-term debt		2,563
Due to the Company (from Euroflow)		9,255
Other non-current liabilities		630
Total liabilities assumed		17,012
Goodwill	$	9,900

          Based upon the markets Biosepra and Euroflow serve, the goodwill was assigned to the Company’s BioPharmaceutical segment. Pro forma financial information related to the acquisitions has not been provided, as it is not material to the Company’s results of operations and cash flows.

NOTE 4 – DISTRIBUTION AGREEMENT

          On December 16, 2005, the Company and Satair A/S (“Satair”) signed an agreement whereby Satair acquired the exclusive rights to the Western Hemisphere commercial aerospace aftermarket distribution channel for the Company’s products for a ten-year period.  The transaction was valued at $22,000, of which $19,000 was paid to the Company in cash on the closing date, and $3,000 in a five-year non-interest bearing note receivable, payable in equal installments.  In addition, the agreement required Satair to purchase certain finished goods inventory from the

10

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands, except per share data)

(Unaudited)

Company valued at $5,683.  The $22,000 in cash and notes receivable received for the distribution rights were recorded as deferred revenue and will be amortized as an increase to sales over the life of the distribution agreement.

NOTE 5 – BALANCE SHEET DETAILS

          The following tables provide details of selected balance sheet items:

	Jan. 31, 2006			July 31, 2005
Accounts receivable:
Billed	$	416,259		$	463,959
Unbilled		28,336			43,206
Total		444,595			507,165
Less: Allowances for doubtful accounts		(13,426	)		(13,515	)
	$	431,169		$	493,650

          Unbilled receivables principally relate to long-term contracts recorded under the percentage-of-completion method of accounting.

	Jan. 31, 2006			July 31, 2005
Inventories:
Raw materials and components	$	118,219		$	113,202
Work-in-process		78,336			44,837
Finished goods		220,480			207,890
	$	417,035		$	365,929
Property, plant and equipment, net:
Property, plant and equipment	$	1,319,172		$	1,278,517
Less: Accumulated depreciation and amortization		(703,781	)		(669,759	)
	$	615,391		$	608,758

NOTE 6 – GOODWILL AND INTANGIBLE ASSETS

          The following table presents goodwill, net of accumulated amortization, allocated by reportable segment in accordance with SFAS No. 142:

	Jan. 31, 2006		July 31, 2005
Medical	$	28,688	$	28,578
BioPharmaceuticals		38,246		45,538
Life Sciences		66,934		74,116
General Industrial		152,066		151,878
Aerospace		5,704		5,704
Microelectronics		21,204		21,206
Industrial		178,974		178,788
	$	245,908	$	252,904

          The change in the carrying amount of goodwill is primarily attributable to the changes in the final allocation of goodwill from the acquisition of Euroflow as discussed in Note 3 and to the changes in foreign exchange rates used to translate the goodwill contained in the financial statements of foreign subsidiaries using the rates at each respective balance sheet date.

11

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands, except per share data)

(Unaudited)

Intangible assets, net, consist of the following:

	Jan. 31, 2006
		Gross		Accumulated Amortization		Net
Patents and unpatented technology	$	96,284	$	45,687	$	50,597
Trademarks		4,586		2,055		2,531
Other		5,322		4,432		890
	$	106,192	$	52,174	$	54,018

	July 31, 2005
	Gross		Accumulated Amortization		Net
Patents and unpatented technology	$	88,098	$	41,858	$	46,240
Trademarks		4,545		1,849		2,696
Other		5,301		4,233		1,068
	$	97,944	$	47,940	$	50,004

          The increase in patents and unpatented technology is due to the finalization of the valuation of intangible assets purchased in the Euroflow acquisition.  The fair value of these intangibles had not been determined as of July 31, 2005.  As such, their cost had been preliminarily allocated based upon their book values.

          Amortization expense for these intangible assets for the three and six months ended January 31, 2006 was $2,594 and $4,402, respectively. Amortization expense for these intangible assets for the three and six months ended January 31, 2005 was $1,486 and $2,959, respectively.  Amortization expense is estimated to be approximately $4,111 for the remainder of fiscal 2006, $8,130 in 2007, $7,159 in 2008, $6,703 in 2009, $6,643 in 2010 and $6,663 in 2011.

NOTE 7 – TREASURY STOCK

          On October 17, 2003, the Board authorized the expenditure of up to $200,000 to repurchase shares of the Company’s common stock. On October 14, 2004, the Board authorized the additional expenditure of up to another $200,000 for the repurchase of the Company’s common stock. The Company’s shares may be purchased over time, as market and business conditions warrant. There is no time restriction on these authorizations. During the six months ended January 31, 2006, the Company purchased 187 shares in open-market transactions at an aggregate cost of $5,750 with an average price per share of $30.81. As of January 31, 2006, $255,004 remains available to be expended under the current stock repurchase programs. Repurchased shares are held in treasury for use in connection with the Company’s stock-based compensation plans and for general corporate purposes.

          During the six months ended January 31, 2006, 625 shares were issued under the Company’s stock-based compensation plans. At January 31, 2006, the Company held 3,178 treasury shares.

NOTE 8 – CONTINGENCIES AND COMMITMENTS

          The Company’s condensed consolidated balance sheet at January 31, 2006 includes liabilities for environmental matters of approximately $21,778, which relates mainly to the previously reported environmental proceedings involving a Company subsidiary, Gelman Sciences Inc. pertaining to groundwater contamination.  In the opinion of management, the Company is in substantial compliance with applicable environmental laws and its current accruals for environmental remediation are adequate. However, because regulatory standards under environmental laws are becoming increasingly stringent, there can be no assurance that future developments, additional information and experience gained will not cause the Company to incur material environmental liabilities or costs beyond those accrued in its condensed consolidated financial statements.

12

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands, except per share data)

(Unaudited)

NOTE 9 - RESTRUCTURING AND OTHER CHARGES, NET

          The following tables summarize the restructuring related items and other (gains)/charges recorded for the quarter and six months ended January 31, 2006 and January 31, 2005:

	Three Months Ended Jan. 31, 2006									Six Months Ended Jan. 31, 2006
	Restructuring (1)			Other (Gains)/ Charges (2)			Total			Restructuring (1)			Other (Gains)/ Charges (2)			Total
Gain on sale of investments (a)	$	—		$	(394	)	$	(394	)	$	—		$	(2,200	)	$	(2,200	)
Severance		3,500			—			3,500			4,601			—			4,601
Other exit costs		677			—			677			2,364			—			2,364
Loss on sale of assets		51			—			51			51			—			51
Other		—			7			7			—			(119	)		(119	)
	$	4,228		$	(387	)	$	3,841		$	7,016		$	(2,319	)	$	4,697
Reversal of excess reserves		(105	)		—			(105	)		(1,011	)		—			(1,011	)
	$	4,123		$	(387	)	$	3,736		$	6,005		$	(2,319	)	$	3,686
Cash	$	3,845		$	(389	)	$	3,456		$	5,727		$	(2,195	)	$	3,532
Non-cash		278			2			280			278			(124	)		154
	$	4,123		$	(387	)	$	3,736		$	6,005		$	(2,319	)	$	3,686

	Three Months Ended Jan. 31, 2005								Six Months Ended Jan. 31, 2005
	Restructuring (1)			Other (Gains)/ Charges (2)		Total			Restructuring (1)			Other (Gains)/ Charges (2)			Total
Impairment of investments (a)	$	—		$	—	$	—		$	—		$	2,875		$	2,875
Severance		3,568			—		3,568			6,233			—			6,233
Other exit costs		1,585			—		1,585			2,070			—			2,070
Gain on sale of assets		11			—		11			(376	)		—			(376	)
Environmental (b)		—			502		502			—			502			502
Other		(2	)		—		(2	)		(2	)		(115	)		(117	)
	$	5,162		$	502	$	5,664		$	7,925		$	3,262		$	11,187
Reversal of excess reserves		(226	)		—		(226	)		(226	)		—			(226	)
	$	4,936		$	502	$	5,438		$	7,699		$	3,262		$	10,961
Cash	$	4,925		$	502	$	5,427		$	7,688		$	597		$	8,285
Non-cash		11			—		11			11			2,665			2,676
	$	4,936		$	502	$	5,438		$	7,699		$	3,262		$	10,961

(1) Restructuring:
	•	During the six months ended January 31, 2005, the Company began to implement its plan to reorganize its business structure. As a result, the Company recorded severance liabilities for the termination of certain employees worldwide as well as other costs related to the reorganization.

13

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands, except per share data)

(Unaudited)

		Furthermore, the Company completed the sale begun in the fourth quarter of fiscal year 2004 of certain manufacturing plants in Germany acquired as part of the FSG acquisition, which resulted in the recognition of a gain of $387.
	•	During the six months ended January 31, 2006, the Company continued its realignment plan and cost reduction initiatives. As a result, the Company recorded severance liabilities for the termination of certain employees worldwide as well as other costs related to these initiatives.
(2) Other (Gains)/Charges:
	(a)	The Company recorded a charge of $2,875 in the three months ended October 31, 2004 for the other-than-temporary diminution in value of its investment in Panacos Pharmaceuticals, Inc., formerly known as V.I. Technologies, Inc. (“VITEX”).
		In August 2005, the Company sold all of the 617.5 shares it held of VITEX for total proceeds aggregating $6,783.  The cost basis at the time of the sale, as adjusted by previous impairment charges, was $4,940.  As a result, the Company recorded a gain of $1,806, net of fees and commissions in the three months ended October 31, 2005.
		On January 13, 2006 the Company sold its stock rights in Satair for total proceeds aggregating $641. The cost basis of the rights at the time of the sale was $247. As a result, the Company recorded a gain of $394 in the three months ended January 31, 2006.
	(b)	In the three months ended January 31, 2005, the Company increased a previously established environmental reserve by $502 related to the environmental matter in Pinellas Park, Florida.

          The following table summarizes the activity related to restructuring liabilities that were recorded in fiscal years 2006 and 2005:

	Severance			Lease Termination Liabilities & Other			Total
2006
Original Charge	$	4,374		$	2,364		$	6,738
Utilized		(1,472	)		(2,160	)		(3,632	)
Other changes (a)		16			—			16
Balance at Jan. 31, 2006	$	2,918		$	204		$	3,122
2005
Original Charge	$	17,496		$	2,928		$	20,424
Utilized		(8,404	)		(2,739	)		(11,143	)
Other changes (a)		(86	)		4			(82	)
Balance at July 31, 2005	$	9,006		$	193		$	9,199
Utilized		(2,201	)		(20	)		(2,221	)
Reversal of excess reserves (b)		(991	)		(20	)		(1,011	)
Other changes (a)		(2	)		1			(1	)
Balance at Jan. 31, 2006	$	5,812		$	154		$	5,966

Amounts reflected as severance liabilities for fiscal year 2006 exclude $227 related to non-cash stock compensation.

a) Other changes reflect translation impact.

14

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands, except per share data)

(Unaudited)

b) Reflects the reversal of excess restructuring reserves recorded in the consolidated statements of earnings in fiscal year 2005.

NOTE 10 – COMPONENTS OF NET PERIODIC PENSION COST

          The Company provides substantially all domestic and foreign employees with retirement benefits. Net periodic pension benefit cost for the Company’s defined benefit pension plans includes the following components:

	Three Months Ended
	U.S. Plans						Foreign Plans						Total
	Jan. 31, 2006			Jan. 31, 2005			Jan. 31, 2006			Jan. 31, 2005			Jan. 31, 2006			Jan. 31, 2005
Service cost	$	1,878		$	1,659		$	2,079		$	1,935		$	3,957		$	3,594
Interest cost		2,368			2,307			3,215			3,310			5,583			5,617
Expected return on plan assets		(1,572	)		(1,299	)		(2,477	)		(2,391	)		(4,049	)		(3,690	)
Amortization of prior service cost		238			222			113			133			351			355
Amortization of net transition asset		(11	)		(10	)		—			9			(11	)		(1	)
Recognized actuarial loss		714			375			1,970			1,348			2,684			1,723
Net periodic benefit cost	$	3,615		$	3,254		$	4,900		$	4,344		$	8,515		$	7,598

	Six Months Ended
	U.S. Plans						Foreign Plans						Total
	Jan. 31, 2006			Jan. 31, 2005			Jan. 31, 2006			Jan. 31, 2005			Jan. 31, 2006			Jan. 31, 2005
Service cost	$	3,756		$	3,317		$	4,216		$	3,769		$	7,972		$	7,086
Interest cost		4,736			4,614			6,498			6,457			11,234			11,071
Expected return on plan assets		(3,144	)		(2,598	)		(5,006	)		(4,675	)		(8,150	)		(7,273	)
Amortization of prior service cost		476			443			230			259			706			702
Amortization of net transition asset		(22	)		(21	)		—			17			(22	)		(4	)
Recognized actuarial loss		1,428			750			3,982			2,636			5,410			3,386
Net periodic benefit cost	$	7,230		$	6,505		$	9,920		$	8,463		$	17,150		$	14,968

NOTE 11 – EARNINGS PER SHARE

          The condensed consolidated statements of earnings present basic and diluted earnings per share. Basic earnings per share is determined by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share considers the potential effect of dilution on basic earnings per share assuming potentially dilutive shares, such as those issuable upon exercise of stock options that meet certain criteria, were outstanding. The treasury stock method reduces the dilutive effect of potentially dilutive securities as it assumes that cash proceeds (from the issuance of potentially dilutive securities) are used to buy back shares at the average share price during the period.  Employee stock options and units of 890 and 27 shares were not included in the computation of diluted shares for the three months ended January 31, 2006 and January 31, 2005, respectively, because their effect would have been antidilutive. For the six months ended January 31, 2006 and January 31, 2005, 906 and 193 antidilutive shares were excluded.

15

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands, except per share data)

(Unaudited)

          The following is a reconciliation between basic shares outstanding and diluted shares outstanding:

	Three Months Ended				Six Months Ended
	Jan. 31, 2006		Jan. 31, 2005		Jan. 31, 2006		Jan. 31, 2005
Basic shares outstanding		125,225		124,482		125,045		124,400
Effect of stock plans		865		975		834		930
Diluted shares outstanding		126,090		125,457		125,879		125,330

NOTE 12 – COMPREHENSIVE INCOME

          Comprehensive income is comprised of the following:

	Three Months Ended						Six Months Ended
	Jan. 31, 2006			Jan. 31, 2005			Jan. 31, 2006			Jan. 31, 2005
Net income	$	32,436		$	32,045		$	57,546		$	53,744
Unrealized translation adjustment		10,714			15,364			6,395			45,697
Income taxes		179			1,274			(360	)		2,472
Unrealized translation adjustment, net		10,893			16,638			6,035			48,169
Change in unrealized investment gains		860			1,664			2,066			5,048
Income taxes		—			54			—			(134	)
Change in unrealized investment gains, net		860			1,718			2,066			4,914
Unrealized (losses) gains on derivatives		(282	)		282			(205	)		338
Income taxes		14			(99	)		(13	)		(118	)
Unrealized (losses) gains on derivatives, net		(268	)		183			(218	)		220
Total comprehensive income	$	43,921		$	50,584		$	65,429		$	107,047

          Unrealized investment gains (losses) on available-for-sale securities, net of related taxes, consist of the following:

	Three Months Ended				Six Months Ended
	Jan. 31, 2006		Jan. 31, 2005		Jan. 31, 2006			Jan. 31, 2005
Unrealized gains arising during the period	$	860	$	1,664	$	3,872		$	2,173
Income taxes		—		54		—			(134	)
Net unrealized gains arising during the period		860		1,718		3,872			2,039
Reclassification adjustment for (gain) loss included in net earnings		—		—		(1,806	)		2,875
Change in unrealized accumulated investment gains, net	$	860	$	1,718	$	2,066		$	4,914

16

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands, except per share data)

(Unaudited)

NOTE 13 – SEGMENT INFORMATION AND GEOGRAPHIES

          Financial information on the business segments identified as reporting segments in accordance with the provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, follows. 

          During the three and six months ended January 31, 2006, certain research and development costs previously managed as a Corporate function were integrated into the Life Sciences and Industrial segments in the Western Hemisphere as part of the Company’s previously reported reorganization efforts.

	Three Months Ended						Six Months Ended
	Jan. 31, 2006			Jan. 31, 2005			Jan. 31, 2006			Jan. 31, 2005
MARKET SEGMENT INFORMATION SALES TO UNAFFILIATED CUSTOMERS:
Medical	$	107,310		$	110,358		$	202,457		$	205,823
BioPharmaceuticals		80,557			77,618			154,357			148,407
Total Life Sciences		187,867			187,976			356,814			354,230
General Industrial		183,080			183,457			348,475			341,678
Aerospace		45,359			41,944			88,771			80,781
Microelectronics		62,130			56,096			115,538			107,516
Total Industrial		290,569			281,497			552,784			529,975
Total	$	478,436		$	469,473		$	909,598		$	884,205
OPERATING PROFIT:
Medical	$	11,696		$	17,534		$	21,843		$	31,329
BioPharmaceuticals		21,105			18,624			36,515			35,565
Total Life Sciences		32,801			36,158			58,358			66,894
General Industrial		15,291			16,988			27,252			30,180
Aerospace		5,669			7,297			12,785			12,386
Microelectronics		14,140			10,069			23,099			18,583
Total Industrial		35,100			34,354			63,136			61,149
Subtotal		67,901			70,512			121,494			128,043
Restructuring and other charges, net (a)		(3,931	)		(5,438	)		(4,192	)		(10,961	)
General corporate expenses		(15,422	)		(17,252	)		(29,800	)		(34,304	)
Interest expense, net		(5,642	)		(6,146	)		(11,381	)		(11,853	)
Earnings before income taxes	$	42,906		$	41,676		$	76,121		$	70,925

17

PALL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands, except per share data)

(Unaudited)

	Three Months Ended						Six Months Ended
	Jan. 31, 2006			Jan. 31, 2005			Jan. 31, 2006			Jan. 31, 2005
GEOGRAPHIES SALES TO UNAFFILIATED CUSTOMERS:
Western Hemisphere	$	177,833		$	167,334		$	332,468		$	319,612
Europe		188,197			191,851			359,885			361,609
Asia		112,406			110,288			217,245			202,984
Total	$	478,436		$	469,473		$	909,598		$	884,205
INTERCOMPANY SALES BETWEEN GEOGRAPHIC AREAS:
Western Hemisphere	$	59,109		$	50,658		$	116,520		$	100,259
Europe		32,377			31,162			61,046			57,321
Asia		1,624			1,427			3,389			2,686
Total	$	93,110		$	83,247		$	180,955		$	160,266
TOTAL SALES:
Western Hemisphere	$	236,942		$	217,992		$	448,988		$	419,871
Europe		220,574			223,013			420,931			418,930
Asia		114,030			111,715			220,634			205,670
Eliminations		(93,110	)		(83,247	)		(180,955	)		(160,266	)
Total	$	478,436		$	469,473		$	909,598		$	884,205
OPERATING PROFIT:
Western Hemisphere	$	26,564		$	34,810		$	54,985		$	61,873
Europe		19,063			20,497			31,992			41,511
Asia		18,277			16,453			33,367			29,764
Eliminations		3,997			(1,248	)		1,150			(5,105	)
Subtotal		67,901			70,512			121,494			128,043
Restructuring and other charges, net (a)		(3,931	)		(5,438	)		(4,192	)		(10,961	)
General corporate expenses		(15,422	)		(17,252	)		(29,800	)		(34,304	)
Interest expense, net		(5,642	)		(6,146	)		(11,381	)		(11,853	)
Earnings before income taxes	$	42,906		$	41,676		$	76,121		$	70,925

(a) Included in restructuring and other charges, net, for the purposes of evaluation of segment and geographic profitability is a charge of $195 and $506 in the three and six months ended January 31, 2006, respectively, related to a purchase accounting adjustment to step up the value of inventory acquired from Biosepra by $2,431, in accordance with SFAS No. 141, in the opening balance sheet. This step up increased cost of sales by $195 and $506 in the three and six months ended January 31, 2006 concurrent with the sale of a portion of the underlying inventory. The step up amount is excluded from operating profit since management considers it non-recurring in nature because, although the Company acquired the manufacturing operations of Biosepra, this adjustment was required by SFAS 141 as an elimination of the manufacturing profit in inventory acquired from Biosepra and subsequently sold in the period.

18

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS.

Forward-Looking Statements and Risk Factors

          You should read the following discussion together with the condensed consolidated financial statements and notes thereto and other financial information in this Form 10-Q and in Pall’s Annual Report on Form 10-K for the fiscal year ended July 31, 2005.  The discussions under the subheadings “Review of Market Segments and Geographies” below are in local currency unless indicated otherwise. The Company considers local currency growth an important measure because by excluding the volatility of exchange rates, underlying volume growth is clearer. As used below, “½%” indicates that the Company has rounded the relevant data up or down to the nearest one-half percentage point. Dollar amounts discussed below are in thousands, unless otherwise indicated, except per share dollar amounts. In addition, per share dollar amounts are discussed on a diluted basis.

          The matters discussed in this Quarterly Report on Form 10-Q contain “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on current Company management expectations and are subject to risks and uncertainties which could cause actual results to differ materially. The Company is subject to risks and uncertainties including, but not limited to: fluctuations in foreign currency exchange rates; regulatory approval and market acceptance of new technologies; changes in product mix and product pricing and in interest rates and cost of raw materials; the Company’s success in enforcing its patents and protecting its proprietary products and manufacturing techniques and its ability to achieve the savings anticipated from its cost reduction initiatives; global and regional economic conditions and legislative, regulatory and political developments; and domestic and international competition in the Company’s global markets. 

Results of Operations

Review of Consolidated Results

          Sales in the quarter increased 2% to $478,436 from $469,473 in the second quarter of fiscal year 2005. For the six months, sales increased 3% to $909,598. Exchange rates reduced reported sales in the quarter and six months by $25,215 and $27,060, respectively, primarily due to the weakening Euro, British Pound and Yen, partly offset by the strengthening of certain other Asian currencies. In local currency (i.e., had exchange rates not changed year over year), sales increased 7½% and 6% in the quarter and six months, respectively. Overall, pricing reduced sales by ½% in both the quarter and six months, and as such, the overall volume increase was 8% and 6½%, respectively. The recent strengthening of the U.S. dollar against the major currencies in which the Company operates, if sustained through fiscal 2006, will negatively affect reported sales and net earnings.

          Sales in the Aerospace segment increased 12% in local currency in both the quarter and six months primarily driven by incremental sales related to the Company’s expanded relationship and agreement with Satair A/S (“Satair”). Refer to discussion below for further details on the Satair agreement. General Industrial sales were up 5½% in the quarter and 5% in the six months, with all submarkets contributing to this growth, with the exception of Municipal Water. Microelectronics sales were up 17% in the quarter and 11% in the six months fueled by growth in the display and data storage markets. Sales in the BioPharmaceuticals segment increased 10½% and 8% in the quarter and six months, respectively, driven by strong growth in consumables. Sales in the Medical segment were up slightly in the quarter and six months, as good growth in the BioSciences portion of the business was offset by shortfalls in the Blood Filtration sector. By geography, local currency sales in Asia were up 8% and 10% in the quarter and six months, respectively, with particularly strong growth seen in the Microelectronics segment. In Europe, sales increased 8% and 5½% in the quarter and six months, respectively, with all segments contributing to this growth. In the Western Hemisphere sales grew 6% in the quarter and 4% in the six months, with all segments contributing to these gains with the exception of Medical. The Company expects overall sales in local currency to grow in the mid single-digit range for the full fiscal year 2006 compared with fiscal year 2005. For a detailed discussion of sales, refer to “Review of Market Segments and Geographies.”

          Cost of sales in the quarter, as a percentage of sales, increased to 52.8% from 52.1% in the second quarter of fiscal year 2005, reflecting the impact of pricing reductions in the Medical business and a one-time purchase accounting adjustment related to inventory acquired as part of the Biosepra acquisition. In addition, cost of sales was negatively impacted by stock compensation and the adoption of SFAS No. 123(R) “Share-Based Payment” (“SFAS No. 123(R)”) as well as transition costs related to the Company’s facility rationalization initiative. These factors were partly offset by savings generated from the Company’s cost reduction initiatives. For the six months, cost of sales, as a percentage of sales, increased to 53% from 52%, reflecting the factors discussed above as well as the impact of several low margin Industrial system sales and facility and equipment refurbishments in certain Life Sciences’ plants. The transitional costs related to the facilities rationalization will continue over the second half of fiscal year 2006 and into fiscal year 2007 as the Company makes progress on this initiative. Based on these factors combined with the very high level of systems business expected in the second half of this fiscal year, the Company expects cost of sales, as a percentage of sales, for the full fiscal year 2006 to be slightly higher than fiscal year 2005.

19

          Selling, general and administrative expenses, as a percentage of sales, improved to 33.3% from 33.6% in the second quarter of fiscal year 2005. For the six months, selling, general and administrative expenses, as a percentage of sales, improved to 34.0% from 34.3%.  The improvement in the quarter and six months reflects savings realized from the Company’s cost reduction initiatives partly offset by the impact of stock compensation and the adoption of SFAS No. 123(R), which negatively impacted selling, general and administrative expenses by 48 basis points in the quarter and six months. The Company continued to move forward with its cost reduction programs. Concerning the Company’s cost reduction initiatives, the Company is making progress on the first phase of its facilities rationalization initiative involving seven manufacturing facilities.  Additionally, the Company has launched a major initiative to optimize its European operations with the objective of delivering improvements in profitability. The Company’s expectation is that it will see some operational cost improvements later this fiscal year with more substantial improvements in fiscal years 2007 and 2008 related to these two initiatives. Based on these factors, the Company is expecting continued improvement in selling, general and administrative expenses, as a percentage of sales, for the full fiscal year 2006 compared with fiscal year 2005.

          Research and development expenses were $14,398 compared to $13,907 in the second quarter of fiscal year 2005. As a percentage of sales, research and development expenses were 3%, on par with last year. For the six months, research and development expenses were $27,464, or 3% of sales compared to $27,620, or 3.1% of sales for the six months of fiscal year 2005. The Company expects research and development expenses in dollars to increase moderately through fiscal year 2006 compared with fiscal year 2005.

          In the second quarter and six months of fiscal year 2006, the Company recorded restructuring and other charges, net, of $3,736 and $3,686, respectively. The restructuring and other charges, net is comprised of severance and other costs in connection with the Company’s on-going cost reduction programs and divisional realignment, partly offset by the reversal of excess restructuring reserves recorded in the consolidated statements of earnings in fiscal year 2005. In addition, restructuring and other charges, net, includes a gain on the sale of the Company’s stock rights in Satair, which was recorded in the second quarter, as well as a gain on the sale of the Company’s investment in Panacos Pharmaceuticals, Inc., formerly known as V.I. Technologies, Inc. (“VITEX”), that was recorded in the first quarter. In the second quarter and six months of fiscal year 2005, the Company recorded restructuring and other charges, net, of $5,438 and $10,961, respectively, primarily related to the Company’s cost reduction programs and divisional realignment. In addition, the charges include an increase of $502 in the second quarter to a previously established environmental reserve and the write-down in the first quarter of the Company’s investment in VITEX that was deemed other-than-temporarily impaired.

          The details of the charges for the quarter and six months ended January 31, 2006 and January 31, 2005 can be found in the Restructuring and Other Charges note accompanying the condensed consolidated financial statements.

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          The following table summarizes the activity related to restructuring liabilities that were recorded in fiscal years 2006 and 2005:

	Severance			Lease Termination Liabilities & Other			Total
2006
Original Charge	$	4,374		$	2,364		$	6,738
Utilized		(1,472	)		(2,160	)		(3,632	)
Other changes (a)		16			—			16
Balance at Jan. 31, 2006	$	2,918		$	204		$	3,122
2005
Original Charge	$	17,496		$	2,928		$	20,424
Utilized		(8,404	)		(2,739	)		(11,143	)
Other changes (a)		(86	)		4			(82	)
Balance at July 31, 2005	$	9,006		$	193		$	9,199
Utilized		(2,201	)		(20	)		(2,221	)
Reversal of excess reserves (b)		(991	)		(20	)		(1,011	)
Other changes (a)		(2	)		1			(1	)
Balance at Jan. 31, 2006	$	5,812		$	154		$	5,966

Amounts reflected as severance liabilities for fiscal year 2006 exclude $227 related to non-cash stock compensation.

a)	Other changes reflect translation impact.
b)	Reflects the reversal of excess restructuring reserves recorded in the consolidated statements of earnings in fiscal year 2005.

          Net interest expense in the quarter decreased to $5,642 from $6,146 in the second quarter of fiscal year 2005.  For the six months, net interest expense decreased to $11,381 from $11,853. The decrease in net interest expense in the quarter and six months primarily reflects the impact of lower debt levels. The Company expects net interest expense for the full fiscal year 2006 to decrease approximately $2,000-$3,000 compared with fiscal year 2005.

          The underlying tax rate (i.e., the tax rate on earnings before income taxes, excluding restructuring and other charges) was 24% in the quarter and six months, unchanged from the second quarter and six months of fiscal year 2005.  However, due to the interim period income tax provisions of SFAS No. 123(R), the Company’s tax rate may vary quarter to quarter based on the deductibility of the stock compensation expense recorded in the interim period. The impact of stock compensation and the adoption of SFAS No. 123(R) impacted the Company’s tax rate by 0.44% and 0.50% in the second quarter and six months, respectively.  However, based upon estimates of the timing of the subject deductibility throughout the year, the Company estimates that it will have no impact on its full year tax rate and continues to expect that its underlying tax rate will remain at 24% for the full fiscal year 2006.

          Net earnings in the quarter were $32,436, or 26 cents per share, compared with net earnings of $32,045, or 26 cents per share in the second quarter of fiscal year 2005. For the six months, net earnings were $57,546, or 46 cents per share, compared with net earnings of $53,744, or 43 cents per share.   In summary, net earnings for the quarter and six months reflect organic sales growth, an improvement in selling, general and administrative expenses, as a percentage of sales, and a decrease in net interest expense partly offset by the impact of lower gross margins. In addition, net earnings reflect restructuring and other charges, net of $3,736 in the quarter ($3,686 for the six months) compared to $5,438 in the quarter ($10,961 for the six months) in fiscal year 2005. The impact of stock compensation and the adoption of SFAS No. 123(R), negatively impacted earnings per share by 2 cents in the quarter and 4 cents in the six months. The Company estimates that foreign currency translation reduced earnings per share by approximately 1 cent in both the quarter and six months.

          On December 16, 2005, the Company and Satair signed an agreement whereby Satair acquired the exclusive rights to the Western Hemisphere commercial aerospace aftermarket distribution channel for the Company’s products for a ten-year period.  The transaction was valued at $22,000, of which $19,000 was paid to the Company in cash on the closing date, and $3,000 in a five-year non-interest bearing note receivable, payable in equal installments.  In addition, the agreement required Satair to purchase certain finished goods inventory from the

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 Company valued at $5,683.  The $22,000 in cash and notes receivable received for the distribution rights were recorded as deferred revenue and will be amortized as an increase to sales over the life of the distribution agreement.  It is expected that the impact of the transaction will be accretive to earnings in fiscal year 2006 as well as future years.

          The Company expects earnings per share for the full fiscal year 2006 to be in the range of $1.29 - $1.44 per share including restructuring and other charges, net for the six months ended January 31, 2006. This range includes the impact of stock compensation and the adoption of SFAS No. 123(R), which the Company estimates will cost approximately 8 cents in earnings per share. In light of its ongoing cost reduction initiatives, the Company may incur severance and other restructuring costs over the second half of fiscal year 2006; however, because these costs are not estimable at this time, this range does not contemplate such charges.

Review of Market Segments and Geographies

Market Segments:

          The table below presents sales for the quarter and six months ended January 31, 2006 and January 31, 2005 by market segment, including the effect of exchange rates for comparative purposes.

Three Months Ended		Jan. 31, 2006		Jan. 31, 2005	% Change		Exchange Rate Difference		% Change in Local Currency
Medical	$	107,310	$	110,358	(3)	$	(4,546	)	1½
BioPharmaceuticals		80,557		77,618	4		(5,082	)	10½
Total Life Sciences		187,867		187,976	—		(9,628	)	5
General Industrial		183,080		183,457	—		(10,396	)	5½
Aerospace		45,359		41,944	8		(1,632	)	12
Microelectronics		62,130		56,096	11		(3,559	)	17
Total Industrial		290,569		281,497	3		(15,587	)	9
Total	$	478,436	$	469,473	2	$	(25,215	)	7½

Six Months Ended		Jan. 31, 2006		Jan. 31, 2005	% Change		Exchange Rate Difference		% Change in Local Currency
Medical	$	202,457	$	205,823	(1½)	$	(4,952	)	1
BioPharmaceuticals		154,357		148,407	4		(5,695	)	8
Total Life Sciences		356,814		354,230	½		(10,647	)	3½
General Industrial		348,475		341,678	2		(10,904	)	5
Aerospace		88,771		80,781	10		(1,841	)	12
Microelectronics		115,538		107,516	7½		(3,668	)	11
Total Industrial		552,784		529,975	4½		(16,413	)	7½
Total	$	909,598	$	884,205	3	$	(27,060	)	6

          Life Sciences sales increased 5% and 3½% in the quarter and six months, respectively, compared to the same periods in fiscal year 2005. Life Sciences represented approximately 39% of total sales in the quarter and six months on par with the same periods of fiscal year 2005.

          Within Life Sciences, Medical segment sales were up 1½% in the quarter and 1% in the six months, as growth in the BioSciences portion of the business was offset by shortfalls in the Blood Filtration sector. By geography, Medical sales in Europe were up a modest 3½% in the quarter while in Asia, the smallest of the Company’s Medical markets, sales were up 16%. Sales in the Western Hemisphere, the largest of the Company’s Medical markets, were down 3%. A similar trend was evident by geography for the six months.

          Within Medical, sales in the BioSciences submarket increased 4% and 6% in the quarter and six months, respectively, driven by double-digit growth in the Laboratory portion of the business. The growth in Laboratory sales was driven by increased sales of core products, the continued success of the Company’s disposable sample preparation products and the success of the Company’s VWR partnership. Sales in the OEM portion of the business were down 3½% in the quarter due to timing of orders and up 1½% for the six months. By geography, BioSciences sales growth in the quarter was fueled by Europe (+11%) and Asia (+7%), while sales in the Western Hemisphere were up slightly. For the six months, the BioSciences sales growth was driven by double-digit growth in both Europe and Asia, while sales in the Western Hemisphere were up slightly.

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          Sales in the Blood Filtration submarket were down 1% and 2% in the quarter and six months, respectively, reflecting shortfalls in the Western Hemisphere. Sales in the Western Hemisphere (which accounts for approximately 65% of the Company’s global Blood Filtration business) were down 6% in the quarter and 5½% in the six months. The shortfall in the Western Hemisphere reflects reduced pricing related to new long-term contracts in place. Blood Filtration sales in Europe increased 2% in the quarter, however, were down 1½% for the six months. In Asia (the smallest of the Company’s Blood Filtration markets), sales were up 26% in the quarter (+21% for the six months). Sales in the Hospital submarket increased 3½% reflecting growth in the Western Hemisphere and Asia. Sales in Europe (the largest of the Company’s Hospital markets) were down slightly. For the six months, sales in the Hospital submarket were down slightly. The Company’s Acrodose Pooled Platelet System recently received clearance in the U.S. from the Food and Drug Administration (“FDA”), which should have a positive impact on blood center sales in fiscal year 2007. The Company’s Leukotrap Affinity prion product continues to demonstrate excellent results under  customer validation studies in the United Kingdom and Ireland. The Company’s Aquasafe water filtration systems are starting to make inroads into the hospital market in the Western Hemisphere and Europe’s Aquasafe position continues to be strong. Overall, the Company expects sales in the Medical segment to be up modestly for the full fiscal year 2006.

          BioPharmaceuticals segment sales increased 10½% in the quarter and 8% for the six months, driven by strong growth in consumables in all geographies. System sales were down 59½% and 53½% in the quarter and six months, respectively, reflecting the typical lumpiness of such sales. By geography, the growth in BioPharmaceuticals was driven by the Western Hemisphere where sales increased 19½% in the quarter and 10% in the six months. In Europe, sales grew 8% in the quarter (+8½% for the six months), while in Asia, sales increased in the low single-digit range in both periods. The growth in consumables in the quarter and six months was across most market sectors, especially Biotechnology, Vaccine and Plasma products. New generation sterile filter cartridges, capsules and single use processing systems all made significant contributions to growth. The Company expects that these trends will continue throughout the remainder of fiscal year 2006. The Company’s chromatography business continues to grow aided by the acquisition of Euroflow and the Company is seeing signs that this has also had a positive impact on its BioSepra sorbent business. Overall, orders were strong in the quarter and six months, increasing 23% and 14½%, respectively. Systems comprised the majority of these orders, however, they also include large contracts for BioSepra sorbents and new filter formats based on the Company’s Ultipleat technology. The Company expects sales in the BioPharmaceuticals segment to increase in the double-digit range for the full fiscal year 2006.

          Industrial sales grew 9% in the quarter and 7½% for the six months, with all segments contributing to this growth.  The Company’s Industrial business accounted for approximately 61% of total sales in the quarter and six months on par with the same periods of fiscal year 2005.

          General Industrial segment sales, which account for about 63% of the Company’s Industrial business, were up 5½% in the quarter and 5% in the six months compared with the same periods of fiscal year 2005. The increase in sales in the General Industrial segment reflects growth in all of the submarkets with the exception of Municipal Water.

          Within General Industrial, sales in the Fuels & Chemicals submarket grew 18½% and 12½% in the quarter and six months, respectively, driven by strong sales of consumables. The consumables business has been very strong over the past eighteen months stemming in part from the start up and operation of many systems installations. System sales, which are often lumpy quarter-to-quarter, increased 17% in the quarter, however, decreased 15½% in the six months. The refining, petrochemical, chemical and plastics markets remain healthy despite increased energy prices. Additionally, the general health of the oil and gas sector is driving growth in this market. By geography, sales in Europe were very strong increasing 39% in the quarter and 19½% for the six months.  Sales in the Western Hemisphere grew 19½% in the quarter (+10½% for the six months). In Asia, sales were down slightly in the quarter, however for the six months, sales were up 6%. Overall, orders growth was strong in the quarter (+39½%) and six months (+35%). Sales in the Power Generation submarket increased 1% in the quarter and 3% in the six months as growth in Asia and the Western Hemisphere were largely offset by shortfalls in Europe. Sales in the Machinery & Equipment submarket were up slightly (+1%) in the quarter as growth in Europe (+7½%) and Asia (+6½%) was offset by a shortfall in the Western Hemisphere (-16%). The shortfall in the Western Hemisphere reflects continued pressure in the pulp and paper markets. In the six months, sales in the Machinery & Equipment submarket increased 4½% as growth in Europe (+6½%) and Asia (+17½%) was partly offset by a shortfall in the Western Hemisphere (-9%). Paper production will continue to face challenges as demand for printed material slows, however, overall growth in primary metals, automobile production and mining (all industries experiencing average to above average organic growth) remains healthy. The Company is refocusing on higher growth markets and expanding its efforts in underdeveloped regions including Latin America, Eastern Europe and China. Food and Beverage sales increased 6% in the quarter driven by strong growth in the Western Hemisphere, where sales increased 88½%. Shortfalls in Europe (the Company’s largest Food & Beverage market) and Asia of 4½% and 3½%, respectively, partly offset the above. For the six months, Food & Beverage sales increased 4% driven by growth in the Western Hemisphere (+62%) and Asia (+6½%). Sales in Europe were down 5½%. The sales growth in the Western Hemisphere reflects the effect of increasing consumables business as well as increased systems business. In Asia, sales were down in the quarter partly due to the timing of systems sales. Sales growth in Asia in the six months was driven by system solutions for the brewery market as well as increased consumables business.  In Europe, sales were negatively impacted by lower OEM sales and a weakness in the wine markets, which the Company does not expect to improve this fiscal year. The Company continues to leverage the expertise of its European Food & Beverage team into growing regions in Latin America, the Middle East, Eastern Europe and Asia, and this strategy has begun to accelerate growth in these emerging regions. Municipal Water sales were down 16% in the quarter and 9½% in the six months reflecting the lumpy nature of this business, which is primarily comprised of system sales. All geographies reported shortfalls in the quarter. In the six months, modest growth in Europe was offset by shortfalls in the Western Hemisphere and Asia. Overall, orders growth remains strong, with orders increasing 24% in the quarter and 37½% in the six months. The increase in orders was fueled by the Western Hemisphere. The Company is working on initiatives to spur growth in Europe and is expecting sales in this region to improve by the end of fiscal year 2006. Additionally, the Company’s product offering in the Landfill Leachate sector will provide an additional growth engine for Europe and Asia. Overall, the Company expects sales in the General Industrial segment, to increase in the high single-digit range for the full fiscal year 2006.

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          Aerospace sales increased 12% in both the quarter and six months. Growth was fueled by core repeat business, such as aftermarket support and OEM production levels; and project business, such as aircraft retrofits and upgrades. In the Western Hemisphere, Aerospace sales increased 6% in the quarter (+8% for the six months), while in Europe sales grew 17% (+18% for the six months).  In Asia, the smallest of the Company’s Aerospace markets, sales were up 71% and 30% in the quarter and six months, respectively. Within Aerospace, Commercial sales increased 3% in the quarter and 6½% in the six months. By geography, strong growth in the Western Hemisphere (+28% in the quarter and 21% in the six months) driven by incremental sales attributable to the transaction with Satair was partly offset by shortfalls in Europe (-22½% in the quarter and –10½% in the six months).  Military sales increased 22% and 19½% in the quarter and six months, respectively. The growth in Military sales was driven by strong growth in Europe (+68% in the quarter and +64½% in the six months) partly offset by shortfalls in the Western Hemisphere  (-17% and -6½% in the quarter and six months, respectively). Overall, the Company expects sales in the Aerospace segment, to increase in the high single-digit range for the full fiscal year 2006.

          Microelectronics sales were up 17% in the quarter and 11% in the six months. In the quarter, all geographies had double-digit growth. For the six months, the increase in Microelectronics sales was driven by strong growth in Asia (+15½%) supported by growth in the Western Hemisphere (+3%) and Europe (+4%). A boom in new “fab” construction has favorably impacted sales growth in the quarter and six months. Additionally, the display and storage side of the business is very robust. The strong sales of MP-3 players, flat panel televisions, and other consumer electronics are bell weathers for the Microelectronics industry. The Company’s growth in the thin film rigid disc (storage) market is directly attributable to consumer adoption of memory intensive devices. The Semiconductor Industry Association is forecasting continued growth in equipment sales through at least 2007, and consequently, the Company believes that its OEM segment of the business will benefit. The Company expects continued strong sales in the Microelectronics segment in the second half of fiscal year 2006.

          The consolidated operating profit as a percentage of sales was 14.2% as compared to 15% in the second quarter of fiscal year 2005. Operating profit dollars decreased by $2,611, or 3½%, to $67,901. The reduction in operating profit reflects the integration of the research and development function into the lines of business, previously managed as a Corporate function, pricing reductions in the blood filtration business, transition costs related to the Company’s facility rationalization initiative, ongoing investments in Asia and the impact of stock compensation and the adoption of SFAS No. 123(R). The integration of the research and development function primarily impacted the Life Sciences business (principally Medical and in the Western Hemisphere). The effect of these factors was partly offset by savings generated by the Company’s cost reduction programs and the impact of higher sales growth, particularly in Microelectronics and Aerospace. For the six months, the consolidated operating profit as a percentage of sales was 13.4% as compared to 14.5% for the six months of fiscal year 2005. Operating profit dollars decreased by $6,549, or 5%, to $121,494. The reduction in operating profit reflects the factors discussed above. In addition, operating profit was negatively impacted by several low margin Industrial system sales in Europe in the first quarter as well as the impact of facility and equipment refurbishments in the European Life Sciences’ plants.  The operating profit details for the quarter and six months ended January 31, 2006 and January 31, 2005 can be found in the Segment Information and Geographies note accompanying the condensed consolidated financial statements. 

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          Geographies:

          The table below presents sales for the quarter and six months ended January 31, 2006 and January 31, 2005 to unaffiliated customers by geography, including the effect of exchange rates for comparative purposes.

Three Months Ended		Jan. 31, 2006		Jan. 31, 2005	% Change		Exchange Rate Difference		% Change in Local Currency
Western Hemisphere	$	177,833	$	167,334	6½	$	331		6
Europe		188,197		191,851	(2)		(18,854	)	8
Asia		112,406		110,288	2		(6,692	)	8
Total	$	478,436	$	469,473	2	$	(25,215	)	7½
Six Months Ended		Jan. 31, 2006		Jan. 31, 2005	% Change		Exchange Rate Difference		% Change in Local Currency
Western Hemisphere	$	332,468	$	319,612	4	$	842		4
Europe		359,885		361,609	(½)		(21,727	)	5½
Asia		217,245		202,984	7		(6,175	)	10
Total	$	909,598	$	884,205	3	$	(27,060	)	6

          Sales in the Western Hemisphere for the quarter increased 6½% on a reported basis and 6% on a local currency basis compared with the second quarter of fiscal year 2005. For the six months, sales increased 4% on both a reported and local currency basis. The increase in sales in the quarter and six months reflects growth in all of the segments with the exception of Medical. Exchange rates increased sales by $331 and $842 in the quarter and six months, respectively, primarily related to the strengthening of the Canadian dollar. Operating profit was 11.2% of total sales (including intercompany sales to other geographies) compared to 16% in the second quarter of fiscal year 2005 as reduced pricing in the blood filtration business, the impact of stock compensation and the adoption of SFAS No. 123(R) and the transfer of the research and development function from Corporate was partly offset by savings generated from the Company’s cost reduction programs. Operating profit dollars decreased $8,246, or 23½%. For the six months, operating profit declined to 12.2% and operating profit dollars decreased $6,888, or 11%, reflecting the factors discussed above.

          In Europe, local currency sales in the quarter increased 8% reflecting growth in all segments, with particularly strong growth seen in Aerospace and Microelectronics. The weakening of European currencies reduced sales by $18,854 resulting in a reported sales decline of 2%. For the six months, local currency sales increased 5½% reflecting growth in all segments, with particularly strong growth seen in Aerospace. The weakening of European currencies reduced sales by $21,727 resulting in a slight decline in sales on a reported basis. Operating profit was 8.6% of total sales (including intercompany sales to other geographies) as compared to 9.2% in the second quarter of fiscal year 2005, while operating profit dollars declined $1,434, or 7% to $19,063. The decline in operating profit was partly attributable to the impact of stock compensation and the adoption of SFAS No. 123(R) as well as transition costs related to the Company’s facility rationalization initiative. For the six months, operating profit was 7.6% as compared to 9.9%, while operating profit dollars declined $9,519, or 23%. The decline in operating profit reflects the factors discussed above as well as the impact of several low margin Industrial system sales and facility and equipment refurbishments in certain Life Sciences’ plants.

          Sales in Asia increased 8% in local currency in the quarter driven by growth in all segments with the exception of General Industrial. The weakening of the Yen partly offset by the strengthening of certain Asian currencies, reduced sales by $6,692, resulting in reported sales growth of 2%. For the six months, sales increased 10% in local currency reflecting growth in all segments. The weakening of the Yen partly offset by the strengthening of certain Asian currencies, reduced sales by $6,175, resulting in reported sales growth of 7%. Operating profit improved to 16% of total sales (including intercompany sales to other geographies) from 14.7% in the second quarter of fiscal year 2005. Operating profit dollars increased by $1,824, or 11% to $18,277, reflecting the growth in sales partly offset by increased costs related to the Company’s ongoing investments in sales and manufacturing in this region and the impact of stock compensation and the adoption of SFAS No. 123(R). For the six months, operating profit improved to 15.1% from 14.5%. Operating profit dollars increased by $3,603, or 12%, reflecting the factors discussed above.

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          General corporate expenses decreased $1,830, or 10½% to $15,422. For the six months, general corporate expenses decreased $4,504, or 13% to $29,800. The decline in expenses in the quarter and six months reflects the impact of the Company’s cost reduction programs, the transfer of the research and development function into the lines of business partly offset by the impact of stock compensation and the adoption of SFAS No. 123(R) as well as increased amortization expense.

Liquidity and Capital Resources

          Net cash provided by operating activities for the first six months of fiscal year 2006 was $125,020, an increase of $59,246 as compared with the first six months of fiscal year 2005. The increase in cash flow reflects the improvement in DSO (see discussion below), the impact of the transaction with Satair as well as changes in working capital items, particularly reduced payments for income taxes.

          Free cash flow, which is defined as net cash provided by operating activities less capital expenditures, was $72,999 for the first six months of fiscal year 2006, as compared with $25,791 for the first six months of fiscal year 2005.  The increase in free cash flow reflects the factors discussed above, partly offset by a higher level of capital expenditures. The Company believes this measure is important because it is a key element of its planning. The Company utilizes free cash flow, which is a non-GAAP measure, as one way to measure its current and future financial performance. The following table reconciles free cash flow to net cash provided by operating activities.

	Six Months Ended Jan. 31, 2006		Six Months Ended Jan. 31, 2005
Net cash provided by operating activities	$	125,020	$	65,774
Less capital expenditures		52,021		39,983
Free cash flow	$	72,999	$	25,791

          The Company’s balance sheet is affected by spot exchange rates used to translate local currency amounts into U.S. dollars. In comparing spot exchange rates at January 31, 2006 to those at July 31, 2005, the British Pound and the Euro have strengthened against the U.S. dollar, while the Japanese Yen has weakened against the U.S. dollar.

          Working capital was approximately $777,000, a ratio of 2.8 at January 31, 2006 as compared with $703,300, a ratio of 2.5 at July 31, 2005. Accounts receivable days sales outstanding improved to 80 days in the quarter, as compared to 85 days in the second quarter of fiscal year 2005. Inventory turns, for the four quarters ended January 31, 2006, were 2.6 as compared to 2.9 for the four quarters ended July 31, 2005. The effect of foreign exchange increased net inventory, net accounts receivable and other current assets by $765, $1,476 and $192, respectively, as compared with year-end fiscal year 2005. Additionally, foreign exchange increased accounts payable and other current liabilities by $964 and income taxes payable by $31. Overall, net debt (debt net of cash and cash equivalents), as a percentage of total capitalization (net debt plus equity), was 21.1% as compared to 24.5% at July 31, 2005. Net debt decreased by approximately $52,300 compared with year-end fiscal year 2005, primarily due to the significant increase in cash. Total gross debt increased approximately $10,800 as compared with year-end fiscal year 2005. The impact of foreign exchange rates increased gross debt by about $200.  As such, the actual increase in the Company’s gross debt was approximately $10,600 in the six months of fiscal year 2006. The Company was in compliance with all covenants of its various debt agreements as of January 31, 2006.

          Proceeds from stock plans were $14,553 in the first six months of fiscal year 2006. Capital expenditures were $52,021 for the first six months of fiscal year 2006 ($30,385 expended in the current quarter). Depreciation was $42,775 in the first six months of fiscal year 2006 ($20,957 in the current quarter), while amortization expense was $4,523 ($2,670 in the current quarter). Full year fiscal year 2006 capital expenditures are expected to be slightly above the fiscal year 2005 level, while depreciation and amortization expense are expected to total approximately $93,000.

          On October 17, 2003, the Board of Directors authorized the expenditure of up to $200,000 to repurchase shares of the Company’s common stock. Furthermore, on October 14, 2004, the Board of Directors authorized an additional expenditure of another $200,000 to repurchase shares. During fiscal years 2004 and 2005, the Company repurchased stock of $75,000 and $64,246, respectively. In the first six months of fiscal year 2006, the Company repurchased stock of $5,750. This leaves $255,004 remaining at January 31, 2006 of the $400,000 the Board of Directors authorized for share repurchases. In the first six months of fiscal year 2006, the Company paid dividends of  $24,885.  The Company increased its dividend by 10%, from 10 to 11 cents per share, effective with the dividend that was declared on January 19, 2006. The Company expects to pay dividends of about $53,000 for the full fiscal year 2006.

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          In August 2005, the Company sold its investment in VITEX and recorded a gain on the sale of $1,806, net of fees and commissions. In addition, in January 2006, the Company sold its stock rights in Satair and recorded a gain of $394. For more detail regarding these transactions, refer to the Restructuring and Other Charges note accompanying the condensed consolidated financial statements.

          The Company considers its existing lines of credit, along with the cash generated from operations, to be sufficient for both short-term and long-term growth.

Adoption of New Accounting Pronouncement

          Effective August 1, 2005, the Company adopted the fair value recognition provisions of SFAS No. 123(R), Share-Based Payment (“SFAS No. 123(R)”), using the modified-prospective-transition method.  Under that transition method, compensation cost recognized for the three and six months ended January 31, 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of, August 1, 2005, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for the vested portion of share-based payments granted subsequent to August 1, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R).  Results for prior periods have not been restated.

          The following table illustrates the impact of adopting SFAS No. 123(R) on August 1, 2005 on the Company’s earnings before income taxes, net earnings and earnings per share (which excludes the effect of certain changes to the Company’s stock plans under the 2005 plan such as the restricted stock units granted in contemplation of the change in accounting):

	Three Months Ended Jan. 31, 2006		Six Months Ended Jan. 31, 2006
Impact on earnings before income taxes	$	2,116	$	3,994
Impact on net earnings		1,881		3,541
Impact on basic earnings per share	$	0.02	$	0.03
Impact on diluted earnings per share	$	0.01	$	0.03

          SFAS No. 123(R) also requires that excess tax benefits related to stock option exercises be reflected as financing cash inflows.  For the six months ended January 31, 2006, this treatment resulted in cash flows from financing activities of $308, which reduced cash flows from operating activities by the same amount.  The tax benefit recognized related to the total compensation cost for share-based payment arrangements totaled $533 and $1,020 for the three and six months ended January 31, 2006, respectively, and totaled $43 and $86 for the three and six months ended January 31, 2005, respectively. The actual tax benefit realized for the tax deductions from option exercise of the share-based payment arrangements totaled $3,293 and $4,905 for the three and six months ended January 31, 2006, respectively.

Recently Issued Accounting Pronouncements

          On October 22, 2004, the American Jobs Creation Act of 2004 (the “Act”) was signed into law. The Act provides for a special one-time tax deduction of 85% of certain foreign earnings that are repatriated, as defined in the Act.  In December 2004, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. FAS 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 (“FSP FAS 109-2”).  FSP FAS 109-2 allows companies additional time to evaluate the effect of the Act as to whether unrepatriated foreign earnings continue to qualify for the SFAS No. 109, Accounting for Income Taxes (“SFAS No. 109”) exception regarding non-recognition of deferred tax liabilities and requires explanatory disclosures from those who need the additional time.  As of January 31, 2006, the Company has not provided deferred taxes on the undistributed earnings of foreign subsidiaries since substantially all such earnings were expected to be permanently invested in foreign operations.  The extent to which the Company will ultimately take advantage of this provision depends on a number of factors, including reviewing future Congressional or Treasury Department guidance, before a determination can be made.  The range of reasonably possible amounts, based upon the law, that are being considered for repatriation due to the aforementioned provision is between zero and $500,000.  The related potential range of income tax is between zero and $26,250.

          In December 2004, the FASB issued FASB Staff Position No. FAS 109-1, Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004 (“FSP FAS
109-1”).  FSP FAS 109-1 clarifies that the qualified production activities deduction should be treated as a special deduction as

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described in SFAS No. 109.  The impact of the deduction will be reported in the period in which the deduction is claimed. The Company is in the process of assessing the effect of FSP FAS 109-1 on its consolidated financial statements.

          In March 2005, the FASB issued Financial Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (“FIN No. 47”). FIN No. 47 describes a conditional asset retirement obligation as a legal obligation to perform an asset retirement activity whose timing or method of settlement is conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing or method of settlement. Thus, the timing or method of settlement may be conditional on a future event. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. FIN No. 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN No. 47 is effective for fiscal years ending after December 15, 2005. The Company is in the process of assessing the effect of FIN No. 47 on its consolidated financial statements.

          In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (“SFAS No. 154”), which will require entities that voluntarily make a change in accounting principle to apply that change retrospectively to prior periods’ financial statements, unless this would be impracticable. SFAS No. 154 supersedes Accounting Principles Board Opinion No. 20, Accounting Changes (“APB No. 20”), which previously required that most voluntary changes in accounting principle be recognized by including in the current period’s net earnings the cumulative effect of changing to the new accounting principle. SFAS No. 154 also makes a distinction between “retrospective application” of an accounting principle and the “restatement” of financial statements to reflect the correction of an error.  Another significant change in practice under SFAS No. 154 will be that if an entity changes its method of depreciation, amortization, or depletion for long-lived, non-financial assets, the change must be accounted for as a change in accounting estimate. Under APB No. 20, such a change would have been reported as a change in accounting principle. SFAS No. 154 applies to accounting changes and error corrections that are made in fiscal years beginning after December 15, 2005.

          In February 2006 the FASB issued SFAS No. 155, Accounting for Certain Hybrid Instruments (“SFAS No. 155”), 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 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. SFAS No. 155 also clarifies and amends certain other provisions of SFAS No. 133 and SFAS No. 140. This statement is effective for all financial instruments acquired or issued in fiscal years beginning after September 15, 2006. The Company is in the process of assessing the effect of SFAS No. 155 on its consolidated financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

          During the period from the Company’s fiscal 2005 year end (July 31, 2005) to the end of the Company’s second fiscal quarter (January 31, 2006), there was no material change in the market risk information previously reported in Item 7A of the Company’s Annual Report on Form 10-K for its fiscal year ended July 31, 2005.

ITEM 4. CONTROLS AND PROCEDURES.

          As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures as defined in Rule 13a–15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission’s rules and forms.

          There were no changes in the Company’s internal control over financial reporting during the Company’s fiscal second quarter ended January 31, 2006, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

          It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

(In thousands)

          In February 1988, an action was filed in the Circuit Court for Washtenaw County, Michigan (“Court”) by the State of Michigan (“State”) against Gelman Sciences Inc. (“Gelman”), a subsidiary acquired by Pall Corporation (the “Company” or “Pall”) in February 1997. The action sought to compel Gelman to investigate and remediate contamination near Gelman’s Ann Arbor facility and requested reimbursement of costs the State had expended in investigating the contamination, which the State alleged was caused by Gelman’s disposal of waste water from its manufacturing process. Pursuant to a consent judgment entered into by Gelman and the State in October 1992 (amended September 1996 and October 1999), which resolved that litigation, Gelman is remediating the contamination without admitting wrongdoing. In February 2000, the State Assistant Attorney General filed a Motion to Enforce Consent Judgment in the Court seeking approximately $4,900 in stipulated penalties for the alleged violations of the consent judgment and additional injunctive relief. Gelman disputed these assertions. Following an evidentiary hearing in July 2000, the Court took the matter of penalties “under advisement.” The Court issued a Remediation Enforcement Order (“the REO”) requiring Gelman to submit and implement a detailed plan that will reduce the contamination to acceptable levels within five years. Gelman’s plan has been approved by both the Court and the State.  Although Gelman has met monthly milestones established under the plan and although contaminant concentrations have been significantly reduced, groundwater concentrations remain above acceptable levels in much of the affected area.  The Court, however, concluded that Gelman was in compliance with the terms the REO in a subsequent order issued in December 2004 (see below) and has expressed its satisfaction with Gelman’s progress during hearings both before and after the five year period expired.  Neither the State nor the Court has sought or suggested that Gelman should be penalized based on the continued presence of groundwater contamination at the site. 

          In February 2004, the Court instructed Gelman to submit its Final Feasibility Study describing how it intends to address an area of groundwater contamination not addressed by the previously approved plan.  Gelman has submitted its Feasibility Study as instructed.  The State also submitted its plan for remediating this area of contamination to the Court.  On December 17, 2004, the Court issued its Order and Opinion Regarding Remediation and Contamination of the Unit E Aquifer (the “Unit E Order”).  The Court adopted, with limited modifications, Gelman’s remediation plan for this area of contamination.  The Court also noted that Gelman was in compliance with the Court’s previous REO.  The State has not appealed the Unit E Order.  Gelman is now in the process of implementing the requirements of the Order.

          In correspondence dated June 5, 2001, the State asserted that additional stipulated penalties in the amount of $142 were owed for a separate alleged violation of the consent judgment. The Court found that a “substantial basis” for Gelman’s position existed and again took the State’s request “under advisement”, pending the results of certain groundwater monitoring data. Those data have been submitted to the Court, but no ruling has been issued.  On August 9, 2001, the State made a written demand for reimbursement of $227 it has allegedly incurred for groundwater monitoring. Gelman considers this claim barred by the consent judgment.

          On May 12, 2004, the City of Ann Arbor (the “City”) filed a lawsuit against Gelman in Washtenaw County Circuit Court.  The City’s suit seeks damages, including the cost of replacing a municipal water supply well allegedly affected by the 1,4-dioxane groundwater contamination, as well as injunctive relief in the form of an order requiring Gelman to remediate the soil and groundwater beneath the City.  The contaminant levels allegedly detected in the municipal well at issue, however, are well below applicable cleanup standards and Gelman will vigorously defend against the claim. 

          By Order dated July 19, 2005, the Court granted Gelman’s motion for partial summary disposition, in part, dismissing two of the City’s three common law claims.  In December 2005, Gelman filed two motions for partial summary disposition seeking dismissal of the City’s claims for injunctive relief and the majority of its monetary claims.  The City filed a motion for summary disposition with regard to Gelman’s liability under state statute.  Rather than hear the motions, the Court ordered the parties into settlement facilitation that is to be concluded by June 1, 2006.  To accommodate the facilitation, the trial in this matter has been rescheduled to August 21, 2006.       

          On June 25, 2004, the Company was sued in the United States District Court for the Eastern District of Michigan by a private plaintiff in connection with the groundwater contamination.  The complaint seeks both money damages and injunctive relief requiring remediation of the contamination.  The plaintiff also seeks to represent a larger class of property owners and residents who plaintiff claims are affected by the groundwater contamination. On August 25, 2004, the Company filed a motion for summary judgment seeking to dismiss the plaintiff’s claims.  In response, plaintiff’s counsel sought and was granted permission to amend the complaint.  An amended complaint was filed on November 17, 2004, which added seven plaintiffs.  The Company renewed its motion for summary judgment on December 27, 2004, asserting various grounds for dismissing the complaint as to each plaintiff.  As ordered by the Court, the Company withdrew its motion to allow plaintiffs an opportunity to further amend its complaint and conduct limited discovery.  Plaintiffs filed a second amended complaint on March 9, 2005, adding two claims under the federal Resource Conservation and Recovery Act (“RCRA”).  Discovery on specific issues related to the seven plaintiffs has been completed, and on October 17, 2005, the Company renewed for a third time its motion for summary judgment , asserting that none of the plaintiffs have established claims under any of the counts alleged, including RCRA. By order dated January 30, 2006, the Court granted the Company’s motion and dismissed the entire case.  To date, the plaintiffs have not sought to appeal this order. 

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          On August 10, 2005, the City filed a lawsuit against Gelman under the Federal Superfund Statute (“CERCLA”) for recovery of the City’s alleged response costs, including well replacement costs.  The City is seeking in this matter essentially the same relief it is seeking in the above-described state court action.  Gelman filed its responsive pleadings on September 15, 2005 and will vigorously defend the lawsuit. In October, 2005, Gelman filed a Motion for Stay, seeking to stay these federal proceedings pending resolution of the parallel state court action.  The parties have agreed to include this matter in the settlement facilitation ordered by the state court and to stay this matter until June 1, 2006 if the Court denies Gelman’s stay motion.

          A local resident and the City of Ann Arbor filed petitions for a contested case on November 26, 2005 and November 30, 2005, respectively.  The petitions challenge various aspects of the discharge permit issued to Gelman by the State on September 30, 2005.  The petitions commence an administrative adjudicative hearing, which can result in changes to the discharge permit.  The Company does not believe there is substantive merit to the claims made in either petition.  The Administrative Law Judge has consolidated both petitions into one proceeding.  The Administrative Law Judge has also stayed this proceeding until June 1, 2006 to allow the City and Gelman to attempt to resolve this matter through the facilitative process described above.  No damages are being sought in this proceeding.

          The Company’s condensed consolidated balance sheet at January 31, 2006 contains a reserve for environmental liabilities of approximately $21,778, which relates primarily to the aforementioned items. In the opinion of management, the Company is in substantial compliance with applicable environmental laws and its accruals for environmental remediation are adequate at this time.

          Reference is also made to the Contingencies and Commitments note in the notes accompanying the condensed consolidated financial statements in this report. 

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

(a)	The Annual Meeting of Shareholders of the Company was held on November 16, 2005.
(b)	Not required. Proxies for the meeting were solicited pursuant to Regulation 14 under the Securities Exchange Act of 1934. There was no solicitation in opposition to management’s director nominees as listed in the proxy statement and all of management’s nominees were elected.
(c)	The matters voted upon and the results of the voting were as follows:
	Proposal I – Election of Directors
	Holders of 110,351,751 shares of common stock voted either in person or by proxy for the election of three directors. The number of votes cast for each nominee were as indicated below:

Director	Total vote for each director		Total vote withheld each director
Marcus Wilson		107,280,454		3,071,297
Ulrich Haynes, Jr.		107,071,000		3,280,751
Edwin W. Martin, Jr.		107,181,867		3,169,884

Proposal II – Approval of an amendment to the Employee Stock Purchase Plan

The amendment to the Employee Stock Purchase Plan was approved as follows:

Shares for	Against		Abstain		No Vote
96,293,508		1,575,205		744,324		11,738,714

(d) Not applicable.

ITEM 6. EXHIBITS.

          See the Exhibit Index for a list of exhibits filed herewith or incorporated by reference herein.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Pall Corporation
March 13, 2006		/s/ LISA MCDERMOTT
		Lisa McDermott
		Chief Financial Officer

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EXHIBIT INDEX

Exhibit Number	Description of Exhibit
3(i)*	Restated Certificate of Incorporation of the Registrant as amended through November 23, 1993, filed as Exhibit 3(i) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended July 30, 1994.
3(ii)*	Bylaws of the Registrant, as amended on October 13, 2005, filed as Exhibit 3(ii) to the Registrant’s Form 8-K filed on October 18, 2005.
10.1†‡	Pall Corporation 2005 Stock Compensation Plan as amended effective January 19, 2006
31.1†	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2†	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1†	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
32.2†	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.

*	Incorporated herein by reference.
†	Exhibit filed herewith.
‡	Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(c) of Form 10-K.

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EX-10.1

Exhibit 10.1

PALL CORPORATION

2005 STOCK COMPENSATION PLAN

1.        Purpose

          This document sets forth the Pall Corporation 2005 Stock Compensation Plan as adopted by the Board of Directors of Pall Corporation on September 17, 2004, approved by shareholders at the 2004 Annual Meeting of Shareholders on November 17, 2004 and amended by the Board of Directors on July 19, 2005 and January 19, 2006.

          The purpose of the Plan is to attract and retain individuals of outstanding ability to serve as employees in positions of responsibility with the Corporation and its Affiliated Companies, or to serve as non-employee directors of the Corporation, by providing them with the opportunity to acquire a proprietary interest (or to increase their proprietary interest) in the Corporation, and to provide them with incentives and awards that will motivate their efforts and contributions towards the success of the Corporation and its Affiliated Companies and the growth of their businesses.

2.        Definitions

          As used herein, the following terms shall have the following meanings:

          “Affiliated Companies” shall mean each direct or indirect subsidiary of the Corporation.

          “Annual Award Units” shall mean Units awarded to an Eligible Director pursuant to Section 8.

          “Annual Award Grant Date” shall mean, with respect to any calendar year beginning on or after January 1, 2005, January 5 of such year or, if January 5 of such year is not a Trading Day, the next day following January 5 of such year that is a Trading Day.

          “Award” shall mean the grant of any Option, Share or Unit to any Eligible Employee or Eligible Director under the Plan.

           “Beneficiary” shall mean the person or persons designated by a Participant in accordance with Section 15 to receive any payment that is required to be made under the Plan upon or after the Participant’s death.

          “Board of Directors” shall mean the Board of Directors of the Corporation.

          “CEO” shall mean the Chief Executive Officer of the Corporation.

          “Change in Control” means the occurrence of any of the following:

(a)	the “Distribution Date” as defined in Section 3 of the Rights Agreement dated as of November 17, 1989 between the Corporation and United States Trust Company of New York as Rights Agent, as amended by Amendment No. 1 thereto dated April 20, 1999, and as the same may have been further amended or extended to the time in question or in any successor agreement (the “Rights Agreement”); or
(b)	any event described in Section 11(a)(ii)(B) of the Rights Agreement; or
(c)	any event described in Section 13 of the Rights Agreement; or
(d)	the date on which the number of duly elected and qualified directors of the Corporation who were not either elected by the Board of Directors or nominated by the Board of Directors or its Nominating Committee for election by the shareholders shall equal or exceed one-third of the total number of directors of the Corporation as fixed by its by-laws;

provided, however, that no Change in Control shall be deemed to have occurred, and no rights arising upon a Change in Control as provided in Section 12 hereof shall exist (other than the rights provided for in Section 12(b) hereof), to the extent that the Board of Directors so determines by resolution adopted and not rescinded prior to the Change in Control.

          “Code” shall mean the Internal Revenue Code of 1986, as amended.

          “Committee” shall mean (i) the Board of Directors, with respect to any Award that may be granted, or that has been granted, to any Eligible Director; (ii) the Compensation Committee, with respect to any Award that may be granted, or that has been granted, to any Eligible Employee, except as otherwise provided in (iii); or (iii) the CEO, with respect to those specific matters pertaining to Awards to Eligible Employees who are not Elected Officers that are within the scope of the authority granted to the CEO under Section 14(d) or delegated to the CEO by the Compensation Committee under to Section 14(e).

          “Common Stock” shall mean the common stock ($0.10 par value) of the Corporation.

          “Compensation Committee” shall mean the Compensation Committee of the Board of Directors.

          “Corporation” shall mean Pall Corporation, a New York Corporation.

          “Covered Executive” shall mean, with respect to any Award granted hereunder, any individual who at the Date of Grant of such Award is a “Covered Employee” of the Corporation for such year for purposes of section 162(m) of the Code.

          “Date of Grant” shall mean, with respect to any Award, the date on which the Committee approves the grant of such Award, or such later date as may be specified as the date of grant of such Award in the instrument evidencing the grant of such Award.

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          “Disability” shall mean, with respect to any Eligible Employee, such employee’s “permanent and total disability” as defined in section 22(e)(3) of the Code or any successor provision.

          “Dividend Equivalent Units” shall mean additional Units credited with respect to a Participant’s Restricted Units, Performance Units, or Annual Award Units pursuant to Section 6(c), Section 7(b) or Section 8(b).

          “Dividend Payment Date” shall mean each date on which the Corporation pays a dividend on its Common Stock.

          “Elected Officer” shall mean any individual who is an Elected Officer under Section 4.01(a)(i) of the By-Laws of the Corporation.

          “Eligible Director” shall mean any member of the Board of Directors who is not an employee of the Corporation or any of its Affiliated Companies.

          “Eligible Employee” shall mean any employee of the Corporation or any of its Affiliated Companies who, in the judgment of the Committee, is expected to make significant contributions to the success of the Corporation and its Affiliated Companies and to the growth of their businesses.

          “Fair Market Value” shall mean, with respect to any Share or Unit or any fractional Share or fractional Unit as of any date of reference herein, the closing price of a share of Common Stock as reported in the New York Stock Exchange Consolidated Transactions  for such date or, if such date is not a Trading Day, on the next Trading Day preceding such date.

          “Incentive Stock Option” shall mean an Option that is an “incentive stock option” within the meaning of Section 422 of the Code.

          “Non-Qualified Stock Option” shall mean an Option that is not an Incentive Stock Option.

          “Option” shall mean an option to purchase Shares granted pursuant to Section 5 of the Plan or, solely for purposes of Section 5(h)(ii), granted under any other stock option plan maintained by the Corporation.

          “Participant” shall mean any Eligible Employee or Eligible Director who holds an Award granted under the Plan, and  any successor, permitted transferee or  Beneficiary that succeeds to such individual’s interest in such Award.

          “Performance Goals” shall mean the performance goals established by the Committee in connection with Awards granted to Eligible Employees under Section 7 that must be met in order for payment to be made with respect to such Awards.

          “Performance Period” shall mean the period established by the Committee for measuring whether, and to what extent, any Performance Goals established in connection with any Award granted under Section 7 hereof have been met.

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          “Performance Shares” shall mean Shares that may be issued and delivered  at the end of a Performance Period pursuant to an Award made to an Eligible Employee under Section 7, depending on the achievement, or the level of achievement, of one or more Performance Goals within such period, as provided in Section 7.

          “Performance Units” shall mean Units credited to an Eligible Employee at the beginning of a Performance Period pursuant to an Award made to such employee under Section 7, and any Dividend Equivalent Units that are credited to the employee with respect to such Units during such Performance Period, payment with respect to which Units and related Dividend Equivalent Units depends on the achievement, or the level of achievement, of one or more Performance Goals within such period, as provided in Section 7.

          “Plan” shall mean the Pall Corporation 2005 Stock Compensation Plan, as set forth herein and as amended from time to time.

          “Pro Rata Portion” shall mean, with respect to any portion of the Restricted Shares or Restricted Units granted pursuant to an Award made hereunder to an Eligible Employee, or with respect to any Performance Shares or Performance Units included in an Award made hereunder to an Eligible Employee, the percentage determined by dividing (i) the number of months in the period commencing on the first day of the Restricted Period established for such portion of the Restricted Shares or Restricted Units so granted, or the Performance Period established for the Performance Shares or Performance Units so awarded, and ending on the date of the Eligible Employee’s Termination of Employment, by (ii) the total number of months in such Restricted Period, or in such Performance Period.

          “Restricted Period” shall mean the period of time during which Restricted Shares or Restricted Share Units are subject to Restrictions as set forth in Section 6.

          “Restricted Shares” shall mean Shares which are granted subject to Restrictions pursuant to Section 6.

          “Restricted Units” shall mean Units credited to an Eligible Employee subject to Restrictions at the beginning of a Restricted Period pursuant to an Award made to such employee under Section 6, and any Dividend Equivalent Units that are credited to the employee with respect to such Units during such Restricted Period as provided in Section 6.

          “Restrictions” shall mean the restrictions to which Restricted Shares or Restricted Units are subject under the provisions of Section 6.

          “Retirement” shall mean the termination of a Participant’s employment with the Corporation and all of its Affiliated Companies, if at the time of such termination of employment the Participant has attained age 62 and is eligible to receive a Retirement Benefit under the Pall Corporation Cash Balance Pension Plan or (ii), in the case of any Participant who is not a resident of the U.S., a similar type of benefit under any plan or program maintained by the Corporation or any of its Affiliated Companies (or to which the Corporation or any of its Affiliated Companies makes contributions) that provides benefits to Employees upon their retirement.

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          “Share” shall mean a share of Common Stock.

          “Termination of Board Membership” shall mean, with respect to any Eligible Director, his or her ceasing to be a member of the Board of Directors.

          “Termination of Employment” shall mean, with respect to any Eligible Employee, his or her ceasing to be employed by the Corporation or any of its Affiliated Companies.

          “Trading Day” shall mean any day on which the New York Stock Exchange is open for trading.

          “Unit” shall mean a unit of measurement equivalent to one share of Common Stock, with none of the attendant rights of a shareholder of such share, (including among the rights which the holder of a Unit does not have are the right to vote such share and the right to receive dividends thereon), except to the extent otherwise specifically provided herein.

3.        Awards

           (a)        Form of Awards.  Awards under the Plan may be made in the form of Options, Restricted Shares, Restricted Units, Performance Shares, Performance Units, and Annual Award Units.  An Award in any of the foregoing forms  other than Annual Award Units may be granted to any individual Eligible Employee, or to any group of Eligible Employees, upon terms and conditions that differ from the terms and conditions upon which any other Awards in the same form are made to other individual Eligible Employees or groups of Eligible Employees.

           (b)        Written Instrument.  Each Award made to an Eligible Employee or Eligible Director under the Plan shall be evidenced by a written instrument in such form as the Committee shall prescribe, setting forth the terms and conditions of the Award.  The instrument evidencing the grant of any Award hereunder shall specify that the Award shall be subject to all of the terms and provisions of the Plan as in effect from time to time but subject to the limitation on amendments set forth in Section 16 of the Plan.

           (c)        Surrender and Exchange of Awards.  The Committee may in its discretion grant to a Participant who has been granted an Award under the Plan or an award under any other employee compensation or benefit plan maintained by the Corporation or any of its Affiliates (any such Award or award is referred to herein as a “Prior Award”), in exchange for the surrender and cancellation of such Prior Award or any portion thereof, a new Award under the Plan. As the Committee may determine in its discretion,  the new Award so granted  may be in a form different than that of the Prior Award surrendered, and may be granted subject to  terms and conditions that differ from those to which the surrendered Prior Award were subject. Notwithstanding the foregoing, no grant of a new Award in exchange for a Prior Award may be made hereunder unless (i) the aggregate fair value of the new Award does not exceed the aggregate fair value of the Prior Award, determined as of the time the new Award is granted; and (ii) the grant of the new Award would not constitute a “repricing” of any Option or would not otherwise be treated as a “material revision” of the Plan for purposes of the applicable rules of the New York Stock Exchange.

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4.       Shares Available for Awards

          Shares distributed in respect of  Awards made under the Plan may be authorized but unissued Shares, Shares held in the treasury of the Corporation, or Shares purchased by the Corporation on the open market at such time or times and in such manner as it may determine.  The Corporation shall be under no obligation to issue or acquire Shares in respect of an Award made under the Plan before the time when delivery of Shares is due under the terms of the Award.  The number of Shares available for distribution in respect of Awards made under the Plan shall be subject to the following limitations:

          (a)        The aggregate number of Shares that may be distributed in respect of Awards made under the Plan shall be limited to 5,000,000 Shares.  Of that aggregate number, no more than 2,500,000 Shares in the aggregate shall be available for Awards of  Restricted Shares, Restricted Units, Performance Shares, Performance Units and Annual Award Units. The maximum aggregate number of Shares that may be issued pursuant to the exercise of Incentive Stock Options granted under the Plan shall not exceed 2,500,000 Shares.

          (b)        Upon the grant of any Award, the overall aggregate number of Shares available for further Awards under the Plan , and if the Award so granted  was in a form subject to a limitation on the aggregate number of shares available for Awards in that form, the aggregate number of Shares available for further Awards under the Plan in that form, shall be reduced by the number of Shares subject to the Award so granted.

          (c)        There shall be added back to the aggregate number of Shares available for the grant of Awards under the Plan, as determined under (a) and (b) above, the following:  (i) any Shares as to which an Option granted hereunder has not been exercised at the time of its expiration, cancellation or forfeiture; (ii) any Shares that otherwise would have been issued upon the exercise of an Option granted hereunder that are surrendered in payment of the exercise price of such Option; (iii) any Shares included in any other form of Award granted hereunder, to the extent that the Participant’s right to receive such Shares, or any cash payment in settlement of such Award, becomes forfeited; (iv) any Shares that otherwise would have been issued upon the exercise of an Option or in payment with respect to any other form of Award granted hereunder, that are surrendered in payment or partial payment of taxes required to be withheld with respect to the exercise of such option or the making of such  payment; (v) any Shares represented by Restricted Units or Performance Units granted hereunder as to which payment  is made in cash instead of by the issuance and delivery of Shares; and (vi) any Shares subject to an Option granted hereunder, or covered by any other form of Award made hereunder, to the extent such Option or other Award is surrendered in exchange for any other Award made hereunder, subject to the limitations set forth in the last sentence of Section 3(c) hereof.

          (d)        The limitations provided in this Section 4 shall be subject to adjustment as provided in Section 13.

5.       Awards of Options.

          Subject to the limitations set forth in Section 4 and to the other terms and conditions of the Plan, Options may be granted under the Plan to such Eligible Employees for the purchase of

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such number of Shares, at such times, and upon such terms and conditions, as the Committee in its discretion may determine. Options shall be granted in accordance with the provisions set forth below.

          (a)        Type of Options.  Each Option granted hereunder shall be identified in the instrument evidencing such grant as either (i) an Option intended to be treated as an Incentive Stock Option, or (ii) an Option that shall be treated as a Non-Qualified Stock Option.

          (b)        Maximum Number of Shares Subject to Options.  The total number of Shares with respect to which Options may be granted to any Eligible Employee during any period of 24 consecutive months shall not exceed 300,000 Shares, subject to adjustment as provided in Section 13.

          (c)        Term of Options.  The term during which an Option may be exercised shall be such period of time as determined by the Committee and specified in the instrument evidencing the grant of the Option, but in no event may the term of any Option exceed ten years from the Date of Grant of the Option.  Notwithstanding any other provision in the Plan to the contrary, no Option may be exercised after its expiration.

          (d)        Exercise of Options.  Each Option granted hereunder shall become exercisable, in whole or in part, at such time or times during its term as the instrument evidencing the grant of such Option shall specify.  To the extent that an Option  has become exercisable pursuant to the preceding sentence, it may be exercised thereafter at any time or from time to time during its term, as to any or all Shares as to which the Option has become and remains exercisable, subject to the provisions of (e) below.

          (e)        Termination of Employment.  Except as the instrument evidencing the grant of an Option may otherwise provide, the portion of any outstanding Option held by an Eligible Employee on the date of his or her Termination of Employment that has not become exercisable prior to such date, and the portion of such Option which was exercisable but had not been exercised prior to such date, shall be forfeited on such date.

          The instrument evidencing the grant of an Option may provide for the portion of the Option that is exercisable at the time of the Eligible Employee’s Termination of Employment to remain exercisable, and for the portion of such Option that is not yet exercisable at such time to become exercisable in accordance with the terms of the Option and remain exercisable thereafter, during such period of time after the date on which the Eligible Employee’s Termination of Employment occurs (but not beyond the expiration of the term of the Option), in such circumstances and subject to such terms and conditions, as are specified in such instrument.  However, to the extent that any Option granted hereunder to an Eligible Employee as an Incentive Stock Option is exercised more than three months after the date of such employee’s Termination of Employment for any reason other than Disability, or more than one year after such date if the employee’s Termination of Employment occurred because of Disability, the Option shall be treated as a Non-Qualified Stock Option for purposes of the Plan.

          (f)        Exercise Price and Method of Exercise.  The price at which Shares may be purchased upon any exercise of an Option shall be the price per share determined by the

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Committee and specified in the instrument evidencing the grant of such Option, but in no event shall the exercise price per share be less than (i) the Fair Market Value of a Share determined as of the Date of Grant of the Option, or (ii), if greater, the par value of a Share.

          An Option shall be exercised by delivery of a written notice of exercise, in a form satisfactory to the Committee, to the Corporation at its principal business office and addressed to the attention of the Corporation’s Secretary or such other person as the Corporate Secretary may have designated to receive such not ice.  The notice shall specify the number of Shares with respect to which the Option is being exercised.  The notice shall be accompanied by payment of the exercise price of the Shares for which the Option is being exercised, which payment shall be made under one or more of the methods of payment provided in (g) below.  An Option may not be exercised at any one time as to less than 100 Shares, or less than the number of Shares to which the Option is then exercisable if that number is less than 100 Shares.

          (g)        Payment.  Payment of the exercise price for Shares purchased upon the exercise of an Option shall be made by one, or by a combination of any, of the following methods:  (i) in cash, which may be paid by check or other instrument acceptable to the Corporation, or by wire transfer of funds, in each case in United States dollars; (ii) if  permitted by the Committee and subject to any terms and conditions it may impose on the use of such methods, by (A) the delivery to the Corporation of other Shares owned by the Participant, or (B) the surrender to the Corporation of Shares that otherwise would have been  delivered to the Participant upon exercise of the Option; (iii) to the extent permissible under applicable law, through any cashless exercise sale and remittance procedure that the Committee in its discretion may from time to time approve; (iv) to the extent permissible under applicable law and permitted by the Committee, by the execution by the Participant and delivery to the Corporation of a promissory note or other instrument evidencing the Participant’s agreement to pay part or all of the option exercise price on a deferred or installment payment basis, upon such terms and conditions (including without limitation terms requiring Shares purchased upon the exercise of the Option to be pledged to the Corporation to secure payment of any outstanding balance of the option exercise price ) as the Committee shall require; or (v) any other method of payment as the Committee may from time to time approve.

          For purposes of determining the portion of the exercise price payable upon the exercise of an Option that will be treated as satisfied by the delivery or surrender of Shares pursuant to clause (ii) (A) or (B) above, Shares so delivered or surrendered shall be valued at their Fair Market Value determined as of the Trading Day next preceding the date on which the Option is exercised .

          (h)        Incentive Stock Options.   Notwithstanding any other provisions of the Plan, Incentive Stock Options granted under the Plan shall be subject to the following provisions:

            (i)        No Incentive Stock Option may be granted under the Plan after November 16, 2014, unless the shareholders of the Corporation have approved an extension of the period for granting Incentive Stock Options under the Plan beyond that date.

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            (ii)       To the extent that the aggregate Fair Market Value of Shares with respect to which Incentive Stock Options granted under the Plan and under all other stock option plans maintained by the Corporation are exercisable for the first time by a Participant during any calendar year shall exceed $100,000, the Incentive Stock Options so exercisable shall be treated as Non-Qualified Stock Options.  For purposes of the foregoing, the Fair Market Value of Shares as to which any Incentive Stock Option may be exercised shall be determined as of the date on which such Option is granted. The determination of whether the limitation set forth in the second preceding sentence shall apply with respect to any Incentive Stock Option granted under the Plan shall be made in accordance with applicable provisions of section 422 of the Code and  the regulations issued thereunder.

            (iii)      No Incentive Stock Option shall be granted to an Eligible Employee if, as of the Date of Grant of such Option, such Eligible Employee owns stock possessing more than ten percent of the total combined voting power of all classes of stock of the Corporation, unless (A) the exercise price per Share under such Option is at least 110% percent of the Fair Market Value of a Share determined as of the Date of Grant of such Option, and (B) such Option is not exercisable after the expiration of five years from the Date of Grant of such Option.

            (iv)      The instrument evidencing the grant of any Incentive Stock Option shall require that if any Shares acquired upon the exercise of such option are disposed of within 2 years from the Date of Grant of such option, or within one year from the date as of which the Shares disposed of were transferred to the Participant pursuant to the exercise of such option,  the Participant shall give the Corporation written notice of such disposition, within ten days following the date of such disposition. 

          (i)        Other Option Provisions.  The instrument evidencing the grant of any Option hereunder may contain such other terms and conditions, not inconsistent with the provisions of the Plan or any applicable law, as the Committee may determine.

          (j)        Rights of a Shareholder.  Upon the exercise of an Option or any portion thereof in accordance with the Plan, the provisions of the instrument evidencing the grant of such Option and any applicable rules and regulations established by the Committee, the holder of the Option shall have all of the rights of a shareholder of the Corporation with respect to the Shares issued as a result of such exercise.

6.        Awards of Restricted Shares and Restricted Units

          Subject to the limitations set forth in Section 4 and to the other terms and conditions of the Plan, Restricted Shares or Restricted Units may be granted to such Eligible Employees, at such times, and in such amounts, as the Committee may determine in its discretion. Restricted Shares  and Restricted Units shall be granted in accordance with the provisions set forth below.

          (a)        Restrictions and Restricted Period.  At the time of each grant of Restricted Shares or Restricted Units to any Participant, the Committee shall establish a period of time within which the Restricted Shares or Restricted Units covered by such grant (and the Participant’s right

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to receive payment with respect to such restricted Units) may not be sold, assigned, transferred (other than a transfer to the Participant’s Beneficiary occurring by reason of the Participant’s death), made subject to gift, or otherwise disposed of, mortgaged, pledged or otherwise encumbered, whether voluntarily or by operation of law.  The Committee in its discretion may prescribe a separate Restricted Period for any specified portion of the Restricted Shares or Restricted Units granted pursuant to any Award.

          (b)        Rights While Restricted Shares Remain Subject to Restrictions.  Restricted Shares granted to a Participant hereunder shall be issued to the Participant as of the Date of Grant as uncertificated shares.  Until the Restrictions to which such shares are subject lapse in accordance with the provisions of (d) below or Section 12(c), the Restricted Shares granted to a Participant shall be held in the Participant’s name in a bookkeeping account maintained by the Corporation. A separate account shall be maintained for all Restricted Shares granted to a Participant with a Restricted Period ending on the same date.

          Except for the Restrictions to which such shares are subject, and subject to the forfeiture provisions applicable under (e) below, a Participant shall have, with respect to all Restricted Shares so held for his account, all of the rights of a shareholder of the Corporation, including full voting rights with respect to such shares and the right to receive currently with respect to the Participant’s Restricted Shares all dividends and other distributions payable generally on the Corporation’s Shares. If any dividends or distributions so payable are paid in Shares, the Shares paid as a dividend or distribution with respect to a Participant’s Restricted Shares shall be subject to the same Restrictions and provisions relating to forfeiture as apply to the Restricted Shares with respect to which they were paid.  Such stock dividend Shares shall themselves be treated as Restricted Shares, and shall be credited to the same account which the Corporation maintains for those Restricted Shares of the Participant with respect to which such stock dividends or distributions were paid.

          Notwithstanding the foregoing, if the instrument evidencing the grant of any Restricted Shares to a Participant so provides, all cash dividends and distributions payable generally on the Corporation’s Shares that are otherwise payable with respect to the Restricted Shares granted to the Participant shall not be paid currently to the Participant but instead, shall be applied to the purchase of additional Shares for the Participant’s account. The additional Shares so purchased shall be subject to the same Restrictions and provisions relating to forfeiture as apply to the Restricted Shares with respect to which they were paid.  Such additional Shares shall themselves be treated as Restricted Shares, and shall be credited to the same account which the Corporation maintains for those Restricted Shares of the Participant with respect to which such dividends or distributions were paid.  The purchase of any such additional Shares shall be made either (i) through the Corporation’s Dividend Reinvestment Plan, or (ii) in accordance with such other procedure as may be specified in the instrument evidencing the grant of the Restricted Shares on which such dividends are paid.

          (c)        Rights While Restricted Units Remain Subject to Restrictions.  No Shares shall be issued at the time any award of Restricted Units is made hereunder. Restricted Units granted to a Participant hereunder shall be credited to a bookkeeping account maintained by the Corporation for the Participant.  A separate account shall be maintained for all Restricted Units granted to a

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Participant with a Restricted Period ending on the same date, and for all Dividend Equivalent Units that are to be credited to such account  in accordance with the next following paragraph.

          Until the Restrictions applicable to the Restricted Units credited upon grant to any account maintained for a Participant  in accordance with the preceding paragraph shall lapse, additional Restricted Units shall be credited to such account with respect to the Restricted Units so credited, as of each Dividend Payment Date.  The number of additional Restricted Units to be credited shall be determined by first multiplying (A) the total number of Restricted Units standing to the Participant’s credit in such account on the day immediately preceding such Dividend Payment Date (including all Dividend Equivalent Units credited to such account on all previous Dividend Payment Dates), by (B) the per-share dollar amount of the dividend paid on such Dividend Payment Date and then, dividing the resulting amount by the Closing Price of one share of Common Stock on such Dividend Payment Date.

          (d)        Lapse of Restrictions and Payment.  Upon the expiration of the Restricted Period for any Restricted Shares or Restricted Units granted to a Participant hereunder but subject to the provisions of (e) below, the Restrictions applicable to such Restricted Shares or Restricted Units shall lapse, and payment with respect to such Restricted Shares or Restricted Units (including any related Dividend Equivalent Units) shall be made in accordance with the following provisions:

            (i)        In the case of Restricted Shares, payment shall be made by delivery to the Participant of a stock certificate for the number of such  Restricted Shares, free and clear of all Restrictions to which such shares were subject. However, if the Restricted Shares with respect to which the applicable Restrictions have lapsed includes a fractional Share, payment for such fractional Share shall be made in cash, in an amount equal to the Fair Market Value of such fractional Share determined as of  the date on which such Restrictions lapsed. Delivery of such stock certificate and any such cash payment shall be made to the Participant as soon after the lapse of the applicable Restriction as is practicable.

             (ii)      In the case of Restricted Units (including related Dividend Equivalent Units), payment shall be made (A) by  the issuance and delivery to the Participant of a stock certificate for a number of Shares equal to the number of whole Restricted Units and related Dividend Equivalent Units with respect to which the applicable Restrictions have lapsed, and (B) by payment in cash for any fractional Restricted Unit payable as a result of the lapse of such Restrictions, in an amount equal to the Fair Market Value of such fractional Restricted Unit determined as of the date as of which such Restrictions lapsed.  Notwithstanding the foregoing, payment for Restricted Units (including related Dividend Equivalent Units) with respect to which the applicable Restrictions have lapsed shall be made solely in cash, in an amount equal to the Fair Market Value of all of such Units and any fractional Unit, determined as of the date on which such Restrictions lapsed, if the instrument evidencing the grant of such Restricted Units so provides.  Payment shall be made in such manner and at such time or times as provided in such instrument.  If such instrument so permits, payment with respect to any part or all of an Eligible Employee’s Restricted Units (including related Dividend Equivalent Units) may

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be deferred, at the Eligible Employee’s election, upon such terms and conditions as are specified in such instrument.

          (e)        Termination of Employment.  Upon an Eligible Employee’s Termination of Employment for any reason prior to the expiration of the Restricted Period for any Restricted Shares or Restricted Units (and related Dividend Equivalent Units) standing to his or her credit immediately prior to such Termination of Employment, the Eligible Employee’s right to receive payment with respect to such Restricted Shares, Restricted Units and Dividend Equivalent Units shall be forfeited and cancelled as of the date of such Termination of Employment, and no payment of any kind shall be made with respect to such Restricted Shares, Restricted Units and Dividend Equivalent Units, except as otherwise provided in the instrument or instruments evidencing the grant of such Shares or Units.

          If the Committee so determines in its discretion, the instrument evidencing the Award of such Restricted Shares or Restricted Units may provide that if the Eligible Employee’s Termination of Employment prior to the end of the Restricted Period established for such Restricted Shares or Restricted Units occurs as a result of the Eligible Employee’s death, Disability, Retirement, or for any other reason other than discharge by the Corporation or any of its Affiliated Companies for “cause” as defined in such instrument, payment shall be made with respect to all or a Pro Rata Portion of such Restricted Shares or Restricted Units and any related Dividend Equivalent Units .  In such case, only the Eligible Employee’s right to receive payment with respect to any remaining portion of the Restricted Shares or Restricted Units (and related Dividend Equivalent Units) for which such Restricted Period was established shall be cancelled and forfeited. Any payment required to be made with respect to an Eligible Employee’s Restricted Shares or Restricted Units (and related Dividend Equivalent Units) pursuant to this paragraph shall be made as soon as practicable after  the date of such employee’s Termination of Employment, and shall be made in the manner specified in Section 6(d)

          (f)        Notice of Code Section 83(b) Election.  A Participant who files an election under section 83(b) of the Code to include in gross income the Fair Market Value of any Restricted Shares granted hereunder while such Shares are still subject to Restrictions shall furnish the Corporation with a copy of the election so filed by the Participant, within ten days of the filing of such election with the Internal Revenue Service.

7.        Awards of Performance Shares and Performance Units

          Subject to the limitations set forth in Section 4 and to the other terms and conditions of the Plan, Performance Shares or Performance Units may be granted to such Eligible Employees, at such times, in such amounts,  and upon such terms and conditions, as the Committee may determine in its discretion.  Performance Shares and Performance Units shall be granted in accordance with the provisions set forth below.

          (a)        Establishment of Performance Goals and Performance Targets.  In connection with each Award of Performance Shares or Performance Units, the Committee shall establish in writing, and the instrument evidencing the grant of such Award shall specify, (i) the Performance Goal or Goals and the Performance Period that will apply with respect to such Award; (ii) the level or levels of achievement of the Performance Goal or Goals that must be met in order for

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payment to be made with respect to the Award; (iii) the number of Performance Shares that will be issued and delivered to the recipient of the Award, or the percentage of the Performance Units (and any related Dividend Equivalent Units) credited to the recipient in connection with the Award as to which payment will be made, if the Performance Goal or Goals applicable to such Award (A) have been fully achieved, (B) have been exceeded, or (C) have not been fully achieved but have been achieved at or beyond any minimum or intermediate level of achievement specified in the instrument evidencing the grant of such Award, and (iv) such other terms and conditions pertaining to the Award as the Committee in its discretion may determine.  In connection with any such Award made to any Covered Executive, the matters described in the preceding sentence shall  be established within such period of time as may be permitted by the regulations issued under section 162(m) of the Code.

          (b)        Accounts and Dividend Equivalent Units for Performance Units Awards.  No Shares shall be issued at the time any award of Performance Units is made hereunder. Performance Units granted to an Eligible Employee hereunder shall be credited to a bookkeeping account maintained by the Corporation for such employee. A separate account shall be maintained for all Performance Units included in each separate Award of Performance Units made to an Eligible Employee, and for all Dividend Equivalent Units that are to be credited with respect to the Performance Units included in such Award in accordance with the next following sentence. If the instrument evidencing the grant of any Award of Performance Units so provides, Dividend Equivalent Units shall be credited with respect to the Performance Units included in such Award on each Dividend Payment Date occurring within the Performance Period applicable to such Award in the same manner as Dividend Equivalent Units are credited with respect to Restricted Units during the applicable Restricted Period, as set forth in Section 6(c) above.

          (c)        Limit on Award Amounts.  The total number of Shares for which any Award of Performance Shares  may be made to any Eligible Employee, and the total number of Units for which any Award of Performance Units may be made to any Eligible Employee (exclusive of any Dividend Equivalent Units credited with respect to the Performance Units awarded to such employee),  may not exceed 75,000  Shares, or 75,000 Units, for each 12-month period included in the Performance Period established for such Award. The foregoing limits shall be subject to adjustment as provided in Section 13.

          (d)        Performance Goals for Covered Executives.  In the case of  any Award of Performance Shares or Performance Units to any Eligible Employee who is a Covered Executive, the Performance Goal or Goals established in connection with such Award shall be based on one or more of the following business criteria, as determined by the Committee in its discretion: (i) the attainment of specified levels of, or increases in, the Corporation’s after-tax or pretax return on stockholder’s equity, (ii) the attainment of specified levels in the fair market value of the Corporation’s Shares; (iii) the attainment of specified levels of growth in the value of an investment in the Corporation’s Shares, assuming that all dividends paid on the Corporation’s Common Stock are reinvested in additional Shares; (iv) the attainment of specified levels of, or increases in, the Corporation’s pre-tax or after-tax earnings, profits, net income, or earnings per share; (v) the attainment of specified levels of, or increases in, the Corporation’s earnings before income tax, depreciation and amortization (EBITDA); (vi) attainment of specified levels of, or increases in, the Corporation’s net sales, gross revenues or cash flow from

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operations; (vii) the attainment of specified levels of, or increases in, the Corporation’s working capital, or in its return on capital employed or invested; (viii) the attainment of specified levels of, or decreases in, the Corporation’s operating costs or any one or more components thereof, or in the amount of all or any specified portion of the Corporation’s debt or other outstanding financial obligations.

          Any of the business criteria described in the preceding sentence which the Committee establishes as a Performance Goal may be measured either by the performance of the Corporation and its Affiliated Companies on a consolidated basis, or by the performance of any one or more of the Corporation’s subsidiaries, divisions, or other business units, as the Committee in its discretion may determine.  In its discretion, the Committee may also establish Performance Goals, based on any of the business criteria described in this Section 7(d), that require the attainment of a specified level of performance of the Corporation, or any of its subsidiaries, divisions or other business units, relative to the performance of other specified corporations, in order for such Goals to be met.

          The Committee may also, in its discretion, include in any Performance Goal the attainment of which depends on a determination of the net earnings or income of the Corporation or any of its subsidiaries, divisions or other business units, provisions which require such determination to be made by eliminating the effects of any decreases in or charges to earnings for (A) the effect of foreign currency exchange rates, (B) any acquisitions, divestitures, discontinuances of business operations, restructurings or other special charges, (C) the cumulative effect of any accounting changes, and (D) any “extraordinary items” as determined under generally accepted accounting principles, to the extent that such decreases or charges referred to in clauses (A) through (D) are separately disclosed in the Corporation’s Annual Report for each fiscal year within the applicable Performance Period.

          (e)        Performance Goals for Non-Covered Executives.  In the case of Awards of Performance Shares or Performance Units made  hereunder to Eligible Employees who are not Covered Executives, the Performance Goal or Goals applicable to such Awards shall be such corporate or individual goals as the Committee in its discretion may determine.

          (f)        Measurement of Performance.  At the end of the Performance Period established in connection with any Award, the Committee shall determine the extent to which the Performance Goal or Goals established for such Award have been attained, and shall determine, on that basis, the number of Performance Shares or Performance Units included in such Award  that have been earned and as to which  payment  will be made pursuant to section 7(h) below, subject to the adjustments provide for in Section (7)(g) and the forfeiture provisions of Section 7(i).  In the case of any Award granted to a Covered Executive, the Committee shall certify in writing the extent to which it has determined that the Performance Goal or Goals established by it for such Award have been attained.

          (g)        Adjustment of Award Amounts.  The Number of Shares or the amount of cash otherwise payable with respect to an Award on the basis of the level of attainment of the applicable Performance Goals as determined by the Committee under Section 7(f) shall be subject to adjustment in accordance with the following provisions.

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            (i)        To the extent not inconsistent with the terms of the Plan and if the instrument evidencing  the Award so provides,  the number of Shares or the amount of cash otherwise so payable with respect to an Award to an Eligible Employee who is not a Covered Executive may be increased or decreased to the extent determined by the Committee in its discretion, based on the Committee’s evaluation of the Eligible Employee’s individual performance or to reflect such other events, circumstances or factors as the Committee in its discretion deems appropriate in determining the extent to which payment should be made with respect to the Eligible Employee’s Award.

            (ii)       The Committee shall not have any authority to increase the number of Shares or the amount of cash otherwise so payable with respect to any Award to a Covered  Executive.  However, if the instrument evidencing such Award so provides, the Committee may in its discretion reduce the number of Shares or the amount of cash otherwise so payable with respect to such Award (A) to reflect any decreases in or charges to earnings that were not taken into account pursuant to clause (A), (B), (C), or (D) of Section 7(e) in determining net earnings or income for purposes of any Performance Goal established in connection with such Award; (B) to reflect any credits to earnings for extraordinary items of income or gain that were taken into account in determining net earnings or income for such purposes; (C) to reflect the Committee’s evaluation of the Covered Executive’s individual performance; or (D) to reflect any other events, circumstances or factors which the Committee believes to be appropriate in determining the extent to which payment should be made with respect to the Covered Executive’s Award.

          (h)        Payment of Awards.  Payment with respect to that number of Performance Shares or Performance Units subject to any Award which the Committee has determined under Section 7(f) above to have been earned, as adjusted to the extent determined by the Committee under Section 7(g), shall be made in accordance with the following provisions:

            (i)        In the case of  any such Performance Shares, payment  shall be made by the issuance and delivery to the Participant of a stock certificate for the requisite number of such Shares. If the instrument evidencing the Award of such Shares so provides, a cash payment shall also be made to the Participant, in an amount equal to all of the dividends that would have been paid to the Participant upon such earned and adjusted number of Shares if such Shares had been issued to the Participant as of the Date of Grant of the Award in question.  Such Shares shall be issued and delivered, and, if applicable, such cash payment shall be made, to the Participant as soon as practicable after the end of the Performance Period applicable to the Award in question.

            (ii)       In the case of any such Performance Units, (including related Dividend Equivalent Units), payment shall be made (A) by the issuance and delivery to the Participant of a stock certificate for a number of Shares equal to the total number of such whole Performance Units and related Dividend Equivalent Units, and (B) by payment in cash for any fractional Unit in an amount equal to the Fair Market Value of such fractional Unit determined as of the Trading Day immediately preceding the date as of which payment is to be made.  Notwithstanding the foregoing, payment for such Performance Units (including related Dividend Equivalent Units) shall be made solely in

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cash, in an amount equal to the Fair Market Value of all of such Units and any fractional Unit, determined as of the Trading Day immediately preceding the date as of which payment is to be made, if the instrument evidencing the grant of such Performance Units so provides.  Payment shall be made in such manner and at such time or times as provided in such instrument.  If such instrument so permits, payment with respect to any part or all of an Eligible Employee’s Performance Units (including any related Dividend Equivalent Units) may be deferred, at the Eligible Employee’s election, upon such terms and conditions as are specified in such instrument.

          (i)        Termination of Employment.  Upon an Eligible Employee’s Termination of Employment for any reason prior to the end of the Performance Period established for any Award of Performance Shares or Performance Units made to the Eligible Employee hereunder,  such Award shall be cancelled as of the date of such Termination of Employment, the Eligible Employee’s right to receive payment with respect to any Performance Shares or Performance Units included in such Award and any Dividend Equivalent Units that were credited with respect to such Performance Units, shall be forfeited as of such date, and no payment of any kind shall be made with respect to such Award, except as otherwise provided in the instrument evidencing the grant of such Award.

          If the Committee so determines in its discretion, the instrument evidencing any  Award of Performance Shares or Performance Units may provide that if the Eligible Employee’s Termination of Employment prior to the end of the Performance Period established for such Award occurs as a result of the Eligible Employee’s death, Disability, Retirement, or for any other reason other than discharge by the Corporation or any of its Affiliated Companies for “cause” as defined in such instrument, payment shall be made at the end of the Performance Period, in accordance with the provisions of Section 7(h), with respect to all or a Pro Rata Portion of the number of Shares and/or the amount of cash that otherwise would have been payable to the Eligible Employee, as determined in accordance with the provisions of Sections 7(f) and (g), if the Eligible Employee’s Termination of Employment had not occurred prior to the end of such Performance Period.  In such case, only the Eligible Employee’s right to receive payment with respect to any remaining portion of the Performance Shares or Performance Units (and related Dividend Equivalent Units) included in such Award shall be cancelled and forfeited.

8.        Awards to Eligible Directors

          Subject to the limitations set forth in Section 4 and to the other terms and conditions of the Plan, Annual Award Units shall be granted to Eligible Directors in accordance with the provisions set forth below:

          (a)        Annual Grants.  In each fiscal year of the Corporation beginning with the fiscal year ending July 31, 2006, each member of the Board of Directors who is an Eligible Director on the Annual Award Grant Date in such fiscal year shall be entitled to receive 1750 Annual Award Units, of which 1000 shall be granted on the Annual Award Grant Date (January 5, 2006) and 750 shall be granted on January 19, 2006.  In each subsequent fiscal year, beginning with the fiscal year ending July 31, 2007, said 1750 Annual Award Units shall automatically be granted on the Annual Award Grant Date.  If any Eligible Director has elected not to receive the Annual Award Units to which he is entitled in any fiscal year beginning with the fiscal year ending July 31, 2006

16

but, prior to the end of such fiscal year, desires to change his election, the Board of Directors shall have the power to award to such Eligible Director, before the end of such fiscal year, the Annual Award Units which he was entitled to receive during such fiscal year.  Each person who is elected a director of the Corporation by shareholders at an annual meeting of shareholders for the first time (i.e., disregarding any previous election of such person by the Board of Directors) and thereby becomes an Eligible Director shall automatically be granted 1,000 Annual Award Units on the date of such annual meeting of shareholders.

          (b)        Accounts and Dividend Equivalent Units.  No Shares shall be issued at the time any Annual Award Units are granted hereunder. Annual Award Units granted to an Eligible Director hereunder shall be credited to a bookkeeping account maintained by the Corporation for the Eligible Director. As of each Dividend Payment Date occurring prior to the date on which  payment with respect to an Eligible Director’s Annual Award Units is made pursuant to (c) below, Dividend Equivalent Units shall be credited to the Eligible Director’s account with respect to all Annual Award Units (and all Dividend Equivalent Units credited to such account on all previous Dividend Payment Dates) standing to the Eligible Director’s credit in such account immediately prior to such Dividend Payment Date. The number of Dividend Equivalent Units to be so credited shall be determined in the same manner as Dividend Equivalent Units are credited with respect to Restricted Units during the applicable Restricted Period, as set forth in Section 6(c) above.

          (c)        Payment with respect to Annual Award Units.  Upon an Eligible Director’s Termination of Board Membership for any reason other than removal for cause in accordance with law, the Eligible Director (or if such Termination has occurred by reason of death, his or her Beneficiary) shall be entitled to receive payment with respect to all Annual Award Units and related Dividend Equivalent Units then standing to his or her credit in the account maintained for the Eligible Director pursuant to (b) above.  Payment shall be made (i) by the issuance and delivery to the Eligible Director, or to his or her Beneficiary, of a stock certificate for a number of Shares equal to the number of whole Annual Award Units and related Dividend Equivalent Units standing to the Eligible Director’s credit immediately prior to such Termination of Board Membership, and (ii) by payment in cash for any fractional Annual Award Unit standing to the Eligible Director’s credit at such time.  Payment shall be made as soon as practicable after the date on which the Eligible Director’s Termination of Board Membership occurs.

          (d)        Forfeiture of Annual Award Units.  Upon an Eligible Director’s Termination of Board Membership as a result of removal for cause in accordance with law, all Annual Award Units and related Dividend Equivalent Units standing to his or her credit immediately prior to such Termination of Board Membership shall be cancelled as of the date of such Termination of Board Membership, the Eligible Director’s right to receive payment with respect to such Annual Award Units and Dividend Equivalent Units shall be forfeited as of such date, and no payment of any kind shall be made with respect to such Annual Award Units and Dividend Equivalent Units.

9.        Transferability of Awards

          Any Option granted to an Eligible Employee under the Plan shall be nontransferable and may be exercised during the Eligible Employee’s lifetime only by the Eligible Employee.  A Participant’s right to receive payment of Shares or cash with respect to any other Award granted

17

to the Participant under the Plan shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors of the Participant.

Notwithstanding the foregoing, if the instrument evidencing the grant of any Award other than an Incentive Stock Option so provides, the recipient of such Award may transfer his or her rights with respect to such Award, or any portion thereof, to any “family member” of the recipient, as that term is defined in the General Instructions to Form S-8 promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended, subject to such limitations, terms and conditions as may be specified in such instrument.

10.     Listing and Qualification of Shares 

          The Corporation, in its discretion, may postpone the issuance, delivery, or distribution of Shares with respect to any Award until completion of such stock exchange listing or other qualification of such Shares under any state or federal law, rule or regulation as the Corporation may consider appropriate, and may require any Participant to make such representations and furnish such information as it may consider appropriate in connection with the issuance or delivery of the Shares in compliance with applicable laws, rules and regulations.

11.     Taxes

          Notwithstanding any other provision of the Plan, the Corporation or any of its Affiliated Companies may make such provisions and take such steps as it may deem necessary or appropriate for the withholding of all federal, state and local taxes required by law to be withheld with respect to the exercise of any Option or with respect any payments to be made in respect of any other form of Award granted to a Participant under the Plan, including but not limited to (i) deducting the amount of taxes so required to be withheld from any other compensation or other amounts then or thereafter payable to the Participant, and/or (ii) withholding delivery of any Shares or payment of any cash amount otherwise required to be delivered or paid to the Participant with respect to the exercise of such Option, or with respect to such other form of Award, until the amount of taxes so required to be withheld has been paid in full to the Corporation or any of its Affiliated Companies.  With the approval of the Compensation Committee and subject to such terms and conditions as it may require, such amount may be paid in Shares previously owned by the Participant, or by the surrender of a  portion of the Shares that otherwise would be delivered or paid to such Participant with respect to his or her Award, or by a combination of payments in cash and Shares.

12.     Change in Control

          Notwithstanding any other provision in the Plan to the contrary (but subject to the “provided, however” clause contained in the definition of “Change in Control” in Section 2), upon the occurrence of a Change in Control, the following provisions shall apply.

          (a)        Each Option outstanding under the Plan on the day preceding the date on which the Change in Control occurs shall become immediately and fully exercisable on the date of the Change in Control, and shall remain fully exercisable, irrespective of the Participant’s

18

subsequent Termination of Employment for any reason, until the date on which the Option otherwise would expire by the passage of time in accordance with its terms.

          (b)        If a Change in Control would be treated as having occurred but for the adoption by the Board of Directors of a resolution described in the “provided, however” clause in the definition of “Change in Control” in Section 2, and if such resolution so provides and has not been rescinded prior to the Change in Control, the Board  of Directors shall have the right in its discretion (i) to direct that all Options then outstanding  and held by Participants shall be cancelled as of a date to be fixed by the Board, provided, however, that not less than 30 days written notice of the date so fixed shall be given to each such Participant, and each such Participant shall have the right during such period (irrespective of the Participant’s Termination of Employment during such period) to exercise his or her Option as to all or any part of the Shares covered thereby, including any Shares as to which the Option has not yet become exercisable, or (ii) to authorize the substitution for each outstanding Option of a new Option, provided that (A) each such new Option has a value at the time it is granted that is at least equal to the value of the outstanding Option in substitution for which it is granted, and contains terms and conditions no less favorable to the Participant than those contained in his or her outstanding Option, and (B) in the case of any new Incentive Stock Option that is granted in substitution of an outstanding Incentive Stock Option, the requirements of section 424(a) of the Code are met with regard to such substitution.

          (c)        The Restricted Periods applicable to all Restricted Shares and Restricted Units (including any related Dividend Equivalent Units) granted to a Participant hereunder that are still outstanding on the day immediately preceding the date on which such Change in Control occurs shall expire on such date; all Restrictions applicable to such outstanding Restricted Shares, Restricted Units and related Dividend Equivalent Units shall lapse on such date; and the Participant’s rights to receive payment with respect to all such outstanding Shares, Restricted Units and related Dividend Equivalent Units shall become nonforfeitable as of such date.  Payment with respect to such outstanding Restricted Shares, Restricted Units and related Dividend Equivalent Units shall be made at the time or times, and in the manner, specified in the instrument or instruments evidencing the grant thereof, except as the Committee  may otherwise determine in its discretion at any time prior to the Change in Control.

          (d)        The Performance Periods applicable to all Performance Shares and Performance Units (including any related Dividend Equivalent Units) granted to a Participant hereunder that  are still outstanding on the day immediately preceding the date on which such Change in Control occurs shall end on such date; all Performance Goals that were established in connection with the Award of such Performance Shares or Performance Units shall be deemed to have been attained as of such date to the fullest extent necessary in order for the Participant to be entitled to receive payment with respect to the maximum number of such Performance Shares, or with respect to the maximum percentage of  such Performance Units (and any related Dividend Equivalent Units), as to which payment could be made under the terms of the applicable Awards, as specified in the instrument or instruments evidencing the grant thereof; and the Participant shall acquire on such date a nonforfeitable right to receive payment with respect to such maximum number of Performance Shares (including any cash payment with respect to dividends that would have been paid thereon, if the instrument evidencing the grant of such shares provides for such

19

cash payment), or with respect to such maximum percentage of Performance Units (and any related Dividend Equivalent Units), determined without any adjustment under Section 7(g)(i) or (ii); provided, however, that any Participant who, pursuant to Section 7(i), would have been entitled to receive payment with respect to only a Pro Rata Portion of the number of Shares or the amount of cash otherwise payable with respect to such Performance Shares or Performance Units if no Change in Control had occurred, shall be entitled to receive only a Pro Rata Portion of the payment that otherwise would be made with respect to such Performance Shares or Performance Units under the provisions of this Section 7(d). Payment with respect to such Performance Shares, Performance Units and related Dividend Equivalent Units shall be made at the time or times, and in the manner, specified in the instrument or instruments evidencing the grant thereof, except as the Committee may otherwise determine in its discretion at any time prior to the Change in Control.

          (e)        If any payment that is required to be made hereunder with respect to any outstanding Award as a result of the occurrence of a Change in Control is to be made by the issuance and delivery of Shares to the Participant, the Corporation shall take whatever steps are necessary to cause such Shares to be issued to the Participant, and to be treated as outstanding, at the effective time of the transaction constituting the Change in Control.

13.     Certain Adjustments to Shares

          In the event of any change in the shares of Common Stock by reason of any stock dividend, stock split, recapitalization, reorganization, merger, consolidation, split-up, combination or exchange of shares, or any rights offering to purchase shares of Common Stock at a price substantially below fair market value, or any similar change affecting the shares of Common Stock, (i) the maximum aggregate number and kind of shares specified herein as  available for the grant of Awards, or for the grant of any particular form of Award, under the Plan, (ii) the number and kind of shares that may be issued and delivered to Participants upon the exercise of any Option, or in payment with respect to any Award of Restricted Shares or Performance Shares, that is outstanding at the time of such change, (iii) the number and kind of shares represented by any Restricted Units, Performance Units, Annual Award Units or Dividend Equivalent Units that are outstanding at the time of such change, and (iv)  the exercise price per share of any Options granted hereunder that are outstanding at the time of such change, shall be appropriately adjusted consistent with such change in such manner as the Compensation Committee, in its sole discretion, may deem equitable to prevent substantial dilution or enlargement of the rights granted to, or available for, the Participants hereunder.

          In the case of any outstanding Incentive Stock Option, any such change shall be made in the manner that satisfies the requirements that must be met under section 424 of the Code in order for such change not to be treated as a “modification” of such Option as defined under section 424 of the Code.

          The Committee shall give notice to each Participant of any adjustment made pursuant to this Section and, upon such notice, such adjustment shall be effective and binding for all purposes.

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14.     Administration

          The Plan shall be administered in accordance with the provisions set forth below.

          (a)        In General.  Except as otherwise specifically provided in the Plan, the Plan shall be administered by (i) the Board of Directors, with respect to all matters pertaining to Awards that may be granted or that have been granted hereunder to Eligible Directors; (ii) by the Compensation Committee, with respect to all matters pertaining to Awards that may be made or that have been made to Eligible Employees, except as otherwise provided in (iii); and (iii) by the CEO, with respect to those specific matters pertaining to Awards to Eligible Employees who are not Elected Officers that are within the scope of the authority granted to the CEO under (d) below or delegated by the Compensation Committee to the CEO pursuant to (e) below. 

          (b)        The Committee’s Authority and Powers.  In addition to the responsibilities and powers assigned to the Committee elsewhere in the Plan, the Committee shall have the authority, in its discretion, to establish from time to time guidelines or regulations for the administration of the Plan, to interpret the Plan, and to make all determinations it considers necessary or advisable for the administration of the Plan.  All decisions, actions or interpretations of the Committee under the Plan shall be final, conclusive and binding upon all parties.  Notwithstanding the foregoing, any determination made by the Committee after the occurrence of a Change in Control that denies in whole or in part any claim made by any individual for benefits under the Plan shall be subject to judicial review under a “de novo,” rather than a deferential, standard.

          (c)        Modification of Awards.  To the extent not inconsistent with the terms of the Plan or any provision of applicable law, the Committee  in its discretion may waive or modify any of the terms and conditions set forth in the instrument evidencing the grant of any Award made to a Participant hereunder, including without limitation, (i) in the case of any Option,  to permit such Option to become exercisable as to any portion of the Shares subject to the Option at any time earlier than the time specified in such instrument,  to extend the term of such Option beyond the date specified in such instrument as the expiration date for the term of the Option (but not beyond the day immediately preceding the tenth anniversary of the Date of Grant of the Option), or to permit such Option, to the extent it has become or becomes exercisable, to remain exercisable for any period of time (including any period after the Eligible Employee’s Termination of Employment) beyond the period of time specified in such instrument but not beyond the date of expiration of the Option, including any extension thereof permitted under this clause (i); and (ii) in the case of any Award of Restricted Shares or Restricted Units, to cause the Restricted Period applicable to such Restricted Shares or restricted Units to expire, and the Restrictions applicable to such Restricted Shares or Restricted Units to lapse, as of any date earlier than the date provided for in such instrument;

          Notwithstanding the foregoing, no waiver or amendment may be authorized or directed by the Committee pursuant to this Section 14 (c) without the consent of the Participant if (A) it would adversely affect, to any material extent, any of the rights or obligations of the Participant with respect to such Award, or (B) in the case of any Option granted hereunder that was intended to constitute an Incentive Stock Option, if such waiver or amendment would cause such Option to fail to be treated as an “incentive stock option” within the meaning of section 422 of the Code. In addition, no such waiver or amendment may be authorized or directed by the Committee

21

pursuant to this Section 14(c) with respect to any Option, Performance Shares or Performance Units awarded to any Covered Executive, if such waiver or amendment would cause the delivery of Shares or the payment of any cash amounts that are made with respect to such Award to fail to be deductible for federal income tax purposes pursuant to the applicable provisions of section 162(m) of the Code and the regulations issued thereunder.

          (d)        The CEO’s Authority and Powers.  With respect to such number of Shares as the Compensation Committee may in its discretion determine to be available from time to time for the grant of Awards in any form to Eligible Employees who are not Elected Officers, the CEO shall have the authority (i) to determine which of such Eligible Employees shall receive Awards in each form specified by the Compensation Committee; (ii) to determine the time or times when Awards in such form shall be made to such Eligible Employees; (iii) to determine the number of Shares that will be subject to any Option, or the number of Restricted Shares, Restricted Units, Performance Shares or Performance Units, to be included in any Award to any such Eligible Employee; (iv) with respect to any Award of Performance Shares or Performance Units made to any such Eligible Employees, to make all determinations which the Committee is authorized to make with respect to such Award under the provisions of Section 7(a)(i),(ii) and (iii), Section 7(e) and Section 7(g)(i); and (v) with respect to any Awards made to any such Eligible Employees pursuant to the CEO’s exercise of the authority granted to him under this Section 14(d), to exercise all of the authority and powers granted to the Committee under (b) above and under the second paragraph of (e) below, but only to the extent that any such exercise by the CEO is not inconsistent with any action taken by the Compensation Committee, or with any determination, decision or interpretation of the Plan made by the Compensation Committee, under (b) above or any delegation made by the Compensation Committee under the second paragraph of (e) below.

          Except for the matters specified in the foregoing paragraph and any additional matters pertaining to Awards to Eligible Employees who are not Elected Officers with respect to which authority has been granted to the CEO pursuant to (e) below, the CEO shall not have any of the authority or powers otherwise granted to the Committee under any other provisions of the Plan.

          The Compensation Committee in its discretion may at any time, by resolution duly adopted by it and without any amendment of the Plan, revoke or modify in any manner or respect the authority and powers granted to the CEO under this Section 14(d).

          (e)        Delegation.  In addition to the authority and powers granted to the CEO under (d) above, the Compensation Committee in its discretion may, by resolution duly adopted by it, delegate to the CEO authority with respect to such other matters pertaining to Awards to Eligible Employees who are not Elected Officers as the Compensation Committee may specify in such resolution.  Any authority so delegated to the CEO may be revoked or modified by the Compensation Committee, in whole or in part, at any time.

          The Committee may delegate any ministerial or nondiscretionary function pertaining to the administration of the Plan to any one or more officers or other employees of the Corporation or any of its Affiliated Companies.

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          (f)        Non-U.S. Participants. In order to comply with any applicable provisions of local law and regulations in any foreign country in which the Corporation or any of its Affiliated Companies operates, the Committee may in its sole discretion (i) modify the terms and conditions of Awards granted under the Plan to Eligible Employees located in such foreign country, (ii) establish subplans with such modifications to the terms of the Plan as it determines to be necessary or appropriate under the circumstances applicable in such foreign country, or (iii) take any other action that it deems necessary or appropriate in order to comply with, or obtain any exemptions from the applicability of, the local laws and regulations in such foreign country.

15.     Designation and Change of Beneficiary

          Each Participant shall file with the Committee, or with such employee of the Corporation who has been designated by the Committee to receive same, a written designation of one or more persons as the Beneficiary who shall be entitled to receive any Shares or cash amount payable under the Plan upon or after the Participant’s death.  A Participant may, from time to time, revoke or change his or her Beneficiary designation without the consent of any previously designated Beneficiary by filing a new designation with the Committee or its designee.  The last such designation received by the Committee or its designee shall be controlling; provided, however, that no designation, or change or revocation thereof, shall be effective unless received by the Committee prior to the Participant’s death, and in no event shall it be effective as of a date prior to such receipt.  If at the date of a Participant’s death, there is no designation of a Beneficiary in effect for the Participant pursuant to the provisions of this Section 15, or if no Beneficiary designated by the Participant in accordance with the provisions hereof survives to receive any Shares or cash amount payable under the Plan with respect to the Participant after his or death, the Participant’s estate shall be treated as the Participant’s Beneficiary for purposes of the Plan.

16.     Amendment or Termination

          The Board of Directors may, with prospective or retroactive effect, amend, suspend or terminate the Plan or any portion thereof at any time; provided, however, that (a) no amendment, suspension or termination of the Plan shall adversely affect the rights of any Participant with respect to any Awards previously granted to the Participant without his or her written consent, and (b) no amendment which constitutes a “material revision” of the Plan, as the term material revision is defined in the applicable rules of the New York Stock Exchange, shall be effective unless approved by the shareholders of the Corporation in the manner required by such rules and by applicable law.

17.     General Provisions

          (a)        Rights of Participants.  A Participant’s rights and interests under the Plan shall be subject to the following provisions:

           (i)        A Participant shall have the status of a general unsecured creditor of the Corporation with respect to his or her right to receive any payment under the Plan.  The Plan shall constitute a mere promise by the Corporation or the applicable Affiliated Company to make payments in the future of the benefits provided for herein.  It is

23

intended that the arrangements reflected in the Plan be treated as unfunded for tax purposes, as well as for purposes of any applicable provisions of Title I of ERISA.

           (ii)       Neither the Plan nor any action taken hereunder shall be construed as giving any Participant any right to be retained in the employment of the Corporation or any of its Affiliated Companies, or shall interfere with the right of the Corporation or any of its Affiliated Companies with whom the Participant is employed to terminate the Participant’s employment at any time subject, however, to the Participant’s rights under any employment contract in effect between the Participant and the Corporation or any of its Affiliated Companies.

           (iii)      No Award made to a Participant under the Plan, and no payment made with respect to such Award, shall be considered as compensation under any employee benefit plan of the Corporation or any of its Affiliated Companies, except as specifically provided in such plan or as otherwise determined by the Board of Directors.

          (b)        Successors.  The obligations of the Corporation under the Plan shall be binding upon any successor corporation or organization resulting from the merger, consolidation or other reorganization of the Corporation, or upon any successor corporation or organization succeeding to substantially all of the assets and business of the Corporation.  The Corporation agrees that it will make appropriate provision for the preservation of Participants’ rights under the Plan in any agreement or plan which it may enter into or adopt to effect any such merger, consolidation, reorganization or transfer of assets.

          The provisions of the Plan and the terms and conditions contained in the instrument evidencing any Award made to a Participant hereunder shall be binding upon the Participant, his or her successors and permitted transferees.

          (c)        Governing Law.  The Plan shall be governed by and construed in accordance with the laws of the State of New York.

16.     Effective Date

          The Plan was adopted on September 17, 2004 by the Board of Directors, subject, however, to approval by the shareholders of the Corporation, in accordance with the requirements of the New York Stock Exchange and applicable law, at the 2004 annual meeting of the Corporation’s shareholders including any adjournment thereof.  The effective date of the Plan shall be the date of such approval by the Corporation’s shareholders, and no Awards may be granted hereunder prior to such date.

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EX-31.1

Exhibit 31.1

CHIEF EXECUTIVE OFFICER CERTIFICATION PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002

I, Eric Krasnoff, Chairman of the Board and Chief Executive Officer of Pall Corporation, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Pall Corporation;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this  report;
3.	Based on my knowledge, the financial statements, and other financial information included in this  report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
		a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
		b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
		c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
		d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
		a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
		b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 13, 2006
	/s/ ERIC KRASNOFF
	Eric Krasnoff
	Chairman of the Board and
	Chief Executive Officer

EX-31.2

Exhibit 31.2

CHIEF FINANCIAL OFFICER CERTIFICATION PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002

I, Lisa McDermott, Chief Financial Officer of Pall Corporation, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Pall Corporation;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this  report;
3.	Based on my knowledge, the financial statements, and other financial information included in this  report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
		a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
		b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
		c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
		d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
		a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
		b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 13, 2006
	/s/ LISA MCDERMOTT
	Lisa McDermott
	Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

As Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

          In connection with the Quarterly Report of Pall Corporation (the “Company”) on Form 10-Q for the quarterly period ending January 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Eric Krasnoff, Chief Executive Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to my knowledge:

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

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

March 13, 2006

/s/ ERIC KRASNOFF

Eric Krasnoff

Chief Executive Officer

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

          In connection with the Quarterly Report of Pall Corporation (the “Company”) on Form 10-Q for the quarterly period ending January 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Lisa McDermott, Chief Financial Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to my knowledge:

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

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

March 13, 2006

/s/ LISA MCDERMOTT

Lisa McDermott

Chief Financial Officer